This is a repeat of Webvan. Webvan had a good idea, but tried to "scale" fast. They had about 3% market share in 30 cities, and needed 30% market share in 3 cities.
I've read a few bitter stories about people with ramen-profitable businesses who got a late-stage investment into their bootstrapped company. Basically you spend years slowly kindling a small fire, and the VC comes over a dumps a truckload of lumber on it. Might get the bonfire they're looking for, but they don't really care if they just smother your campfire instead.
For mass market groceries, there are two virtuous cycles a retailer needs to trigger. The first is:
1. Get higher customer density
2. more deliveries per driver shift
3. reduced delivery costs
4. attract more customers with lower delivery prices
5. go to 1
The second is:
1. Get more customers
2. better economies of scale and more negotiating leverage with suppliers
3. reduced grocery costs
4. attract more customers with lower item prices
5. go to 1
Now, the first virtuous cycle only works at the city level - operating in two cities doesn't improve your customer density. But for the second virtuous cycle you need overall market share, not just local market share. To get Wal-Mart market share (~30%) and prices you need Wal-Mart buying power.
Of course, that's no excuse for building loads of warehouses full of tech that can't achieve the performance you need and to 'iterate' costs a few hundred million per warehouse! But it's understandable why the business plan would call for national expansion at some time - and I can also understand why people immersed in the SV community would find it hard to slow down and not break things :)