I want you to do something for me right now.
I want you to mentally walk into your garage.
Okay. Or maybe it's your basement or that weird
crawl space under the stairs where you just shove
things you don't know what to do with. I have
one of those. I want you to look for a bin. Specifically,
a very, very sturdy colored plastic tub. Oh,
I know exactly the one you're talking about.
It's probably a dull red or maybe a forest green
or a deep blue. It has these interlocking teeth
on the lid, kind of like a zipper. Yep. I think
I have three of them holding holiday decorations
and, like, a mess of old cables I'm too afraid
to throw away. Everyone has them. They're practically
indestructible. I mean, you could probably drop
one off a roof and it'd be fine. These stack
perfectly, too. Honestly, they're probably the
best storage containers ever made. They really
are. Yeah. But here's the thing. Those tubs aren't
just Tupperware. They are ghosts. They are the
physical debris of a corporate explosion. Exactly.
They are the archaeological artifacts of Webvan.
And today, we are going to do a deep dive into
how those plastic tubs represent one of the most
spectacular, most expensive, and frankly, just
confusing failures in the history of the Internet.
It really is the ultimate cautionary tale. We
are talking about a company that incinerated
nearly $1 billion of capital. And that's the
mystery we need to solve today. We have a whole
stack of research here, financial filings, old
interviews, postmortems from the early 2000s.
And the question isn't just how do they lose
so much money? It's how did a company backed
by the absolute smartest venture capitalists
in the world, I mean, the royalty of Silicon
Valley. How did they go from a valuation of over
$4 .8 billion to absolute zero in roughly 24
months? It's a story about hubris, absolutely.
But it's also a story about physics. You know,
the physics of moving atoms versus moving bits
and why really smart people so often confuse
the two. So let's set the scene. We need to go
back in time. It's 1996. The Macarena is on the
radio. Independence Day is blowing up the White
House and theaters. And in Silicon Valley, people
are just losing their minds. You have to understand
the atmosphere of the late 90s. This was the
era of irrational exuberance. That was the phrase
Alan Greenspan used. And it was absolutely perfect.
Netscape had gone public just a year earlier.
The internet felt like this wide open frontier.
And there was this... pervasive, almost religious
belief that the old rules of business, you know,
profit, margins, physical assets, that they were
all dead. Right. Brick and mortar was basically
a slur back then. Right. If you owned a building,
you were a dinosaur. If you owned a domain name,
you were the future. Precisely. The feeling was
that the Internet would frictionlessly connect
buyer and seller, eliminating the middleman and
just, poof, creating infinite value. And into
this fever dream steps a man named Louis Borders.
Now, that name, Borders. as in the bookstore.
The very same. Louis Borders was a legitimate
retail titan. He co -founded Borders Books back
in 1971. And this is really important. He wasn't
just some book guy who liked literature. He was
a systems genius. Okay, so he's not just some
kid in a garage hacking code together. This is
a guy who built a physical empire. He was a math
guy. A huge math guy. At Borders Books, he developed
something called the Borders Expert System or
BES. It was this incredibly sophisticated piece
of software that could track inventory turnover
at a really granular level. What do you mean
by granular? I mean, it could predict which specific
spy novel would sell better in Ann Arbor versus,
say, Austin. It gave them this massive advantage
over all the independent bookstores because they
always had the right stock at the right time.
So he builds this empire on code, on data. He
sells his stake in borders, makes a fortune.
He's sitting pretty. Why on earth does he then
look at the grocery industry, which is notoriously
miserable, low margin and just messy, and say,
you know what, I can fix that? That is the billion
dollar question, isn't it? I think he fell into
a classic trap that we see with highly intelligent
engineers. He thought that because he had solved
the logistics of books, which are drugs. Their
square, non -perishable shelf sta - Right, easy.
He thought he could just copy -paste that same
logic onto groceries. But a book doesn't bruise.
The book doesn't melt if you leave it in the
van too long. And a book definitely doesn't smell
like fish if it sits there for two days. Precisely.
But Borders looked at the grocery supply chain
and all he saw was inefficiency. He saw middlemen.
He saw wasted shelf space. He saw customers wandering
up and down aisles pushing carts. Right. To an
engineer's mind, a supermarket is just a disaster
of inefficiency. He thought, I can centralize
this whole thing. I can build the giant automated
warehouse, use my software to manage the flow
and deliver. directly to the consumer. It sounds
so logical on paper. It's the classic disintermediation
play. Cut out the store, keep the margin. And
that was the entire pitch. In 1996, he founds
Webban in Foster City, California. And the promise
wasn't just we deliver food. It was about precision.
You'd log on via dial -up. Remember, you'd pick
your cereal, your milk, your eggs, and then you'd
select a 30 -minute delivery window. Wait, hold
on. A 30 -minute window. In 1999, I ordered from
Amazon today. And I'm lucky if they hit a four
-hour window. A 30 -minute window is insane.
That's how ambitious this was. They weren't just
trying to catch up to the current standard. They
were trying to leapfrog it by 20 years. And to
do that, they needed money. A staggering, staggering
amount of money. This is where the story gets
really wild for me. Because usually when you
start a business, you test it outright. You open
a lemonade stand. If people buy the lemonade,
maybe you buy a second pitcher. You prove the
model. Yes. Webvan didn't do that at all. They
went straight to industrial scale. They subscribed
to a strategy that was absolute gospel at the
time. Get big fast. Or just GBF. Get big fast.
It sounds like a bad bodybuilding supplement
or something. But this was a serious economic
theory. It was treated as a law of nature. The
theory was based on this idea of first mover
advantage. The thinking was that the internet
is a winner take all market. So if you are the
first online grocer, you grab the customer. And
they stick with you. Exactly. Once the customer
has entered their credit card and saved their
shopping list, they become sticky. They won't
switch. So the goal isn't to make a profit. The
goal is just to grab the land. So it's a land
grab. You worry about making money later on.
First, you just plant the flag everywhere you
can. That's it. And because of that pressure,
Webvan didn't start small. They didn't just service,
you know, Foster City with a couple of vans to
see if the math actually worked. They immediately
planned for world domination. But hold on a second.
Groceries aren't a social network. There's no
network effect. If I buy milk from Webvan, it
doesn't make the milk any better for you. Does
first mover advantage even apply to selling bananas?
That is the critical flaw that almost nobody
seemed to ask at the time. In software, you have
network effects. In groceries, you just have
a truck stuck in traffic. But the investors,
they didn't care. They were just terrified of
missing out. So who's feeding this beast? Because
Louie Orders had money, but he didn't have this
kind of money. He brought in the absolute heavy
hitters. We're talking Benchmark Capital, Sequoia
Capital. And for anyone listening who doesn't
track VC inside baseball, Sequoia is the gold
standard, right? They're the biggest name there
is. Sequoia is Mount Olympus in Silicon Valley.
They backed Apple, Google, Oracle. If Sequoia
writes you a check, it's not just money. It's
an anointing. It tells the rest of the market,
this is the one. This is the winner. Backing
up a dump truck full of money to anyone with
a big idea is in. How much cash are we talking
about here? In the private round, so before they
even went public, they raised nearly $400 million.
$400 million. SoftBank alone put in over $160
million of that. What's that in today's money?
Close to a billion. Something like that, yeah.
Just in private cash. And they hadn't really
sold any groceries yet. They had sold some. They
started their operations in the Bay Area in June
of 1999. But the revenue was, it was a rounding
error compared to the investment. But it didn't
matter. The hype train had left the station.
They went public, the IPO, in November 1999.
I looked up the numbers for the IPO, and I actually
thought it was a typo in the source material.
I had to double check. It's breathtaking, isn't
it? They went public, and the market valued the
company at $4 .8 billion. Billion dollars with
a B. $4 .8 billion. Okay, I need you to anchor
us in reality here. At the exact moment, they
were worth $4 .8 billion on paper. How much money
had they actually collected from customers? What
was their cumulative all -time revenue? $395
,000. Wait, say that again? $395 ,000. That's
the revenue of a decent neighborhood deli. Or
like a busy Starbucks for a few months. Successful
deli, yes. And against that $395 ,000 in revenue,
they had already lost over $50 million. So for
every single dollar they brought in, they were
burning. What's the math on that? Something like
$125? Roughly, yes. And the market looked at
that and said, this is fine. This is the future.
It really just highlights how completely disconnected
the dot -com bubble was from fundamental economics.
Investors weren't buying the business as it existed.
They were buying the story of what it could become
if it took over the entire U .S. grocery market.
They were betting on that get -big -fast dream.
Okay, so they have the cash, they have the valuation,
they have the mandate to expand at all costs.
Now they have to actually build the thing. Yeah.
And this is where that Borders philosophy kicks
in again. They didn't just want to rent a warehouse
and put up some shelves, did they? No. Oh, no.
And this is where we have to talk about the infrastructure.
Because this is where the money really, really
vanished. Borders believed that the only way
to make the margins work was through extreme
automation. He didn't want humans walking around
picking cans of soup. He wanted robots. So he
hires Bettel. Yes. The massive global engineering
firm. You know, these are the people who build
nuclear power plants, airports, the Hoover Dam.
Webb Van hired them to build their distribution
centers. And when you say distribution center,
I'm picturing a warehouse, a big shed with some
forklifts driving around. You need to erase that
image completely. These were not warehouses.
They were food factories. There were 330 ,000
square feet. That's about eight football fields
under one roof. And inside. They were an absolute
marvel of engineering. Walk us through it. What
was inside one of these places? Okay, so you'd
have miles of conveyor belts, massive rotating
carousels. They looked like giant dry cleaning
racks that would bring the product to the picker
so the human didn't have to walk. Wow. They had
complex server farms just to manage all the different
temperature zones. They had specific climate
-controlled rooms just for bananas, different
rooms for chocolate, different rooms for frozen
goods. It was... Unbelievably complex. It sounds
amazing, honestly. It sounds a lot like an Amazon
fulfillment center looks today. It does. That's
the great irony. The technology itself was actually
brilliant. The problem was the cost. Each one
of these centers cost about $30 to $40 million
to build. Each one? Each one. And remember the
get big fast strategy? Don't tell me. They plan
to build 26 of them. 26? That was the rollout
plan. Seattle, Portland, Atlanta, Chicago, Dallas.
They were signing leases and breaking ground
in multiple cities at the same time before they
had even proven that the first one in San Francisco
could make a single dollar of profit. This feels
like watching a car crash in slow motion. They
are literally scaling their losses. If you have
a machine that loses a dollar every time you
turn the crank, building 26 more machines just
means you lose $27 every time you turn the crank.
That is exactly what happened. But they were
completely convinced that volume would fix it.
They thought, once we are processing a billion
dollars worth of food, the overhead per order
will drop to nothing. But they just ignored the
upfront capital expenditure. And it wasn't just
the buildings. It was the trucks. I remember
seeing pictures of these things. They weren't
just standard delivery vans. No, these were custom
-designed logistics vehicles. They looked a bit
like space capsules on wheels. They were cute
in a way. Very distinctive. But they were incredibly
expensive. They had to be insulated. They had
special racking systems for those plastic tubs
we talked about at the beginning. Let's talk
about the tubs for a second because that's where
the whole cold chain idea comes in. Right. If
a customer orders ice cream and toilet paper,
you can't just throw them in the same box. The
ice cream melts. The toilet paper gets soggy.
Webvan designed these color coded bins. Some
were for ambient temperature things, some were
chilled, some were for frozen. They used dry
ice and passive cooling. It was an engineering
triumph. But again, expensive. Incredibly expensive.
And the sheer complexity of managing those tubs,
getting the right tub on the right truck in the
right order so the driver isn't digging around
for 10 minutes at every single stop. It was a
logistical nightmare. So they are bleeding money
on construction. They are bleeding money on custom
trucks. They are bleeding money on robotics.
And then in the middle of all this, in the year
2000, they make another move that just seems
baffling to me. They buy a competitor. The home
grocer acquisition? Yeah. Right. They bought
home grocer for $1 .2 billion in stock. Now,
was home grocer the profitable, stable alternative?
Were they buying a working business model? No.
Not at all. Home Grocer was another online delivery
service that was also losing money hand over
fist. So let me get this straight. You have a
company that is actively drowning, and to save
itself, it grabs onto another swimmer who is
also actively drowning. It's like tying two rocks
together and hoping that they'll float. The logic,
ostensibly, was to expand their footprint faster.
Home Grocer had operations in the Pacific Northwest,
and Webban wanted those customers. They thought,
if we combine, we'll be too big to fail. But
financially, it must have been disastrous. It
was. They took on Home Grocer's leases, Home
Grocer's employees, and most importantly, Home
Grocer's losses. The burn rate. The amount of
cash they were spending every month just to keep
the lights on it skyrocketed. You know, when
things go this wrong, this spectacularly, you
have to look at the people in charge. We talked
about Louie Borders, the founder, but he wasn't
the CEO during the big collapse, was he? No.
And this is a crucial piece of the puzzle. The
investors, you know, Sequoia and the gang, they
wanted what they called adult supervision. So
they hired a professional CEO, a man named George
Shaheen. And where did he come from? Was he a
grocery guy? Did he run Kroger or Safeway? Nope.
George Shaheen was the head of Anderson Consulting,
which is now known as Accenture. He was the ultimate
consultant, a very high powered, very successful
strategy guy. OK, so he knows strategy. He knows
how to talk to Wall Street. But does he know
what happens when a pallet of strawberries sits
on a hot loading dock for four hours in July?
He did not. And this was a critical, critical
flaw. In fact, almost none of Webvan's senior
executives had any management experience in the
supermarket industry. There were tech guys and
consultants playing store. That seems like such
a glaring oversight. The grocery business is
famous for having razor -thin margins. It's a
penny business. You fight for every single cent.
It is a game of pennies. If you don't understand
spoilage, inventory turns, and the brutal economics
of perishable goods, you are dead in the water.
Shaheen was used to high -margin consulting contracts
where you bill someone $500 an hour. He wasn't
used to a business where if you drop a single
carton of eggs, you've just wiped out the entire
profit for that whole order. And getting him
to leave a place like Anderson Consulting couldn't
have been cheap, was it? No. At Anderson, he
was making about $4 million a year. So to lure
him away to this risky startup, Webvan had to
offer him a compensation package that became
legendary for all the wrong reasons. What was
in the package? Well, there was the stock, obviously,
a ton of stock options. But there was a contract
clause, a golden parachute that promised him
$375 ,000 per year. For life. For life. Just
for taking the job, even if he got fired. Essentially,
it was a retirement package guaranteed by the
company. It just shows you how supremely confident
they were. They thought this company will be
around for 100 years. Paying this guy is just
peanuts. That is audacious. So Shaheen is at
the wheel. They're building $40 million warehouses
in Atlanta. They're buying a fleet of custom
vans. And then the year 2000 rolls on. The dotcom
bubble starts to hiss. The Nasdaq peaked in March
of 2000, and then it just started a long, painful
slide. And suddenly, investors stopped caring
about eyeballs and growth metrics, and they started
asking about profits. A novel concept. And when
you looked at Webvan through the lens of profitability,
it was a complete horror show. So what did the
financial picture look like at its peak? If we
look at the full year 2000, they had sales of
$178 .5 million. So real money was coming in.
People were using it. Okay. But their expenses
were... $525 .4 million. Oh my. For every dollar
of revenue they brought in, they spent three.
The burn rate was completely unsustainable. They
were running out of cash. And because the stock
market had crashed, they couldn't just go back
to the investors and say, hey, can we have another
$100 million? The well was dry. So the crash,
how fast did it happen? Frighteningly fast. By
April 2001, Shaheen sees the writing on the wall
and he resigns. Does he get his lifetime payout?
And that's the karmic twist in the story. When
the company filed for bankruptcy just a few months
later, He became just another unsecured creditor.
The contract was worthless. Wow. He had to get
in line with the guys who sold them the cardboard
boxes. He lost the golden parachute. So even
the exit strategy failed. The plane crashed too
fast for the parachute to even open. Walk us
through the final days. June, July of 2001. Well,
they tried to retrench. They pulled out of Atlanta
and Dallas to try and save the core San Francisco
operation. But the fixed costs of those massive
warehouses were just too high. You can't just
turn off a $40 million facility. It's like having
a mortgage on a mansion while you're suddenly
working a minimum wage job. The math doesn't
work. Exactly. On July 9, 2001, it all ended.
They ceased all operations. Just like that. Did
the customers know it was coming? No. People
logged on to their computers to order dinner
and the site was just gone. Drivers who were
out on their routes were told over the radio
to stop delivering and return the trucks to the
depot. What happened to all the food? That's
one of the few nice details in this whole mess.
The warehouses were still full of fresh food.
As part of the shutdown, they donated all the
non -perishables to local food banks. So something
good came of it. But 2 ,000 people lost their
jobs that day, and investors lost everything.
So the tubs are left. The vans are auctioned
off. I think I read somewhere that the vans were
sold for just pennies on the dollar. Oh, yeah.
You can still see them even today sometimes.
They have a very distinct shape. Plumbers bought
them. Electricians bought them. The ghost of
web van is probably parked in front of a house
in your neighborhood right now fixing a sink.
Okay, we've told the tragedy. Now we need to
do the autopsy. Yeah. Why did it fail? Because,
and this is the key. I can pull out my phone
right now and order groceries. Instacart exists.
Amazon Fresh exists. The idea wasn't wrong. People
clearly want grocery delivery. So why did Webvan
fail so badly where others eventually succeeded?
Analysts have spent 20 years dissecting this.
And it really comes down to three main failures.
But the biggest one, the one that really killed
them, comes down to two words, unit economics.
OK, let's break that down. Specifically, it's
about delivery density. That's the magic word,
density. Why is density so important? Okay, think
about the mailman or a UPS driver. A UPS driver
stops on a single street and delivers five packages
to three different houses. He walks maybe 50
feet between stops. That is high density. The
cost of his truck and his salary is split across
those five deliveries. Makes total sense. Web
van had no density. They were driving across
a 30 minute radius to deliver one order, then
driving another 20 minutes across town to the
next single order. So the truck is just driving
around empty, burning gas and paying the driver
just to carry one bag of groceries. Exactly.
This is the famous last mile problem. The cost
of that driver and that truck is fixed. per hour.
If you can't spread it over multiple orders in
that hour, the math never, ever works. Webvan's
model required a density of customers that simply
didn't exist yet. They were trying to service
an entire metro area with a scattershot approach.
And this connects to the second big failure,
right? The target demographic. Who are they trying
to sell to? They wanted to be the everyman supermarket.
They wanted to replace Safeway or Kroger. They
targeted price sensitive mass market consumers.
And why is that a mistake? Everyone eats. It's
a huge market. Because the everyman cares about
price. If a gallon of milk is $3 at the store,
they won't pay $4 .50 on Webvan. So Webvan couldn't
charge a high delivery fee and they couldn't
mark up the prices of the food itself. They squeeze
their own margins to death. So who should they
have targeted instead? They should have targeted
the time poor, cash rich demographic, you know,
lawyers, doctors, tech executives, people who
would have happily paid a $20 delivery fee to
avoid going to the store on a Tuesday night.
If they had started as a niche luxury concierge
service, established that density in a few wealthy
neighborhoods and then expanded, they might have
actually survived. They tried to be Walmart before
they were even a boutique. That's the perfect
way to put it. They wanted the volume of Walmart
with the cost structure of a limo service. It
was never going to work. And the third failure.
Infrastructure overload. Yeah. The build -it
-yourself trap. Contrast this with how a company
like Instacart started. Instacart is the anti
-web ban. Instacart built zero infrastructure.
No warehouses, no trucks, no inventory. They
just built an app. That's it. That's it. They
sent a gig worker into an existing Safeway who
picked the food off the existing shelves and
drove it to the customer in their own car. Asset
light versus asset heavy. It's the ultimate example.
Webvan tried to rebuild the entire grocery infrastructure
of the United States from scratch. Instacart
just skimmed a service fee off the top. It was
infinitely cheaper and faster to scale Instacart's
model. It's amazing when you put it like that.
Webvan spent a billion dollars to build warehouses.
Instacart spent maybe, what, $100 ,000 to build
an app and then leveraged billions of dollars
of Safeway's real estate for free. That is the
lesson. Don't build what you can rent, especially
if you don't know for sure if the business model
even works yet. But and here's where it gets
really interesting for me. Webin didn't completely
die. The DNA, the idea, it survived. It did.
And the connection to Amazon is absolutely fascinating.
Tell me about that. Well, first off, Amazon actually
resurrected the brand name. In 2009, when Amazon
started Amazon Fresh, in some markets, they literally
used the web van URL for a while. It was sort
of a little nod to the pioneer. But it's deeper
than just the name, right? Oh, it's much deeper.
A lot of the former web van executives, the guys
who were in the trenches when it all collapsed,
they went to work for Amazon. They took those
hard -learned, painful lessons about density
and warehousing and logistics straight to Jeff
Bezos. And what about the robots? You mentioned
the carousels and the automation. The concept
of automated warehousing didn't die at all. It
just evolved. A company called Kiva Systems developed
these amazing little orange robots that move
entire shelves around warehouses. And in 2012,
Amazon bought Kiva for $775 million. The robots
you see in Amazon warehouses today are the spiritual
successors to the Webvan automation dream. So
Webvan was right about the robots. They were
right about the Internet changing how we shop.
They were just being too early is the same thing
as being wrong. They were a decade ahead of the
technology, especially smartphones, and a decade
ahead of customer behavior. In 1999, people were
still genuinely scared to put their credit card
information online. In 2020, we don't think twice
about it. Speaking of 2020, this brings us right
to the modern era. The pandemic hits and suddenly.
What do we see popping up everywhere? We see
the dark store explosion. Companies like Gatier,
Gorillaz, GoPuff. Yes. Ultra fast delivery. 15
minutes or less. They raised billions and billions
of dollars in venture capital. And they operated
out of these small mini warehouses right in the
middle of city center. It sounds incredibly familiar.
It's deja vu all over again. They burned cash
to acquire customers. They subsidized the delivery
costs. And guess what happened to a lot of them
in 2022 and 2023 when that... Venture money started
to dry up. They crashed. Many went bankrupt.
Others consolidated or pulled out of markets.
It turns out the physics of delivering a $2 bag
of chips to someone's door in 15 minutes is still
really, really hard to make profitable. It's
the web van curse. It is. It's the siren song
of the grocery business. It looks like this enormous
trillion dollar market, but... The margins are
a minefield. So what is the final takeaway here?
If you're a listener, maybe you're an entrepreneur,
or maybe you just invest in stocks on the side,
what should you learn from the humble plastic
tub? I think the biggest lesson is to beware
of smart money. Just because Sequoia or Goldman
Sachs is investing, it doesn't automatically
mean the business makes fundamental sense. They
can get caught up in the hype just like anyone
else. They often drive the hype. And secondly,
unit economics are undefeated. You can have the
best vision, the best logo, and the coolest app
in the world. But if you lose money on every
single order, you cannot make it up in volume.
Gravity always, always wins eventually. I think
that's the perfect place to leave it. Next time
you go into your garage and you see that sturdy
green or red plastic bin, give it a little salute.
It cost a billion dollars to make. Inexpensive
souvenir from the dot -com era. Thanks for listening
to this deep dive into Webvan. If you enjoyed
this, share it with a friend who thinks they
have a can't -miss business idea. We'll catch
you on the next one.