In the wake of Amazon buying Whole Foods and ramping up free delivery for Prime members, it might seem like a bad time to bet big on a grocery delivery startup focused on organic food.
But that’s just what top Silicon Valley investor Bill Gurley has done.
Gurley’s venture capital firm, Benchmark, has led a new $50 million investment in Good Eggs, an online grocer that delivers a wide range of organic and locally-sourced produce, meats, meal kits and alcohol to customers in the San Francisco Bay Area.
With the new funds, Good Eggs expects to slowly expand its reach both within the Bay Area, and eventually to Southern California next year — going after what it believes will be at least a $7 billion online grocery market in California alone.
As it does, Good Eggs will find itself competing for customers with the local farmers market, as well as giant competitors like Amazon and Whole Foods, and heavily funded startups such as Instacart, which has raised $1 billion in investor money. Thrive Market, which has secured more than $160 million in investments for an online grocery membership model, also focuses on organic goods — but doesn’t yet sell produce.
“We’re always looking for opportunities where it may not be obvious,” Gurley said in an interview with Recode. “You make money with contrarian, non-consensus” investments.
In recent years, Good Eggs seemed like anything but an obvious startup to bet on. The company had already raised $57 million before the Benchmark investment and had nearly gone out of business in the process. In 2015, the startup laid off a large chunk of its staff and shut down service in three of its four markets to avoid bankruptcy as it expanded too fast before its economics were sound.
By the end of that year, Good Eggs had brought in a new CEO in Bentley Hall who had previously held executive positions with Plum Organics, the baby food brand. The company then raised $15 million from Index Ventures and Obvious Ventures in 2016, and restructured investor ownership stakes as well, Recode has learned.
With that investment, some early investors like Sequoia Capital had their preferred shares converted to common shares, which eliminated any guaranteed returns they would secure in the event of sale, sources said. The ownership stake of Sequoia, which is also an Instacart investor, shrunk in the process, one person said.
Since then, Good Eggs has focused on building strong unit economics by, in part, focusing on a customer base in a single metro area and operating out of a single warehouse. It has also added new product categories, such as meal kits that don’t require a subscription as well as beer and wine, so that it can be a one-stop shop for busy families.
Hall said the result is an average Good Eggs order that is north of $100, and an average customer that orders multiple times a week. The CEO declined to say whether the company is currently profitable, but said that he and Gurley envision EBITDA margins to eventually hit 10 percent, compared to at traditional grocers where that number can come in as low as 3 percent.
As for the Amazon question, Hall unsurprisingly is taking the glass half-full outlook: “It was highly validating. It’s a catalyst to shift consumer behavior online and that is really, really good for our business.”
Gurley, on the other hand, acknowledges the threat — “I have the utmost respect for Amazon” — but believes the online grocery market will be big enough in the U.S. for a variety of players including Good Eggs, which he believes will attract “a subset of the population that is hyper passionate and emotional about food.”
“On one hand, [the Amazon’s Whole Foods acquisition] would cause you to pause and take a breath,” he added. “On the other hand, I think for a certain group of people it’s just not going to be OK getting food you eat every day from the largest e-tailer in the world.”