Hi, it’s Alexandre from Idinvest. Overlooked is a weekly newsletter about underrated trends in the European tech industry. Today, with Thibault, we are sharing our learnings on the upcoming DoorDash IPO.
I hope that you are all doing well.
In the coming weeks, I’m planning to cover all the major US tech consumer companies that have released their S1 and that are planning to go public. I will talk about Airbnb, DoorDash, Wish, Affirm and Roblox. I’m doing this because it’s a good way to take the pulse of the consumer market after a wild year during which all our behaviours as customers have been re-evaluated. It’s also a great way to unpack some recipes for success both in terms of company culture and company building.
My goal is not to give you a holistic coverage of these companies but to share some personal learnings while researching them. I will also add resources at the end of each article to have a good starting point if you want to dig deeper into these IPOs.
If you want to give a hand and work with me on these articles, feel free to drop me a line at email@example.com
I’m starting with DoorDash. It’s a food delivery company that was started in the US in 2013. I think it’s the most impressive company I have ever come across operationally-wise. They are nailing it despite being in a super competitive and operationally complex market. DoorDash is now the undisputed leader in its category with healthy unit economics, without having a first mover advantage and facing fierce competition from players like Uber, Grubhub and Postmates. DoorDash has built a powerful and efficient last mile delivery network. It has conquered the restaurant industry but it has a broader vision around supporting local and physical small businesses to help them thrive in the digital world. I’m convinced that DoorDash has a lot of room to grow by expanding massively into other categories like groceries and B2B deliveries and adding numerous other services to support local and physical businesses.
In this article, I’ll cover the following topics:
A quick history of DoorDash
A mobile app review - powered by App Fuel
The key ingredients used by DoorDash to win the US market
Empowering Local Businesses
Leadership Lessons from Tony Xu (DoorDash’s CEO)
A Quick History of DoorDash
In October 2012, four Stanford students (Tony Xu, Stanley Tang, Andy Fang and Evan Moore) were working on a business project to serve small physical business owners when they discovered that many businesses were suffering from nothaving the infrastructure needed to deliver products from their shops to customers. After interviewing 200 small businesses, they decided to focus on this issue. They started with restaurants because they had the most prevalent pain point but also because it was the hardest to solve.
In January 2013, to validate the model, they launched a food delivery website called PaloAltoDelivery.com for people in the Palo Alto area. The goal was to make sure that the model was viable for the three parties involved in the marketplace: restaurants, riders called Dashers and customers.
In June 2013, the company was incorporated under the DoorDash brand. The team started to test the model in East San Jose to validate that the model would work in less dense and less tech-savvy areas. From day one, DoorDash believed in building a mainstream service and not just something for Silicon Valley.
When you take a step back, Doordash has really started with the most difficult delivery service: delivering food with a store-picking model in suburbs. If the model worked in East San Jose, then it was a guarantee that the company would be able to expand in city centres and deliver not only food but any other products.
During the summer 2013, Doordash went to Y-Combinator and Khosla led a $2.4m seed round in October 2013. In 2014, Doordash expanded to the East Coast (the company stayed focused on two markets for 1.5y before expanding massively in North America) and convinced Alfred Lin from Sequoia to invest into the company.
In 2015, the company signed a first partnership with a national restaurant brand called California Pizza Kitchen. Today, Doordash is working with 175 of the largest 200 national restaurant brands.
In 2016, there was a small economic downturn in the first quarter while the company was raising external funding. DoorDash ended up raising $127m with existing investors (especially Sequoia which doubled down into the company) and had to refocus on making the unit economics work at scale.
It seems that 2018 was a tipping point in the company's history. DoorDash raised two rounds for a total amount of $785m from new deep-pocket investors like Softbank, Coatue and DST. The funding was used to bring the company to another level by building a strong marketing team and expanding from 600 locations in the US to 3k locations.
In April 2018, DoorDash also expanded into the grocery category by signing a key partnership with Walmart. In September 2018, Doordash launched DashPass a membership subscription to get free deliveries and exclusive discounts. It’s a great success as 5m people are now subscribed to the DashPass.
In August 2019, Doordash acquired Caviar from Square for $410m which was a food delivery service targeting mainly premium restaurants that were typically not offering delivery. I have two learnings from this acquisition: (i) the consolidation was starting in the food delivery market, (ii) it was a good positioning fit as Doordashhas has always emphasized its operational excellence, its extreme attention to details, a prerequisite to serve Caviar's premium restaurants and customers.
With the Covid crisis, 2020 has been a record year for the company with a GMV that has more than tripled between the first nine months of 2019 ($5.5bn) and the first nine months of 2020 ($16.5bn). DoorDash has demonstrated that it has sound unit economics (read this post if you are not convinced). The company has also expanded its food delivery activity in the past 12 months opening dark kitchens, partnering with 1,800 convenience stores across the country and launching a convenience store offering called DashMart with micro-fulfillment centers selling 2k products. It has also signed a deal with Walgreens to deliver over-the-counter medicine and snacks through its app. The IPO is just a logical cherry on the cake to celebrate this incredible success story.
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DoorDash introduced the DashPass to lock loyal customers: It's a $9.99 monthly subscription program to convince clients to use DoorDash more frequently, while paying less per order. It offers free delivery and reduces service fees on a selection of restaurants. On average, users save $4-5 per order meaning that the plan is profitable if you make more than two orders per month. Today, the DashPass has more than 5m users. The idea beyond this subscription program is not to generate additional revenues through subscriptions but to lock users on DoorDash to increase their usage and make sure that they don't churn to another competitor. It's an attractive subscription program, but not the best one on the food delivery market as it's relatively expensive and it's constrained to a limited selection of restaurants.
The search experience is a key issue: DoorDash offers many customer journeys to find the restaurant that you are looking for. You have several options to choose from, like delivery timing, type of food, type of delivery, ratings, offers etc. These options are highlighted at the top of the home page with smart tags. On the home page, you can also access a feed customized with special offers and recommended restaurants based on your preferences. DoorDash iterates a lot on this topic and we observe a clear homogenization of the search experience across the food delivery apps (see the similarities between DoorDash and UberEats for instance).
DoorDash wants to empower restaurants and plays a big role in their marketing: DoorDash offers merchants an online channel to distribute their products as well as a last mile delivery logistic service. But DoorDash also helps them promote their products directly to customers through a wide variety of marketing services. On DoorDash, restaurants can run promotion campaigns, set up loyalty program and pay to be pushed forward on the marketplace through merchandised sections.
DoorDash bets on pickup as a distinguishing feature. DoorDash has decided to showcase its pickup service, while other delivery apps consider it as just a delivery option for restaurants and does not allocate a specific part of the app to this service. In the DoorDash app, this means - for instance - a nav bar item entirely dedicated to pickup and a dedicated user flow.
The convenience/grocery items are mixed withthe restaurant offer: DoorDash displays grocery as a sub-category, on the same level as the types of cuisine for instance. Both UberEats and Postmates have adopted the same approach. This could either mean that ordering a meal from a restaurant or purchasing grocery items are part of the same use case in consumers' minds, or that the grocery part of the business is not significant enough to be showcased on its own in the app. The convenience category is likely to be put forward in the app as DoorDash is moving fast: they launched new partnerships with 7-Eleven, Walgreens or CVS to develop the convenience offer last April, and went even further in August by introducing DashMart, DoorDash's own store of convenience and grocery items.
Like everyone in this market, DoorDash likes discounts: Discounts and promotions are a key factor in deciding what app to use, as users are in general not attached to a specific food delivery app. Contrary to other players like goPuff, DoorDash does not offer a reward program, but it does not mean that it doesn’t have an aggressive discount strategy. The onboarding process is full of discounts, and users can find additional promotions in the restaurant menus.
The restaurant discovery experience could be enhanced. The personalization of the home page is a strategic element, since users are less adventurous on delivery apps. They usually only order from the restaurants they know or the types of cuisine they like. DoorDash displays many unpersonalized categories (nearby restaurants, national favorites, etc) that probably have business explanations but can hurt the user experience. According to many app reviews, people highly value personalization: they would like to see more recommendations on the home page based on the types of meal they like. DoorDash has a "Your favourites" section but it only includes historical orders. On the competition side, Postmates displays "recommended for you" restaurants and UberEats has a "like" feature that allows the user to save favourite restaurants which gives insights on the user's preferences.
Improving the UI menu would also increase the conversion rate. The DoorDash team made two main changes in the latest version. They added a navigation at the top of the screen to prevent back-and-forths between the restaurant menu and the item categories. Also, they added item pictures that substantially improve the likelihood to add to cart.
Winning the US Food Delivery Market
In the past three years, DoorDash has outpaced all its competitors in the US food delivery market with a national market share that is now above 50%. Competitors had no choices but joined forces to stay relevant. Uber is currently in the process of acquiring Postmates and European player Just Eat Takeaways is acquiring Grubhub. What happened?
First, food is one of the largest industries and most of the restaurants have yet to adopt delivery. Before Covid, only 5% of restaurants orders were fulfilled through delivery. Market penetration is still low and there’s a lot of room to increase, especially when we know that deliveries represent 50% of sales in the pizza category. The above graph shows that DoorDash has grown its market share by expanding the delivery market; not by taking market shares from competitors.
Second, the first generation of food delivery companies like Grubhub were exclusively lead-generating platforms for restaurants which already had a delivery fleet. DoorDash, Postmates and UberEats unlocked a completely new market by building their own delivery fleet to allow any restaurant to offer delivery. For most restaurants, it's a no brainer to start offering delivery as you generate additional revenues without any additional fixed costs (labor and real estate). You just increase the utilisation rate of your fixed assets. I love this concept of unlocking a supply that was nonexistent to kickstart a marketplace. Airbnb has done the same in the travel industry by pushing consumers to put their house as listings for travelers - a supply that was different from hotels and B&B that we were used to finding on Booking.com and Expedia.
Third, we saw that DoorDash started by ensuring that they could nail deliveries in the most difficult set up: in suburban areas where the density is low and in the restaurant category. They were able to reach a level of excellence that has been key to retain customers and attract top tier restaurants as partners. As Sarah Tavel said, DoorDash won over competitors because its experience for customers was generating “meaningfully more happiness than any substitute”.
Fourth, DoorDash did not tap into the same rider supply as ride hailing companies like Uber and Lyft. This differentiated supply for contracted workers was key to avoid frontal competition. The overlap between Dasher and drivers on Uber is less than 10%. DoorDash is targeting people in their twenties (vs. forties on Uber), both male and female (40% female vs. 15% on Uber) working either at the universities or in retail. Most Dashers already have a job and are using DoorDash to earn additional income to reach an objective in their lives.
Empowering Local Businesses
DoorDash's vision goes way beyond being a delivery service for restaurants in the US. It aims at empowering local businesses to compete in a world where you are no longer relevant if you don't have an online presence.
DoorDash started to build a last mile delivery network for restaurants but it can also be used for any other small businesses (grocery, pharmacy, flowers). This delivery network is unique and it is differentiated from traditional delivery networks like Fedex and Amazon which operate with a door to door model: a courier will fill his truck with packages that need to be delivered one after the other following a predefined route. A last mile delivery network is more adapted to modern consumer behaviors: impulsive purchases, convenience, fast delivery etc.
To thrive, local businesses have to reinvent themselves to combine both convenience and experience. Consumers will continue to visit and make purchases in small shops and restaurants but will be expecting unique experiences that they can't find online. At the same time, consumers are expecting small businesses to have a presence online and to be able to consume their products and services without having to leave their home. DoorDash wants to help local businesses to achieve this transition by allowing them to offer delivery in the first place but also additional services like an online presence, online marketing services etc.
For local businesses, it means that they will have to re-arrange their store space. It's impossible to have 30-50% of your sales coming from delivery without reducing the size of the front store and expanding the size of the back store. Front stores will be smaller and more focused on experiences while back stores will be larger and optimized for delivery.
Leadership Lessons from Tony Xu
Tony Xu is Doordash’s co-founder and CEO. He is only 35 years old and has an inspiring personal story. His family moved from China to the United States when he was 4 years old because his father had been accepted to work at the University of Illinois. He grew up in a frugal environment in which his parents had to work hard to make ends meet. Her mother worked small jobs for 12 years before having the funds necessary to have a medical licence and open a medical clinic - the job she was doing back in China. She worked at a restaurant and climbed the ladder from waitress to co-owner of the restaurant. Tony worked there several times to support her. The family moved to California when Tony was 15 years old. He studied industrial engineering at Berkeley and started his career at McKinsey. He left to join eBay’s corporate strategy department and then to lead the business of a company acquired by eBay. After eBay, he completed a MBA at Stanford where he met his co-founder and started Doordash with the insight that food delivery was a first good service to support small and local businesses in the digital world.
I have learnt most of the leadership lessons described in this section while listening to countless interview hours with Tony Xu and you will understand that these lessons are all rooted in his personal history.
Having a strong bias for action. It means that you need to recruit the people who will have the courage to take initiatives. Sometimes, initiatives will fail but it's the only way to consistently move the ball forward. It also means that you should structure your organization to reduce the friction to start acting. In the early days, anyone at Doordash had to learn SQL to make queries into the database and quickly gather data to make decisions. There is a strong culture of ownership in which anyone is empowered to launch new initiatives on a daily basis.
Operating at the lowest level of details. I tend to crack jokes on people who work in consulting when they try to fit this incredibly complex world into their prebuilt frameworks. At least, they have the right attitude when it comes down to breaking a problem into components, finding the root causes for each component and to prioritizing solutions for each one of them. As I told you, Tony started his career at McKinsey and you can feel it immediately when you are listening to interviews. I'm impressed by how he breaks down a delivery into small pieces and works hard to make sure that each piece is done as efficiently as possible.
Firing yourself every six months. In a startup, you are evolving in a fast changing environment in which you need to be a continuous learner to thrive. It's wrong to believe that you have the pre-requisite expertise to launch a startup. There are too many different topics that you will have to master during your growth journey. You have to tackle each new topic with a faster learner attitude, identify the challenges around this topic, test solutions to solve them and find a better person that you to nail them so that you can free your time to jump on the next big thing. If you don't delegate regularly the topics that you are working on, you will never be able to bring your company to the next level.
Having a unique point of view of the world. As an entrepreneur, you need to have a bigger goal than becoming rich. Otherwise, you will never be able to build a category-defining and sustainable company. DoorDash needed to have this big vision to empower local businesses to thrive in the digital world to be able to attract and retain the best stakeholders over the long run (employees, Dashers, restaurants, investors).
Getting better 1% everyday. In Atomic Habits, James Clear explains that people can improve themselves not by making revolutionary changes overnight but by doing small incremental improvements everyday that will end up compounding exponentially. At Doordash, this principle has been crucial because of the inherent complexity of dealing with the offline world.
Best Resources to Learn More on DoorDash
🔎 S1 (Doordash, Nov. 2020)
💌 Dashing to IPO (Firehose #181, Nov. 2020)
💌 DoorDash and Societal Arbitrage (The Margins, May 2020)
💌 Doordash and Pizza Arbitrage (The Margins, May 2020)
💌 The Story of a Cap Table: DoorDash (NewComer, Nov. 2020)
📹 Newton Distinguished Innovator Lecture Series - Tony Xu (Berkeley, May 2018)
📹 Tony Xu Talks Protecting DoorDash Workers (How I Built This, May 2020)
🗞 Food Delivery Wars (Sarah Tavel, Feb. 2020)
🗞 The Hierarchy of Marketplaces (Sarah Tavel, Jun. 2020)
🗞 DoorDash: Great Unit Economics, but Many Unanswered Questions (Daniel McCarthy, Dec. 2020)
Thanks to Julia for the feedback! 🦒 Thanks for reading! See you next week for another issue! 👋