Summary Notes


In this episode of Acquired, hosts Ben Gilbert and David Rosenthal recount the remarkable journey of DoorDash from its inception as Palo Alto Delivery to its status as a leading food delivery service with a valuation soaring above $70 billion post-IPO. They detail how the company, co-founded by Tony Xu and his Stanford peers, navigated the fiercely competitive market, raised substantial funds from venture capitalists like Sequoia and SoftBank, and expanded rapidly, especially during the global pandemic. Despite legal challenges and the controversy over tipping practices, DoorDash's innovative strategies and persistent growth have positioned it as a dominant player in local logistics, raising questions about its long-term impact on the restaurant industry and gig economy workers. This story highlights the company's ability to adapt, scale, and potentially redefine how consumers interact with local businesses beyond just food delivery.

Summary Notes

Introduction to Acquired Podcast Season 7, Episode 7

  • Ben Gilbert and David Rosenthal introduce themselves and their roles.
  • They discuss the main topic of the episode: the rise of DoorDash from a Stanford startup to a leader in food delivery.
  • The episode aims to explore whether a sustainable business with positive unit economics can be built in the food delivery category.

"Welcome to season seven, episode seven of acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I'm the cofounder of Pioneer Square Labs, a startup studio and venture capital firm in Seattle."

This quote introduces Ben Gilbert and sets the stage for the podcast episode.

"And I'm David Rosenthal, and I am an angel investor and advisor to startups based in San Francisco."

David Rosenthal's introduction provides context for his perspective as an investor and advisor.

The Origin of DoorDash

  • DoorDash, formerly known as Palo Alto Delivery, was started by Stanford students in 2013.
  • The founders sought to address the problem faced by local businesses, particularly with delivery orders.
  • They created a minimum viable product (MVP) and tested the market response.

"Tony Shu and his co founders were launching Palo Alto Delivery, which we all know today as DoorDash."

This quote explains the original name of DoorDash and its early beginnings.

The Growth of DoorDash

  • DoorDash experienced rapid growth, tripling year over year as of December 2019.
  • The global pandemic provided an unexpected boost to the business, leading to an IPO.
  • DoorDash faced competition from established companies like Grubhub and Uber.

"This is the story of insanely fast growth, a company currently tripling year over year."

The quote highlights the remarkable growth rate of DoorDash during the early years.

The Business Model and Economics of Food Delivery

  • The podcast seeks to understand the viability of food delivery businesses.
  • The discussion revolves around whether DoorDash can maintain positive unit economics.
  • The hosts question the sustainability of the food delivery business model.

"Is it even possible to build a sustainable business with positive unit economics in this category? And if so, will DoorDash actually be the one to do it?"

This quote poses the central question of the episode regarding the sustainability of the food delivery business model.

The Role of Technology and Logistics in DoorDash's Success

  • DoorDash leveraged technology like Google Voice, Square, and Find My Friends to operate efficiently.
  • The company's approach differed from traditional delivery services by incorporating logistics and technology.
  • DoorDash aimed to build a local on-demand FedEx for food delivery.

"They were using square to take payments... they used find my friends on iPhones to track the deliveries in real time."

The quote illustrates the innovative use of existing technology by DoorDash to manage their operations.

Expansion Strategy and Market Insights

  • DoorDash chose to expand to suburban areas rather than dense cities.
  • The suburbs provided less competition and easier access to drivers.
  • The strategy allowed DoorDash to deliver a higher quality of service at a lower price point.

"Tony had the insight... the mass market is out there. It's not in San Francisco. It's not in cities."

This quote explains the strategic decision to focus on suburban markets for expansion.

DoorDash's Funding and Investor Perspective

  • DoorDash raised a $2.4 million seed round led by Keith Rabois of Kosla Ventures.
  • Other notable investors included CRV, SV Angel, and Pear.
  • The company's vision to be more than a food company but a logistics company was attractive to investors.

"Ultimately, our vision is to become the local on-demand FedEx."

This quote from a Medium post by DoorDash conveys the broader vision of the company beyond food delivery.

Customer Experience and Trust

  • Trust is critical for service-based companies, especially delivery services.
  • One bad customer experience can lead to a loss of trust and future business.

"The thing is, you can blow it with one bad customer experience."

This quote emphasizes the importance of maintaining high standards for customer service, as a single negative experience can have lasting repercussions on customer loyalty and a company's reputation.

DoorDash's Rapid Market Expansion

  • DoorDash experienced significant growth in the San Francisco Bay Peninsula after participating in Y Combinator in summer 2013.
  • Within a year, they had a notable user base in the region, with one in six people using their service.
  • DoorDash raised a $17 million Series A from Sequoia, led by Alfred Lin, and expanded to other markets like LA and Boston.

"By the beginning of 2014... one in six people on the San Francisco Bay peninsula... have used DoorDash."

This quote highlights DoorDash's rapid market penetration in the San Francisco Bay Peninsula, demonstrating the company's early success and growth trajectory in a densely populated area.

DoorDash's Funding and Valuation

  • DoorDash raised a $40 million Series B led by Kleiner Perkins at a $600 million valuation.
  • John Doerr, a highly esteemed venture capitalist, joined the board, indicating strong confidence in DoorDash's potential.
  • The funding and valuation were considered exceptional for the time, as it was less common for such high valuations with minimal dilution.

"They raise a $40 million series B again... led by Kleiner Perkins at a 600 million dollar valuation."

This quote signifies a major milestone for DoorDash, securing a substantial investment from a reputable firm and a renowned venture capitalist, which reflects the company's promising performance and market position.

Challenges in Market Expansion

  • Launching in new cities is resource-intensive, requiring the acquisition of restaurants, drivers, and consumer marketing.
  • DoorDash's expansion strategy involved meticulous planning and execution, especially before partnering with national chains.

"It's just as hard to launch your 8th city as it is your second city because you need to go get all the restaurants, you need to go get all the drivers, you need to do all the consumer marketing because people don't move that much between cities."

This quote explains the complexities and challenges DoorDash faced when entering new markets, as each city required building a new network of restaurants and drivers from scratch.

Strategic Partnerships and Brand Recognition

  • DoorDash secured partnerships with national brands like Yum Brands, starting with Taco Bell, which helped them enter new markets.
  • These partnerships provided instant recognition and an appealing value proposition to consumers unfamiliar with DoorDash.

"They signed their first partnership with Yum brands to do Taco Bell in the markets that they're in."

This quote indicates a strategic move by DoorDash to align with established brands, which facilitated market entry and consumer adoption by associating with well-known restaurant chains.

Competitive Landscape and Perception Shifts

  • DoorDash faced competition from Uber, which launched Uber Eats but initially struggled with a different operational model.
  • The market perception of delivery services was influenced by Uber's challenges and Square's public market struggles.
  • DoorDash continued to grow and attract investor attention despite a challenging environment and skepticism from some VCs.

"Uber is basically voting with their feet that you can't make this operate profitably."

This quote reflects the skepticism surrounding the delivery service industry, influenced by Uber's hesitancy to fully commit to the same operational model as DoorDash and the broader market's doubts about the viability of such businesses.

Fundraising Difficulties and Perseverance

  • DoorDash experienced difficulties raising funds, with a six-month period where they could not find a lead investor.
  • Sequoia Capital demonstrated continued support, eventually leading a down round to keep DoorDash afloat.

"Tony goes out to fundraise, and it is just like a slog. Nobody wants to lead this round and invest in this company."

This quote captures the challenging period DoorDash went through in securing additional funding, highlighting the perseverance required to navigate the venture capital landscape during tough times.

SoftBank's Investment and Turnaround

  • SoftBank's Vision Fund invested $535 million in DoorDash, significantly changing the company's trajectory.
  • This investment came at a high cost, with DoorDash selling 38% of the company, but it enabled aggressive expansion and market share growth.

"Softbank comes in over $500 million pumped into the company."

This quote marks a pivotal moment for DoorDash, where SoftBank's substantial investment provided the necessary capital to scale operations and become a dominant player in the market.

Customer Loyalty and Platform Retention Strategies

  • DoorDash uses DashPass to foster customer loyalty and habit formation, similar to Amazon Prime's strategy.
  • The goal is to shift focus from breaking even to creating a strong customer base deeply invested in the service.
  • Even with price hikes, the perceived value and convenience outweigh the costs for users.

"But much like Amazon Prime, I'm sure they make up for it in the amount that you are now loyal to and conditioned to have a habit of using DoorDash instead of competitors or frankly, just making food on your own."

This quote emphasizes the strategic goal of DashPass to build a strong, habitual customer base that prefers DoorDash over other options, including cooking at home.

Value Perception and Subscription Pricing

  • The perceived value of subscription services like DashPass and Amazon Prime is high, given their annual fees.
  • Customers find the convenience and cost savings worth the subscription price.

"I mean, it's got to be the amount of value you get as a consumer out of that. What is it, $129 a year?"

This quote highlights the customer's perspective on the value derived from subscription services, suggesting that the benefits are worth the cost.

Credit Card Partnerships and Customer Acquisition

  • DoorDash's partnership with Chase Sapphire Reserve card offers free DashPass, influencing customer loyalty.
  • The partnership targets a specific customer segment, likely skewing towards urban users.
  • The strategy effectively reduces customer acquisition costs and increases platform usage.

"And so interestingly enough, I do think it worked, at least for me personally."

This quote reflects the success of the credit card partnership in making the speaker a more loyal DoorDash customer, indicating an effective customer acquisition strategy.

DoorDash's Market Position and Customer Base

  • DoorDash has a significant portion of its customer base using DashPass, which impacts revenue.
  • The company's market penetration is primarily in the US, with limited international presence.

"So that's a meaningful chunk. I mean, that's a little under a third of their total customer base are on this reduced fee program."

This quote indicates the substantial impact of the DashPass program on DoorDash's overall customer base and revenue model.

Financial Health and Contribution Margin

  • DoorDash achieved a positive contribution margin in Q1 during the pandemic, marking a turning point in financial health.
  • Contribution margin measures profitability after variable costs but before fixed costs.
  • The company's financial turnaround is compared with Uber's longer path to a similar margin.

"They reach, overall for the whole company, positive contribution margin in Q1."

This quote signifies a pivotal moment in DoorDash's financial trajectory, where the company begins to see profitability after covering variable costs.

Growth Trends and Profitability Post-Pandemic

  • DoorDash experienced significant growth in contribution margin and overall growth during the pandemic.
  • There is speculation on whether this profitability and growth will continue post-pandemic.

"So, like, having 25 ish percent contribution margin is great. The big question will be, will this continue after the pandemic?"

This quote raises the question of the sustainability of DoorDash's growth and profitability once the pandemic's effects subside.

Regulatory Environment and Prop 22

  • California's Prop 22 was a significant win for gig economy companies, allowing them to classify workers as contractors.
  • This regulatory development removed an existential threat to DoorDash's business model.

"This was super controversial... It removed an existential threat to the business."

This quote explains the importance of Prop 22's passage for DoorDash, as it secures the company's labor model and protects its economics.

DoorDash's S-1 Filing and Ownership Structure

  • DoorDash filed to go public, revealing ownership percentages and the company's valuation expectations.
  • The S-1 filing provides insights into the company's growth, revenue, and strategic direction.

"Literally ten days later, on November 13, 2020, DoorDash releases their S-1 and files to go public."

This quote marks the transition of DoorDash from a private to a public company, signaling a new phase of transparency and growth expectations.

Business Model and Service Diversification

  • DoorDash has diversified its offerings with products like DoorDash for Work, Storefront, and Drive.
  • These services cater to different aspects of the food delivery ecosystem, from office deliveries to white-label solutions for restaurants.
  • The diversification strategy aims to leverage DoorDash's customer base and logistics network for broader market opportunities.

"There's Doordash for work... DoorDash storefront and DoorDash drive that are worth understanding."

This quote introduces DoorDash's expanded services, indicating the company's strategy to address various market segments and customer needs.

Acquisition Costs and Customer Lifetime Value

  • The cost to acquire a customer and the projected lifetime value (LTV) are critical metrics for DoorDash's profitability.
  • The company's CAC to LTV ratio and payback period are analyzed to understand financial efficiency.

"It costs about $6 for DoorDash to acquire a customer... DoorDash can earn about $60 in pure profit from them over those five years."

This quote presents the financial calculation behind customer acquisition and retention, highlighting the importance of long-term customer value for DoorDash's business model.

Online Platform Economics

  • Online platforms like DoorDash have shifted consumer behavior from real-world ordering to online ordering.
  • These platforms are capturing consumer attention, becoming the default mode of ordering, and impacting local business profits.
  • Businesses without a differentiated offering are at risk of being consumed by platforms like DoorDash.
  • DoorDash may eventually establish warehouses for commonly purchased items to capture more margin.
  • Only restaurants offering unique products or experiences will likely thrive in the future.

"As you think about the far future of like how does the world of restaurants reorganize given you now have this participant in the system or this set of participants in the system that are gobbling up all the consumer attention and the default way to order food as the default shifts from that real world to online, whether it's DoorDash or you're using Prime Now to have stuff delivered, they're going to start eating, or they already are eating the profit of that local business or store."

This quote discusses the impact of online platforms on the restaurant industry, predicting that local businesses may suffer unless they offer something unique, as platforms like DoorDash become the default choice for consumers.

Economies of Scale and Network Effects

  • Network economies emerge as platforms grow and connect consumers and suppliers.
  • Brand power requires consumers to be willing to pay more for a commoditized product due to the brand name.
  • DoorDash and similar platforms benefit from economies of scale but do not necessarily have traditional brand power.

"This is, that is a consequence of economies of scale and then growing into network economies, which I think they maybe have a little bit of now."

This quote explains that platforms like DoorDash gain advantages from economies of scale and the beginnings of network effects, but do not rely on brand power in the traditional sense.

The Impact of Uber's Troubles on Competitors

  • Uber's difficulties in 2017 and 2018 allowed Lyft to become a stronger competitor in the ridesharing market.
  • DoorDash's survival and growth may have been influenced by Uber's issues during that period.
  • The nature of the supply for food delivery differs significantly from ridesharing, affecting the competitive landscape.

"What would have happened to DoorDash if Uber hadn't gone through their 2017 and 18?"

This quote raises the question of how much Uber's challenges contributed to DoorDash's opportunity to grow and become a significant player in the food delivery market.

Dasher Demographics and Supply Differences

  • Dashers (DoorDash delivery people) typically differ in demographics from rideshare drivers.
  • The average Dasher is younger, and a larger percentage of Dashers are female compared to rideshare drivers.
  • Vehicle type is a crucial factor, with DoorDash offering more opportunities for people without a suitable car for ridesharing.

"According to Tony, the average Dasher is in their mid-twenties and the average rideshare driver is in their early forties. And women are willing to be Dashers. There's 40% of Dashers are female, whereas only 15% of rideshare drivers are women, largely because of the safety concern."

This quote highlights the demographic differences between Dashers and rideshare drivers, which influence the supply dynamics and competitive advantages of DoorDash.

Winner Take All Markets and Venture Capital

  • Winner take all markets promise significant rewards, but require substantial capital investment.
  • DoorDash's financial losses illustrate the venture capital model where large investments are made in anticipation of future market dominance.
  • The pandemic has accelerated DoorDash's growth, but long-term profitability remains uncertain.

"Winner take all markets do indeed have a pot of gold at the end, but so far, we have just seen cash flooding in to try and take it all."

This quote reflects on the nature of winner take all markets and the venture capital strategy of investing heavily for a future dominant position, as exemplified by DoorDash's financial journey.

Value Creation and Value Capture

  • DoorDash captures value by charging markups on food delivery, but there is a limit to how much consumers and restaurants are willing to pay.
  • The company's impact on gig workers and local businesses raises questions about value creation versus destruction.
  • Restaurants need to adapt creatively to thrive alongside platforms like DoorDash.

"They seem to be capturing basically the maximum amount that they possibly could anymore, and consumers probably wouldn't buy."

This quote suggests that DoorDash is maximizing its value capture from consumers, but there are constraints based on what the market will bear, impacting the overall value dynamics within the industry.

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