Lessons from Webvan

Whether you just started a small business or you’re looking to expand your existing business, you want to make sure you take the right steps to succeed. One way is to look at how other successful companies did it.

But you can often learn just as much by looking at business failures. Webvan is generally considered one of the biggest failures ever.

Here we look at some of Webvan’s mistakes.

First, Some Background

Louis Borders started the company. He and his brother, Tom, founded Borders Books while they were students at the University of Michigan. Tom focused on the books; Louis developed a software program that tracked inventory and predicted future sales.

The brothers sold the company to Kmart in 1992. In 1996, Louis started a new firm called Intelligent Systems for Retail. He was convinced an online company using a software system that managed the inventory and delivery of a wide variety of products would be very successful. His vision was similar to the modern-day Amazon. He set out to find investors.

Some of the first investors he met with were the partners at Benchmark Capital. Louis impressed them, but his idea didn’t. The following comment appears in Webvan: A Disaster on The Web,

“The partners, though initially doubtful about the project, were impressed by Borders’ intelligence and determination. They persuaded him to start his site with groceries. He agreed and Benchmark Capital agreed to invest $3.5 million in his venture.”

Louis obtained another $150 million from other investors, including Yahoo, CBS and Knight-Ridder. Later, an initial public offering added $375 million more. The new firm was named Webvan and at the very start they had $1.2 billion in capital.

The board members and its executives saw the company as a tech startup, not an online supermarket. They felt an online grocery store offered people:

  • Greater convenience than traditional grocery stores.
  • A wider variety of products.
  • Better prices (they advertised their products would cost 5% less than other stores).
  • Free delivery within a 30-minute window.

Webvan took its first orders in June 1999, then shut down in June of 2001. Management burned through over a billion dollars in just two years.

Webvan’s Top Three Mistakes

Mistake #1: Lack of Experience

Neither Louis nor his executive staff had any prior experience in the retail grocery business. They didn’t seem to know grocery stores have one of the smallest profit margins of any industry — between 1% and 2% of sales.

To survive in 2000 and 2001, the company needed an average order size of $103. In February 2000, the average order was $80. By the end of that year, it had increased to only $81.

In 2000, the company’s daily expenses averaged $1.8 million. Daily sales averaged only $489,000.

Lesson #1: Know the Industry

  • Are the profit margins sufficient for your company to achieve success?
  • How many sales can your company realistically expect to make in the first six months and then in the first year?
  • How many customers do you need for those sales?
  • What do you need to charge per sale?

Mistake #2: Webvan did not understand its customer.

No focus groups or surveys were done to see what the average American wanted when grocery shopping. If these had been done, the company would have learned:

  • Most people prefer to pick out their own vegetables, fruits and meats.
  • Many grocery shoppers are impulse shoppers; while shopping, they select other items not on their lists.
  • Many use coupons (Webvan did not accept coupons until late in their existence).
  • Some buy economy sizes to save money (Webvan did not carry these larger sizes).
  • People do other things when out grocery shopping. They pick up prescriptions, dry cleaning and go to other stores.
  • Some stay-at-home moms believe they’d look bad if they shopped online rather than go out to buy groceries. This has since changed, but Webvan was early to the game.

Webvan also required orders to be placed 24 hours in advance. Shoppers also had to specify a 30-minute window when they would be home to accept delivery. While this was geared to accommodate busy working people, many found last-minute changes prevented them from being home at the specified time.

Many people tried Webvan once; half of them never returned to buy again.

Lesson #2:  Know Your Customer

  • Do people want your product or service?
  • Are there enough customers who will buy it?
  • How much competition will you have?
  • What will you have to do to get customers to buy?
  • How long will it take to generate a profit?

Mistake #3: Webvan built its own infrastructure rather than using what was already available.

Webvan opened in San Francisco and got its first order on June 2, 1999. In early July, it signed a contract with Bechtel to build 26 distribution centers across the country within 2 years. Webvan paid a billion dollars for the distribution centers.

  • Each center was 350,000 square feet and fully automated (there were over 4 miles of conveyor belts in each).
  • The design of these centers was never tested in advance.
  • Each distribution center contained a butcher area; those all went unused when the company decided to outsource their meat business.
  • Each distribution center had Lazy Susans in refrigerated areas. They did not work properly.
  • Products were crushed on the conveyor belts.
  • Totes with orders fell over.
  • Orders were incomplete.

Each center only operated at 35% of its capacity.

Lesson #3: Don’t Reinvent the Wheel

  • Use existing infrastructures whenever possible.
  • Test and refine early versions before building new ones.

Correct your mistakes along the way; you won’t spend money unnecessarily, and you’ll avoid problems.

If you want to find out more about Webvan’s collapse, there are many articles on the web about it. A very good one is the Anatomy of a Dot-Com Failure: The Case of Online Grocer Webvan.

Final Thoughts

Back in the Dot Com era, the mantra of entrepreneurs was to Get Big Fast. Venture Capital firms loved this model because they thought being the “first mover” was a huge advantage.

Today, most Venture Capital firms still believe in the Get Big Fast method, but they temper their excitement by embracing the Minimum Viable Product (MVP) approach — the rapid expansion phase only begins once a company has achieved a minimum level of market acceptance using the minimum viable product.

This approach seems to work better, and definitely reduces the likelihood of catastrophic early-stage business failures.

At Ground Floor Partners, we generally focus on businesses that grow more organically.

That doesn’t mean they can’t grow quickly, but it does mean their business model doesn’t depend on landing huge amounts of capital before generating reasonable cash flow.

Webvan falls on the opposite end of the spectrum; they raised massive amounts of capital long before they had a single customer.

But the lessons from Webvan’s arrogant and catastrophic failure are universal. Anyone who plans to start a business should pay attention; otherwise they just might end up where Webvan did: broke and out of business.

About Andrew Clarke

Andrew Clarke is President of Ground Floor Partners. Over the past twenty years he has advised hundreds of small businesses on strategy, marketing, real estate and finance. He is passionate about small business, social and environmental justice, and is a proud member of the American Sustainable Business Council, Food and Water Watch, Green America, Food Consultants Group, and the American Planning Association.

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