Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: Welcome to season 7 episode 7 of Acquired, the podcast about great technology companies, and the stories and playbooks behind them. I’m Ben Gilbert and I’m the co-founder of Pioneer Square Labs, a startup studio and venture capital firm in Seattle.

David: And I’m David Rosenthal. I am an angel investor and advisor to startups based in San Francisco.

Ben: And we are your hosts. The year was 2013. Everyone had just finished cracking their jokes about how every startup is just another photo-sharing app, but the wave of yet another food delivery app was just getting started. Tony Xu and his co-founders were launching paloaltodelivery.com, which we all know today as DoorDash.

On this episode, we'll dive into how these Stanford students became one of the very few winners in the cut-throat food delivery category, how they raised $2.5 billion from VCs, the SoftBank Vision Fund, and even sovereign wealth funds around the world, how they went up against incumbents like Grubhub and Seamless, and the even more well-funded startup on a warpath for world domination, Uber.

This is the story of insanely fast growth, a company currently trippling year over year. That's the December 2019 number before the global pandemic created the ultimate tailwind at their back to IPO at the greatest possible time in the business' history.

David: They nailed the timing on this one, didn't they?

Ben: They did, David. Today, we will dive into the question that we're all wondering, is it even possible to build a sustainable business with positive unit economics in this category? And if so, will DoorDash actually be the one to do it?

All of these and more coming up on Acquired.

David: Ben, your hooks and intros are getting so good. Do we even need to do history and facts? I feel like you covered everything there.

Ben: You know we didn't.

David: You mean that we should go through these 15 pages of notes that I have here?

Ben: Lots to do, let's get to it. As always, if you love Acquired and want to hone your own craft of company-building, you should join us as an Acquired Limited Partner. You'll get access to the LP show where we dive deeper into the fundamentals of company-building and investing, in addition to our monthly LP calls where we talk with all of you directly, and of course, our book club and the Zoom calls with the authors.

This is really where we have gotten to know so many of you personally and frankly, this is the set of people who have most influenced the direction of the show and the subtopics that we want to tackle. Thanks to all of you who are a part of that community, and welcome if you're thinking about joining. If you do want to join, you can click the link in the show notes or go to acquired.fm/lp. All listeners get a 7-day free trial.

Now, on to our presenting sponsor for all of season 7, Tiny, and it's founder, Andrew Wilkinson. Andrew, at this point, we're pretty familiar with what Tiny's business is. Let's get some numbers. How do you think about the business and the portfolio? How many companies, how the values of these companies grown since you've bought them. What would you like to share with our audience?

Andrew: We're a private business, we don't share a ton of numbers. On a high level, I can say we're just about to crack about $100 million of revenue. We're highly profitable, we have a really nice net profit margin, and we're up to almost about 30 companies now.

As we've gotten larger, we've been able to do bigger and bigger deals. Now we'll do everything from a million-dollar bolt-on acquisition up to the largest deal we've done today that is about $50 million. Tiny isn't quite as tiny as it was when we first started which has been really cool to see.

Ben: That's great. Thank you to Tiny. If you own a wonderful Internet business that you want to sell or you know someone who does, you should get in touch. You can learn more at tinycapital.com or by clicking the link in the show notes.

David, let's do it.

David: Let's do it. Today, in non-typical Acquired fashion, we're actually going to start with the founding of the company. I thought about going way back, doing the history of restaurants. It's too much, we got a lot to get through here.

Ben: Yeah, when was the first restaurant?

David: I don't even know. That's a good question. Anyway, that is a question for another day because this story even on itself stands on its own. We started on the Stanford campus in the fall of 2012.

I remember it very vividly and well because I was there. I was starting at GSB that very fall. Unbeknownst to me, right across the two main quads, right across the way in the class, was called Startup Garage. This is a legendary class at GSB. It's co-taught with GSB and the design school, the d.school. It's interdisciplinary as a two-quarter class. You apply as a fully-formed team to go build a product or service. The idea was you're going to build the company and actually launch a company as part of this class.

There were four Stanford students, two from GSB, two undergrad computer science students who had applied to the Design Garage class that fall and entered. Andy Fang and Stanley Tang were the two undergraduate computer science majors and the two GSB business school students were Evan Moore and Tony Xu.

I think the story behind how they came together is that Evan and Stanley had worked on a project in another class the previous year. Evan and Tony were second years at GSB, and Stanley and Andy were juniors. They're juniors, undergrad. They'd worked together in another class and then they brought in their two friends and said, okay, the four of us, we're going to be the Stellar Team.

Ben: You have this good mix of business school students, computer science undergrad.

David: Yeah, the dream team.

Ben: Interestingly, this is a fairly common thing at universities for an entrepreneurship program, to go start a company class. It's always the dream if you're the instructor or professor, that one of them actually goes on to become this big, successful company but the vast, vast, vast majority of time, it ends up just being an academic exercise.

David: The crazy thing in Stanford is Design Garage is not the only class that does this. There are probably 16 classes across campus that all have similar premises.

Regardless, here we are, they get into the class and they start thinking what they're going to focus on. Tony had just finished interning that summer at Square. Square, of course, that we all know, use, and love today, public company, just about $100 billion market cap.

When he was there that summer—this would have been the summer of 2012—it was about 30 employees. Much, much different. It was just a credit card reader. But it was focused on—as we covered in our episode—this idea of empowering merchants and local businesses to accept credit cards.

It was clear already, at least for people on the inside like Tony, that this was unlocking a huge amount of commerce and commerce activity for local merchants. They thought, okay, what else can we build, we know that this is a big opportunity, the internet is coming to all these businesses. Most of these places don't even have WiFi.

Ben: Right. The amazing Square innovation there was so many of these people that could never take credit cards before, that were independent merchants, that were selling things at craft fairs and food trucks, that were currently ever big cash businesses were now brought online. They were trackable GDP of these categories of now digitally-enabled businesses.

David: We'll get into this more as we go throughout the episode but this was a huge insight that was completely not obvious yet to the rest of the world.

I remember I was starting a GSB that fall. I'd been at Madrona as an associate before that. Everytime we looked at a company, a startup that was going to sell the smaller local businesses, help them, yada-yada, like, no, this is a bad category, can't invest there, acquiring these customers is too hard, they're not online, and it's not going to work.

Ben: And these customers are notoriously difficult to serve because they have razor-thin margins, they have low willingness to pay, they churn like crazy, it's expensive to acquire them, and then they obviously don't retain well because either they don't know how to use your product well or in fact, they go out of business so you have to reacquire someone else. Notoriously the worst customer segment as an adventure capitalist to be investing in.

David: Yeah. If Tony had gone and pitched this on Sand Hill Road at the time, he definitely would have gotten a lot of rejections. But as we said, Square was starting to change this, and really what changed it all was the mobile phone and the smartphone that proprietors and managers within stores were using.

They come up with a few ideas, the vision is how do we help these local merchants? The class sends them out into the streets, the Main Street of Palo Alto. They go and they have design conversations with local store owners. They ask them what their problems are, they start thinking about an idea.

The iPad was big at this point, it's about 2–2½ years old and had cellular-kind activity. They're like, well, Square's taking payments, they're using iPads, the store owners are buying iPads, they have them there, what if we had an app also on the iPad that when customers came in the front door, the iPad would be there and it would ask, how did you hear about us?

Ben: That was the initial business?

David: That was the initial idea. They had a couple of initial ideas but this was the one that they were testing. I think they had actually maybe built an MVP at this app and then these business owners could now track the customers, where they came from. They could market to them more effectively.

They're doing these design interviews, and famously as the story goes—and by all counts, this is actually true—they sit down with a woman named Chloe who owned the Chantal Guillon Macaron Shop in Downtown Palo Alto.

I don't know if we ever frequented that, but it was probably too expensive for the broke students at the time. It's serving the VCs in Palo Alto not the students and the startup founders.

They sat down with her, they pitched on her this app. They're about to leave and she's like, actually, you know, I do have a problem that you guys might want to think about.

As they write on their Medium account when they launched business, "Just as we were about to leave, Chloe bursted out, ‘Well, there is one thing I wanted to show you.’ She took out a thick booklet. It was pages and pages of delivery orders. ‘This drives me crazy,’ she said. ‘I have no drivers to fulfill them and I’m the one doing all of it.’"

She's the proprietor, she's running the store, she's managing the storefront, she's making the macaroons. She can't take time to go out and do these deliveries even if they'll probably be all those Sand Hill Road, venture firms want their macaroons.

They said, okay, that's interesting, I wonder if other businesses have the same problems. They go out and interview more restaurants and food businesses, and they hear the same thing. All these restaurants are like, the pizza guys were doing delivery but nobody else is. The Thai places are not doing delivery. Most importantly, Oren’s Hummus is not doing delivery, so they say, okay, well, let's spin up a little MVP and see what happens here.

Ben: Which is actually pretty amazing to think about this. When I was growing up in Ohio, if you wanted to order delivery, there was pizza delivery, it was a category. Then take-out food was another category where you'd go and you'd pick it up, Maybe there'd be a Chinese restaurant or a Thai restaurant, they would have figured out delivery on their own. But if you're ordering delivery food, it was pizza.

David: Yeah, that was it. It was Domino's, it was Papa John's, it was Pizza Hut. That's a crazy thing, too. They figured it out and nobody had made the leap yet (in the US at least) to hey, people like getting pizza delivery delivered to their house, they might also like other food getting delivered to their house, too.

Ben: You got to think like pizza has to land itself better to a more regular-type of delivery than other food with more complex menus and stuff. For sure, we'll get into that but it's interesting to just think about, why was this so obvious, prevalent, and decades long for pizza companies and yet no one had really done it for other food categories?

David: Well, I think there's a very specific answer about why DoorDash made it work, which we’ll get into in a sec, but it's a good question. In New York, it was happening with Seamless, and then Grubhub which merged with Seamless. When I lived in New York, you could use Seamless to get any food you wanted delivered, but it didn't really happen anywhere else in the country.

They throw up this MVP, they bought the domain name paloaltodelivery.com, they take PDF menus of a bunch of the top restaurants in Palo Alto. They had some really good ones. They had the Oren's, they had Patxi's, the pizza place. I guess Patxi's probably didn't deliver. Patxi's a really good pizza in the Bay Area. Life Kitchen, it was great. A bunch of good places. They had the Thai place, they had the Indian place.

They put it up and then they have on the website, a phone number. You can order on the website, it's just on the web. It's a phone number and it's a Google Voice number that rings all four of their cellphones when anybody calls it.

On January 12th, 2013—this would've been the start of the second quarter of winter quarter at Stanford, it's the second quarter of Design Garage—they put this up. Literally within an hour, they got a call. They put it up and then they blasted it to a couple email distribution lists at Stanford.

Within an hour, they get a call from a guy who wants to order (I think it was) Thai food. They're like, wow. They drive over, they get food, they go, and they drop it off. Tony talks about this, he actually gets out his phone and they interview. They want to know like, how did you hear about us, what's going on, why'd you order this?

It turns out, it was this guy named Bruce Barcott who lives on Bainbridge Island in Seattle. He works for Leafly, the marijuana company. He had written a book called Weed the People about legalizing marijuana. He was a visiting author at Stanford and he was staying—I don't know if it was on Stanford housing or something—over on Alpine Road which is behind the Dish if you know the Stanford campus. Over there, you're pretty far from University Ave. There's no food over there. He was probably like, I just don't want to get in my car and drive all the way over to go get this food. This is great.

Ben: Perfect first customer.

David: Yeah, pretty great use case. They do this and they just put it out on the email distribution list. Some people started using it, all over the GSB, people are using it, the undergrads are using it, Jenny and I used it. The total move was get Oren’s Hummus, especially if you have people over at a big party, get a big thing at Oren's and Palo Alto Delivery to come and make it happen for you.

Ben: You remember it being called Palo Alto Delivery?

David: I was trying to recall. I went back and looked back through my email history. I think by the time we actually did our first order, they were in YC and they had changed the name to DoorDash, but everybody knew that this was happening.

My classmates usually go to a party and the food was there from Palo Alto Delivery. They'd hacked it all together. This was total find the problem, solve the problem, design focused just in terms of solving the problem.

They were using Square to take payments. You would call the number, it would ring their cellphones via Google Voice, one of them would pick up, they'll take your order down, they would then call the restaurant, put the order in with the restaurant, they would go and pay, and then they would drive it over, and drop it off. Then they would take out the Square reader and you would swipe your credit card to pay them back for the food.

Ben: Unreal. That sounds like a tax and accounting nightmare. You're basically losing money because you have to pay taxes on the income that you're—

David: They didn't actually incorporate the company until they applied to YC, so this is all lost to history in terms of the accounting. It was also super cool. The other really smart thing they did once they started bringing on some other drivers to do delivery for them, they used Find My Friends on iPhones to track the deliveries in real time.

Ben: That's so smart.

David: They could route people and be like, okay, this courier is closer to this restaurant, we get the order coming in over there. Like, hey you, when you finish this, go over grab this.

Ben: It's so crazy thinking, this is probably the first company we've covered on Acquired on the main show here that is started in this modern iPhone-is-already-ubiquitous era. You think about Uber's founding, or Airbnb which we'll do tomorrow, or so many of the companies that we covered in the 2018–2019 IPO booms. All those stories developed alongside the mobile revolution and here you are, you already have a very modern set of tools. There's Google Voice, there's Square, and there's Find My Friends. All of which were not available to the previous generation of startups.

David: Exactly. That was the key point that made this work even though probably people had tried this in different ways in the past. Notoriously, Grubhub actually merged with Seamless. We'll get into their model in a minute. They acquired lots and lots of local delivery companies.

Actually, one of them was one of my classmates in the year behind Tony and Evan. He had sold his company in Atlanta to Grubhub. He had the second nicest car in the GSB Garage, behind the guy who had started a Zynga Clone in college but didn't raise money and just kept all the cash flow.

I feel like there's a lesson in there somewhere.

Ben: I don’t quite know. There are many lessons there.

David: Yeah. We’ll unpack that on an LP show.

Ben: You mean with the psychologist?

David: Yeah. Back to 'why now' with Palo Alto Delivery, mobile, and these tools. This Find My Friends thing was really important because unlike Uber where you just had the consumer—the rider—and you had the driver. You had these two pieces. You can give the driver smartphones and coordinate everything.

With DoorDash, it's like the 3D chess version of ridesharing. You have this third element which is the restaurant, which is a participant in the system both from an operations perspective and from a business model perspective. Consumers need to be able to place the order easily and efficiently. Find Mobile helps with that.

You've got the Dashers,what they end up being called the couriers. They need to be tracked just like rideshare drivers, but they need to be routed to the restaurant and to people's homes so it's doubly difficult.

Then you've got the restaurants, you got to know where the restaurants are. You got to know the status of the food, you got to have them get the orders coming in, accept them, know that they've gotten it.

This is super hard and there's no way any of this could have happened without all of these players having smartphones. Still today, most restaurants don't have WiFi.

Ben: Right. It's such a good point. And to flash back to the previous era of businesses working really well now but failed previously—look at Instacart, you look at Webvan—aside from there just weren’t enough people on the internet yet, there are definitely weren't people doing this on mobile phones yet. Frankly, the technology stack wasn't sophisticated enough in that Web 1.0-era to facilitate all this real timeliness and keeping everyone in sync at the same time.

As we're talking here, David, it hit me that not only of course do you have to split the money one additional way in food delivery because in addition to the Dasher, the person ordering the food, and the company facilitating the transaction, you have the restaurant involved, which is different than ridesharing.

Money has to flow out of one pocket then to three others instead of out of one pocket then to two others. There's also an unbelievably operationally complex component here where the timing has to be perfect.

You're heating food. There's a very narrow window where you can get there too early or too late. That'll be okay just in the kitchen, let alone rather than having it sit out for a while, than having the right amount of time that it takes the driver to get to a person's house. Everyone's very familiar with thinking through this problem from a consumer perspective but just thinking through the technology infrastructure is really crazy.

David: Yeah. I was talking about this with some friends—in the research for this episode—who are former Uber employees. The thing is Uber, Lyft, and ridesharing, either canonically everybody found, like hey, once you get the wait times down to 5, maybe 10 minutes, that's fine, it's all good.

But to your point, with food, it's not all good. The degree of diminishing returns is much, much higher for food delivery because I want it fast but it also needs to be high quality and still good. If it's fast but it's only half-way cooked, I'll never use your service again.

Ben: The far more forgiving side is it took too long. The food can stay warm-ish under a heat lamp for a while, but I think everybody knows when they've gotten food that's been sitting under a heat lamp for too long.

David: Totally. Okay, they're hacking these pieces together. This is cool. From the beginning, the business model was basically already there and they haven't changed it much since. Under the hood, a lot has changed. Initially, it was a flat $6 delivery charge to the consumer for getting your food delivered. Obviously, that has changed since then in terms of how it's calculated.

Jenny and I ordered Chinese food last night from Mama Ji's here in San Francisco, a great Chinese place. They're on DashPass. We paid a $7 tip to the Dasher and got our food, it was basically the same from our perspective.

They also started going to the restaurants really early on—this is even during the Palo Alto Food Delivery days—and said, hey, we're bringing you these incoming orders, will you pay us a cut of the revenue so that we can make this work, the $6, $7 delivery fee that will go to paying the couriers, we're bringing these revenue deals, we'll take a little bit of cut off the food. The restaurants said, yeah.

Tony's talked about it. They basically never had a problem with it. I think it was because for many restaurants, this behavior had already been established with the Grubhub and Seamless model.

This is probably a good time to take a step back and say, okay, what is unique and different here? We were texting before the show. Most people don't understand the difference between Grubhub Seamless, and what DoorDash and Eats were doing.

Ben: It took me until actually diving in and doing the research to realize—I'll just spoil one little bit here—that it was only pretty recently that Grubhub started actually having fulfillment drivers as a part of the thing and not just a dumb pipes that you order through.

David: We rerun back, Grubhub was started maybe early 2000s. Seamless—Brad Stone writes about this in The Upstarts—had been started in 1999 in New York, and they were the same thing. They merged in 2010 maybe, I want to say.

Their models were you could go to their websites or you could call them. In the early days it was calling Seamless, it was calling Grubhub, just like Palo Alto Delivery. They would take down your order, they would call the restaurant, just like Tony and team were doing in the early days, but then they'd stopped at that. They're just like, hey, Ben wants pad thai, go ahead, go for it.

Ben: Make it happen. It was 2013, the onus was on the restaurant to have a driver that could actually get the order to you.

David: To have a courier, driver, and do the fulfillment.

Ben: Courier, yeah. In New York it’s probably a bike messenger–type person.

David: Exactly. This is why this caught on so well in New York. And then other cities, this existed. Restaurants were on mostly Grubhub outside of New York and then they acquired all the small, local players. This is a pretty good model. Grubhub went public, it was a well-regarded internet stock because this was a super capital-light model.

Ben: It's notable that they’re a very profitable business.

David: Yeah, very profitable. They acquire customers and they do all sorts of interesting things shall we say to acquire customers via some SEO hacks. They pass on the orders, restaurants would pay them a commission fee for bringing the orders, and then call it a day. This worked super, super well.

Now, what DoorDash is doing is obviously very different. The downside of the Grubhub model is that most restaurants aren't equipped or aren't even thinking about doing the logistics. And even if you were thinking about this, you'll say, okay, great, I'm going to hire a courier.

Okay, you're going to hire one, maybe two couriers, you're going to use those heavily during the rush hours for eating or whatever your type of food is that you're preparing, whether that's breakfast, lunch, or dinner. Probably lunch or dinner. The rest of the day they're going to sit around but then when you need them, you're only going to be able to fulfill a couple of delivery orders. This is a nightmare.

Ben: Right, and probably not fair of me earlier to use the term dumb pipes, but I guess more to say what they really were were a demand aggregation company, where their primary business activity was consumer marketing or retention. You could keep the people, you are the mechanism by which they order, but then the market is still constrained to the set of restaurants who are willing to take on this delivery stuff on their own.

David: In a place like Palo Alto which is not a very dense city, even though there are a lot of people that live on the San Francisco Peninsula, it really doesn't make sense. You didn't have any of this really operating, again, outside of the Domino's, the Pizza Huts, and the Papa John's.

This is another cool thing that Tony and team do. They realized as they got going on this like, hey, we're not building Grubhub and Seamless. We're building Domino's. We’re building FedEx. We're building a logistics network. We're taking it to every business. What did they do? They go and they work for Domino's and FedEx for a couple of weeks just to learn how their logistics systems operate. They signed up. Tony was a driver for Domino's delivery pizza for a week or two and took notes on how everything worked.

He talks about this, he is really surprised. These are world class operations, so you learn a lot and realize, hey, this is a complex business that we're going to have to build and delivery times are super important, density is super important to make this work. But these aren't tech businesses so Tony talks about Domino's being run on paper and not with Find My Friends, not with smartphone technologies, mobile ordering systems, and mobile app logistics at the endpoints. So they're like, oh okay, this is really interesting.

It's basically during this period that there were three questions that they wanted to answer. One of which was just simply, do people want this? Is there a reason on the demand side where food delivery of non-pizza restaurants doesn't exist outside the big cities? The answer to that was a resounding yes. Everybody in Palo Alto Mountain View wanted this.

Two was can they find a way to do this, to pay the drivers enough and keep them utilized enough with making trips that they look more like Domino's and FedEx than they would like a restaurant trying to do this themselves and not being able to utilize their drivers enough to make it worth it? That clearly is a yes.

Ben: How do they do that? People want food from 12:00–2:00 PM and from 5:30–8:00 PM, how do they handle off-peak?

David: This is going to show later in the story but this is the gig economy that makes this work.

Ben: Oh, I see. Since it sets their variable expenses, the business doesn't have to worry about paying people during the hours where there's no demand.

David: Yeah, exactly. You can do this as 1099 contractors. I don't know what Domino's and FedEx was doing in these days if they were W-2ing their employees or if they were 1099s, but Uber clearly already started to pave the way.

Ben: This was ostensibly legal.

David: Yeah, exactly. It was ostensibly legal and now post-Prop 22 in California, definitely legal. That makes it work on the driver side. Then on the restaurant side, would the restaurants be happy to pay us for these incremental orders that we're generating for them? Again, apparently it was super easy. They were all willing to pay them.

Ben: Getting back to my question on what if people do want to work between 2:00 PM and 5:30 PM, were they already thinking about non-food options at this point in order to utilize that workforce over more hours?

David: I think they were. You're going back to the original macaroon shop, Chloe at Chantal Macarons. That's not a full meal, but I suspect what happened was just that the meal delivery became so big and clearly had a product/market fit that just became all-consuming.

But now you read the S-1 and they talk about, hey, we do want to be the on-demand delivery local logistics network, FedEx for small local businesses. We want to do flowers, we want to do groceries, we're already experimenting with that, but it's a small, small percentage of the business.

Ben: Question number one is do consumers want this? Question number two is about the—

David: Can we make this work for drivers?

Ben: Yeah. Question number three then are the restaurants. At this point, how are they thinking about how much we can take from restaurants without them: (a) getting mad, or (b) having an unsustainable business. And then how little can we take and still have a business ourselves?

David: That's a good question. I don't know, but I do think—as we'll get into this as we go along in the story—similar to Bezos and Amazon in their early days, one thing about DoorDash is they've been willing to fly very low to the ground, so to speak on this.

Tony talks about this a lot. They're like, hey, by us improving our density and being able to do more, fulfill more orders more quickly, that improves the economics in the system. If we can give that back to consumers… They've definitely given it back to consumers. It's crazy that you pay $5, $6, $7 to get somebody to drive across the city and deliver food for you. We also give it back to restaurants that'll allow us to grow the market more or grow our share more.

They figure all this out in the Palo Alto Delivery days. Then the school year is coming to an end. They apply to Y Combinator, they get in, and say, okay, we're going to go do this for real now. They ditched the Palo Alto Delivery name because it's hard to imagine that playing well in Wichita.

Ben: By the way, do you know another famous example of someone that had to do this but took a little bit of a different track also in the restaurant space, also in the food delivery space?

David: I don't know.

Ben: People from St. Louis will know what I'm talking about, that's a clue. Panera Bread.

David: Oh, Panera Bread. Wow.

Ben: To this day in St. Louis, it's called the St. Louis Baking Company, St. Louis Bread Company, something like that. I remember my first trip to St. Louis. I was like, what? That's the Panera logo. It's called St. Louis… What is this? When they expanded outside of that region, they just decided, we're going to leave the ones local here with the same name and everywhere else, it'll just be called Panera.

Just to wrap this full circle, they actually win it alone. They basically run their own single-client DoorDash and are the black sheep that created their own version of a full end-to-end fulfillment system order on their website and app, and they deliver to you. I think they're one of the few restaurants who actually does that independently.

David: Interesting. Even to this day?

Ben: I think so. It was true as of Q1 2019.

David: Interesting. There is this other category of restaurants that have done this historically which is this lunch catering, office catering sandwich-type shop of which Panera is obviously consumer-facing. But if you think about specialties, they're in a bunch of cities. You're doing a lunch business meeting, they'll deliver and cater that for you.

Ben: That's true. That has totally been a market that has existed for a long time and there's a different set of startups going after that. Obviously, DoorDash and these folks are trying to create an offering for those business customers, too, but that's a little bit of a different market.

David: They do YC. Coming out of YC, they raised a $2.4 million seed round in the fall of 2013 which was good, great too, but nothing crazy here. At the same time, there were companies coming out of YC raising $5 million, $6 million, $7 million seed rounds already. These are the go-go days. It's led by ( interestingly) Keith Rabois who had just joined Khosla. Now Keith, before that—of course PayPal Mafia member and now partner of Founders Fund—had been the COO of Square while Tony was there over the summer.

Ben: Did he know Tony? I guess it was only 30 people so he had to.

David: I'm sure they knew each other. That was and would have also explained why he probably was more likely to get this than other VCs at the time.

Ben: Right, so they're onlinification of independent merchants and particular on food.

David: He leads the CRV. SV Angel and Pear also come in in the seed. To this question that you said about what types of delivery are they doing, what types of logistics, they write a Medium post at the time saying, "Ultimately, our vision is to become the local, on-demand Fedex. We are a logistics company more so than a food company. We help small businesses grow, we give underemployed people meaningful work, and we offer affordable convenience to consumers. We’re tackling some of the most difficult logistical challenges that come with on-demand delivery, both in engineering and operations."

I think as Tony tells the story, that was also part of what helped them raise coming out of YC, pitching this bigger version of, hey, this isn't just meal delivery, you've already heard of this, Grubhub exists, but this is actually a logistics network and this is something different.

Ben: Okay, I want you to name all those investment firms again that participated in this initial round.

David: Khosla, CRV, SV Angel, and Pear.

Ben: None of those appear in the S-1. Those are all below 5% shareholders. As we will talk about later, this company underwent a tremendous amount of dilution in order to scale the way that they did.

David: Yeah, we are still in act one of the story here. Let's wrap up act one. There was this seed, $2.4 million, and they realized, okay, we're going to change the name to DoorDash. We're going to expand beyond Palo Alto. Let's go to our first bigger market.

The natural thing to do that all the ridesharing guys did was go to San Francisco. You think like, hey, city. Natural use case for food delivery. It was for ridesharing. You should go there. Tony had the insight. He grew up in Illinois in Champaign Urbana, but in highschool, his family moved to San Jose. Champaign Urbana and San Jose. While San Jose is a big metropolitan area, it's much more suburban in feel than it is than it's like a city.

Tony said, actually, the mass market is out there. It's not in San Francisco. It's not in cities. They launched in San Jose, in East San Jose, specifically, as their first market. This was just brilliant. It's been talked about elsewhere, but going to the suburb versus the cities, there was no competition. It was Domino's or DoorDash.

Ben: It's really interesting thinking about, and much ink has been spilled on this concept but I think it's really worth diving into here. Intuitively, you would think launching in the cities is better because there's much more density. It's been working in New York for a long time. People really value convenience there. It's the convenience economy. People have lots of disposable income.

What that meant was number one, they don't have any competition in the suburbs in terms of other mechanisms of delivery. Number two, drivers were much easier to come by in the suburbs because everyone has a car, whereas in cities, 10%–15% of people have a car so there's much more available Dasher supply.

On top of all of that, there's no traffic and parking is not an issue. You can actually deliver a higher quality of service at a lower price point with greater supply of Dashers. There are all sorts of reasons why it was actually great to be out there, and they had a wide-open lane to themselves because these incumbents weren't playing there at all.

David: That's the thing. One of DoorDash's core values—usually, core values are a bunch of baloney, but in this case, I think actually makes sense—is operating at the lowest level of detail. Tony talks about this. Yeah, in cities you got this density, but think about what that means. This is not ridesharing where you pull up to the curb, somebody gets in, and you drive off. You pull up to the curb, you got to park, you got to get out, you got to go get the order.  If you're getting the order at the restaurant and there's a queue, you have to wait in the queue and then get the order. Then you got to go drive and then you got to drop it off. You might have to be dropping it off at the 12th floor, apartment building.

In New York, this can work okay because couriers are on bicycles. As we'll talk about later, DoorDash did really embrace different forms of vehicles for dense cities. But in the early days, in San Francisco, you're going to bike around and do this? No, you need cars and motorcycles.

Ben: Yeah, this 'operate at the lowest level of detail' thing is really one of the things that makes this company special. The quote is, "Averages in our industry are meaningless. It’s the distribution that matters. No consumers care if our average delivery time is 35 minutes if they received their food in 53 minutes."

It's such a great point. It's a very Amazonian way of looking at it where you're obsessed with every customer on an individual basis rather than welled-up metrics. For this business in particular, one bad experience, you could lose trust and never rely on them to deliver your dinner again especially if you have company over, you're really hungry, or whatever the thing is. You can blow it with one bad customer experience.

David: Yeah, so this going to San Jose was brilliant and it works amazingly well. They did YC in the summer of 2013. By the beginning of 2014—we're now just about a year since they had that first delivery to the Weed the People author on paloaltodelivery.com—literally one in six people on the San Francisco Bay Peninsula—not San Francisco itself but the Peninsula below San Jose, Mountain View, Palo Alto, Cupertino; there are millions and millions of people that live there—have used DoorDash. They just ran the table on the market very, very quickly.

On the back of this in May, they went from being middle of the pack in YC, raising a good seed round from great people, but clearly not as large as some of their peers. There is a $17 million Series A from Sequoia at a $73.5 million post–money valuation led by friend of the show, Alfred Lin, former Zappos' COO.

It's off to the races here so they said, okay, we're going to use this money, we're going to expand out to other markets. Later that summer in June, they went to LA. They run the same playbook in the suburbs there, and then they go to Boston next which is interesting. I assume also in the suburbs, but they also go into the urban core in Boston with cyclists. Boston's a great city for this because it's flat.

Ben: Oh, yeah. You do it in any West Coast city, you're in a world of hurt.

David: Exactly. This is before ebikes and scooters of all various types had really become a thing. It's all going great off to the races. This was summer and into fall of 2014. By early 2015—we're now less than a year after the Series A—they are alive in eight markets. They raise a $40 million Series B—again, we're two years removed from paloaltodelivery.com launching—led by Kleiner Perkins at a $600 million valuation. John Doerr basically comes out of retirement, he's ready to move along—I think he's Chairman of the firm at this point—he joins the Board.

Ben: If you've listened to the show for a long time, you know the name John Doerr. Google, Amazon, the point to drive home here is John is arguably the greatest venture capitalist of all time. He came in, personally did this deal. If you think about that, $40 million on $600 million, they sold 8% of the company, less than 10% of the company in that Series B and got John Doerr to do the deal. The way to read into this is the company is going gangbusters and has a lot of leverage at this point.

David: Absolutely. Today, it's not uncommon to see Series Bs happening within two years of a company's life, raising this amount of money at that valuation with less than 10% dilution. This was not common back in those days. Yes, seed rounds were happening at expensive prices already but this hand trickled down, they're trickled up to the Series A and Series B part to the market yet. This was an eye-popping round that happened.

Ben: Let's talk about what it takes to launch in a city because now they're ubiquitous in the US. They were in every suburb. It's crazy. There's some stat that it's either 85% or 95% of the US population that lives in an area that has DoorDash at this point. At this time, for them to launch any city, because they haven't really signed a lot of big national chains yet, it's just as hard to launch for this city as it is your second city because you need to go get all the restaurants, you need to go get the drivers, you need to do all the consumer marketing because people don't move that much between cities. Just because you're alive in Palo Alto and Boston doesn't mean that someone in Tallahassee has heard of you.

David: Exactly. It's actually in July of 2015, shortly after the Series B, that they signed their first partnership with Yum! Brands to do Taco Bell in the markets that they're in. Then later, Yum! also launched KFC. It was part of Pepsi. It has spun out of Pepsi. It was Pepsi's restaurant brands—Taco Bell and KFC—that had spun out and now it's an independently-traded public company.

Ben: I don't remember if it's still this way, but at some point, Pizza Hut was lumped in there. That's why you have those Kentacohuts at highway rest stops.

David: That's great. I think Pizza Hut is now independent. I'm not 100% sure about that, though.

Ben: When Acquired drifts into conglomerate land and out of tech, that'll be a fun one to cover.

David: That's a good point. The thing here is these guys figure out what it takes to operate at the lowest level of detail and make these launches and this crazy business work. Having these national brands to be able to go in and open markets with, hey, you've never heard of us but do you want Taco Bell and KFC delivered? Especially, if you live in the suburbs. Lots of people want that.

Ben: It's an appealing-enough value proposition even before they sign any local restaurants.

David: Exactly. After this round and with this going on, this big national partnership, they start to attract some attention. Specifically, they attract attention from two audiences. First, Uber. Pretty early on Uber's life—we talked about this on the Uber episode—they started experimenting with other things. They had Uber Everything, they were delivering ice cream. I remember one year early on, they had puppy hugs or something like that.

Ben: Uber Puppies. In 2015, they did Uber Health so you get a flu shot. That was a nurse that got Ubered to your office. In fact, you mentioned the ice cream thing. I remember from that promotion, I actually still have the t-shirt that I got when I got my Uber-delivered ice cream cone.

David: That must have been a marketing stunt.

Ben: Totally was. As was Uber Puppies. They definitely were experimenting a lot with what else could take an Uber deliver to your house or your office besides a person?

David: Yeah. They also get as much as anyone besides DoorDash at this point. Density is super important. Utilization of drivers and the network is super important.

They’re looking at this and they launched Eats in 2015. This is how hard what it is that DoorDash was doing. Uber said, I don't think we can really make this work in the same way because this is so hard, all the reasons that we said.

The first version of Eats that they launched—I don't know if you remember this—they partner with the restaurants in the city, a small number of them. They load up in the late morning, food in heaters in the back of Uber drivers and have their Uber cars just driving around the city, waiting for orders to come in for salads or hot meals.

Ben: David, a mutual friend of you and I who did operations for Uber at this time was telling me about the massive industrial strength refrigerators that they had purchased and kept in the Uber engineering office because they don't have a separate facility for this yet. The mad rush at 10:30 AM was all of the Uber drivers showing up to get the food out of the refrigerators that had been heated up and then put into the heaters in the back of the Ubers to go and start the delivery routes.

David: Yeah, of course. In Mancherry we try similar things as well at dinner. I can't remember. The first version of Eats was big at lunch. I don't know if they did dinner as well. They probably did it at some point.

Ben: Was the name not Eats? The name was something slightly different, too.

David: I think it was Eats. They first had Fresh, but Fresh was more groceries and drugstore-type things.

Ben: Interesting.

David: If I have my history right.

Ben: Quickly, Uber then is way actually what people on us with Doordash is doing. We need to invest in building out the infrastructure to do that, too.

David: Well, it's interesting. They do get there. They get there in 2016, they realized that pretty quickly. But the narrative shifts so hard on the space here. I don't know if this is true but looking back on this now at the historical perspective, I wonder if what Uber did here was part of how everything shifted so hard perception-wise against Doordash.

You've got Uber, this titan of startups along with Airbnb. Everybody says one of the two—at this time—canonical next-generation Internet companies is being built in Silicon Valley. Uber is basically voting with their feet that you can't make this operate profitably—the full logistics network that Doordash is doing. They're having the resort to doing this driving food around in cars to make it simpler. Interesting.

Meanwhile, DoorDash has raised all this money. They're growing quickly. Consumers (at least) love the surface. They're entering all these markets. There is the $40 million Series B. Their plan is to spend the money. They are going to do it and keep raising. To do that—of course as you are launching these markets—does take a huge amount of capital. As you're saying, Ben, you got to go acquire the consumers, you got to acquire the restaurants, you got to acquire the Dashers.

Then—this is another moment in Acquired history—in November of 2015, another blow against the perception of businesses like DoorDash, Square goes public. We covered this on the show. This was one of my favorite all-time Acquired episodes, our Square IPO episode.

Ben: We don't do this often but we nailed that. I just feel so good about that episode, even today. It's a little bit of our older style. It's not as enjoyable to listen to. I don't think there's more recent ones, but in terms of analysis, certainly, the market had decided when they IPOed that it was not a good stock.

For years afterwards, I think people had a lot of hate toward this company. They just grew 30% year over year and still are. The narrative has shifted now where people love Square, especially with cash.

David: And Bitcoin. We were texting yesterday about this DoorDash episode and the Airbnb episode we're going to do tomorrow. Ben, you had such a good point about us at Acquired. When we do this live, on-the-scene episodes, it's actually when we are at our second best. We're still good, they're better than the average Acquired episode—not that the average one is bad, hopefully—but our best Acquired episodes are when we have a view on a company that other people don't and don't realize yet. That was the case with Square.

What are we talking about, for people who don't remember the history? Square had been also a Silicon Valley darling. Raised money from Sequoia, plenty other great firms, multi-billion dollar valuations. They were in this first group of unicorns talked about alongside Airbnb, Uber, Lyft, and the like.

Then they made a crazy decision (relative to their peers) to go public. They go public in fall of 2015 and the market completely turns against them. This was the down round IPO. They’re priced at $9 a share for a less than $3 billion market cap. Oh my goodness. Today, they are trading at $213 a share and a hair under $100 billion market cap. But Meme Style popping up all over the Valley and TechCrunch, dead unicorn, this is going to be the reckoning, and the bubble has popped.

Ben: And the impact on that for employees. That share price was under the last two rounds. Anybody who got stock options in the last 2½ years before they went public were completely underwater and worthless, unless you held them all the way through the stock recovering.

David: People did. Ratchets, too, which those private rounds have been at high valuations, but had terms in there that if the company were to go public at a lower share price, those investors would get trued up to the new, lower share price. It was just a bloodbath.

One of the things that the public markets really penalize Square for was this question of whether this payments business looks like a bad business. It looks like poor unit economics. You're basically operating these payment rails for your small business customers at lower margins than Visa, or Mastercard, or Amex. This seems bad. You're selling dollars for $0.90. We're going to put you in the penalty box.

Now, Tony had worked at Square, so there was that connection. It's a similar story here of we're serving small businesses and we are operating this crazy complicated logistics network for them in a way that Grubhub wasn't doing just, like Square was operating this payment rails for them in a way that Visa and Mastercard weren't doing, and everybody's like, you're just giving away free value here that doesn’t make sense.

Ben: An infinite customer demand when you're selling dollars for dimes. I don't doubt you can grow fast.

David: The other thing that happens here is the first big lawsuit hits DoorDash. They had been delivering In-N-Out in California without In-N-Out’s permission. They didn't have a deal with In-N-Out, but they picked me, hey people, I want to order, well, come in.

Ben: The non-partner restaurants.

David: The non-partner restaurants. In-N-Out sued them in November 2015. There would be many other lawsuits along the way with DoorDash.

Ben: You've got Uber and Square that are creating these bad public narratives for DoorDash for their prospects.

David: And you've got lawsuits hitting. Meanwhile through all of this, DoorDash is investing capital they’ve raised. They're growing super fast. Clearly, consumers liked this. Sequoia and Alfred say to the team, things are going great. You're going to need to raise another round. You've been in for more than our pro rata in the next round. We're going to commit that we'll do up to $40 million in your next round up to $1 billion valuation, but we want somebody else to come in and price it.

Ben: And the last round had been at $600 million?

David: $600 million the year before.

Ben: Sequoia is like, we're not going to lead but—

David: We're not going to lead, but we’re in, our money's good. I got to imagine this was a huge lesson for Sequoia as well. This was before the global growth fund. It was later after this that they just said, we're not going to mess around with anybody else, we'll lead the rounds. But they said, we're not going to lead. Tony goes out to fundraise and it is just a slog. Nobody wants to lead this round and invest in this company.

I remember this so well, I graduated from GSB at this point. I was back at Madrona, talking with all my other VC friends. Tony didn't come pitch us at Madrona. We did early stage at the time and wouldn't have led this round, anyway, but everybody was like, man, DoorDash came to see us. Unit economics are terrible. It doesn't make sense. I can't believe Sequoia is putting their money in here.

Ben: What was it that Sequoia saw then if people believed that unit economics were terrible? Because what we can see now is cohorts over time—we'll touch on this later—but basically, when people retain, they start spending more, make this a regular behavior, and need less incentives.

David: I don't know. It's a good question. It's hard to tell. Certainly, we don't have that time frame in the S-1.

Ben: The only time frame disclosed is the last 18–24 months.

David: But for whatever reason, whether it was blind faith or actually based on the numbers, knowing Alfred and Sequoia, I think it was probably based on the numbers. They did really believe in the company.

The net of it is Tony's out there fundraising for six months. He can't find a lead. Nobody wants to invest in the company. Ultimately, in March of 2016, even though Sequoia had said they didn't want to lead, they did lead the round. They lead a $127 million Series C. They bring in the GIC—the sovereign wealth fund from Singapore comes in as part of the round as well—and they bring in some of Sequoia's LPs as well to bolster the round. It happens at a $700 million post-money valuation.

So, $127 million and seven posts went down. The share price is down. This is a down round that happens, and this was so hard for all of this. I don't really know Tony personally at all. I haven't spoken to him since GSB, but I just have to imagine this was crushing. Just to complete, says so much about him that he persevered through all of this and the company.

Ben: And the whole team that stuck with, because at that point, you're starting to see stars in your eyes because all the internal numbers are going up. You hold a number of shares and the way people probably think about it as, I hold this percentage of the company and you're told it's going to get diluted down over time, but in your head, not that much. And then something like this happens and you're, oh wow, it can get diluted down a lot.

David: And we're just getting started here. We're only in act two. Tony writes on the company's Medium account announcing the round. He says, “It's easy to look at the landscape over the past few months and think that the technology industry has had its best days behind it. However, at DoorDash, at least, I take the contrarian view. We are growing fast while building a scalable business that is built to last.” Other VCs must've just been laughing in their shoes, reading this. “In 2015 we added 19 markets to DoorDash, including two in Canada, and have completed millions of deliveries across our footprint. We've built a business based on first principles that is helping grow local businesses across North America, and we have more than doubled our staff by recruiting great...” blah, blah, blah. “The fact that in a tough economic market and in a crowded space, we were able to raise more than $125 million,” here we go, “without resorting to valuation gimmicks and employee-unfriendly terms is a testament to the incredible team, technology, and opportunity at DoorDash.”

Ben: Oh man, that's right. At this time, everyone was so obsessed with being a unicorn and being a billion dollar company that people were taking crazy, participating preferred terms. A million high liquidation preferences, the ultimate downside protection, many rounds before you would have that downside protection built in.

David: Really private equity–style capital coming in and it was private equity firms. TPG was doing this, you saw big traditional private equity firms come in and say, oh, I'll make that trade. You're basically guaranteeing me my money with some upside.

Ben: You can write your Medium post and say you're a unicorn?

David: Yeah. They have this capital, though. They pull back on market growth. They finish 2016 with 28 markets that they're in broader markets. They're individual cities and towns within the broad geographic market. They only added 6 that year, even though what Tony said they added 19 the previous year. Clearly, they're trying to conserve cash. The same deal in 2017. Actually, towards the end of 2017, they signed their next really big national distribution deal with Wendy's.

Ben: Before we move on, in the blog post there's two or three words in there where Tony talks about the economic climate. It is worth remembering that there was a macro-economic stock market hiccup in Q1 2016. I'm trying to remember exactly when that hiccup was, but there was all this narrative around the longest bull run in history, the S&P is at an all time high, and tech's a bubble. There was a moment the market got scared, obviously came roaring back, and then even threw a global pandemic came roaring back again. The first time I read that Medium post, I was a little confused by the economic climate term that he referenced. And then you go back and you look at stock tickers, you’re like, oh yeah, I forgot about that.

David: By end of 2017, even with slowing market expansion, trying to conserve cash, it is still incredibly capital-intensive to run this business. They're out of cash at the end of 2017, and they can't raise money. This was not announced. We only found out about this by going through the S-1; it’s in the S-1. They do a $60 million insight bridge round just to keep the company alive at the end of 2017. That was led by existing investors and one new investor, according to the S-1. I’m not sure who that was. I don't think it was SoftBank yet, but TBD. I'm sure one of the existing investors at least was Sequoia stepping up to keep this company alive.

Ben: What you hear Sequoia doing here over and over again, that's how you build a position in a company, especially if you have a big fund. Sequoia owns how much of this company at IPO, 18% or something like that? You're seeing in the narrative here how they built that position over time, especially having conviction when others didn't.

David: As you alluded to at the top of the episode, everybody else who had invested along the way, they're not in the S-1 because they got massively diluted here.

Ben: Meanwhile, just one more quick comparison, Uber in it's private lifetime raised something like $8 billion. They IPO’d in 2018 so by 2017, they had already raised the majority of that. DoorDash is a company that's raised in the low hundreds of millions at this point, and their biggest competitor is a better part of $8 billion funded, junk or not.

David: Also has this other synergistic business to find out what they're doing, theoretically synergistic business. We'll get into it. End of 2017, I remember it was March 2016 when Sequoia stepped up to lead that inside around. We're now at the end of 2017, 18 plus months later, companies out of cash have to do a bridge round. It looks like death's door here and then history turns. I would say on a knife point in this case, it turns on a singular man and his vision one might say. We’re now in March 2018 and DoorDash’s fortunes change.

Ben: This fund wasn’t quite in the back of a taxi cab like Adam Neumann's was. This one doesn't have quite the same story to it around Masa telling Adam that the crazy man beats the smart man, or whatever it is in the fight. But kind of the same approach.

David: It's funny. The code is Masayoshi Son of SoftBank and the vision fund, which is what we're talking about here, when they invest, WeWork. There's the story at the back of the Uber, Our Taxi with Adam Neumann and says, crazy man beats the smart man. Obviously, that went horribly wrong. In this case, I want to make the argument and the markets are proving SoftBank right here today. This was the smart, not the crazy bet.

Ben: SoftBank is looking like a genius out of all this. David, how did this deal go down? And then more importantly, how did they do this and Uber?

David: Oh boy. I don't know the answer to that. I'm going to guess the answer is DoorDash was desperate for cash.

Ben: SoftBank was already a big investor in Uber at this point.

David: Yes. I believe this is 2018. I'm pretty sure they're already the largest investor in Uber, at this point. They come in and do a $535 million Series D in the company, that's check size, not valuation. This company has raised a little over $200 million previously in all the capital that they've raised. SoftBank comes in over $500 million pumped into the company. I said a minute ago that I thought this was the smart move, not the crazy move. Why would SoftBank do this? Were they just being cowboys, maybe they had some dumb luck here. But I don't think so. They did certainly do plenty of nutty stuff. SoftBank is basically investing globally, but most of their dollars are going into two markets at this point, the US, North America, and China. They are not investors in this company in China, in Meituan which had at this point merged with Dianping, it was Meituan-Dianping, but they were active investors in the Chinese ecosystem, and maybe in one of the competitors.

Ben: Meituan is food delivery?

David: Meituan has a very interesting story of its own that we need to tell one day on Acquired. But at this point, Meituan has become food delivery and they are starting to dominate the Chinese food delivery market. They are on a clear path to becoming the winner. This is the dream. This is what everybody was chasing with Uber and Lyft.

In theory, the same thing here with food delivery was, you might have competition. You might have bad-unit economics while you're investing in growing the market, but at a certain point, you're going to get to a spot where you have enough density, that you can have low enough prices to all participants in the ecosystem, and just have enough volume of transactions going through, that you're still able to eke out a marginal profit at that while having way lower prices than any competitor. You tip the market, you become a monopoly, essentially you win.

This is happening in China with Meituan. Now, Meituan real quick, we'll do a whole episode on them someday. They started as a Groupon clone in the early 2010s in China. They went through a whole long, crazy history, but by this point they had pivoted into food delivery, merged with their biggest competitor, Dianping. They were dominating the food delivery market in China, which is even bigger than the food delivery market in the US. They went public later that year in 2018 at a $50 billion plus market cap. Today Meituan, which we'll get into later, is much more than food delivery. Now the Series A investor in Meituan, it's Sequoia Capital China. They knew what was going on here, too.

Ben: So good.

David: SoftBank comes in. They do this big round. There's a catch though, as we go along.

Ben: What’s the valuation on the $500 million they're putting in?

David: Oh man. $500 million round, that'd be a $5 billion valuation. Nope. $1.4 billion post-money valuation.

Ben: DoorDash is now a company.

David: DoorDash is now a unicorn, but that is coming at a very high cost, 38% of the company that they sell in this round to SoftBank and the other investors. Here's the crazy thing. They raise all this money, $1.4 billion valuation. The actual share price is still lower than the Series B that Kleiner led at a 600th post back in the day, because the dilution is so large here that while the post-money valuation is obviously much higher, over 2X higher, the share price at which shares are being sold is still lower than the Series B.

Ben: That's crazy. I did not realize that this could possibly be a down round, but you're right.

David: There were two down rounds that happened.

Ben: SoftBank now owns a ton of this company.

David: And still today, at IPO, the largest shareholder.

Ben: I bet. It's hard to dilute that down.

David: Now, other existing investors did come in for pro rata as well. It seems quiet, and others in this round. But this changes the game.

Ben: They're back in it. It’s a new breath.

David: Not only are they back in it. This deal, literally as costly as it was to the company and its existing shareholders, creates a whole new life and opportunity here. DoorDash goes back on the offensive. We're now in 2018, remember Uber is getting ready to go public on their own. They've got the new CEO Dara. They're going through all of this stuff. They've got their own investors and perspective. Public market investors breathing down their neck about profitability, path to profitability.

Ben: Certainly, they had their own challenges aside from that, too.

David: Exactly. We haven't talked about Postmates yet in this episode, but they're struggling. They haven't raised money since 2015 and remember, a capital intensive business.

Ben: Three years without raising.

David: Three years without raising money, going to be pretty hard to keep winning shares here. DoorDash has all this money. They say, we're going big. They go on day literally 5X, so multiply by five the number of markets that they're in during this year in 2018. By the end of 2018, they are operating in over 3000 towns and cities in America. Enormously wider footprint than, certainly, Postmates, or Caviar, or other independent competitors and approaching and probably even surpassing, in terms of footprint, Uber at this point. They start taking a ton of share in the market. They quickly become the fastest growing food delivery company. They overtake Uber during this year for the number two spot behind Grubhub. Grubhub is still the biggest in 2018.

On the back of this presumably, we don't have access to the data, but as they get this density, even though they're spending all this money to acquire new customers through promotions, the unit economics and their attention starts to work and it starts to play out like things have in China with Meituan. They build loyalty on the platform. Before the year is even out in August of 2018, they raise another $250 million from Coatue and DST at a $4 billion valuation.

Ben: They’re filling on themselves again.

David: Yeah. Less than six months after that highly dilutive SoftBank round, now, they raise a quarter billion at less than 5% dilution. Incredible.

Ben: Got the leverage back.

David: Got the leverage back. Then in the next year, in March of 2019, they finally passed Grubhub and became the number one player in North America. Summer of 2019, as we've talked about on the show, they acquired Caviar for $400 billion from Square, that adds even more restaurant supply and diner demand to the platform. They consolidate there. They raised even more money at increasing valuations. By the end of 2019, they raise $600 million at a $12.6 billion valuation. Now, we're 10X, the price of the SoftBank round already within and a little over a year. Kind of basic.

Ben: What tipped there? Because they went from on the ropes to being a darling. Obviously, having $500 million to spend can give you the opportunity to do a lot of growth quickly, which we saw in the new markets. What was changing around the company that would change people's opinions on why they're willing to bet on this thing so heavily?

David: The two hypotheses I would have are, one, simply watching Meituan in China and that they are making it work, they are becoming a dominant number one player in the public markets at this point in time, and their stock is performing exceedingly well. They are now at over $100 billion market cap as we record today. And then, two, all the other players have suddenly either shot themselves in the foot or taken themselves out of the game. Square gives up with Caviar and sells to DoorDash. Uber is now public and going through all the struggles that we've chronicled on the show, not to mention pre-public with Travis, that's in the past.

Ben: Early 2017 was no cakewalk for them, many self-inflicted wounds.

David: Multiple years now of self-inflicted wounds. Postmates can't raise money. Meanwhile, DoorDash is out there spending money, they're the only player doing it. The window finally opened to realize or attempt to realize this dream, the Meituan dream, of becoming a number one player in a highly competitive market.

Ben: Right. The thing that we see in markets is an explosion and then consolidation, especially when there are these low margin, highly competitive ones. You're right, as everything started to consolidate around them, and they suddenly had a large balance sheet, it became possible to see how they would be the one left standing who would roll up others rather than being forced to join one of the big guys on unfavorable terms.

David: As we’ve seen, it's even become a question of, do they need to roll up anymore, or are they just going to take so much share? It doesn't matter. By the end of 2019, they finish with—and this is the second year, we have full financials for them in the S-1—$885 million in net revenue, up over 3X year on year, 263 million orders also up over 3X, 8 billion in total gross order value—and I thought this is interesting too—60% year over year, same-store sales growth on the platform. Taking out new market launches, taking out new restaurants added to the platform, just for existing restaurants that were on the platform last year, doing 60% more sales the next year in 2019.

Ben: The question you're asking yourself if you're one of those restaurants is, is all 60% of those new customers? Or is that some of my old customers shifting their behavior toward ordering through this thing where I don't make as much profit?

David: Before we get into that, the other thing that happens in 2019—hopefully, it's come across, we're so excited—the lavatory of just this journey that DoorDash has been on because they have really faced the fire here and pulled out of it. On the other hand, we can't let them off the hook. The other thing that happens in 2019 is tips.

Ben: We're going to dive into it because it's an important thing to know about the company. This may just sound very familiar to lots of you. I want to open this by saying the company's response to their tipping scandal is completely nonsensical. I have listened, and watched, and read many interviews with people at the company, trying to explain what they thought they were doing that was right here. It is just absolutely predatory and wrong. Honestly, none of the explanations make any sense to me. But David, what was happening?

David: What was happening was always, or at least from the early post-Palo Alto delivery days, early DoorDash days as a consumer on the platform, you would order, you would pay for the food, then there would be a service charge, and then you'd have the option to add a tip for your Dasher. It comes out that The New York Times did a big investigative piece, it was July 2019, that tip that you assume when you're tipping your courier, that money is going to the courier like it would in a restaurant when you tip the waiter and it goes to the waitstaff, and the cooks in the kitchen, and maybe there's a tip pool, but it's all split between the employees—and that tip is going to DoorDash. DoorDash is combining the tip into the total value of the order. And then they are splitting up the economics of the order, according to their fee splits.

Ben: What they were doing is they were only paying the tip out to the driver, if the driver didn't make enough in their base from DoorDash, from the order that they deliver it. They're, oh, we have to give you some of your tips because you didn't hit the minimum. But if you did hit the minimum, then DoorDash was keeping the tip.

David: It was like the minimum and the maximum. That’s not good work.

Ben: For anybody who wants to listen to the company's response to this, it sounds good and you're nodding your head until you're like, wait, that doesn't make any sense. They try it and blame it on a UX issue sometimes. It's originally intended to help the Dasher, and you're like, how could it possibly have been trying to help the Dasher? It just goes to illustrate what a freakin tight margin business this is and what a tight rope they're walking to make this thing profitable.

David: Yup, that’s it. There's no excuse for it.

Ben: Nope, but they fixed it. They did a complete 180, the tips are real tips now as they needed to do.

David: Exactly. That's interesting, maybe it was there's no way to know. Maybe it was part of what helped make the unit economics work during this period that doesn't make it right to do it makes it wrong still. But now they fixed it, and the business unit is economically positive, even with not stealing the tips. Let's pick back up. How does this happen? Basically, 2020 has been a rough year for a lot of people. It has been the opposite of a rough year for DoorDash.

Ben: DoorDash had their Zoom moment.

David: They basically had their Zoom moment in the private markets. When the pandemic hits in March in the US at least, DoorDash grows over 20% that month, which was already coming off an $8 billion-plus base which is pretty incredible.

Ben: For context, a company growing 20% in a month is like what a good seed-stage company with product-market fit can do. This is a company that did $8 billion the previous year in gross order value.

David: I don't have the stats for the other platforms handy right now. They grow too with the pandemic, but nowhere near the degree that DoorDash grows. Their share taking of the market just accelerates further throughout COVID such that by the time the S-1 hits, which we'll get to in a sec. DoorDash now has 50% of the entire food delivery market in America up from 20 something the year before.

Ben: Over the year, in three quarters between the beginning of 2019, and when the IPO, the S-1 was filed, they just had an extraordinary run of becoming the dominant player in the space. It's hard to figure out why. I don't really know why they smoked Uber Eats so hard. UberEats grew too, but in terms of share how DoorDash went from a one-of-four player with 20% something percent share to now over 50%.

David: If I had to hypothesize, it's two things. One, being willing to spend on customer acquisition. Just in San Francisco at least, I noticed especially at the start of the pandemic way more billboards for DoorDash than anything else, than any of the others. I don't think I saw or I've ever seen and it soars up the Postmates billboard. I'm sure they exist somewhere.

Two though, it is related to this being willing to fly low to the ground, that DoorDash has always operated with the prices that you are paying as a consumer are notoriously opaque in the space. But this is a feeling more than any data that I have that generally ordering on DoorDash, I am relatively paying a fair, pretty close to the price of the food that I would also pay if I were to go order from the restaurant directly. Now, I'm also paying the tip to the courier to deliver it.

Ben: And the additional fees?

David: And the service fee, but it's all reasonable.

Ben: The food may or may not cost more, or you're saying it doesn't, there's a delivery fee. There's a service fee. There's a tip. And then there's tax.

David: DoorDash just has the service fee if you're ordering with DashPass.

Ben: Yes, that's the important distinction. One of the fees drops to zero and one of them gets shaved by $3.

David: Delivery. Yep, drops to zero. The other thing that we didn't talk about is they do a deal with Chase Sapphire.

Ben: I looked it up because I hate just throwing out wrong numbers on this show. In the two and three-quarters years from January 2018-October 2020, they grew from 17% market share to 50% market share. It’s just an extraordinary last 2 ½ years.

David: To finish the point I was going to make before, certainly on Postmates and it's a feeling to an extent on UberEats, I've ordered from those platforms and then looked at the bill and this is crazy. How am I paying $70 for two dishes from a Thai restaurant? Just from all the markups that they were doing on the food.

Ben: I think that's fair. It's totally fair. I will say it feels nicer as a DashPass member, that the prices do somehow feel more reasonable at the end of the day. If the prices go down just enough, you're like, okay, it's meaningfully cheaper to order compared to Uber Eats. We should explain what DashPass is. You pay $10 a month, it's basically Amazon Prime, they knock off some amount of the fees. It makes sense for you if you’re ordering a lot at DoorDash, some numbers on that. They do call it a membership program to the physical world, which is an interesting way to put it.

David: We're going to get into discussing that when we get to narratives.

Ben: Yes. They've got 5 million customers on DashPass. If everyone paid for that, it would be a $600 million revenue business on its own, just DashPass. Now, obviously, there's some internal accounting there because they are losing the fees that they would be making if you weren't on DashPass. But much like Amazon Prime, I'm sure they make up for it in the amount that you are now loyal to and conditioned to have a habit of using DoorDash instead of competitors or frankly just making food on your own.

David: They were retaining you on the platform.

Ben: The way Amazon Prime famously works is originally they were like, if we can just break even, then it'll be nice to be able to increase the number of orders people make. Now, it's very much the mindset of we don't need to break even because we just know how much more that makes people invest in the Amazon ecosystem. People can correct me if I'm wrong on that, but that's my impression on, despite the price hikes, how they feel about it.

David: The amount of value you get as a consumer out of that, which is $129 a year.

Ben: It’s crazy. David, your comment earlier on Chase Sapphire Reserve, the way that I have DoorDash is not at all because I felt like I should pay $10 a month to have DashPass, it’s because my credit card came with it for free this year. Interestingly enough, I do think it worked at least for me personally, wildly anecdotal, this is not data, it did make me a more loyal DoorDash customer to the point where maybe three times, I compared my exact same cart in DoorDash versus Uber Eats and it was $5, $8, $10 cheaper on DoorDash. I was like, great, I don't check anymore in the same way that I don't price check Amazon anymore, so that totally worked.

The thing that is interesting to me about that Chase Sapphire Reserve deal is the customer segment they're going after because of the Sapphire Reserve—it's a fascinating credit card, it's a $550 annual fee, of which you can get some meaningful amount, $300 or something back—

David: You have $350 back.

Ben: —travel credit. But then you can get the rest of it back in these other benefits, in Lyft Pink, which is the same thing as DashPass, but for Lyft in the DashPass, which has a value of a hundred-ish dollars a year. Now, they're crediting back your Peloton membership.

David: Oh, it’s huge for you.

Ben: Were we still flying, you effectively get 7% back as long as you redeem it for travel because you get the 5%, but then it has the 50%. It's an amazing card if you have a particular lifestyle where you eat out and you travel. A wildly successful program they ran out on aluminum, they were printing on paper for a while and the initial batch and they couldn't sell enough of these things.

It is very interesting for DoorDash to say, we want to throw in with this lot and get this crowd to be DoorDash customers because it probably skews a little bit more towards the city. The suburbs strategy was a great go-to-market and now they're saying, we need all the customers. I'll be very curious, I don't think they'll ever disclose it, but how many of these 5 million people that are currently using DashPass are via this Chase Sapphire Reserve program? How many of them are actually paying? And to contextualize that 5 million number, how many people are currently DoorDash customers, David? Do you have that off the top of your head?

David: Eighteen million, I believe.

Ben: That’s a meaningful chunk, that's a little under a third of their total customer base are on this reduced-fee program.

David: Yeah. The net of all that in Q1 of which it's only marching Q1, that is the pandemic month for the company.

Ben: Because they’re so US-based and almost no international penetration

David: In Australia but very small in reach.

Ben: Right. It wasn't till March that they would've seen anything.

David: They reach overall, for the whole company, positive contribution margin in Q1. To define contribution margin for a second why this is so important, contribution margin is you've got your revenue, $885 million in revenue, net revenue that they did in 2019. If you take out all of the variable costs associated with that revenue, the cost to serve, support, and most importantly, sales and marketing—how much sales and marketing spend, how many promos are you doing to acquire all the customers and retain all the customers that go into generating that revenue base—take that all out for the whole rest of the company's life up until this point, they were losing money at this point. They were giving away dollars for less than a dollar.

Ben: $0.97 or something.

David: Yep. At this point in Q1, it flips. They're now contribution margin-positive. Now, they're not either cash flow or net-income-positive as a company at this point yet because they still have their fixed costs, their engineering base, their GNA headquarters, that rent, we'll see if they keep that, all that they're paying. But this is a huge moment in any company's life, and I believe I did some work based on what I could tell from Uber's 10K for 2019. Uber only in 2019, just barely hit this mark. They were essentially a contribution-margin break even in 2019, despite being way older, way bigger, having multiple products around for a long time. DoorDash hits this in Q1 and then continues to accelerate throughout the pandemic and the rest of the year.

Ben: Accelerated growth or get more contribution margin positive?

David: The answer is both. Definitely, growth and contribution margin. In the last quarter Q3 ended September 30th, contribution profit improved to $215 million which a year ago, they had lost $52 million in Q3, and I believe the total contribution profit for the nine months of 2020 so far is $433 million. They did half of that in Q3, spread across Q1 and Q2, it would obviously be less so they’re accelerating.

Ben: Their contribution margin was -70% then -20% then -20%, exactly what you talked about in Q1. It flipped, where they were +7%, then Q2, +29%, Q3 was +24%. Having a 25% contribution margin is great. The big question is, will this be able to continue after the pandemic? In one of the sources that you can check out in the show notes, I remember reading that someone was like, they're effectively essential infrastructure for the country right now. I sure hope they can be profitable with that demand but all power to them there.

David: Totally. Two more things to wrap up history and facts. On election day, November 3rd, 2020, a huge moment for the country, but also for DoorDash, and Uber, and the whole gig economy. Prop 22 passes in California. It was super controversial. We said we would get back to gig labor here. We won't go into all the ins and outs here, but the TLDR is California has a crazy legislative and legal system where citizens actually vote directly on propositions that in fact, the laws instead of a Republican representative-type system, and Uber and DoorDash, as well as the other gig economy companies had put forward this Prop 22 to permanently create space and classify their labor as contractors and gig economy workers.

This idea of a third type of workers—you have pure contractors who are at 1099, you have pure W2 employees. California and other states have been trying to classify gig workers as making companies classify them as W2 employees. Prop 22 says, no, they are contractors. They will be paid as 1099s, but it's this third class of business. Basically, it opens the way for the companies’ sustainable economics on their labor supply. That was a huge win for the companies, regardless of what you think politically, whether this is good for gig workers or not, it happened, it removed an existential threat to the business. Ten days later on November 13th, 2020, DoorDash releases their S-1 and files to go public.

Ben: As we wrap up history and facts here, should we talk about some of the interesting nuggets revealed about there?

David: Absolutely.

Ben: One thing that I found interesting was trying to put into context the size of their business. This was useful for me because we talk about all these different companies and numbers. Once you get to a certain level of a big number, there's a big-number syndrome that takes over where you're like, I don't even understand how many billions are normal. You get into this weird headspace. There was $8 billion in gross order volume in 2019 as we've talked about, which means $8 billion of food were paid for including taxes, and DoorDash kept $880 million of that as revenue. That's an effective take rate of 11%. All their cohorts have different take rates, they started at different take rates. There are different incentives applied to each one. It's an 11%-15% or 10%-15% floating thing that starts high and then goes down over time as you receive less incentives.

David: In terms of the incentives that the consumers are getting, but the take rate for DoorDash gets higher over time as they're paying incentives.

Ben: Sorry, yes I said that backward. They had monumental growth. You can back into depending on how their Q4 goes that their run rate right now is something like a $22-$25 billion gross order volume on an annualized basis. For 2020, it would seem they'll probably come in around $25 billion in gross order volume. How big is $25 billion? To contextualize this, in the small-ish order values of food delivery as a category compared to, say, travel, which we will cover tomorrow on the Airbnb episode, it's hard to stack all those purchases on top of each other to get to a truly huge gross business.

Those who have done that successfully are in the e-commerce vertical, DoorDash has $25 billion-ish a year that moves through their platform. Amazon last year had $335 billion and when you look at Alibaba in China they had close to $1 trillion of gross volume through their platform, and even Pinduoduo which we covered to start this season had a $150 billion in GMV or gross volume.

David: Talk about the big-number syndrome.

Ben: That's 6X DoorDash’s gross order volume, and even crazier to put Pinduoduo's growth and scale into context is that they started two years after DoorDash did. But China is a whole different category, comparing any numbers to US-based.

David: By the way, we've talked about Meituan here, now we're talking about Pinduoduo. China is so different, we need to do more episodes. We need to do Meituan. Tencent owns over 20% of both Pinduoduo and Meituan, so if you want to index this, take a look at Tencent.

Ben: Another few interesting things that I thought were noteworthy from the S-1, were the existence of different products that I did not know that DoorDash had. Most notably, there's DoorDash for Work, which is competing in that market of office delivery that we talked about. We talked about DashPass. There are these two things that I didn't know about, DoorDash Storefront and DoorDash Drive, that are worth understanding because basically, the way you can think about DoorDash is they are the ones who are aggregating all of the customer demand. They're putting massive amounts of pressure on the back end of the supply chain—the person delivering it to you, and the restaurant—because they hold the customer hostage. They say I've got this customer. I can send it wherever I want. Therefore, I get to have outsized economics in this transaction.

For some restaurants, that's a bummer. For other restaurants they say, I got my own customers who love me. Sure, your delivery network is interesting and maybe your little checkout page is interesting. I'm going to operate my own business, thank you very much. I'm going to pay you a piecemeal for these things. If I can't get it from you DoorDash, I'm getting it from other people. We had Nick Kokonas on the LP Show to talk about Tock. We had this fun episode with him called arming the restaurateur rebels. That was a fun dive into, if you wanted to not use DoorDash, and you felt like you had a strong brand, and customer relationships and a big email list, whatever, how do you do that yourself?

DoorDash then realizes we got to compete. If people are unbundling us, we have to be able to offer our services piecemeal in order to compete with those who are building their own restaurant stack. Storefront is an interesting version where they say, look, you don't want to build your own complicated ordering website. It's a white-label ordering solution. They launched it in July. I don't think they want to be in this business, but they have to be. Otherwise, they're just going to lose those customers.

David: This is directly competing with Tock.

Ben: Tock and what's the other big online—

David: Ordermark?

Ben: Yeah. Ordermark federates it out to all the others. But there's a handful—

David: Toast?

Ben: Yes. They're letting you set up your own checkout page. Most of those don't offer the delivery because we talked about that, that's a very difficult tech problem to solve and an operational problem.

David: They partnered with DoorDash, but I assume with the drive product to do the logistics and delivery.

Ben: Right. It's interesting the Storefront ends up being $2 in order. There's a SaaS fee that you pay monthly along with that, but it's $2 out of every order. Go to DoorDash just for operating the little website that you drive your own customers to.

David: Is that covering the payment fees though?

Ben: It might be.

David: It probably is.

Ben: The second product is probably the more interesting one, David. The one you're referencing is DoorDash Drive, which is the white label logistics service, where restaurants can have food delivered from orders that they generate through their own operated channels like the telephone, maybe they used DoorDash Storefront, or a competitor, or they make their own website.

That's $7 per order and $1 for every mile after the first. I was like, "Oh, DoorDash Drive, that's interesting. I wonder, does anyone use that?" I have gotten Chipotle delivered from my Chipotle app many, many, many times and have never realized that it is actually DoorDash on the back end. A Dasher walks into Chipotle, picks it up, and brings it to my house. That is a really interesting business to be in.

You get to command obviously less of the economics because you don't control the customer relationship if you're DoorDash in this case that we're talking about. But it lets them leverage this asset that they've built for customers who say, "Hey, I do have my own customer relationships. I still want to pay you to use this driver base asset that you've created and all the technology to power the whole thing," and it lets them address basically a larger market than they would otherwise be able to address with the pure DoorDash marketplace.

David: Yeah, the analogy I've heard here, and I think it's apt, is DoorDash is both Amazon and the Shopify in this space. Amazon, in that they operate a marketplace that consumers go to, the DoorDash app, and they'll generate the demand and they'll send you marketplace orders, fulfill it with their logistics, just like FBA, just like Amazon does, and they'll take a cut of the transaction for doing that. They're also the Shopify where you got your own demand, just like you're saying, Ben, that's cool. Do that, we'll give you the tools to service your demand and you'll pay us for the tools.

Ben: Yep and they actually encourage their customers if it's like a Chipotle to do a list, they say, "Look, you have your customers, you have an app, you should do that. We should only extract $7 a value from you if you've got your own customers. You probably want access to our customers too, you should also list on doordash.com.

David: Just like lots of D-to-C brands sell on Amazon and sell direct.

Ben: Exactly. It's the omni-channel strategy for food. All somehow paying DoorDash along the way.

David: Well, to my mind, that's what I find, we'll get into more nuggets from this one, but that's what I find so impressive about the company. They have gone through this slog and built up this thing that everybody thought was impossible, and the thing being a local delivery logistics network that can operate contribution margin positively.

Ben: Yup.

David: Once you have that, then you can start doing all of these other things.

Ben: Yup. Before we finish out the S-1 nuggets here, we've got probably three or four more before we get into narratives, the bear and the bull. I want to thank Bamboo, the official sponsor of the analysis of Season Seven. Bamboo is one of the top growth marketing firms in tech, and they've supported world class growth programs for startups like AllTrails, Peloton, Rover.com, who we constantly tell our friends of the show and love them and all the folks they work with like Bamboo and many more. Whether it's paid search, social, creative production, attribution, product analytics, basically, if you're trying to grow digitally, Bamboo's services always have the same objectives in mind, helping tech companies earn their growth, marketing budgets back faster and retain customers longer.

I've read this a thousand times, I don't know, seven times now. It's interesting actually thinking about the concept of earning the marketing budget back faster and it actually ties right into what we're talking about in this episode. If you are doing a really good job at this and proving that the digital marketing you're doing is ROI positive, then that marketing team gets to go, "All right, we're going to have a huge budget and go to a bunch more interesting things. Try more channels, prove what works." Not that I just connected the dots, but I did think that was worth talking about on this episode.

David: Let's take the second part of the Bamboo, what they can help with and talk about retention. This I thought to my mind, the other hugely impressive thing in the S-1 is the cohort data that DoorDash published.

Ben: Finally, someone's publishing cohort data in their S-1.

David: I know! Come on, Uber. It is so impressive to my mind. They published three cohorts, 2016 cohort, 2017 cohort, 2018 cohort. These are all the customers that they acquired during that year and they published what happens to the amount of money that those customers spend on the platform.

The narrative had been about this space and all the companies in it, they’re spending so much money to acquire these customers multihome, they churn, this is a terrible space, everybody will lose money because you spend the money to acquire them upfront but then if they don't stick with you, you don't earn it back. Okay, that is not the case.

Ben: DoorDash wanted to brag about that.

David: DoorDash wanted to brag about it, exactly. As they should right? They are creating a market for their equity. Every cohort of 16, 17, 18 where there is at least two years data spends at least 38% more dollars in the second year on the platform than that cohort did in the first year. There is a large expansion here and depending on the cohort and the year, either second or third year, they're approaching over 1.6X the dollars that they spend.

Ben: Basically customers come in, they spend a certain amount of money and then you get 50% more out of them the year after that and that continues.

David: The customers you retain, you're probably getting double, triple more out of them in the future. Some customers drop off and then you get zero and then that tracks it back down. But I compared the episode we're going to do tomorrow and obviously travel is a totally different category with different use cases and lots of different dynamics. Airbnb also has cohort data in their S-1. They're flat. Flat is impressive, that's good. Most cohort's go down over time but here is a company, in DoorDash, that is not just flat, but upticking and upticking every year that customers stay on the platform.

Ben: Yeah. Before I make another comment on that, I want to finish the Bamboo sponsorship and say you should totally work with bamboo if you're thinking about a lot of the stuff we're talking about on this episode in digital marketing and running a really efficient performance marketing machine. You should check out growwithbamboo.com or click the link in the show notes.

Man, this is like hardcore native advertising in action that we're doing right now, David. The last point I want to make on that is a great point that was done in the S-1 club and the S-1 Club is an awesome sub stack that friends of the show put together that you should check out. You can click the link in the show notes to see that, too, in our sources.

An excellent analysis that basically shows it costs about $6 for DoorDash to acquire a customer, and assuming that they stick around for five years and frankly, we don't know how long they're going to stick around, but that seems like a reasonable enough estimate just because the company is so young that DoorDash can earn about $60 in pure profit from them over those five years. That's a 10-1 ratio, and it takes about 16 months for them to recover that six dollars.

It sounds like a little bit of money but when you think about you’re ordering all this food, DoorDash is only keeping a small percentage of that, call it 11%-15%. For most people, you're not ordering every night from DoorDash, ordering a few times a month or year.

In addition, they're doing a lot of incentive based little subsidies that are trying to get you to get your order. The longer someone sticks around, the more they're going to generate and a lot of that profit is actually back for DoorDash.

David: Yeah, and I think the other important point here, too, that as [...] has written about in the past, a lot about how just looking at payback unmasks a lot of complexity and important things about the business, you've got to think about what the levers are that DoorDash is pulling here.

They certainly could do things to generate more profits out of every order that they're getting from customers. They're raising prices and that would make those numbers go up and that would make payback happen faster. If you think about their contribution, the profit margin is based on gross order value right now, 2%? 3%?

Ben: 2.4%.

David: 2.4%.

Ben: They did an analysis that shows on the average order value of a $30 order, including tip, after allocating all the variable costs and all the sales and marketing costs and promotions, DoorDash's contribution margin is about 80 cents. To understand why it takes 16 months to earn back that $6.

David: To think about that, you're going to earn $50 in contribution margin profit over five years. That means consumers are spending 25X of that in terms of the dollars they're spending on the platform. That's a huge amount of economic activity you're generating. By keeping those margins lower, this is the whole thing about flying close to the ground, Bezos says your margin’s my opportunity.

You're generating more value for consumers, and for the restaurants, and the Dashers in the platform, presumably too by keeping that lower. Other people won't be able to match that. You get more density, you grow over time. The flywheel spins here. So, $50 bucks to you, but what's that $2500 in spend that the customers are doing over five years? Can that grow as you add new categories? I think it could.

Ben: You better hope if you're a buyer of this stock that it can grow as they add new categories. David, this is the best illustration yet of the whole point we've been trying to make on this episode, which is in order to try and be profitable and grow without massive investor influxes of cash.

In order to be a cash flow positive company who is profitable and growing in this category, you have to fly so freaking close to the wire, if it can be done at all, and the best possible illustration is for one order, one $30.36 order, they get to keep 80 cents. Boy, are they working hard to get that 80 cents.

They have to believe that they're providing tons of value all around the ecosystem and betting that there's going to be a crap ton of those transactions in order for you to believe that this business can eventually spin off a lot of cash.

David: Indeed.

Ben: I think that brings us to our analysis section.

David: Should we talk about the price?

Ben: Yes, just to contextualise who currently owns this company before it's going to IPO, Softbank. The Vision Fund owns about 22%, Sequoia 18%, I think that's very evident by the story told of how we sort of got there. Greenview, who we didn't really talk about, owns 9%.

David: That's GIC, that's Singapore.

Ben: Oh, I didn't realize.

David: GIC stands for Greenview Investment Capital or something like that.

Ben: Got it. Tony owns 5%. Co-founders Andy and Stanley each own 4.7%. Once upon a time, these guys owned the entire company along with a fourth co-founder, and here they are three of them representing under 15%. That's a story of dilution if I've ever seen one. Kleiner Perkins owns about 2.1% that was reported. I don't think that's necessarily in the S-1.

David: I think the number of shares, because John Doerr is still on the board, so the number of shares...

Ben: That's who owns this company coming into today. I sent David an article last night just to take a trip down memory lane. I should look up the date on this. I think it was November 13th from the Wall Street Journal, "Food delivery company expected to fetch a valuation of over $25 billion in December market debut."

David: That sounds high, Ben.

Ben: I think the biggest number we might have mentioned was $13 billion. They did raise around a valuation of $16 billion. My gosh, that would be awesome if they could fetch a $25 billion valuation. That's a great markup for investors.

David: It’s a premium, nice markup.

Ben: Share price for that would have been, I'm trying to remember gosh, it's hard to remember because the price was so low.

David: At 50's maybe? Something like that.

Ben: What were some of the different ranges that then were given in the ensuing weeks.

David: When they filed the S-1, like all companies, I think the range was blank. Then the first range that they filed was $75-$80 a share. I think they up that to $85-$95 a share. Then last night, Tuesday, December 8th 2020, they priced the IPO.

Ben: For a fully diluted market cap of $39 billion. It's a lot higher than $16 billion.

David: Now to be fair, last year net revenue was $885 million, so just under a billion. So far in the first nine months of 2020, they've done almost $2 billion, $1.9 billion in net revenue. We're talking 20 times trailing nine months net revenue. You do some math to extrapolate that out to a year, maybe about 15 times revenues still high.

Ben: Still high. David, I have not refreshed our browsers yet, but as of we started this episode, it had priced and sold it at $102 but price discovery was still happening for the open market. David, let's let's pop open the stock and see where it's trading now. Holy crap.

David: I don't have it yet, hang on.

Ben: I'll tell you the price that it opened this morning. It opened trading at $182 a share, which is a market cap of around $70 billion.

David: Wow.

Ben: David, where are we now?

David: As I look at the ticker at $177.70.

Ben: All right. Dropped a little since the open.

David: Yeah, but that is up 75%. Goldman is leading this IPO and they had some hybrid system, and everybody's like traditional IPOs. You give up the pot, you leave money on the table, Girlie’s been crusading against this for years. Now we got this new system, not going to leave money on the table. I don't know about this new system.

Ben: This is one of the most egregious offenders of leaving money on the table. This is probably close to a $3 billion wealth transfer from employees and investors of this company to the people who bought the IPO last night.

David: The investment bank's clients.

Ben: Yeah.

David: Here's the thing, though. I think it's been proven over the last five plus years that people have been talking about this, that you can't beat them. You can't stop this from happening. I think what we need to do is we need to find a way for the Acquired community to get allocations. We can't beat them, we're going to join. All our friends at Goldman, if you're listening, we need to get [...]. We need allocations.

Ben: Honestly, I cannot believe this. If you would have told me a month ago that DoorDash was going to be a $65, $70 billion company.

David: Up 71.5% from a $39 billion market cap. Say we're talking at a $70 billion market cap right now. Somewhere in that neighborhood.

Ben: Wow. It's kind of a volatile first day, too, because it opened at $182. It's now down to the... high point on the day it was $187. The low point so far has been $173. There's still a good amount of price discovery happening in the public markets right now.

David: Yeah. Wow.

Ben: Man.

David: We've got another hour to trade.

Ben: Over the course of the next several sections, all these analysis sections, I think the question that we have to keep in the back of our minds is what are the things you have to believe about their future growth and about their future profitability in order to justify the value of this company right now?

I can't think of any better way to do that than heading into our narrative section. For folks who are new to the show, this section, we try to paint the media narratives over the last few months for the bull case and the bear case of why you should be excited about this company or why you should run from it at all costs and the market has certainly spoken. But David, what was the biggest bull narrative surrounding the company?

David: The bull narrative, I think we've told a lot of it along the way here, and I at least mostly subscribe to it is they have just like Meituan seems to have done in China, they have accomplished the dream or in the process of accomplishing the dream and taking a market like this, a highly competitive local network effect market, and tipped it in their favor such that there's no viable competition. They have a wide berth to run, both to keep growing in the sector that they're in right now with food delivery, to add other products and services into it, and become the dominant.

Meituan, as we’ll get into now, is not really just food delivery anymore. That's a small part of what they do. They are a super app just like Tencent and WeChat is the super digital app. Meituan in China is the super physical app. Friend of the show Rita Yang over at GGV has a really great YouTube walk through that we'll link to in our sources of what it's like to use Meituan in China.

You want to book a massage? You book a massage. You want to order food? You order food. You want to order flowers? You order flowers. You want to make a restaurant reservation? Great, you order your food from restaurants. You also make restaurant reservations in the app and you're opening it all the time and it's how you interact with your physical world and local businesses around you. I think that's probably the bull case to me.

Ben: Yeah, it's boiled down to, they are the last mile near real time logistics company, like their the local on demand FedEx to get anything to you. Then you just have to let your mind wander on what are all the things that you could want at your door in a moment's notice and that really starts to shift your mindset to like oh, so they're actually a competitor of Amazon Prime now less so a food delivery company.

David: Well, I think what's interesting is, I think it's a yes and on the real bull case.

Ben: In his market cap, it has to be.

David: It has to be a yes end, right? I think it's everything you just said. But what Meituan has become in China, which Tony talks about this and they talk about it in the S-1. This is part of what DashPass is. It is your way that you interact with all local businesses in your area, whether that's bringing stuff to you, or you going to them, or even other interactions.

The example of restaurant reservations. Well, what if you can make restaurant reservations, but you also get special offers at the restaurant. You can book things, you can book special experiences, and because you're a DashPass member, you might get some discounts on that. Then just like Amazon, it has made a big high margin business in advertising on Amazon.

Ben: Once you have that traffic, there's lots of ways to...

David: Not hard to believe you could have sponsored listings for food delivery or for other things within the app. If I, as a consumer, I'm opening this three, four, five, six, ten times a week to interact with things and I'm getting all this stuff put in front of me, that's pretty interesting.

Ben: Right. Smart to name the company DoorDash and not like DoorFoodDash. It's also smart to to introduce DashPass in sort of even pulling the door away from it, because then DashPass, you could imagine applying that brand to you get special discounts and special relationships with merchants that aren't necessarily being delivered to your house, but you're just transacting through the app.

David: Yeah. Look, this is the super bull case. Lots of questions about whether this can happen, when, how.

Ben: There is another way to paint the bull case, too, which is basically like this company is an optimization machine and they will run at fully utilized optimization. It's kind of like a factory floor.

All those machines are really expensive so you better run them at the most perfect, harmonious capacity so that you can be profitable on that high amount of fixed costs. The way to think about that and in this sense is there's a lot of different ways in which they can optimize. But the biggest one is once you've acquired a customer, can you get the most amount of profitable transactions out of them over time? Obviously, a big performance marketing angle to this company, similar to like a restaurant.

Once you are on board a restaurant, can you keep them for a long time? Can you be profitable on them? It's all about getting to not only the scale, but the internal data that the company has so they know exactly how to price every component. What customer is worth going after? What restaurant's worth going after? What product at what time? In a lot of ways, it's basically a bet on data and data science being able to be the way that you can do this thing profitably.

David: Yeah, not to mention even just the fixed cost, so to speak, although they're variable costs, but it's a fixed set of variable costs of having the Dashers operating. You have capital in the system all day, every day with the dashers that are operating on the platform. How do you leverage the fact that they're getting paid to be doing the fulfillment on the platform? How do you get more leverage out of that? Meaning, make them do more deliveries more efficiently during the time that they're working for you? It's almost like the gig economy. It's a third way to think about costs. It's variable but it’s not totally variable. It's a fixed set of variable costs in the network and how much leverage can you get out of that?

Ben: Yeah, and then that goes to the bear case. Actually one of them is pandemic related, which is the most simple way to look at the pandemic related bear cases. This is the best it's ever going to be for this business and after this, there's going to be way less demand than there previously was

The other, I think a little bit more nuanced way to look at it is, the data that they're getting right now may not inform consumer behavior in the future, and so it will be hard to trust the guardrails for this cohort.

David: Yeah, of course, all their most recent cohorts are looking great right now because of the pandemic.

Ben: Right. I personally think the way it will play out is that all the new customers they did acquire have pseudo permanently change their behavior. I think once you make a behavior shift and I just know this from myself, DoorDash has sort of won me over as a customer and I don't think I will sort of change behavior after this. But they're certainly not going to acquire customers with the ease that they did during the pandemic. That's sort of my metered bear case.

David: I would say also too even on that, one thing, we don't get delivery often. I've done it the last couple of nights in research for this episode. But what we do often is takeout and I think this is one of the things that's really smart that DoorDash has invested in is making that a feature on the platform, too. It's way more I vastly prefer and probably the restaurant vastly prefers me to place my takeout order to walk over and pick up from my local Thai place via an app rather than calling them and tying up the phone lines. DoorDash has found a way to enable that and get paid for it.

Ben: Yup. The biggest bear case I think you can make is that they're not going to be able to make the leap out of this restaurant category and this is going to continue to be a razor thin, highly competitive business, and they're just never going to be able to take all the investment that they've made and actually get to benefit from an immensely cash flow positive output on the other side.

David: Yeah, that makes sense. I guess maybe there is one more legitimate argument you can make on the bear case, especially at this valuation, which is this [...] is maybe not as big as you think. Obviously it's big, but how big is it now? In the S-1, they talk about what is it, I want to say something like $600 billion off premise restaurant food annually in the US.

Ben: Yeah, that sounds right.

David: Okay, now what percentage of that is actually addressable by DoorDash? Last year they did $8 billion in GMV out of that 600. But a bunch of that is Domino’s. A bunch of that is catering businesses, which obviously DoorDash is getting into, but they're not going to be able to address all of that.

Ben: By the way, it's $300 billion. 2019’s off premise spend at restaurants and other food service in the United States.

David: $300 billion, okay. Now you're like, wait a minute, even if you get the whole market, $300 billion in gross order value. We said we have a 2.5% contribution margin, let's say 10% of revenue. 10% revenue margin, now you're talking about a $30 billion net revenue company. Yeah, that's great. That's super impressive, but that's not Amazon.

Ben: That's if you address 100% of it. Even Amazon only addresses 50% of ecom, but ecom is only 20% of commerce. The way they define their market, just to make sure I understand this well, is that they say Americans spend $1.5 trillion a year on food, $600 billion of that is spent on restaurants, and then $300 billion is off premise.

David: That's what I was thinking.$600 billion is also dining in.

Ben: You could imagine, I don't know how dining is addressable for them.

David: At this valuation, not only do you have to not believe the bear case, you have to believe the bull case that they are going to expand outside of just the off premise food delivery market.

Ben: Yep, absolutely. Actually we decided to do power on this episode as well in a section where we normally trade it off with narratives but I think it's actually very appropriate to do both of them. This comes from a friend of the show, Hamilton Helmer's book, 7 Powers and Power is defined as, "What enables the business to achieve persistent differential returns," or put in another way, how do you be profitable and more profitable than your closest competitor and do so sustainably over a long period of time.

The options for this are counter positioning scale economies, switching costs, network economies, process power, branding, and cornered resources. David, I'm curious where you come down on what power did they actually have here?

David: Well, it's interesting. Before we get to us, it seems pretty clear to me that Tony and the team at DoorDash are probably also Hamilton Helmar fans, because if you read the S-1, they have this handy little flywheel diagram, three noted flywheel. Then they also talk about what they view as their defensibility, and they list local network effects, economies of scale, and increasing brand affinity.

Three of the seven got to imagine that Hamilton, so much of his work has influenced so many people here and Silicon Valley, has also influenced them. That's what they think, network effects, economies of scale, scale economies, and brand, and we could talk about how they think about them. To me, the biggest one right now is economies of scale.

Ben: Hundred percent. I think it's actually the only legitimate one, because I think it's pretty easy. For any participant in the ecosystem, it's very easy to multihome and it's very easy to choose the next best competitor. It's easy to order food, it's easy to deliver food, and it's easy to, as a restaurant, also list on UberEats, no problem at all. I think any defensibility that comes from a network effect is not really real.

David: Yeah, I was going to say that it's related to order times and density, but that's scale economies. So, yeah, I think scale economies are the big one.

Ben: There's something to brand, but it's always hard to actually know how much to sort of chalk up to brand. One thing is really true and rings really, really true to me, which is that the whole end game is aggregating the consumer attention. This is the Ben Thompson Aggregation Theory concept applied to food, where if you're the way that people think to order food, like you're the destination site, they're the front door to someone's purchase, you're going to get superior economics on that transaction.

As you think about the...

David: Especially if you start introducing an advertising business model into this too.

Ben: Absolutely, and I think about it as you think about the far future of how the world of restaurants reorganize, given you now have this participant in the system or the set of participants in the system that are gobbling up all the consumer attention and the default way to order food.

As the default shifts from that real world to online, whether it's DoorDash or you're using Prime Now to have stuff delivered, they're going to start eating or they already are eating the profit of that local business or store and for the vast majority of local businesses without a differentiated offering other than store location, which is how most businesses used to differentiate, DoorDash will totally eat them and they'll actually eat their back end, too in the same way that Prime Now has a warehouse like DoorDash will eventually have warehouses for the most commonly purchased things and be able to capture some more of that margin.

Then only the restaurants who deliver unique products or a unique experience will actually be in a good position as the world continues to reorganize. It's the same thing Amazon did to ecommerce is going to happen in food.

David: Yup, I agree with all that, I don't think this is brand power in the Hamilton sense. That is a consequence of economies of scale and then growing into network economies, which I think they maybe have a little bit of now. But I do think, as what you're saying happens, that it'll grow more than more of a network effect as they have all the consumers and all the restaurants for now but let's say suppliers with large local businesses on the other end.

To me, for a brand to be a power, it has to be like Tiffany's. That's the canonical thing where I'm willing to pay more for these exact same commodities simply because of the brand name on it and there's no way that applies to DoorDash, no way. If Uber Eats gave it to me cheaper or for the same.

Ben: You're absolutely right on that.

David: That's pretty aspirational. Nice one, Tony. We appreciate that. Good drive.

Ben: Listeners, for what would have happened otherwise are sort of sections where we are in a traditional Acquired episode would talk about what would happen if this transaction didn't happen. We thought it'd be fun on this episode to dive into what would have happened if Uber hadn't imploded during their 2017 and 2018, would we be here today?

I think that gave in the ride sharing market, Lyft, a new breath where they were basically dead until Uber imploded and are now quite a formidable competitor. I don't know if I can call them formidable when no one rideshares.

David: They exist and it doesn't seem like, in 2017 it seemed like they were about to die and indeed, as we've talked about on the Lyft and Uber episodes, they were about to die. Uber was going to win and then they have it and now it's stabilized into more of a duopoly type structure.

Ben: What would have happened to DoorDash if Uber hadn't gone through their 2017 and 2018? As we know, 2016 wasn't looking so good for DoorDash. Early 2017, they could have died. How much of Uber fumbling had to do with DoorDash having a breath?

David: I think this is really one of the most interesting questions on this episode, because part of the narrative around this whole space and Uber's role in it, particularly that we haven't yet talked about on this episode, is what Uber would say, which is we have a structural advantage in both of the main core products that we markets that we operate in which is rideshare and food delivery, because we can use our supply of drivers across both of these products.

Lyft is a pure play ridesharing, they can't use their supply for food delivery. DoorDash is pure play food delivery, they don't do ride sharing. Thus, we should know that this is the narrative that they and lots of other people believe over time, is that we should be able to win both markets because we'll have better, essentially 2x the scale economy that any pure player could have had. That has not played out. Interesting question is-

Ben: I do want to say like that actually, according to Tony it is not true like that. Dashers are actually different from rideshare drivers. That all sounds great until I was doing the research I was like, how did Uber not win here? They already had all the drivers. All I had to do was tell them to deliver food instead of people. But according to Tony, at least the average Dasher is in their mid 20s and the average rideshare driver is in their early 40s, and women are willing to be Dashers, 40% of are female, whereas only 15% of rideshare drivers are women. Largely because of the safety concern. This has been this common belief.

David: I totally agree. I think about what would have happened otherwise, I think it would have been interesting. I think Uber got lazy and relied on this idea. I think it would have been interesting if they weren't going through everything that they went through to see how well they would have done with less having their eye taken off the ball here?

Because I totally agree with Tony on this one, that the nature of the supply for food delivery is quite different across many dimensions versus rideshare. In particular, there's all the demographics that you mentioned. I think perhaps especially in cities, the more important one is vehicle type.

If you're going to do rideshare in a city, you need to have a nice late model car or access to one. That immediately segments out a huge portion of your addressable gig labor economy, your labor force there. There are a whole lot more people who either don't have a car at all or have a car that doesn't meet the standards of Uber and Lyft. DoorDash came along and said, this is why I think bicycles were so brilliant in the early days and in Boston, and then that grew into ebikes, then that grew into scooters of all different types but the powered motorcycle like scooters and so birdlike scooters. I think that opened up a lot more addressable supply for them that Uber was never going to be able to multihome across their two products.

Ben: It's a really great point. It's a larger potential supply base than Uber has. The way Uber solves that problem is like oh, well, that person can lease a car from us or at least a car from one of our partners. I actually think this gets to the fact that the way that people plug in to DoorDash is pretty different than the way that people plug into ridesharing.

I think Uber would like to continue the narrative that it's largely the sharing economy, but I think the professionalization of supply is pretty clear at this point. The majority of Uber drivers, their full time job is to drive Uber.

I actually don't know if that's true with DoorDash. I think it is much more like a younger crowd with a different job that is using this to make a little bit of money on the side in order to do something else. It feels to me much more like an actual realization of the sharing economy as opposed to what Uber turned into.

David: Yeah, I would agree with that. I actually don't know what would have happened otherwise. It's not like we can crystal clear, say like oh yeah, Uber shot themselves in the foot. They would have won here. Things would have been different.

Ben: Well certainly it became possible for DoorDash to raise money in a climate that would have been too hostile had Uber continued to be a juggernaut.

David: Yup, and raise money from Uber's largest shareholder.

Ben: Still so crazy to me that happened.

David: Indeed. All right.

Ben: Playbook?

David: Playbook. Let's do it. Oh, man.

Ben: So many things we've already talked about but the headline of this needs to be winner take all markets do indeed have a pot of gold at the end but so far we have just seen cash flooding in to try and take it all but that pot of gold has totally not materialized.

In 2018 they lost $200 million and then just like their growth, they tripled it to over $660 million loss in 2019. And of course the losses are shrinking in the pandemic, they've only lost $150 million so far this year.

This is the classic modern embodiment of a venture capital business where capital floods in, because the perception is that when you're at the biggest scale, then even if you stay small margin, all those little margins across all those little purchases add up and maybe people can take that next leap and believe that you have pricing powers so then you actually can make more money per order over time when you're a monopoly.

But I think this is like the bear case on this whole ecosystem that we're in right now. The winner take all effects may not be as strong as people thought and the lock in may not be as as deep, or wide, or whatever you want to say as people thought, and it continues to take longer, and longer, and longer to be able to realize that end state where you actually can realize all the fruits of your labor, or not really labor but actually capital that has gone in.

To me, that's the biggest playbook theme here is they're running the playbook that is capturing a winner-take-all market but we're in the middle of the story, we're not at the end of it yet.

David: I think that's true although I think coronavirus was a huge accelerant to them, vastly improved their chances, and also stepped on the gas and continued to run this playbook while their competitors pulled back, vastly improved their chances. The narrative has shifted on this where in 2013, 2014, it was run through this playbook, there's a pot of gold. In 2016, 2017, 2018, it was there's no pot of gold at all, this is all a mirage. Now, the question is there may be a pot of gold.

Ben: Right, I could take away...

David: I think I've related the corollary playbook theme to that for me that we've seen across this season at Acquired and some of the other episodes we've done recently, focusing on more bootstrap businesses and just businesses with different histories. I would put Epic Games in this category, too.

Different markets are different. If you're going to go after a market like this, you stand no shot unless you raise a lot of money. You're going to get torched but that's not the case in other markets.

Ben: Sort of. It depends if you want to compete nationally, or globally, or not.

David: Hmm.

Ben: I don't know. DoorDash is probably going to win if you're trying to operate just in one city and then they come in and compete against you in that city. But, I actually don't think there are any meaningful cross geography network effects other than the national chains which DoorDash has done better at than Uber. But if you're UberEats, really what are the cross geography network effects between your UberEats business? Basically nothing.

You get to reuse the same technology on the back end, great. Customers know of your brand, great but compared to Airbnb which has an unbelievable cross geography network effect.

David: Probably the best ever.

Ben: Right, I only live in one place and if word gets around pretty quick that all the restaurants are on one app. I don't think you need a national brand or an international brand in order to win.

David: I think that's fair but I think your upside is capped. You're never going to build an Epic Games type-sized company if you don't take the go big approach in a capital intensive market like this.

Ben: Great point, great point.

David: I think it really comes down to capital intensity. If you're operating in a capital intensive market, good luck if you don't have capital. But as we've seen on this season, there are lots of other markets that are not capital intensive.

Okay, great. That's one for me. The other one I want to highlight again because I think it's very Amazonian, it's very Appeton to me to sum up DoorDash exquisitely well is their value of operating at the lowest level of detail. I think it's one of those things that people say as oh, yeah. People talk about the Amazon.

Ben: Leadership principles.

David: The leadership principles, exactly, but I think understanding what that really means. Tony talks a lot about this in interviews and he uses the example of The Cheesecake Factory in San Francisco which is in Union Square. The Cheesecake Factory is on the sixth floor of a mall in Union Square. There's no dedicated parking out front, you need to take an elevator to get up there and they have a bunch of different serving stations. You've got customers even in San Francisco who like to order from Cheesecake Factory and they live a 20-minute car ride away in the city, how are you going to get them their cheesecake in a high quality timely manner?

The only way you can do that is by doing things, he talks about well, okay, we went to the mall and we're like can we get a dedicated elevator shaft for us? Great. We went to the restaurant and we're all like can you give us a dedicated serving station? Great. I went to the parking garage there and they're like can we get dedicated Dasher parking spots? Great. You can't do that when you're sitting in an office writing code.

Ben: Right, and only paying attention to averages. I think another great embodiment of this is I think it's Michael Block, that's how you pronounce his name on Twitter and he's an early employee.

In food delivery, you can compete on four things; price, speed, selection, and quality. They looked around, realized that they weren't necessarily going to beat Uber on price or speed because they didn't have the density yet that was in cities. They didn't have the broadest selection yet, they did have high quality restaurants, and one of the very interesting things that they zeroed in on is speed. They're like well, how fast do we need to be? And he says that our analysis shows that there was a limited marginal benefit to customer conversion or retention rates under 42-minute ETAs. As long as deliveries were sub 42-minute, customers didn't really care how long they took.

It's just this amazing lightbulb that by diving into it, this flies in the face to what I said a moment ago because this is an average number and not a per customer, per location, per type of food tail number, but the idea that they can learn that 42 minutes is their food delivery equivalent of that magic five-minute mark for Uber where I don't care if an Uber's two minutes away or five minutes away, it's the same thing. I do care if it's 5 minutes away versus 15 minutes away, those are very different things.

I think his point, in his Twitter thread—which we'll link in the show notes—is that when they were competing against Uber, Uber wasn't a constant optimization race to get the food to you faster, and DoorDash was realizing actually, that might be a waste of resources.

Anyway, it's the Amazon leadership principle dive deep, being deeply analytical, which they need to be able to operate at the margins that they're operating at.

All right. Last section before grading is value creation and value capture. This is the section that we started doing based on actually a lot of listener demand that has two parts. The first part is how does the value that they are capturing compared to the value that the company creates? Is it like Wikipedia where they capture a tiny little percentage and could be capturing way more, or are they capturing plenty, like Google who makes a ton of money from the value that they create in the world? There's that component. The second is how does the value created for the world, not just for shareholders, compare to any value destruction that they've done in the world?

I think let's address this in order. On that first one, they seem to be capturing basically the maximum amount that they possibly could. Any more and consumers probably wouldn't die. It's effectively a 40% markup on your food in order to pay DoorDash and then to pay the Dasher.

The market actually feels relatively constrained to me of people who are willing to pay 40% more for their food to have that convenience. I don't think they can be destructing anymore. That's any more from consumers, any more on the restaurant's side and the restaurant probably couldn't take their doors open. I think DoorDash does a lot of research and figuring out how much of the trip we need to give to restaurants so they'll continue to be our suppliers and not turn off the platform? Either because they don't like us or because they just can't operate at all. I think they're doing a reasonably good job of maximizing the value that they possibly can take.

David: Then there's the Dasher's side, too, of are they earning enough on the platform?

Ben: Then how come this whole business model, is there actually enough dollars to go around as you start to get to more and more customers versus a smaller set of customers who are willing to pay a larger markup in order to have more actual dollars to go around here?

That's how I would describe. Company's doing a bang up job of capturing value. How is the value created for the world compared to the value destroyed for the world? I think there's a strong case to be made around exploitation of gig workers. Not nearly as strong as the ridesharing. I actually think that this seems to be a much friendlier company to Dashers than ridesharing tends to be to drivers.

David: I agree. I think the biggest reason for that I think is structural—we're talking about a minute ago in terms of vehicle types—the depreciation on ridesharing, on the vehicles is a huge in cost that the laborers bear and of course depending on what vehicle you're driving with for DoorDash, you're probably also incurring depreciation but potentially way less.

Ben: And a lot of them are leases which are built into the cost of the lease. I think the bigger case is that there's value destruction happening for the world just on the restaurant's side. As much as DoorDash wants to sell a story around how we empower local businesses, I would hate to live in a world where those businesses didn't thrive, and people only bought stuff through us, and we're not the merchant, our merchants are the merchants and we're just the platform.

I just don't think that's where this business is really going. I think that's a wolf in sheep's clothing or fox in the henhouse or whatever you want to say, especially now that they have the market cap that they do and they're publicly traded and they have the shareholders that they do. I just don't see a world where what they're actually doing 10 years from now is empowering local businesses.

David: It's interesting. It's funny. I think I would maybe push back on that a little bit in the now in the short term in that yes, there's a lot of sentiment among restaurateurs and often justifiably so that DoorDash and other platforms take way too much of the order, is eating their cost, their restaurant's cost structures are not sustainable, profit margins have went sailing on these platforms, they can't make things work.

I think there probably is some truth to that. On the other hand, I think there are also plenty of businesses and restaurants that have figured out how to make it work and it's incredibly additive to them being able to have this new delivery channel that honestly they can't operate this network themselves as we've talked about in the whole episode I think yesterday.

I do think that in the future, the point you made is going to become more salient as cloud kitchens, ghost kitchens, and other food-related businesses get built that are going to be more of-scale business as opposed to local restaurants.

Ben: My question is how did they just not end up combining and how does DoorDash not build this themselves?

David: I think they are. I think they're working on it internally. I think there are also a bunch of other startups out there, several that have come out, one that my brother-in-law works for, a virtual kitchen company.

I think those businesses are going to be more scaled businesses and some of them are going to partner with local restaurants like kitchen virtual kitchen company partners with local brands and helps them and includes them in the economics and I think others are going to just be like no, we're doing this ourselves, we're vertically integrated. You're going to move more and more towards an Amazon-type marketplace where you have big players that are large, consolidated manufacturers and brands operating in the Amazon marketplace and the small guys get pushed out.

Ben: It's going to be more important than ever for restaurants to create customer love and not in a begging way, not in a please support us versus these bad guys and shop local but more in a delight way.

I think if I was running a local restaurant right now, what I would try and do is I should caveat all this with oh my gosh, I can only imagine how hard it must be to be a small business entrepreneur running a restaurant right now. I think the most successful path for the future is to look at something like DoorDash drive and be like okay, great, we're going to use them for the delivery network. Awesome.

Let's not list DoorDash Marketplace. Try and aggressively start building my direct email list, figure out how to do all sorts of segmentation on who loves me the most, figure out referral programs, figure out basically how do you run your restaurant like a bootstrap web business where you have really rich CRM information about your customers and then try and be creative in ways where you're not just a food experience. You have an only component, a lot of this is pages from Canwest's book.

David: Coconis and Tuck too. They've done it with Next. They've executed this playbook to a T.

Ben: How do you do this stuff creatively, cleverly, digitally, cheaply, without being fine dining experience and then use DoorDash for its component parts? Because it's great that it's built out but you don't want your customers coming from there and you don't want that traffic at the whim of someone who's trying to commoditize you.

Anyway, I think the restaurants that do have the most differentiated offerings will be able to thrive independently. It actually looks a lot like the travel market where once OTAs came to the picture, it was really for any airline to differentiate and then they all ended up being a commodity, rising to the bottom, dropping their prices, seeing massive consolidation. It feels like that's a playbook that's being run in restaurants right now.

David: Totally. I think then the question for value creation, value capture here for DoorDash, questions that can happen anyway. Is DoorDash causing this or are they participating in or they're also arming the rebels? It's captured.

Ben: DoorDash, merely inevitability in the same way that with Facebook inevitability for the publishing world.

David: Again Tony, DoorDash, the team has amazingly persevered. They had really great insights that very few other people had at the moment. They persevered through incredibly hard times and they have against all odds seemingly built, actually they're on about to doing it. They built a good simple business at the same time this was going to happen because this is happening in China. If it wasn't them, it would've been somebody else.

Again not to take away from anything that they've done but the timing was right that now mobile enabling this for all three sides of the marketplace, it was going to happen.

Ben: Before we get into grading, we'd like to thank Perkins Coie, the official legal sponsor of season seven of Acquired. Like the Bamboo sponsorship earlier, I'm going to go off-track here and say I know I have a standard read that I typically do on this one but on our last couple episodes here, I do want to personally say how great my experience has been working Perkins attorneys at the Seattle office. The work itself and the quality of service along with it has just been exceptional and if you want amazing representation with all your base covered, I think Perkins Coie is a fantastic partner for you.

I guess pulling back to my script here, they work internationally. The work that they do with Fortune 50, with startups, with everyone in between, they work on everything from corporate formation to the actual property, company financings, even on the IPOs that we're covering with DoorDash today. I can't recommend them highly enough. Great firm, great people, and to learn more, you can visit them at perkinscoie.com.

David: Indeed. Seconded everything.

Ben: Grading. For the new influx of folks joining for the show, when a company buys another company, what we do is we grade how good of a use of the capital of the acquirer's company was for the acquiree. Basically, for Facebook to buy Instagram, in hindsight, how good of a use of capital was that?

On this episode, the way that we're going to do that is collectively, how good of a use of capital was it for the company, like all these people's human capital, and for the investors and the monetary capital to go after this business opportunity in this way over the last five years and everyone bought it in a different share price so I think it's very different to say how good of a use it was to buy a share today versus if you're Sequoia.

I think actually what we should do is in some ways, that's true, in other ways, everyone's all in the same boat now. It's unlikely that there's any path other than really big success long-term or going out of business or doing some kind of merger combination. At some point, the market cap is going to reflect the actual long-term cash flows of the business, and that might be a long time from now so I don't want to talk about things like gosh, if you had gotten in early, what your shares would be worth today. It's just not actually interesting to think about the market value of the shares right now, what I think is interesting is to say should all of these people and all of this capital have raised after this opportunity, and will that eventually yield a very profitable business?

David: Such a good way to frame it. So glad you had this idea to do it this way on this episode.

I think my answer is it was not in the very beginning, not in the seed A or B, but in that period after the B, it was a very contrarian move to keep doing this. The end is not yet written so we can't say for sure because they've had a couple contribution margin positive quarters during the greatest tailwind to their business that they could ever experience but given that and given now, the reward along the way and this IPO and the $70 billion market cap during the temporary outcome here.

I got to think it's an A to make this decision. It's so high stakes though. I had the notes I didn't say but it reminds me, in a very different way, of Santi at Emergence and the Zoom investment. This was, for a lot of people, specifically for Sequoia and I have to imagine Alfred at Sequoia, this was a bet your career moment for a lot of these people. It took a lot of conviction to do just to quit the company like they did and I think it's paid off so far. I give it an A.

Ben: Again I see what you're saying but I guess what I'm saying is we should totally abstract any notion of so far. Let's take out the notion of having your shares appreciated in value. It's like a course, there's a hype train. Have you seen Snowpiercer? I imagine the hype train for this is like the train for Snowpiercer.

David: Oh, no.

Ben: The way that I've been thinking about this is basically what is the likelihood that they'll actually be able to be very profitable in each customer or get a whole bunch of customers that are contribution margin positive and they can ramp down marketing spend and ramp down R&D relative to their overall revenue in the future?

I think the thesis a few years ago of we're going to be your local real-time FedEx, I think it sounds better than it has been true in practice based on the way the market has evolved.

Remember when Uber said there were going to be Uber for everything and everyone's like oh my God, this is going to be the most valuable company on earth? I think it sounds better than it is because once you start actually getting into it, you're like okay, what are they going to deliver besides food? And you're like oh, groceries but that market, that adjacency went away. That lane is no longer open for them.

For Uber, the adjacency of food was interesting and there's other adjacencies that are interesting, I don't think DoorDash has as rich of an adjacency landscape available to it because when pressed, they're like oh, flower delivery. You're like that's what you're going to list in the first two or three.

David: That's not a big market.

Ben: Stuff from drugstores, we're already listing stuff from CVS. You're like you're going to compete head-to-head with Amazon and Prime now? Okay, huh.

I think the market that they're actually in here is food delivery and I think based on their cohort data, and their return on marketing spend, and their CAC to LTV ratio, this is going to be a really good food delivery business when they can finally ramp down the marketing spend but I don't think it's bigger than that.

For me, it's like a B opportunity for everyone to have chased after this just because I think it's like a big market but not an Amazon market.

David: I totally hear you. I think I'm probably maybe a little caught off in the story and the Snowpiercer hype train. As I was thinking this morning and a couple hours before we started recording, I went back to Meituan and looking at what that business is, I do think there's an opportunity to be more. Tomorrow, in the Airbnb episode, we're going to talk about trips and honestly 2016 I think it was Airbnb opened.

Ben: Dream of Airbnb trips, the products that none of us ever used.

David: Exactly, experiences, places, reservations, all this stuff, I think that could be that that's just nobody wants that, it's just a bad product idea. More likely, they want to look at Meituan and I'm like oh, wow, that all lives on Meituan now.

I think the issue was with Airbnb, you didn't interact with Airbnb every day. You interacted with Airbnb very and frequently for a travel use case.

With DoorDash, if you're opening it multiple times a week and interacting with it, I don't know, it still stretched, it's not what they're doing today but I think there's a good chance that they can add more just in the same way that Amazon was the book company when they started.

Ben: Very fair. This will certainly be a fun one to watch evolve.

David: Indeed.

Ben: I know we've gone longer than any other Acquired episode in history but I do think we should do carve outs. I think we haven't done them in a while and they're fun. I'm curious. David, what do you get on docket?

If you're new to the show, carve outs are basically where we throw in things we're watching, things we're paying attention to, things we're reading that have nothing to do with the show but we think are interesting to put on your radar.

David: I'm so excited we're doing this, too. It's been a long time.

I thought about all the important erudite stuff I could put in here. I was like you know what? It's mid-December. We're heading into the holidays. It's been a rough year.

My carve out that I've been getting a lot of fun and joy out of is the game Hades on the Switch. I think it's on PC Switch, might be on PlayStation and Xbox, too. It's made by the guys who made Bastion and Transistor, if you ever played those games. Indie game developer but just super high quality, really well-done.

This game is so much fun, you play, you're the son of Hades, the god of the underworld and you're trying to escape Hades. All the other Olympian gods help you escape and it's you trying to do these escape runs and then you die, you never make it, and so you're like over and over. It's so well done, so fun, great time suck but you feel you're progressing. You get that sense of accomplishment like I didn't just throw hours down the drain. I actually built my skills like what Rahul was talking about in game design. You're building towards the sense of mastery. You have this account you're getting. Whatever it is, it's got that magic that I just feel it's like worthwhile investment.

Ben: Sweet, love good game design. I have to get a Switch and I have to get that game and check it out.

I have three because I was making my list and I was you know what? I'm just going to put all three out there. They're all three things you can watch while you're looking for some things to stream while you're staying safe this holiday season.

The first two I think are the best written, acted, directed TV shows that I've streamed this year. I have a lot of trash year TV I'd like to watch, Always Sunny, The League, a lot of that stuff but it is always jarring when you watch something that is just art. There are two great pieces of art that I want to talk about and then a movie.

If you haven't seen Watchmen on HBO, the series, whether or not you were a big fan of the graphic novel or the movie, it is exceptional and I think it grapples with social justice issues in a really unique and interesting way that was a little ahead of its time since it was before this summer. It's fun sci-fi, fun social justice, amazingly well-produced and written. I highly recommend it.

The other, I'm sure many people who listened to the show have watched Succession. David, I don't know if you've been a fan.

David: I've not watched it but heard good things.

Ben: Many people told me about it before I got a chance to watch. It's a fictionalization of effectively the Murdoch family and News Corp, different names, different characters, all that but just unbelievably well-written and acted. It's so easy to get super sucked in and you can't stop thinking about it. Highly recommend both of those.

Then for a movie, on Hulu, you should go watch Palm Springs. It's an absolute delight. It's an Andy Samberg film.

David: I heard this is hilarious.

Ben: It's so funny, it's so light-hearted, it's so unexpected. In some ways, it's actually a thinker movie while being light-hearted.

David: It's like a modern Groundhog Day, right?

Ben: It's got an element to that, yeah. It leaves you thinking in a different way than the other two but it's also worth your time. If you're like me and you're looking for great stuff to get into on these streaming services, all three of those are awesome.

Before we wrap here, David, I know you've got a little tribute that you want to do.

David: One other thing we didn't want to make a huge deal because we didn't know him and we're more arm's length but Tony Hsieh passed away last week and we just want to take a moment and just reflect on how tragic that was but also say just thank you to everything, the impact that he had on the whole tech Silicon Valley ecosystem, the companies that we're covering today in DoorDash and directly through Alfred Lin who was the CEO of Zappos, Airbnb tomorrow, Tony had a huge impact on, just the whole ecosystem, and tragic he passed away. So young but thank you for everything he did during his life to really push the Valley forward.

Ben: And other communities, too. I remember when I was really involved in the Startup Weekend community, Tony hosted a bunch of us at the Downtown Project in Downtown, LA and what he was doing to revitalize that area, north of the strip. It's just really cool, staying at the container park, and just seeing that vision come to life. I know the city's much better for it.

David: That's a good point, not just the Valley but our whole industry and other things. Graduate of same high school as my wife Jenny, Branson in Marin.

Ben: Now I know a security question of yours.

For folks who don't know, as we wind down the show here, we have started codifying the playbook from each episode so I'm pulling out not only in the actual playbook session we talked about but key things from earlier on. If you wanted to run the DoorDash playbook, how would you go about doing it?

We've been pulling those from each episode in some written bullet points and we started emailing those to folks after we post each episode. If you want a digestible, consumable way to share or help you understand the points we're making in each episode, you can sign up to receive those playbooks at acquired.fm Anywhere that allows you to type in your email, we'll only have one email we send, you'll get that one.

If you join the Acquired community Slack at acquired.fm/slack, you'll be automatically signed up for that as well. We're going to do those on an ongoing basis. It's totally open to any of you if you want to tackle that for our previous episode because we think it'd be cool to host more of those on our website, too.

David: We've had some great ones that community members have done.

Ben: Thanks to the folks that have already done that. If you want to, just shoot us a note, acquiredfm@gmail.com or in the Slack if you want to do those.

We've talked about the LP Show a bunch but I did want to highlight our most recent one we just did with two of David and my LPs from our current and past funds from the Foundry Group.

David: Actual LPs.

Ben: Actual, it's the first time we're having LPs on the LP Show.

David: Investors in venture funds.

Ben: It was amazing to get to talk about all the things that we talk about more in private with them, the ways that they help guide especially for me at PSL Ventures, how to think about our portfolio construction and the ways that we work with portfolio, and how do you manage your time across all those? When you're sizing the types of investments you want to make, how much do you save for reserves, how much do you do upfront? Just really good to dive into a lot of the nitty-gritty in a super structured way in a way that we can share more than just the private conversations we have. That was part four in our VC Fundamental Series, more good stuff like that to come but if you want to be an LP, seven-day free trial, acquired.fm/lp. Feel free.

David: Also two things for the holidays that are important on that front. One, LP subscriptions make great gifts for the Acquired fans in your life.

Ben: Whoo.

David: Whoo. Two, on an even more important note, we said before but it's been a while, we never want financial hardship of any type to be a barrier to someone accessing more Acquired content, and engaging more deeply with us, and getting access to all the stuff we do on the LP Shows. If that is the case for you for whatever reason, just shoot us an email, hit us up on Slack, acquiredfm@gmail.com or join the Slack and DM one of us and we will make sure that we take care of you and you get access to an LP subscription even if you can't afford it.

Ben: Similarly for gifts, it's a little complicated to go through the imaginations of making sure to use someone else's email address. If you want to give the LP Shows a gift, just shoot us a note and we will send over instructions.

With that, if you are not already subscribed and you like what you hear, you totally should subscribe. If you like this episode and you have a friend that you think would like it too, you can share it from your favorite social media hilltop or with them one-on-one directly. I think that's probably the best way for any one person to tell a friend personally like this was great, you should listen to it, too. I think you'll like it for X reason. I just love the one to one to one to one to spread that we've had so far. Feel free to share it, feel free to sign up for playbooks.

With that, everyone, we'll see you next time, actually tomorrow.

David: I was going to say. Usually, we say we'll see you next time. Today, we'll say we'll see you tomorrow.

Ben: See you tomorrow.

‍