A new grocery startup is taking on Amazon and pursuing a $100 billion opportunity

From Instacart to FreshDirect to AmazonFresh, on-demand grocery delivery has taken off.

A new farm-to-fridge player called Farmstead is doing things a little differently. Food costs the same as in the supermarket; delivery takes under an hour and is less than $5 (or free in some cases); and the company uses artificial intelligence to figure out what and how much to stock, based on what customers buy most.

Farmstead has been piloting the service for the past year and formally launched in San Francisco on Thursday after raising $2.8 million in seed funding from Resolute Ventures, Social Capital, Y Combinator, and Joe Montana's Liquid 2 Ventures.

Farmstead's CEO, Pradeep Elankumaran, told Business Insider that the company's goal is to reinvent the supermarket model. He believes the future of grocery is on-demand delivery. The online grocery industry is expected to reach $100 billion in US sales and share approximately 20% of the market by 2025.

The startup is entering a crowded space - one that has only become more crowded since Amazon began offering Whole Foods items for delivery this summer. The e-commerce giant is expected to gain a big share of the grocery market, boosting competition for online grocery delivery startups and traditional retailers alike.

But Elankumaran believes Farmstead offers lower costs, better customer experience, and increased efficiency compared to competitors.

"If you shop at Instacart, for example, there are a lot of nitty-gritty things you have to do between you placing the order and you getting the order," he told BI. "These are things that do not happen at Farmstead. We want you to treat us as a utility. It should be as simple as opening a tap and getting water."

Here's how Farmstead works: