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AI-Powered Digital Grocer Farmstead Raises $2.2m Series A in Mission to Finally Crack Perishable E-Commerce

December 13, 2018

Farmstead, which claims to be the nation’s first AI-powered digital grocer that sources and delivers fresh, local food from farm to fridge in 60 minutes, has raised $2.2 million in Series A funding from ARTIS Labs, Resolute Ventures, Y Combinator, Red Dog Capital and other investors. The round brings its total capital raised to $7.5 million. The funding will help Farmstead set the stage for accelerated geographic expansion.

For Farmstead CEO Pradeep Elankumaran, the idea behind his company was born out of a mundane and tiresome chore that most of us begrudgingly share: going to the grocery store.

“Farmstead started because when my daughter turned two, she started drinking a lot of milk and I found myself going to the supermarket after long days at the office buying the same things over and over, trying to get things delivered consistently without substitutions or packaging issues,” Elankumaran told AgFunderNews. “We all have computers in our pockets now. I get everything else delivered. Why can’t I get perishable groceries delivered?”

Launched in 2016, the Bay Area startup’s AI-powered predictive analytics models help it accurately predict demand, supply accordingly, deliver orders of fresher-than-the-usual local products in less than an hour while minimizing food waste.

But, to replace a trip to the grocery store that involves perishable goods, many different moving parts have to operate in perfect harmony. As a testament to the mountain-sized challenge that perishable e-commerce poses, the grocery industry is an $800 billion space but so far there has only been an 8% adoption rate for digital technologies like online delivery, notes Elankumaran. Meanwhile, customers are hungry for a digital solution to food shopping, particularly the 32 and younger crowd.

Farmstead’s technology consists of two main parts. Its consumer-facing technology allows customers to place an order quickly. The more often they order, the more personalized food recommendations and reminders about past purchases become. Delivery is free for shopping carts totaling $35 or more and delivery within San Francisco city limits takes roughly 35 minutes. For the more organized shopper, Farmstead offers a weekly delivery service that automatically refills your staples. Delivery is free for orders of $30 or more and weekly orders can be managed in a few minutes from the company’s platform.

To facilitate its operations, Farmstead relies on microhubs, which are 3,000 to 5,000 square-foot warehouse spaces that hold roughly 1,000 to 3,000 inventory items. This is a drastic contrast to many supermarkets that boast a footprint of 50,000 square-feet and hold 30,000 items. The inventory is acquired from local sources whenever possible, but Farmstead also stocks plenty of national brands like Cheerios.

Farmstead has created software to power its microhubs and purchasing platform that does everything software does everything from track purchasing trends to managing inventory to orchestrating routes for the company’s drivers, which it retains as independent contractors. Learning how to manage inventory was a major challenge. Unlike grocery stores, which can turn unsold food into prepared goods, unsold inventory in Farmstead’s microhubs equates to profit losses. And unlike grocery stores where demand remains largely static for its three-mile-radius customer base, the online availability meant that demand would likely be in flux.

The key to Farmstead’s formula, it seems, lies in the mountain of data that it is able to amass.

“We went into this business knowing that data would be the key to making our model sustainable,” said Elankumaran. “In the last year, we have turned all the tricky operational parts of our business into digital products that abstract away much of the complexity and drive profitability on each order. With our playbook in hand, we’re already laying the groundwork for aggressive geographic expansion in 2019.”

Customer experience was a large part of the company’s R&D efforts. Customers are eager for online grocery delivery, but skeptical when it comes to knowing whether the produce they receive will be top notch or whether they will be stuck with item replacements that they wouldn’t have picked if given a choice. Having a digital connection to shoppers and being able to see the data regarding their purchasing patterns proved to be an asset when it came to fine-tuning prices and inventory.

“We can respond to customers and ask them why they are doing certain things. We had an interesting experience with bananas. Customers said they were too ripe, so we asked them what they were using them for and they said smoothies. So we sourced ripe bananas and created a unique SKU called smoothie bananas,” Elankumaran explained.

The company’s customer base has reported 20-30% month-over-month growth, with solid repeat business according to Farmstead. The startup has big ambitions for scaling, with a mission statement that’s dedicated to making high-quality food affordable to everyone. Elankumaran believes Farmstead’s model his highly scalable, even for less urban areas provided there is sufficient demand.

“There could be one or two days assigned to geographic regions in rural areas. If users commit to delivery on those days and there is a sufficient network of drivers, it would work,” he says. “We are also very malleable when it comes to sourcing. Local is the new organic. If we open in Chicago, we can’t sell the same brands that we sell in the Bay Area because no one knows those brands. So we would get Chicago brands.”

Perishable Delivery Might be the Final Frontier of Food E-Commerce

The race to digitalize shoppers’ grocery experience has been a heated one. Several companies have attempted to marry e-commerce with food shopping. In addition to Farmstead, San Francisco is home to food delivery service Good Eggs, which raised $50 million in May 2018. Other online markets include Los Angeles’s Milk & Eggs, which raised $6 million in September 2018, and New York’s online farmers’ markets Our Harvest and Rustic Roots.

There have been many e-commerce casualties along the way, however. In Brooklyn, food delivery service Farmigo ceased operations in July 2016, and Good Eggs’ New York operation shut down in August 2015.

“The question regarding cracking perishable grocery becomes what structure is required to push this forward? The grocer approach is to ask whether we can layer delivery on top without stepping into unionized labor concerns. This is where Instacart shines. They say grocery stores cannot change operations because they would have to renegotiate unions and they also don’t know how to do delivery. So Instacart layers on top and lets the customer, the grocer, and the brands all pay for some of the cost,” says Elankumaran.

Through the fray, online grocery delivery platform Instacart has made repeated strides. In  March 2017, the company raised $400 million in Series D funding at a valuation of $3.4 billion. A number of major funds participated in the round, including Sequoia Capital, Wellcome Trust, Y Combinator Continuity, Andreessen Horowitz, FundersClub, Khosla Ventures, Kleiner Perkins Caufield & Byers, Initialized Capital, Thrive Capital and Valiant Capital.

“Overall, the customer experience has not been great. We are not like Amazon/Whole Foods or Instacart. We do not lay tech on top of grocery. We are from scratch, reimagining the grocery experience.”

Image: Farmstead Facebook page

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