Webvan’s Wild Ride: From Dot-Com Darling to Digital Disaster

In the heady days of the late 1990s, when the internet promised to revolutionize everything from pet food to groceries, Webvan emerged as the poster child of the dot-com boom. Founded in 1996 by Louis Borders of Borders Books fame, Webvan promised to deliver groceries to your doorstep within a 30-minute window of your choosing. It was a bold vision that captured the imagination of investors and seemed poised to transform how Americans bought their daily bread.

The Birth of a Unicorn

When Webvan opened its virtual doors in 1999, it was considered a unicorn before the term became part of the Silicon Valley lexicon. Aside from Amazon, a modest online bookstore that had yet to turn a profit, and Peapod, a Chicago-based delivery company, few retailers were so cutting-edge.

The dot-com bubble was in full swing, and investors were throwing money at anything with a ".com" suffix and a bold vision. Webvan's promise to disrupt the $450 billion grocery industry was irresistible. The company raised a staggering $396 million from venture capitalists before it even began operations. Blue-chip firms like Benchmark Capital, Sequoia Capital, Softbank, Goldman Sachs, and Yahoo were all too eager to jump on the Webvan bandwagon.

In November 1999, just months after beginning operations, Webvan went public in a highly anticipated IPO. The stock price doubled on the first day of trading, valuing the company at a mind-boggling $8.5 billion. This astronomical valuation came despite Webvan having less than $5 million in revenue and more than $50 million in losses.

The Numbers Tell the Tale

Let's take a closer look at the financial rollercoaster that was Webvan:

- Initial venture capital raised: $396 million

- Valuation at IPO: $8.5 billion

- Revenue at IPO: Less than $5 million

- Losses at IPO: Over $50 million

- Daily cash burn rate: $2 million

- Cost of Oakland warehouse: $40 million

- Money spent for every $100 worth of food sold: $143

- Total capital raised before bankruptcy: Nearly $800 million

- Total losses before bankruptcy: More than $1 billion

- Number of employees laid off: 1,200

These numbers paint a stark picture of a company burning through cash at an unsustainable rate while pursuing a vision that was perhaps too far ahead of its time.

The White-Glove Service

When Oakland resident Chas Schley was busy raising a family and building his career as a software developer in the early 2000s, Webvan's white-glove service fit perfectly into his chaotic schedule. "It was the dawn of e-commerce," he told SFGATE. Though we take it for granted now, 25 years ago, it was a novel concept.

After Schley placed his order, the driver would come into his home, take out the produce from plastic tubs, and meticulously stock his fridge, all while wearing booties to prevent dirt from tracking onto the floor. "I thought it was a great service," Schley said.

Many of these friendly truck drivers were given generous stock options and were critical to the company's success. One of them, a "32-year-old former high school track star," was described as "unfailingly polite and endlessly patient," even as he hauled armfuls of bottled water and a week's worth of groceries up multiple flights of stairs. Customers bonded with them, developing real relationships.

The Commitment

Matt Mahood, the company's former vice president and general manager, recalled, "I was committed through and through. I mean, I had never worked so hard in my life, but I had never enjoyed working so hard either because there was so much commitment from everybody on the entire Webvan team to make it work."

And for a brief moment, it really did seem like Webvan was poised to succeed. By November 1999, it was worth an estimated $10 billion and eventually expanded its fleet to the far reaches of Los Angeles, Portland, and Chicago.

As its customer base soared to 750,000 users, influential investors from SoftBank and top Silicon Valley firms who dumped millions of dollars into the startup believed they were about to become rich — and so did the hourly warehouse employees who spent all day packing customers' orders.

The $2 Million Daily Burn

But there was still one small, lingering problem: The company they were banking on was hemorrhaging over $2 million daily. In Webvan's case, the company's worst enemy was its own unbridled ambition.

That's partly because executives decided to build a complex, highly automated $40 million Oakland warehouse long before the company turned a profit, Mahood explained. According to Schley, it was common for startups to blow through mountains of venture capital funding until they ran dry, and if they expanded too quickly — and recklessly — CEOs would simply pack up their floppy disks and move on.

In Webvan's case, it had too much money and simply didn't know how to properly expand a low-margin business.

The Oakland distribution center, which spanned 300,000 square feet and housed the equivalent of 17 supermarkets, was considered one of the most advanced food factories in the world. There, warehouse workers would stuff orders along a route programmed for maximum efficiency, complete with software that beamed infrared signals to a small computer attached to their wrist.

Pickers then verify each item "using a tiny scanner wrapped around an index finger" while navigating miles of conveyor belts, electrical wiring, and gigantic carousels that helped move thousands of items. Ultimately, Webvan execs believed this faceless system would allow the company to sell over $300 million in groceries yearly. Humans, they argued, were simply too inefficient.

The Financial Quagmire

Mahood said the warehouse was probably twice as expensive as the company thought it would be. Exorbitant money was spent on real estate, software development, and construction. The state-of-the-art distribution center proved far from perfect: System bugs led to software crashes, and the drivers' handheld computers would sometimes lose entire orders in the process.

To make matters worse, Webvan spent an estimated $143 for every $100 worth of food sold. Even though the company had a vast customer base, including software engineers and busy stay-at-home moms, their loyalty wasn't enough to offset massive overhead costs.

The Beginning of the End

Within just two years, the mismanagement caught up with them. At first, it was a normal day at the warehouse. It was just after the Fourth of July, and Mahood was in his office while employees packed orders. Suddenly, his boss, CEO Bob Swan, called and asked him if he could talk. By the end of their conversation, he found out he no longer had a job.

"I couldn't believe it, and I had to prepare myself for what was to come," he said. He would have to help lay off 800 workers in 24 hours and figure out how to liquidate the remaining perishable food in the massive, 300,000-square-foot distribution center.

"It was brutal," Mahood continued. Then came time to finally tell his employees, who gathered near the break room. "There were a lot of tears shed, a lot of disappointment, a lot of anger, a lot of frustration. It was a tough time," Mahood said.

The Aftermath

As warehouse operations were slowly dismantled, news hawks circled outside in their vans, eager to break the story to the rest of the world. Meanwhile, Schley, who made a $5,000 investment, was curious to see whether it would soar to new heights, making everyone rich, or completely tank. "And, of course, it tanked.

By 2001, Webvan had lost over $1 billion and laid off 1,200 workers nationwide. Drivers who once had a small fortune's worth of stocks never cashed them in on time and were subsequently left with nothing. While they applied for jobs at Safeway, George Shaheen, the company's former CEO, reportedly walked away with a lifelong salary of $375,000 per year - a golden parachute that he's still enjoying.

The Lessons Learned

Ironically, Webvan's failure did not spell the end of its vision. Online grocery delivery has become a staple of urban life two decades later. Companies like Amazon Fresh, Instacart, and a host of others have successfully implemented many of the ideas that Webvan pioneered. The COVID-19 pandemic accelerated this trend, making online grocery shopping a necessity for many.

Webvan's story serves as a cautionary tale about the dangers of rapid expansion without a proven business model. It also highlights the importance of timing in business – Webvan's concept was sound, but it arrived before consumers and technology were ready to support it at scale.

The company's rapid expansion into multiple cities before proving its business model in a single market was a critical mistake. Pressure from venture capitalists to grow too big, too quickly, was one of the main reasons for the company's failure.

Webvan had plans to launch in 26 markets within 24 months, building a new $35 million warehouse in each market. They bought fleets of vans similar to UPS trucks to make grocery deliveries and even began buying out some of their competitors. All this before figuring out how to make the business model successful in just one city.

The Final Word

As Warren Buffett observed: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

 Webvan may have been an excellent idea, but at $8.5 billion, it was anything but a fair price.

In the world of investing, timing is everything, as in life. And sometimes, being too early is just as bad as being wrong. The Webvan story serves as both a warning and an inspiration to entrepreneurs and investors in the ever-evolving world of e-commerce and tech startups.

Perhaps Webvan's most significant contribution to the business world was not revolutionizing grocery delivery but providing a cautionary tale for future entrepreneurs and investors alike.