Sources say Postmates has struggled to raise money to fund its on-demand deliveries business

Future of Finance
Future of Finance

Postmates CEO Bastian Lehmann has set ambitious goals.

At a conference in May 2015, Lehmann touted the 2 million deliveries his on-demand-anything startup had reached and said profitability was possible by 2016. That June Postmates raised $80 million in a series D round that valued it at $450 million, and a few months later Lehmann said the San Francisco company would seek funding again beginning in January.

But 2016 has proved a sobering year. Postmates has yet to become profitable and long ago pushed its target date to 2017. In the meantime it has struggled to recruit and retain workers, to integrate restaurants and stores into the platform, and to make the low margins of delivery viable. Postmates aims to be an affordable convenience but so far its efforts to make instant gratification cheap have come up short. In August, Quartz reported that Postmates was alienating many consumers with high fees and misleading price estimates.

Behind the scenes, Postmates has also had trouble securing the additional funds it has chased for the better part of this year. Sources familiar with the matter told Quartz that Postmates has been in talks to raise a Series E round of at least $100 million, a figure that has also been reported by Bloomberg and TechCrunch. The funding is being led by Founders Fund, the venture-capital firm co-founded by Peter Thiel and an existing Postmates investor. It would value the company at around $450 million, the same as its series D valuation, sources said.

Even at that price, Postmates has had a tough time finding interest on the terms it hoped for, and has packed the round with deal-sweeteners such as warrants, the sources told Quartz. A warrant is a type of derivative that gives its holder the right to buy or sell another security—typically equity—at a preset price before it expires. Postmates’ proposed funding terms for this latest round contain “substantial” amounts of sweeteners, the sources said.

Such arrangements can quietly make deals more attractive to investors in order close a round without forcing a startup to officially drop its valuation, a move usually perceived as a sign of faltering. In such situations, it’s often “a game where everyone knows the pricing has gone down—but it’s almost like the emperor’s new clothes, no one wants to say it,” explains Aswath Damodaran, professor of finance at NYU’s Stern School of Business. Startup employees with options or shares in the company often suffer the worst dilution of the value of their holdings under these circumstances.

Postmates did not respond to multiple requests for comment. One source familiar with the matter described the funding round as “oversubscribed,” saying that “means having to drop investors, or ask investors to invest less, in order to hit the capital that the company wants to raise.” It’s unclear whether the round remains open.

Private companies, particularly those like Postmates looking to raise big, late-stage rounds, have grown increasingly willing to offer special incentives to investors as financing has become harder to come by. The private funding market is also relatively opaque, making Postmates’ fundraising process a rare glimpse into the measures some startups have taken to secure much-needed funds.

Venture capitalists put $15 billion into US startups in the three months ended Sept. 30, according to data compiled by Pitchbook and the National Venture Capital Association. That was down 29% from the same period a year prior, the worst year-over-year decline since the third quarter of 2009, when the US economy was lingering in the throes of recession. Investments into late-stage US startups fell 46% between the second and third quarters of 2016.

The collapse in financing has been even more precipitous in the hyper-competitive food delivery sector. Funding to VC-backed food delivery companies worldwide totaled $320 million in the second quarter of 2016, down nearly 50% from the previous three months and down 84% from its $2 billion peak in the last quarter of 2015. When Postmates competitor DoorDash raised $127 million earlier this year, it sold shares at a 16% discount from its funding in March 2015. Other food delivery startups have gone out of business: California-based SpoonRocket in March, India’s Tiny Owl in May, Belgium’s Take Eat Easy in July.

Startups like Postmates have leaned heavily on funding from investors to fuel their growth, often with sign-up coupons for new customers and steep discounts for returning ones. Postmates has continued to offer promotions as it has searched for fresh capital—just last week in New York it emailed users about a “Slice & Soda On Us!”—but its growth has nonetheless slowed. According to data from 7Park, which looks at purchases from millions of US consumers, growth in Postmates orders has been decelerating for several quarters.

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