Louis Borders founded Webvan in 1996. Borders was a well-respected entrepreneur at the time, having founded Borders Bookstores in 1971. He lured George Shaheen away from Andersen Consulting (now Accenture) to become CEO. Shaheen filled the Webvan management team with high-profile executives.
Webvan was a grocery-delivery business that promised to deliver groceries within a 30-minute window specified by the customer. Customers used the internet to order groceries and identify the delivery time.
Webvan started taking orders in San Francisco in June of 1999. Later that summer it signed a billion-dollar contract with Bechtel to buildout warehouses. It quickly assembled a fleet of delivery vehicles. By the end of 1999, it served 10 major metropolitan areas in the United States with plans to operate in 26 cities by 2001.
Webvan financed its rapid expansion first through venture capital and then through an IPO. Venture capital firms invested a total of $400 million. The company’s IPO in November of 1999 raised $375 million at a price of $15/share. The IPO valued the company at $7 billion. Webvan’s share price rose 126% on its first day of trading, increasing its value to $15 billion.
At the time of the IPO, the company shockingly had just $4 million in revenue from a single warehouse in California. The company, though, had swag. It addressed a $400 billion market (the U.S. grocery business) with a new technology (the internet) and was managed by the A-Team. The company believed it could swipe a significant share of the $400 billion grocery business from brick-and-mortar grocers.
The company quickly put the proceeds of the IPO to work. Sales rose to $178 million in 2000.
Nobody knows exactly when it dawned on the company that its business model was idiotic, probably shortly after the IPO. Did anyone actually run the numbers? Apparently not. What did it cost to give consumers the option to designate a 30-minute delivery window? Unit delivery costs turned out to be about $27/order. And the grocery business also turned out to be, well, the grocery business: high volumes on razor-thin margins.
Oops. Spending $27/order to deliver a product with almost no margin turned out to be a recipe for burning through lots of cash.
The $178 million in revenue in 2000 came with a half billion dollars of expenses. In April of 2001 – just 17 months after its IPO, the company “retrenched” into seven cities and laid off 900 employees. Three months later, the story of Webvan was over. The company was bankrupt. Its stock was worthless.
Wow. How does a company go from threatening the entire U.S. grocery industry one moment to filing for bankruptcy 20 months later?
Every once in a while, a false narrative arises that takes the market by storm. People drink the Kool-Aid. Smart people do stupid things.
Most first movers, it turned out, went bankrupt.
eToys.com had an IPO in May of 1999. It was gone 16 months later. Garden.com had an IPO in September of 1999. It shut down 12 months later. Pets.com had an IPO in February of 2000. It went bankrupt by the end of the year. The main problem with Pets.com, according to one news outlet at the time, was its inability to generate revenue. Really?
The suppliers of the underlying technology got caught up in the narrative as well. In the 30 months between January of 1998 and June of 2000, Cisco stock increased over 6x, Intel stock increased nearly 4x, and Oracle stock increased 11x.
The stock prices of Cisco, Intel, and Oracle dropped 78%, 79%, and 81%, respectively, in the 24 months following the dotcom peak. Intel and Cisco have yet to reach their June 2000 peaks 24 years later. The NASDAQ wouldn’t see its June 2000 peak until 2015, fifteen years later.
The internet, it turns out, did change the world and changed it in a big way. It just took a little longer than expected and the winning formula was not all that obvious at the outset.
Viable and sustainable business models in the grocery delivery business emerged over time, but it took 20 years of tinkering to do it. Ironically, the brick-and-mortar grocers that the early movers were supposedly putting out of business were among those that found the winning formula. A viable online pet store also emerged (Chewy), but again only after a decade or two of tinkering.
One downside of moving quickly to capture the benefits of a new technology is it robs the entrepreneur of the ability to iterate. Iteration is an important element of innovation. When one approach doesn’t work, we try something slightly different. Eventually we latch on to something that works. That process takes time.
Webvan applied its business model on such a large scale right out of the box that before it could do any iteration, the game was over. Same with all the other dotcom busts.
The true long-term winners that did exist in the early days of the internet were difficult to identify. Who would have picked a small book retailer named Amazon as the company that would emerge over 30 years to dominate e-commerce? Not many.
