You Don't Know DoorDash...

Everyone thinks they know DoorDash. It dominates food delivery in the United States and is making inroads internationally. But what if I told you that most of the things you thought about this company were wrong? Or that DoorDash's own founders don't even consider it a food delivery business? So what kind of company is it? I want to start by talking about these, you know, macaroons. It might sound kind of crazy, but they're a really important part of the DoorDash story. Let me rewind a bit. DoorDash's co founders, Tony Hsu, Evan Moore, Andy Fang, and Stanley Tang all met at a Stanford Business School course called Startup Garage. Tony, who remains the CEO to this day, was in grad school there with Evan. Andy and Stanley were undergrad compsci. The guys were brought together by a shared insight. The creation of early portable payment systems were unlocking a huge stream of potential commercial activity for local merchants. Armed with this knowledge, they started pounding the pavement in their neighborhood. They'd ask local businesses what problems they'd solve if they had a magic wand. The first idea that the team came up with was to create an iPad app which would ask a restaurant's customers how they heard about the place. Not bad. Improving customer acquisition is great, but not a multi billion dollar idea. For that, they'd have to go to a macaroon store in downtown Palo Alto called Chantal Guian. The version of the story that's passed into legend is that Tony and his team members were about to leave the store when the owner said, actually, there is one thing I wanted to show you. She got out this thick booklet with pages and pages of delivery orders. This, the owner said, pointing to the booklet, drives me crazy. I have no drivers to fulfill these orders and I'm the one doing all of it. Tony, Evan, Andy, and Stanley realized that this was the big unmet need they'd been looking for. Inspired, they bought the domain name paloaltodelivery.com and uploaded PDF menus from a bunch of the top restaurants in palo alto. On January 12, 2013, they went live with the website. They. They got their first order for Pad Thai within an hour. And they just kept coming. There were two more on launch day five, the day after, then seven, then 10. The guys immediately saw that there was demand for what they were doing. But that demand created a puzzle for them to solve. How would they take orders? How would they communicate those orders to the restaurant? And how would they track the progress of deliveries? Tony set up a Google voice number for the team. So any incoming calls would go to all of their phones at the same time. They'd then ring the restaurant and place the exact same order, drive over, pick up the food, and take it to the customer. Once they started bringing more drivers on board, they'd use the Find my friends feature on their iPhones to track the deliveries. That first iteration was pretty janky, but they were tackling a genuinely hard coordination problem. Food delivery is harder than ridesharing because it's a three sided equation. With ridesharing, you've got customers and drivers, one source of demand and one source of supply. To meet that demand. There are still tricky optimization problems, but it's kind of a basic model. Restaurants introduce a second source of supply into this equation. Orders can't be fulfilled without the input of both the driver and the restaurant. You've either got a driver with no payload or an order getting cold at the restaurant. As Tony put it, you need to nail 15 small things to get one delivery right. Except for pizza places, food delivery was rare before companies like DoorDash came along. That's because restaurants had to create and maintain their own delivery operations. They had to hire and pay the drivers they had. They had to track the progress of deliveries and make sure the whole system ran smoothly. Basically, they had to solve both sides of the supply equation themselves. Only a few restaurants could take on that type of complexity. Most understandably didn't even try. Which is why what Palo Alto delivery was doing was genuinely innovative and hard. The team saw that they had an idea which resonated with restaurants and customers. Local restaurants liked that their food became visible to a bigger group of customers. Customers loved it because they didn't have to leave their apartment to get the best pad thai wings or hummus in town. It was just the beginning, but the opportunities were getting bigger every day. So the guys said to each other, let's do this for real, 100%. But they needed to learn more about how delivery actually worked. So Tony and the rest of the team actually signed up to be Domino's drivers for a few weeks. They even drove for FedEx for a while. This is more than an amusing little anecdote. It's a great example of the approach which has typified the company's journey. An obsession with operating at the lowest level of detail. For DoorDash's founders, operating at the lowest level of detail meant learning about the nuts and bolts of delivery years before they became a billion dollar company. Learning how delivery actually worked meant they could apply it to their business. That meant Reducing costs, passing savings on to restaurants and customers, and outsmarting their competitors. Fully committed, they applied to Y Combinator and were accepted into the 2013 summer batch. For Tony, Evan, Stanley and Andy, this was a signal that they were on the right path. But they'd only taken the first steps. First things first. They ditched the name Palo Alto Delivery because they didn't want it restricting their addressable market. The team used three criteria to come up with their new name. It had to be easy to spell. Ideally, it would have two syllables or less, and the domain name needed to be available. There's that commitment to operating at the lowest level of detail. With this little algorithm in mind, they came up with the name DoorDash. No more Palo Alto Delivery. Then they cleaned up the website. They ditched the PDF menus and got proper restaurant pages. Getting the small details right is important, but without the right strategy, it doesn't really matter. The team was about to confront their two biggest choices by far. Looking back, they might have been the two most important calls they ever made. How they handled them tells us a lot about the kind of company these guys were building. Y Combinator culminates in Demo Day, where you pitch to a huge group of investors. And the summer 2013 cohort was extremely competitive. In fact, when TechCrunch published an article covering the top eight most promising companies in the batch, they didn't even mention DoorDash. The DoorDash team had come up with a pitch that would stand out from their competitors, that this was it. The moment that would determine if DoorDash could make it to the next stage and secure a solid funding round. After Demo Day, they needed cash to scale up their operations, so they had to nail their pitch. When Tony and the team presented DoorDash, they made a bold claim. They weren't a food delivery company. They were building a logistics business. Food delivery was just the first use case. It was audacious, but they knew that they could back it up. Companies like grubhub and Seamless created demand for restaurants that already managed and operated their own delivery infrastructure. DoorDash's pitch was that in exchange for a share of revenue, they would build that infrastructure. They would take on the risk of managing a workforce and optimizing delivery routes. DoorDash was helping restaurants solve the delivery problem by stepping in to be that second half of the supply equation. It was a totally different approach to what their rivals were doing. This might mean sacrificing early market share and interest from certain investors, but it was a model that DoorDash could apply to industries beyond food. And this is that lowest level of detail. DoorDash raised $2.4 million in seed funding out of YC. It wasn't a huge raise. Even then, companies were coming out of the gates raising $5 million or more. But it was enough. With that money in the bank, the founders had to make the second of two huge early decisions. Where to expand. They started in Palo Alto. Where do you think they went next? San Diego, Louisiana, Maybe outside of California. How about San Jose? Specifically east San Jose. I want to put this into context for people who might not understand how unorthodox this was. San Jose is a big city in the Bay Area, but east San Jose is the suburbs. Families who own homes and walk their dogs down leafy streets, that kind of thing. It couldn't possibly have the density that a company like DoorDash needed to turn a profit right. Wrong. Because once again, DoorDash saw something others didn't. First, the founders realized that the higher rates of car ownership in the suburbs would mean a greater supply of drivers. But their more important insight was that expanding into the suburbs would allow DoorDash to refine their operation and introduce their business to customers without much competition. And here we are again, operating at the lowest level of detail to get an edge. This first move beyond Palo Alto went well enough that in May 2014, DoorDash raised $17.3 million in funding from Sequoia Capital. Just 15 months after the guys were driving around making deliveries themselves. They were now in charge of a Series A company valued at $73.5 million. There's this great photo that Stanley took from right around then. He's holding his computer science homework, his tax forms, a speeding ticket, and the Sequoia term sheet. It was a crazy time, and they were just getting started. That Series A funded DoorDash's expansion to Los Angeles. And the team ran the same playbook. Lock down the suburbs first. The first location outside of California was Boston. That choice was a really interesting signal about how DoorDash was thinking about the challenges of expanding into big cities. Boston is big, but it's also very flat, so it's great for cycling. Those conditions presented an opportunity to experiment with dashers on bikes who could weave through heavy traffic better than if they were in a car. Again, they were doing things differently and finding small ways to outsmart the competition. In March of 2015, a $40 million Series B round led by Kleiner Perkins valued DoorDash at $600 million. DoorDash was operating in eight markets. But by the end of the year, they were active in 22, including two in Canada. Interestingly, at this stage, all of the 65 employees, even the co founders, were actually required to deliver one day per month. So if you were near the Stanford campus around then, you may have had your order delivered by Tony, Stanley or Andy. That close proximity to the actual operation of the business meant that the team saw things that others couldn't. They saw that Dashers needed access to dedicated elevators, their own parking spots and separate serving stations at restaurants. The DoorDash team was deep in the weeds and found finding tons of small improvements that would add up to a big competitive edge. So far, so good. But things were about to become a whole lot more complicated. DoorDash was getting a lot of publicity. And it wasn't all good publicity. By 2015, several restaurants were claiming that DoorDash had uploaded menus to its website without permission, which meant that sometimes prices were different on the DoorDash website than at the restaurant. And like many gig economy companies at the time, DoorDash had to grapple with whether or not their delivery drivers were should be classified as independent contractors or full time employees. Moving fast in a new industry led to tons of tough decisions. And DoorDash was facing a ton of competition as well. GrubHub still had by far the biggest share of food delivery in the us And Uber, which was flush with investor cash, launched Uber Eats. Often the best thing to do when you're under pressure is to grow so fast you can't be caught, unfortunately. Just as that pressure ramped up, DoorDash stumbled. Sequoia was encouraging the team to raise a Series C round and and was prepared to commit $40 million as long as another firm was leading the round. So Tony went out looking for a new VC firm to lead DoorDash's Series C. He started looking and he kept looking. Eventually, after six months, it's now March 2016. DoorDash closed a $127 million Series C round that valued the company at $700 million, just $100 million more than the Series B round. 2016 was a rough year for the company. The US economy grew by just 1.6%, which spooked markets and slowed investment. DoorDash added only six new markets across the whole year. That underwhelming funding round meant that it needed to be careful with its cash. Customer acquisition was still expensive and their other costs weren't really coming down. Its market share had grown to 10%, but that paled in comparison to Grubhub's 70%. And Uber was burning through money trying to enter the same on demand delivery market. That combination of slowing growth, high costs, low margins and ambitious rivals has killed off lots of promising companies. It's it could have done the same to DoorDash. In fact, it nearly did. In late 2017, the company raised a $60 million loan. We only learned about this three years later when DoorDash went public and we got to see their S1, which is the SEC document companies file pre IPO. To this day, we don't know for sure which investors provided the loan. DoorDash may have been weeks away from running out of cash, and yet by August 2018 it was valued at $4 billion. How do you explain this incredible turnaround from nearby near death to an almost 6x increase in value? Success has many ingredients, but there are three things that stand out. First is that in 2017, DoorDash began turning a profit on a per order basis. This didn't mean that the company was suddenly profitable overall. But at a time when common wisdom said it was impossible to run a delivery company without burning through piles of VC money, it was vital to demonstrate to investors that you were making progress towards that goal. The second reason is that DoorDash's existing investors kept the faith. Companies like Sequoia were smart enough to know that Doordash's business model and commitment to operating at the lowest level of detail was enough to beat the competition. Provided they survived the tough times, their faith was rewarded. Sequoia and other longtime investors held big stakes in DoorDash when it began dominating the industry. The other reason can be boiled down to basically just one SoftBank. The SoftBank Vision Fund was placing big bets on delivery and ride sharing around this time. This included being one of the biggest biggest investors in Uber. SoftBank led DoorDash's $535 million Series D round in March of 2018. DoorDash was now a unicorn, but a highly diluted one. SoftBank and other investors had just taken a 38% slice of the company. It was a high price to pay, but it gave DoorDash the cash it needed to hit the accelerator. And that's exactly what they did. In August, they raised another $250 million at less than 5% dilution when they weren't even actively losing. Looking for more investment. That round valued DoorDash had $4 billion, which is a huge valuation. But deliveries grew by 250% over the course of 2018, so clearly things were Going well. By the end of the year, the company was operating in more than 3,000 markets, thanks partly to big chains like Chipotle and IHOP signing up. That massive increase to their footprint enabled DoorDash to overtake Grubhub to become the number one food delivery company in North America America By March 2019, from the verge of extinction, DoorDash was going stratospheric. In May, DoorDash announced another massive funding round which valued the company at $12.6 billion. This valuation came on the back of 60% growth since its Series F expansion to 4,000 markets in North America and its DashPass service approaching a million subscribers. And in 2019, DoorDash made $880 million in revenue off of $8 billion in gross order value. Tellingly, the company extracted 60% more revenue in 2019 from the same restaurants that were on its platform the previous year. Its growth wasn't just broad, it was also deep. So nothing could stop it, right? Sometimes companies generate enough momentum that only two things can change their a black swan event or an unforced air. In 2019, a New York Times piece revealed that rather than going straight to dashers, customer tips were only going to them if they otherwise wouldn't hit hit a guaranteed minimum take. In practice, it meant that millions of tips were going straight to DoorDash, not Dashers. It was a public relations nightmare. Delivery drivers work super hard for what is often low pay without benefits. Strategically, it was also a risk. Wasn't DoorDash kind of admitting that it needed this tipping scheme to make money? It quickly reversed the policy, but that was too late to assuage people that thought that DoorDash was too eager to move fast and break things. And investors started to get concerned that DoorDash's unit economics wouldn't hold hold strong without the tips. The issue of worker classification is extremely complex. But before that could be resolved, there was the small matter of a global pandemic beyond its human costs. COVID 19 destroyed incumbent business models, disrupted supply chains and accelerated existing social and economic trends. It was terrible news for businesses that relied on foot traffic, but it was absolutely incredible for DoorDash. In March of 2020, the company grew by more than 20% and they were already massive at the this point. From being nervous about the entry of Uber Eats into the market and the head start that they were giving up to incumbents like Grubhub, DoorDash quickly captured half of the US market. In June, it raised another $400 million in funding at a $16 billion valuation. But November 3 brought a prize that was arguably even bigger. 59% of voters in California voted yes on Proposition 22, which meant that rideshare and delivery companies could classify their workers as independent contractors rather than employees entitled to benefits. Gig Economy companies had always argued that classifying their workers as employees would force them to raise prices, and DoorDash clearly thought the outcome was important to the viability of their business model. They spent almost 48 million out of a total of $200 million to support Proposition 22. That argument isn't over, though. In August last year, a judge overturned the law created by the passage of Proposition 22, and gig economy companies are appealing, sealing the ruling. A very similar proposition will be on the ballots in Massachusetts this November, and it's going to be an expensive fight. But DoorDash is such a large company now that worker classification issues in a few states aren't really an existential threat anymore. After all, DoorDash was now big enough to start planning an IPO, and the combination of the pandemic turbocharging demand for food delivery, the outcome of Proposition 22, and a buoyant market for tech stocks gave it the perfect opportunity. The IPO priced DoorDash at $102 per share by the end of the first day of trading. The shares were now valued at $189, an 86% increase for the day. In a season of absolutely crazy tech listings, DoorDash's was one of the most ridiculous, and the stock price kept climbing. Now, obviously, DoorDash hasn't been immune to the broader downturn in tech stocks. There's a ton of factors affecting the public markets right now and increasing volatility. But there are other numbers that tell us much more about why this company has emerged as the market leader in food delivery in the United States. It's still not profitable, but it is reliably generating positive operating cash flows. Investors aren't watching the profit numbers, though. They're looking at revenue growth, and DoorDash's revenue has exploded $1.3 billion in Q4 of 2021, compared to less than $300 million just two years earlier. Total orders increased from8.83 million in all of 2018 to 369 million in just the last three months of 2021. And they've done a great job increasing customer loyalty, nearly quadrupling the amount of money each DoorDash customer spends on average. The company's huge market reach means its marginal marketing and customer acquisition costs are decreasing. This is what happens when you get the flywheel spinning? DoorDash's latest earnings report put its gross order value at $42 billion in 2021. But compare that to Amazon, which generated a staggering $600 billion of gross order value in the same time frame and you realize that despite being a big fish, doordash is swimming in a medium sized pond. The size of its addressable market is the biggest constraint on its growth. The DoorDash team knows this though. In fact, they've been preparing to overcome this constraint for years. Remember what Tony and his co founders told YC at Demo Day back in 2013 we're not a food delivered company, were building a logistics business. The platform that DoorDash built helped restaurants deliver food to their customers, but food was only ever the first use case. Since then, DoorDash has diversified its product offerings to consumers and merchants. Let's start with DashPass. Launched in 2018, DashPass is a membership program where subscribers pay $9.99 a month for free delivery from qualifying partner merchants. It's the same basic concept as Amazon prime and allows them to extract higher revenues from the most dedicated customers. The average order from a subscriber does generate lower contribution margins, but these members have higher retention and higher order frequency, which drives faster growth. In the last quarter of 2021, this DashPass program surpassed 10 million subscribers. Then there's DoorDash for Work, which launched in October 2020 and enables employers to feed their staff while they're working from home. This allows employees to make subsidized DoorDash order orders, employers get to keep their staff at their desks for longer, and DoorDash opened a new revenue stream. And that's not all. DoorDash now has three new products aimed squarely at merchants. DoorDash Drive, launched in 2016, is a white label last mile fulfillment service that allows businesses to deliver orders that originated from outside the DoorDash ecosystem, effectively piggybacking off the large pool of Dashers and the company's logistics operation. Storefront, launched in the mid-2020, enables merchants to manage online orders by creating a simple website. This is valuable because DoorDash estimates that 40% of its restaurants don't have any kind of online ordering system, and its most radical product offering is its most recent. In early February 2022, DoorDash announced DoorDash Capital, a program to offer merchants cash advances that they pay back automatically with DoorDash sales. DoorDash calls this a cash advance, not a loan. Merchants are charged a one time fixed fee instead of a typical interest structure and the amount a merchant will be eligible to borrow will be based on its past sales history with DoorDash. DoorDash capital is quite different from past product offerings, which have fundamentally been consumer loyalty programs or initiatives to encourage merchants to use the company's logistics operation. Nevertheless, this shows that along with its sustained growth in non restaurant orders, DoorDash has has its eyes set on bigger markets than just food delivery. Since it was founded, DoorDash has been asking every question and questioning every answer. When they graduated from YC, the food delivery market was dominated by Grubhub. In 2015, Uber, which was far more heavily capitalized, launched uber eats. Yet DoorDash rose to meet every challenge its rivals, critics and external forces put in front of it. Today it has 58% market share in the United States, up from 17% at the the end of 2017. But in such a competitive industry, there's no such thing as a permanent victory. The story is still being written and there are many challenges ahead. New rivals and entirely new service models are rapidly emerging to challenge incumbent firms like Ghost Kitchens, which are restaurants with no storefront at all. More on that in a future video, so be sure to subscribe International expansion is always complicated. The medium term macroeconomic outlook is uncertain. Profitability remains elusive, and what will happen to revenues as we move past the pandemic? All unanswered questions, but for now, DoorDash leads the way in food delivery in the United States. Commentators and analysts have offered many reasons as to superior customer acquisition and retention, command of unit economics, a diversified product portfolio, better investor relations. All of these are true, but they're all ultimately a subset of something that I've been emphasizing throughout this video. DoorDash has mastered the art of operating at the lower, lowest level of detail. Rather than chase grubhub, it worked from first principles to construct a fully operational logistics business which allowed them to expand quickly. It devised an elegant solution to the three cornered demand and supply equation. It made the brilliant decision to expand into the suburbs and use them as a lab to build its profile and refine its delivery model. It partnered with the right restaurants at the right times. It achieved per order profitability years before Uber, despite the latter's formation, formidable financial advantages, it has ruthlessly committed to scaling at speed, and it has laid the foundations to diversify well beyond food delivery. DoorDash has played tough and they've made some enemies. But when faced with a strategic choice that would shape what kind of company DoorDash became, they made the right decision almost every single time. That's what has enabled DoorDash to create a customer experience which has become an important part of people's lives. I love that DoorDash has become such a Y Combinator success story. If you're interested in learning some key lessons from Y Combinator, be sure to watch this video next. Thanks a lot.