FreshDirect Bags $31M Series C

FreshDirect Inc. one day may be the grocery world’s equal of Amazon.com. For now, the 4-year-old company from Long Island, N.Y., will gladly settle for succeeding where its big-name predecessors have failed.

FreshDirect operates an online grocery store for New York City residents. Like its defunct corporate ancestors Webvan and Kozmo, FreshDirect customers pick their selections online and set up a home delivery date. However, FreshDirect emphasisizes quality perishable items, such as produce and meats, which have a higher profit margin (about two times those of non-perishable items) and are harder to find in New York City at a reasonable rate. In addition, FreshDirect claims that its products are fresher than retail supermarket outlets because the middleman handlers are removed.

“Those other companies thought the food business was about convenience, but it’s driven by the quality of the food,” says Jason Ackerman, president of FreshDirect.

FreshDirect currently serves customers in parts of Manhattan. Ackerman knows his company must expand its reach to achieve success. Not only does this mean expanding to outer boroughs, but in other urban markets.

To accelerate this process, FreshDirect recently secured $31 million in new Series C preferred stock funding. AIG Global Investment Corp. led the deal with a $15 million investment, while the remaining $16 million came from CIBC Capital Partners, Canyon Partners and Mercantile Capital Partners.

“This is the type of company that had to pass some pretty high hurdles to get funded, but so far it’s done everything it said it would do,” says a non-company source familiar with the deal. “It’s a different model than companies like Kozmo because it’s appealing to families.”

Indeed, much of the investor due diligence may have been conducted from talking to parents in New York City playgrounds. FreshDirect boasts 120,000 customers, which it says works out to about one-fourth of all Manhattan households. Of course it doesn’t hurt that first-time buyers get $50 off their first purchase of $100 or more. Ackerman is convinced that FreshDirect’s focus on quality will generate return users.

Ackerman declined to disclose how much he has raised to date. Form D filings with the SEC seem to indicate that the company has secured approximately $150 million in total funding. No future VC deals have been planned, as the company believes that it can become profitable in six months.