DoorDash, a third party ordering and delivery company for restaurants, will need to provide liquidity to its investors at some point. Given their latest valuation of $13B, odds are that they will only be able to find such liquidity in the public markets. In other words, DoorDash is simply too large to keep private. That’s especially true because DoorDash is losing an estimated $450M annually.
We need to give you a quick primer on finance to explain the situation.
When you start a company you create shares of stock. Some of those shares are allocated to founders, employees, and other do-gooders, while others are sold to investors to raise capital to fund the business. When you sell shares to finance the company the founders have fewer shares as a percentage of the overall share pool, but the collective value of the shares they possess are worth more money.
Quick example – you start a company and issue 100 shares. There’s only one founder and employee (you) and you have all 100 shares. You don’t know what your company is worth but you need to raise some money to pay yourself to work on the company full time.
You find an investor who says they’ll give you $2 in exchange for 20% of your company, effectively valuing the company at $10. Since you’ve already issued yourself all 100 shares you would need to issue more shares- enough to give the investor 20% of the company after issuance. Do the math and you’ll find that you will need to issue 25 new shares. Now the total number of shares are 125 – you own 100 of the 125 (80%) and the investor owns 25 of the 125 (20%).
While you will continue to own less and less of the company the hope is that the value of the companies increases disproportionally to the amount of equity you give up. That’s how, as venture investors would love you to believe, you can own 10% of a company but be better off financially than if you owned 100%.
Now, all of this selling shares to raise capital business is the most expensive way to build a company. The cheaper way to build a company is to borrow money (debt) and pay interest on the debt. If your growth rate is much higher than your interest rate you’re winning. But companies who would usually lend you debt (banks) have a bunch of requirements that make it nearly impossible to raise debt unless you’re a very profitable company with years of operating history. That’s not the case for many fast growing startups whose particular strategy is to lose a lot of money in search of very fast growth.
Said more plainly, raising debt is practically impossible for companies losing the amount of capital DoorDash finds itself to be losing.
Which gets us to why DoorDash will need to go public. When you sell your shares to investors those investors want a return on their investment. This means someone needs to buy their shares at a higher price than the investor paid to acquire them. Going public is one way to do this – anybody can exchange shares publicly at market prices.
Another way to do this is when a large private company buys the shares of DoorDash at a premium. However, the private companies most likely to purchase DoorDash are private equity companies. Private equity companies mostly acquire other companies using a mixture of equity (cash) and debt. But it’s impossible to put debt on a company like DoorDash if there’s no profit to leverage – just like it’s nearly impossible for DoorDash to get debt from a bank themselves. It’s just too risky.
Therefore a private company would need to buy DoorDash is cash, which is a very tall order. Most of the large acquisitions made by private equity companies are called leveraged buyouts, or LBOs, where they use generous amounts of of debt to acquire the company.
That’s a lot of financial background but it leads us to the conclusion that DoorDash will need to go public.
However, companies losing large amounts of money – like Uber and Lyft – have not been well received by the markets as of late. Part of that has undoubtedly come from the WeWork debacle, where investors realized much of the valuation hype is just that – hype. Here are the share price performances of Uber and Lyft since IPO respectively.
If DoorDash goes public they may get dumped on. But they’re likely not sweating it over the long run. At least we wouldn’t be.
For starters GrubHub is a public company. It went public in 2014. And they compete with DoorDash, Uber, and other food ordering and delivery companies. Yet they’re profitable. Have been since going public. Here are the last four years of their income statement – you’ll notice they’ve cranked out earnings every year.
Even when they reported Q3 2019 results and got shellacked they were still profitable. Their revenues are falling due to literal billions in marketing spend by their competitors, which is manifesting itself in marketshare dynamics as seen below and can be further explored with insights from SecondMeasure. But still profitable.
But Grubhub’s CEO left analysts with an insightful nugget.
…as Grubhub sees an increasingly large number of “promiscuous” diners that are less loyal to just one food delivery platform. The company said that trend led to a 300 basis point impact to third-quarter growth, though it would be investing in loyalty programs in an effort to offset the drain.
https://finance.yahoo.com/news/grubhub-falls-40-in-its-worst-trading-day-eliciting-laughs-on-its-earnings-call-220620442.html
Catch it? Grubhub will turn to other, non-delivery tools to make up the revenue difference. In other words they’re going to expand the stack. Sound like a familiar strategy?
DoorDash will do the same. According to DoorDash’s VP of Business Development Toby Espinosa, “At DoorDash, we will double down on our suite of merchant-first services designed to generate value to our partners.” And we think it’s a very, very workable strategy for several reasons.
First, the 3PDs (third party delivery companies) have distribution in spades. Distribution is the most important piece of the puzzle and why you don’t see awesome solutions penetrating even 1% of offline merchants – it’s too expensive and investors know this. So while you might work 90-hour weeks for a month straight to get 3 merchants to pay you for your tool which solves X problem, merchants flock to 3PDs in record numbers because they’ve already created a consumer lever to drive inbound business. DoorDash has around 300,000 direct North American restaurant relationships. And they’ve done it in 7 years. Can you name any other service provider that can claim that in offline retail? NCR and Micros topped out at around 70,000 merchant locations and it took them 3+ decades to get there.
Second, 3PDs are data companies at their core. They’re collecting data and already doing useful things with it. So it’s not like they just have the phone numbers of hundreds of thousands of merchants but they often have POS integrations and are receiving very useful transactional data that empowers them to make tools in the stack relatively quickly. Culturally they’re much more aligned on product than any payments company will ever be. Which leads to the third, but most crucial point.
Lastly, POS companies have done such a magnificent job of supplying horrible product that the 3PDs could tag literal shit with a HEX code and it would be better than the products produced by the POS companies. And it’s not hard to understand why: the restaurant POS companies with the largest market shares give zero fucks about product and improving the value they deliver merchants. From our reading of the tea leaves:
- NCR Aloha (maybe 50,000 merchants): busy putting lipstick on the pig and trying to financial engineer a win for executives while the company attrits marketshare behind walled gardens. Take the same old products (the shit), apply a new skin (the HEX code), and convince merchants to pay a recurring fee for it.
- Global Payments (maybe 80,000 merchants): frantically buy a cloud POS solution at the 11th hour even though you’ve sunk $50M into your own attempts (Xenial) and then remember that you’re a payments company and don’t do this whole “product” thing. Make your new POS system the main focus of your dealer conference (even though 95% of your installs come from dealers supporting the legacy POS systems you acquired), watch key product executives leave, take some data from Mastercard and build a tool a sophomore engineering student could hack in a weekend, and call the job done.
- Shift4 (maybe 80,000 merchants): with a pending transaction it’s too early to call the direction this one will go, but we’re nervous as we pick up subtle signs that the company is following the footsteps of others on this list.
- Random assortment of legacy POS systems (another 75,000 merchants): haven’t invested in product, won’t invest in product (or even return phone calls of partners that will), and are just waiting for the grim reaper to give them a dirt nap.
(Note: if you notice Micros missing from this list that’s because they’re investing in moving things the right way. We can’t believe we’re actually writing this either.)
You sum this up and you could be at 285,000 (mostly US) restaurants that are getting jack shit for respectable product. And that’s not even counting the cloud POS companies who’ve done very little too (despite what they claim publicly). This is the opportunity that DoorDash and other 3PDs see.
What’s this opportunity worth? Well, we’ve put together a little calculator for you to explore it for yourself. Here are the fields:
Merchant Count.
We put a limit of 1,000,000 merchants on the calculator. To even reach those numbers of restaurants the 3PDs would need to expand internationally. Some have, of course. There’s also no reason to relegate 3PDs to restaurants: they could start last-mile delivery for retailers as well. Once they build those integrations they could carry their stack solutions to retailers. Still, 1,000,000 merchants is a lot.
Merchant MRR.
This is the monthly recurring revenue you believe the 3PD could extract from a merchant. A tool that costs $100/mo is just a MRR of $100. We put a MRR limit of $15,000 on the calculator. Why? We assumed the best case scenario would be a merchant who spends their entire IT and marketing stack with a 3PD. This is generally billed as 10% of gross merchant revenue on the high end, and we assumed a large end merchant would do $150,000 in monthly revenues. Considering the average restaurant is much smaller than that makes this a very generous ceiling; per the below table 74% of the market does less than $1M in sales.
Revenue Multiplier
This is a value multiplier for annual revenue. The median value for recurring revenue multiples has historically been 5x. Today the market is around 10x. For high growth companies this number can be 20-30x trailing revenues. When DoorDash goes public they won’t be growing 300% a year, so we capped the multiple at 30x, which is still absurd.
Just running some quick numbers – let’s say DoorDash penetrates 100,000 merchants, gets them paying $300 per location per month for some tools that POS companies have shit all over, and receives a 10x market multiple.
That means DoorDash has created $3.6B in enterprise value and it will contribute positive margin since the biggest expense – distribution – is already paid for.
Delivery economics will figure themselves out in due time, and we can point to Grubhub as a live example of a profitable delivery company – it isn’t make-believe like people would have you think. When you question profitability of delivery you’re implicitly questioning the perpetuity of a 30% take rate on merchants – that’s a financial loser eventually.
Meanwhile we need to remember that the revenue opportunity for the 3PDs is still massive because nobody has delivered quality products to merchants at scale. We think 3PDs are the mostly likely candidates to consume that product stack budget because 3PDs have distribution solved, have a strong product and data culture, and perhaps most importantly benefit from the complete and total incompetence of POS companies – most of the US POS market is now owned by payments companies who intentionally eradicate the product cultures necessary to maintain relevancy the market.
Uh, why spend time on this product thing when you can just make a quick change and add a $50 monthly fee to all our statements?
Exactly payments bro. Exactly.
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