DoorDash’s Future, the S-1 Edition

I couldn't wait until Wednesday to send you my thoughts, here's the first round.

Mmm, a Friday S-1 drop. I spent the day with my preschooler, but couldn’t resist sharing thoughts about DoorDash’s forthcoming IPO today. My favorites (so far): 

Amid huge investments, the company’s sitting on serious cash. 

My favorite thing to do every time DoorDash announced another mammoth round of funding — most recently $400 million in June at a $16 billion valuation — was to guess how much cash it was burning to grow quickly. Turns out the company is still sitting on over $1 billion of the $2.5 billion it’s raised. 

I believe DoorDash execs when they say there’s tons of opportunity. I’m just not sure the long-term success is predicated on the current model. 

DoorDash claims it’s number one in U.S. market share with 50 percent of the market. Worldwide (which includes operations in Canada, and its newest market, Australia), it’s serving over 18 million consumers, 390,000 merchants (this is more than just restaurants; the company has always reported in “merchant” not “restaurant” terms — an important but oft overlooked detail IMO), and over a million Dashers (the company’s term for couriers.) Still, the company says, just six percent of U.S. consumers were represented on the platform in September, leading the company to say “we are in the early phases of broad market adoption.” This is a common talking point among third-party delivery executives. 

Even though the company has lost money every year since its inception, it has managed, recently, to generate some cash — a net income of $23 million for the three months ended June 30. Still, the company is running on an annual net loss of $149 million as of the end of September.

The company has spent huge amounts of cash to acquire new customers.

In 2019, it spent $581 million on marketing expenses but also $176 million on refunds and credits and $182 million in promotions, pushing DoorDash close to spending $1 billion to attract new business that year.

However! This has already proven a good investment. It appears to be DoorDash’s existing customers that are spending the most on orders in 2020, or at least, the spend from existing customers is growing faster than spend from new. Timing is everything.

The entire business model shows why delivery through third parties is tough for independent restaurants — and DoorDash knows it. 

“Our ability to attract more merchants, including local favorites and national brands, creates more selection in our Marketplace, driving more consumer engagement, and in turn, more sales for merchants on our platform. Our strong national merchant footprint enables us to launch new markets and quickly establish a critical mass of merchants and Dashers, driving strong consumer adoption.” 

Think about the small, local, indie restaurant operating in this giant, churning, 390,000+ merchant machine. DoorDash brings the business — at a cost — but then it works to keep the business in its ecosystem. 

BUT, (and this is a big but) 

DoorDash has done well offering some relief to small businesses during Covid. A day before the S-1 filing went public, the company shared a blog post announcing a five-year, $200 million pledge to support local and independent businesses and Dashers. In the early days of the pandemic, DoorDash moved (relatively) fast to cut commissions that independent restaurants pay — right around the time that some cities capped fees through temporary orders. The new initiative also includes an accelerator program to help women- and minority-led businesses, launching next year. 

Everyone knows what the challenges are, no business operates in a vacuum. But it’s working.  

DoorDash’s summary of risk factors reads like a list of third-party delivery criticism at large: a history of net losses, limited operating history in a new industry, concerns about evolving regulations (especially potential driver classification as employees rather than independent contractors, that’s a big one that shows up in a few places in the filing), and the inability to sustain growth at the current pace. It lists restaurants like Domino’s Pizza, with its proprietary and robust ordering and delivery networks, as competition. This is the story across the board in 3pd; Covid has been a tailwind and new users are converting to regular users, but the pace at which that will continue on the other side of stay-at-home life is questionable.

But perhaps most interesting is that DoorDash acknowledges that its future success hinges on the success of merchants and restaurants, broadly. (“This risk is particularly pronounced with restaurants,” the filing reads.) Uber’s S-1 a few years ago said the same, but basically: without sustainable restaurants there is no sustainable restaurant delivery. In recent months, most of us have been thinking about this the other way, it’s impossible not to. Without third party delivery’s money and platform, restaurants might not make it through 2020. Let’s take this moment to remember that pandemic life isn’t forever life, and the relationship between business and technology/logistics provider is symbiotic. 

Also remember not to sleep on the big restaurant companies that contract with DoorDash. Enterprise businesses (that’s chain restaurants) are a massive part of the delivery-app equation, providing growth in sales and also geographic spread; co-branded marketing and advertising campaigns from the likes of Chipotle can do huge things to signal boost for DoorDash the app.

I’ve always been excited about DoorDash’s other revenue streams because I think they say more about where the future of the business is headed than the current Marketplace model. 

“We generate the substantial majority of our revenue from orders completed through our Marketplace,” the filing reads. That’s the consumer-facing app and ordering business. But the company has other revenue streams, too. DoorDash Drive has always been sort of hidden in DoorDash’s product offering, at least it has in the tidy restaurant-delivery narrative, but it’s an important part of the story, both because of growth via enterprise restaurants and also because the offering sets DoorDash apart in the U.S. market. Drive provides logistics support for businesses that may not need the lift that a third-party marketplace offers (think: Chipotle, or Wingstop.) It’s a way to get cash from big businesses to provide a service that those businesses probably don’t want to deal with in-house. Because the operations of the Marketplace business and the Drive business are so different, I’m interested to watch if/how these two arms of the business are broken out in future financial reporting.

There’s also DashPass, the company’s subscription service. It’s an important part of the DoorDash flywheel because it keeps consumers platform loyal vs. restaurant business loyal. Of course, this is another hit to indie restaurants hopeful to convert newly acquired DoorDash customers to regulars whose data they own. (If you want to split hairs, I will concede that a customer who orders from a particular restaurant regularly through DoorDash is technically a regular customer of that restaurant, but the restaurant pays the same commission for the fourth order as it does the first. Multiple smart people in the industry have told me that success using third party delivery means a restaurant must convert those diners to direct-ordering regulars.)

I can’t wait to watch the company’s international growth, because this seems like a very, very tall order in a crowded market. 

While DoorDash is the leader in the U.S., it’s looking abroad for future growth. The company operates in Canada and, more recently, in Australia and says it will expand international operations, incurring “significant operating expenses.” (Worth noting that Uber does exceptionally well for a U.S. company in international markets, and because of its existing infrastructure likely incurs fewer operating expenses while working to expand.) 

A founder-CEO leading the company to IPO is a nice story. Period. 

The filing opens with a letter from DoorDash co-founder and CEO Tony Xu. “We started DoorDash to help people like my Mom,” he wrote. The story of DoorDash — at least from where I sit — is far less dramatic than others. (For example, the rise and fall and rise again of Uber, which lost its initial and controversial leader in the process.) At this time, Xu remains in control of the company, including in the boardroom.

But also, the vaccines. 

I don’t like to judge life by stock market performance but since we’re talking about potential stock market performance here, I’ll note that recent really good news from two major vaccine manufacturers has caused the market to jump while stay-at-home stocks like Zoom and Peloton took a hit. These small shifts certainly aren’t enough to derail DoorDash’s IPO, but promising news of a light at the end of the dark tunnel that is 2020 — and our collective enthusiasm about going out of our houses and frequenting crowded restaurants — might make the delivery proposition a little less sparkly.

In this sense, the high-profile moves from DoorDash to help businesses open takeout kitchens or even come back to life via an online sales channel go a long way to show investors the potential of the platform when we’re not confined to our homes. Exciting times!

Whoops, this ran longer than I expected (what can I say, I love a good filing!), but look for another all-new Expedite on my regular Wednesday schedule. 

I don’t mean to get (too) aggressive about this, but I’m putting out a lot of content for not a lot of money and I’d like to grow my list of paid subscribers. I won’t take away this useful free info from those who need it to run their businesses in challenging times. But if you’re in a position to toss $5 per month or $50 per year my way, it would go a long way to helping keep that model a reality. Thank you as always for your support. 

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