After its stellar IPO debut last year – with shares popping 92% on the first day – many of us expected DoorDash to face tough comps this year. It seemed like the company had priced in all the growth it could handle valued at 24x sales. After all, this was a delivery company, not a SaaS company. Margins, delivery is not known for.
Furthermore, with the second year of the pandemic upon us, the comps for a delivery service looked rough. Cooped up with mandatory lockdowns for too long, Americans seemed to be done ordering delivery. As restaurant revenue began to rebound towards pre-pandemic levels, it appeared Americans were done with 90% markups on their food.
It didn’t help that Uber was doubling down on Eats. Or that, as a public company, there are serious pressures towards profitability.
Yet somehow, DoorDash has managed to continue to grow revenue and take share. At 57% market share in October, it has more than doubled its closest competitor, Uber Eats. Grubhub, the dominant player as recently as 2018, has been completely left in the dust.
The company that was sneaking up on no one managed to pull a fast one on all of us. But just how did DoorDash do it? Let’s explore:
- Doordash’s History
- The Strategies It Uses to Win
- What the Future Might Hold
Doordash’s History
Chapter 1 – Operating the Lowest Level of Detail
I still remember when Evan Moore arrived at the bottom of my apartment building in Palo Alto, CA in 2013. We had ordered some Thai food and the delivery company was DoorDash. I did not know the company, but the restaurant was good enough to try a new delivery provider.
“How did you hear about us?”
“We wanted some food from this Thai restaurant.”
“Ah, well thanks. I’m the founder. Our office is around the corner.”
“That’s awesome! I work at a tech startup too.”
“Rad.”
And, that, as far as my fallible memory – corroborated by my wife – can remember, was the extent of the conversation. “I just spoke with the founder of the delivery startup who just delivered to us,” I said to my wife after. “That’s awesome!” And like that, it was done.
Amy and I would frequently drive by the place and speculate how well it was doing. But it was one amongst hundreds that are now household names today – Palantir, MongoDB, and Nest, to name a few. I eventually forgot about the company.
But DoorDash founders Evan Moore, Tony Xu, Stanley Tang, and Andy Fang would keep working. The foursome out of Stanford would drive DoorDash on an unstoppable ascent from the humble home it was renting adjacent to the graduate student apartments at Stanford to a $50B market cap.
As co-founder Stanley Tang explains it, Amy and I were not the only people who liked that restaurant, at that time. People would put up with the poor DoorDash interface – in comparison to Grubhub, its 10 years older sibling – and keep ordering.
This isn’t exactly the most professional-looking site, yet we kept getting phone calls; we kept getting orders. And that’s kind of when we knew that we were onto something. We knew we found a need people wanted when people were willing to put up with all of this.
It was a classic case of founder’s insight. The young DoorDash team found product market fit because users were willing to go through hoops to get to the product. Restaurants in suburban areas like Thai places without delivery had loyal customer bases willing to pay.
The four founders asked themselves three questions from the Startup Garage class they met in:
- Is this a service that students would want?
- Would they pay for it?
- Would they pay $6 for it?
The response was about 15%, enough to focus the business on. But, further, when the team dug into the numbers, they found that 85% of restaurants in America did not deliver. It was the type of counter-intuitive insight that can drive a generational business. The founders realized that despite delivery being around forever, there was a huge base to grow into.
In that first year, DoorDash’s revenue rise was so rapid that Square thought they might be money laundering. It shut off payments. Tony Xu, a former Square intern, had to email the company to get the account hold lifted.
Meanwhile, the whole time, the team remained extremely curious. They would go into restaurants and ask:
If there was a magic wand and we could take any problem away for you, what would it be?
Then, when they would do the deliveries, they would observe the stores and take notes. They ultimately identified 20 steps in the process, and, at each step, asked the five why’s, doing analysis to get to the lowest branch of what the actual problem is.
One day a restaurant would be delayed because someone did not show up to work. That is something that does not show up in the data. But if you are doing the work, you notice. Tony calls this “operating at the lowest level of detail.”
One discovery they made was that it was really hard for small businesses to know how many drivers they need. They had trouble every major holiday or football game. Every team member did deliveries and customer support for the first year. As a result, little insights like these would compound into the understanding to build the company’s vision and strategy.
Chapter 2 – Logistics, Not Food
It was at this early juncture that the four founders solidified their vision that stays with the company to this day.
Ultimately, our vision is to build 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 in operations.
To expressly cast themselves as a logistics instead of food company that early age was very prescient. Half of strategy is focus, and how you cast your company is half of focus. The young founders recognized this at their early age and set the company to work to develop a moat around its operations and engineering functions.
This manifests itself in numerous advantages, but one of the most important is unit economics. The company has had a logistics mindset from the beginning, so it focuses on costs. Although the company was not profitable in its blistering growth phase, the logistics focus has helped make it a future possibility.
Chapter 3 – The Anti-Grubhub
Delivery is, in many ways, an ancient business. If you travel to a part of the modern “old world,” like deep in a medina in Morocco, you are bound to see couriers delivering packages throughout. Economists got hold of the business model long ago.
As such, the thought has always been: density matters. In the tight alleys of a Moroccan medina, delivery makes sense because one trip can service multiple customers expediently. The distance between points is short, and an experienced courier knows her way around a tight alley crowd.
Grubub, started over a decade before DoorDash, was built on the economic foundations of the delivery business. The company historically had been laser focused on city areas. Apartment folks tended to eat out more, so the supply and demand sides were more attractive. Up until 2016, that strategy worked fabulously. Gruhub had 70% market share.
But urban delivery, being an ancient business, is also brutally competitive. DoorDash decided to play a different game. Like my suburban Palo Alto apartment building, it would service the more suburban communities. It would target restaurants that did not already have a pre-existing delivery offering, because they likely had a pre-existing customer base. It would even service chains.
This allowed DoorDash to quickly grow as it brought restaurants and areas that were not previously delivered online. It became a ground game like Uber in the early 2010s: how quickly can we hire drivers? DoorDash was playing the game of bringing people into a tech for the very first time.
Meanwhile, Uber themselves chose to compete. Uber Eats was primarily driving revenue in urban areas where Grubhub played. This meant fighting on rates with places already delivering to customers who already order delivery.
Of course, taking the route less traveled is not all rosy all the time. At the end of 2017, the company almost ran out of money. Investors had soured on the delivery space. For six months the founders attempted to secure a lead investor and were unable to.
But the company’s tenacity of focus helped it make through the tough period. Eventually, it was able to secure a half billion dollar round led by Softbank in March, 2018.
Chapter 4 – Building a Subscription
That same year, the company launched a subscription membership, DashPass. It has become the company’s secret weapon. By IPO, the company had 5 million active DashPass subscribers. That is a $600M a year subscription business.
It offers free delivery on select merchants and reduced fees on others. It also helps create lock-in and continued demand for the company. Fees are baked directly into item prices, so this continues to help it extract value from its superusers.
As 2019 rolled around, Doordash surpassed the former giant Grubhub in market share.
DashPass and DoorDash’s executional excellence contributed to 7x’ing revenue year over year between 2017 and 2019. By the end of the year, Uber Eats, however, had more market share than DoorDash. The wars were not won quite yet.
Chapter 5 – Winning Covid
A black swan event would help with that. When the Covid pandemic hit and Americans were locked in, DoorDash was ready. And this would propel it to the #1 spot.
In the pandemic, Americans flooded cities. So this was terrible for the urban delivery companies. Americans ended up in suburbs, exactly where DoorDash specialized and had been bringing restaurants online for years. As a result, DoorDash was often the best option for customers to get the food they wanted while being covid-safe.
Of course, with massive demand comes the need for more drivers. Here, the DoorDash benefited from the relative dearth of ridesharing. Uber and Lyft drivers became DoorDash drivers, and the company was able to grow through the pandemic at a blistering pace.
But it was not just environmental factors and preparation that enabled the company to succeed. It also actively worked in the pandemic on the right problems. At the onset of the pandemic, the platform cut 50% of their commissions. Then they followed that up with products like daily pay – merchants needed their cash everyday in the crisis, and DoorDash delivered.
Ultimately, restaurants that worked with DoorDash had six times better odds than an average restaurant to survive the pandemic. True to its goal of empowering and improving local economies, DoorDash helped its merchant partners.
Chapter 6 – IPO and Beyond
The company arrived at its IPO party with 300,000 restaurants and 200,000 dashers on its platform. That is an immense responsibility. But, bankers were not quite sure how to price it. Ultimately, they priced it 90% too low. The stock popped on the first day and has maintained a similar valuation through its first year.
The company had tough comparable revenue growth numbers going into this year, but it has managed to keep up the blistering pace of growth.
With all that revenue, one question that investors had was: is there further room to grow? Or is this just a Covid business? At the roadshow, the DoorDash leadership highlighted the statistic 6%: that is how much of off-premise food spending delivery represents in the United States. Their argument was that if it can grow to 12% and have 50% share, that is a $15B+ yearly revenue company.
So far, the progress looks to be phenomenal. The company’s last 12 months revenue of $4.5B only 9 months into the year continued its blistering pace of growth. We can expect a big Q4 to take that number to the stratosphere. The company has been branching beyond food delivery to deliver both food delivery revenue, and also convenience, grocery, pet supplies, and more.
The Strategies It Uses to Win
Of course, to this point, we have already explored several strategies DoorDash used to win at the specific level. Let’s abstract them out to the meta-layer and discuss the implications.
Strategy 1 – Optimize the Company
The DoorDash founders have relentlessly looked at the company and asked, “how can we organize to maximize growth?” This translates to its meetings, people, and thinking.
Take its meetings. DoorDash has a fairly strong writing culture. Like Amazon, they tend to start meetings by reading documents.
This also, of course, applies to its people. The company has aggressively recruited from sharing economy businesses that serve small and medium businesses. COO Christopher Payne is from ebay. CFO Prabir Adarkar, CBO Keith Yandell, and VP of Engineering Ryan Sokol are all from Uber. These companies, along with Square, Groupon, and Airbnb give the leadership team a seasoned outlook on how to grow.
Finally, this translates into its thinking style. The leadership focuses the company on operating at the lowest level of detail so they can attack problems with hypothesis trees. As a result, the company has solved a litany of problems for all three of its stakeholders – dashers, restaurants, and eaters – that its competitors have not.
To this day, Tony does customer service. By setting the example from the top, the leadership encourages every employee to intimately understand the business.
This all manifests in the company value of, “truth seeking.” The idea is that you come with your data and your insights, but not necessarily your opinions. The company tries its best to remain intellectually honest, even when the world around it is singing its praises.
Tony has a couple great anecdotes for leaders on this point:
Over time, it’s about learning: how do you build systems? The obsession morphs towards: what are the mechanisms we’re gonna build to allow speed?
The goal is to build systems that move fast, and the Doordash leadership team has enabled its engineering and operations teams to ship at extremely high velocity.
Strategy 2 – Treat All Your Stakeholders As First Class Citizens
DoorDash has an unusually strong product suite for its business partners and dashers. It focuses as furiously on user experience for those two groups as it does eaters.
Take DoorDash Drive. This is a service where companies do not even sell through the Doordash consumer channel. They use the dasher and software Doordash has created to facilitate deliveries.
Or take DoorDash Storefront. This product empower businesses to create their own online stores. It integrates into their pre-existing back-of-house systems to allow the merchant an easy onramp into e-commerce.
The company is building full-stack services for its customer needs, mirroring the founders’ early penchance for curiosity and solving customer problems. Because of the company’s historical product and engineering focus, it has the chops to pull of these software businesses servicing merchants in addition to its core business.
Nowadays, the company has millions of dashers. The company takes its responsibility to them very seriously. For instance, 90% of them work fewer than 10 hours a week. The company builds for these gig economy workers very specifically. It helps them find the right 10 hours to work, for instance.
Strategy 3 – Competition is for Losers
DoorDash’s driving strategy for success has been taking restaurants online that did not have delivery. In this way, DoorDash has run away from the competition. With clever user segmentation and targeting, it has focused on a part of the market others did not want to build it for.
This has allowed it to go greater than $4B dollars in less than 8 years, a truly mind blowing feat.
What the Future Might Hold
Creative Destruction
One of the meatiest issues that is coming out of the rise of the food delivery giants is, what happens to restaurants? Some studies have found that delivery has grown at the expense of restaurants. Other studies have found that delivery provided a critical hold-over in the Covid pandemic and help to stabilize revenue for weather-sensitive businesses, like those with heavy walking traffic.
To DoorDash’s point of operating at the lowest level of detail, it appears the details will end up mattering here. There are probably specific cases where delivery is hurting restaurants. DoorDash considers restaurants a stakeholder. It will drive to the root causes of why this is and help restaurants. This might be in the form of app education, or in person strategy sessions. The methods may vary, but the company has the potential to help its restaurant partners grow with its large consumer network. So the future does not seem written on whether food delivery giants, and DoorDash as the leader, are going to kill restaurants.
As far as I can tell, the amount of creative destruction that is resulting as a result of food delivery is at least matched if not exceeded by the growth in the ghost kitchen market. The habituation of Americans to delivery that DoorDash has pushed has helped entire businesses spin up without storefronts. The market is now $50B a year.
One of the hottest issues is the listing of restaurants without their consent. It has more or less become standard practice in the industry, and DoorDash has been accused of it multiple times. This is another issue where it appears the details matter. DoorDash is likely to put an end to any loose cannons still doing so. If not, regulators might.
Taking on Amazon
DashPass is DoorDash’s Amazon Prime. And with the companies dreams of becoming a logistics company, it is headed straight to a fight with Amazon. The two are the top dogs in the new wars, to build out America’s last mile delivery infrastructure. While countries like South Korea are serviced by giants like Coupang offering overnight delivery, Americans still satisfice for two day delivery with Amazon.
DoorDash, like GoPuff and millions of other competitors in the space, is hoping it can help change consumer expectations. As the company looks to maintain its blistering pace of growth, it knows it needs to extend beyond food. Like it has with food, DoorDash is hoping to raise consumer expectations for delivery times and take share from Amazon.
Taking on a company with 34x your market cap is always a tough proposition. But, if anyone can do it, perhaps DoorDash can.
