Figuring out the fundamentals | Bastian Lehmann

So as I mentioned, last summer you raised your Series D. That puts your valuation at about $500 million. And I'm fairly confident Postmates could have had a billion-dollar valuation by now, just if you look at the 150+ companies that are now at more than a billion-dollar valuation, many of which were attained over the last 2 to 3 years. Many of which don't deserve that valuation. Many of your competitors, some of your competitors have close to a billion or more than a billion-dollar valuation. Talk about, Bastian, if you would, the necessity and the importance of self-restraint in an often ego-driven, hypercompetitive market.

Yeah.

In deciding how much money you should get, and what are the terms, what valuation. How important is self-restraint? How did you exercise it?

VC told me once that we suck at fundraising. Maybe that's the reason we don't have a billion-dollar valuation. That could be the case. The answer is likely a very complicated one. And it— how can I answer this correctly? So at some point—

Did you have a chance to get a higher valuation?

Yes, absolutely.

Okay, and why did you say no?

None of the term sheets that we accepted in the Series B, C, D were the highest bidding term sheets because it was more important for us to work with a specific person. That was true for Tiger. That was true for Spark. We kind of had made up our mind on who we want to work with, so we didn't max that out. We also— the reason I'm saying it's a bit more complicated— here's what happens. Companies get built in 2 ways. You can go hypergrowth. And what that means is that you throw everything you have in the fire and you hope that the growth will never stop. And you likely have to subsidize huge parts of your business with a lot of dollars. You're creating a fake reality for yourself and for investors, but you hope that at a massive scale this will, this will work out. It was a very popular way to build companies throughout the last 2+ years. And growth is a really popular way to grow a company when things are going very well. Capital is readily available. Valuations are high because there is so much capital in the market. That means people competing with later-stage financing. At the same time, you have hedge funds and people that usually don't invest in private sectors come down the market. They want to get an earlier piece of that pie. So they're competing now with late-stage VCs. And you have a scenario where That in itself fuels the idea that the best company you can invest in is a company that grows the fastest. During those times, you have no problem raising a lot of money, and you will face very little questions around your unit economics and if your company can actually work. But that's totally fucking bad for you as a founder and as a CEO and as probably a large shareholder in your own company, because what happens is that You push aside decisions, you push aside any textbook management that will come back to you at some point in time. And what that means is that you're also pushing away figuring out if this thing can actually work, which is like a super important thing if you wanna build a company where you can be in charge of in the long run and not all the investors that gave you their money and then they tell you to sell that thing because they feel that you can't figure it out. So you can choose the path, but the path that we've chosen is we want to be in charge of our own destiny. So we made a couple of decisions. How can we have high margins so that we make a lot of money and hopefully as fast as we can get to profitability so we don't need a lot of money to get there? How do we really understand the dynamics of supply and demand, the couriers, the customers, and the merchants in a, in a 3-sided marketplace? How do you get a flywheel going without lying to yourself or using millions of dollars to keep that flywheel going? And because we modeled our company that way, and because we have a little bit more conservative growth ambitions than other companies, I think that's when you probably also get offered slightly lower valuations. That was true until December. when we know that things got really rough.

Right.

And a lot of our competition who raised like party rounds before had to raise inside rounds, right? Because they couldn't get the valuation that they wanted in the markets. So they had to get back to their own investors and raise more money from them to protect themselves from an even lower valuation. So sometimes you're right, sometimes you're wrong. In the end, it all comes down to when you want to take a company all the way, If you want to take a company public, you need to figure out these fundamentals. At some point, you need to make money. You need to get to breakeven, and you need to be profitable. And then you need to show that you can grow this thing for a long, long time. So that's the difference, right?

And often term sheets that propelled a company's valuation to $1 billion and above came with all sorts of fun things like ratchets and inflated preferences and other sorts of things. I don't know if that was anything that you saw out there.

Not when we raised. I mean, I heard about this, but I have yet to see a lot of companies that have that. These ratchets and liquidation preferences, these are all parts of an investment vehicle that want to make sure that whatever happens, the guy who puts in the $200 million gets the money out first.

Right?

And what that means is that you're fucked and a lot of other VCs are screwed because the later-stage money weighs more and has more protection. Employees as well. Of course, yeah. All your team. Horrible.

Yeah, that was something that happened when Square went public. They went public at a lower valuation and the ratchet kicked in.

Square is a good example.

Good. So you mentioned quite a bit about unit economics so far, and I think that's a great thing to touch on a little bit more. You're in the on-demand space, which is under a lot of growing scrutiny, in part simply because it has become so crowded.

Yep.

And generally there really can't be more than 3 or 4 players. I talk to venture capitalists all the time. They bring up a lot of concern about food delivery. How can that be a sustainable business when you have really low prices on delivery and this logistically Intensive and labor-intensive process of getting it from point A to point B. And there are, you know, you talk about the importance of being profitable on every delivery. You know, some companies are not. Bloomberg had a story recently talking about Uber makes 19 cents per ride. So, Bastian, you figured out a couple things to do to make the unit economics work for Postmates. Subscriptions. You've got high prices for some services. You're not dirt cheap. Maybe talk a little bit about the importance of the unit economics and what specifically you do so that Postmates isn't hemorrhaging money on all these costly deliveries.

Yeah, that's a great question. So I'll try to address this in the most entertaining way. Basically, the, the strategy of Postmates is very similar to that of Tesla. You start with a really expensive product and that it can't be afforded by a lot of people, but that has an appeal to a specific premium segment that looks really cool, does something that couldn't be done before. People buying that product, helping you bring the price down for other products that you create over time. Now, what does it mean for Postmates? Let's think that through step by step. First version of Postmates, 2011, United States. Seamless, Grubhub, huge players in the food space. 50% of all restaurants deliver. The remainder of the— the other 50% of them never done a delivery before. Means if you want to take out in 2011, you go to— you go to Grubhub, you order from a restaurant that has their own delivery fleet, a dude comes by, gives you that food. Most of these places, very generic food, bland food, food that can be produced fast and on a large scale. If you ever had the choice, to pick a restaurant, likely for takeout, you wouldn't choose that restaurant. So what Postmates did in the first product, we brought the other 50% of restaurants— and I'm just concentrating on restaurants for now— we brought them online. Suddenly, you can press a button and have that same pizza delivered from Delfina, or you can have something from the meatball shop, or from the restaurant that you actually love the most. At a premium. Again, we're talking about a premium product. Average delivery fee is $9. There's a 9% service fee. But the stuff that you can get delivered is so good that people want to have access to it. Maybe not all the time and maybe not everyone, but there is a segment, a segment of people that is absolutely, and has been from day one, in love with Postmates. And the cool thing for us happened that that's also a very vocal segment. So you have this, this very affluent group of people that love to use the product because it gives them stuff that they previously couldn't have access for. That's a product where we have an extremely high margin, even though it's logistically very challenging. And it is a product that nobody else is offering. 4 or 5 years in, there's virtually no competition in that space. We deliver from over 50,000 places every month. What we did and what we always wanted to do. So the big question is, how can you bring the price down? You can do a lot of stuff on the engineering side. You can create more density around popular places. You can create better routes for the fleet. You can have them bundle certain deliveries. You give— instead of giving a Postmate one delivery, you can give them 2 or 3. You can stack them. That means you can give them a perfect combination of work so that their hourly earnings increase.

Yeah.

But if you want to bring down the price for the customer significantly, at least in the logistics space, you have to find other ways to do that. So after around 4 years, and I think almost after driving over $500 million in GMV to local merchants last year, we just— it's a crazy high number. We decided to say, you know what, let's create that lower— let's create that economy class product. So we created a small sales team, 15 people only, and their job was to convert the best-selling merchants on our platform into paying participants in the Postmates ecosystem. We went, we went to our merchants and we said, hey, we love you. We drive you a million dollars in revenues per month, and we would love to integrate with you so that the whole operations here is a lot more efficient and And in return for some great reporting and even more sales that we drive you, we're going to charge you a fee of 20% of the food or the items that we're selling for you. And turns out that if you bring something to the party, as in if you actually have done a lot of revenue for someone, that is a lot easier discussion to be had than going to someone that you never met before and promise them that you're really good at delivering their stuff. there's a proof point. And that allowed us within 9 months to scale that product that is called Postmates Plus and that has the largest number of in-network merchants in the United States in the on-demand space— 3,200. It grows extremely fast still at this point. What that product does is it allows you to order from these places in the Plus tab for $2.99 or $3.99. Now, it still has a service fee, so it is not It is not for free, but it is around 60% cheaper than the Anywhere product. And 10 days ago, we launched, or maybe 2 weeks ago, I was on the road for a while, we launched Postmates Plus Unlimited, basically an Amazon Prime subscription service that has no service fee, no delivery fee, and allows you to order from those Plus places as much as you want as long as your basket size is over $30.

Yeah, and that's subscription, so that's revenue that you can count upon. Oh great, investors love that.

Yeah, recurring revenues. A customer pays $9.99 a month. It's, it's a really great thing. Again, we don't have a problem with our revenues, so for us it's more about how can you lock in the customer just like Amazon did it in like a very, very attractive way. And by removing the service fee, we created price parity with the merchants that are on our platform. American Apparel is a launch partner, for example, in the non-food space. If you pay $45 plus tax for an American Apparel hoodie in-store, you pay $45 plus tax on the Postmates platform. No markup, no service fee.

How do you make money on that?

We— because we get a kickback from the merchant. That's how we make money on that, right? And that, that is Basically how that product works.

Good, thanks. So I'll do one more question, turn it over to you guys. So Postmates recently announced to be doing 15-minute guaranteed food deliveries in New York, and you announced that just after Uber axed its instant delivery food— excuse me, instant food delivery program in New York. I think it was promising about 10 minutes for your delivery. So Uber's got $10 billion in venture capital, a $62.5 billion valuation. If they couldn't do it, what makes you think Postmates can?

It's a great question. I think we're looking at this a little bit from the wrong angle. All the money in the world doesn't help you if you have concentrated the last 5 years on a completely different problem. The logistics space is fairly new for Uber, and what happened in New York is that we're facing a situation where Postmates controls a huge portion of the available bike fleet, and bikes are the key for successful deliveries in New York. So our fleet— thousands of Postmates in New York have a great income, are busy throughout the day, and we have such a large fleet that what Uber tried to do with the instant delivery and their cars is likely going to be a challenge. Now, Keep in mind, they left it in the other markets where they have cars. But when it comes to New York, bikes are the key for fast deliveries, not cars.

Thank you.