DoorDash: Initial Public Restructuring?

Connecting-the-dots on DoorDash's confidential IPO filing

Welcome to the Nongaap Newsletter! I’m Mike, an ex-activist investor, who writes about tech, corporate governance, the power & friction of incentives, strategy, board dynamics, and the occasional activist fight.

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Lots of interesting news in the U.S. online food delivery space over the past couple weeks. Notably, DoorDash confidentially filed paperwork for an IPO!

There are are 2 ways to approach this DoorDash IPO news (and this post):

  1. Face Value: It’s mildly interesting news but there’s nothing material as far as industry ramifications are concerned (for now). Everyone knows DoorDash needs capital and they’ve decided to pursue an IPO to get it. (You can probably stop reading here. See you at the next newsletter!)

  2. Speculative: This is a material event (more-so than casual observers realize) with industry-wide ramifications. If you contextualize the announcement with other recent happenings in U.S. online food delivery, DoorDash just low key announced they need to “restructure” the Company to align with current market realities. The strategic options timeline just accelerated for all 4 major players (DoorDash, Grubhub, Postmates, Uber).

Join me as I go down the rabbit hole and connect-the-dots…

Note: I use this photo/meme a lot but this is very much a speculative write-up and my way of trying to makes sense of what’s going on in online food delivery. I don’t have inside information. Hopefully you’re entertained.

Premium Newsletter Recaps

I’m trying to keep my speculative hot takes on premium (with non-premium focused more on learnings and concepts), but it’s only fair I do a non-premium write-up for DoorDash given I previously wrote about the Company’s breakthrough unit economics and speculated that things are moving towards a material down round:

Overall, DoorDash CEO Tony Xu has built a huge, successful company which is incredibly hard to do and warrants celebration, but he also has to deal with a Gordian Knot of a cap table to raise more capital when all competitive signs and potential past liabilities point to a massive down round.

DoorDash’s breakthrough unit economics gave them the wings to soar, but the Company may have flown too close to the sun.

I think we’re in the endgame of that “down round” scenario/speculation.

Over the past week or so, I’ve written a couple premium notes on U.S. online food delivery and the “peculiar” news flow around strategic alternatives. Don’t worry if you’re not a premium subscriber. Here’s a high-level recap to get you up-to-speed:

Last weekend (Feb 22), I discussed how online food delivery players seem to be openly fighting with each other through the media and things seem to be intensifying ([Premium] Food Delivery: Who is Keyser Söze?):

Companies and investors alike are massaging and/or leaking information to the media in order to shape the narrative, influence incremental decisions, and outright negotiate with each other (in my opinion).

I even speculated (half joking, half serious) that there’s a Keyser Söze figure pulling strings behind-the-scenes:

When you carefully examine the news flow around food delivery strategic alternatives, an argument could be made that a key (unknown) figure is pulling strings and trying to accelerate rationalization and consolidation in the space.

Speculation aside, the goal of the post was to highlight the reflexivity of media coverage on valuation and competitive behavior. This is especially important for private companies and in private vs. public company fights. In the absence of financial transparency and comparability, narrative can materially reshape competitive dynamics and strategy.

Since last weekend’s Keyser Söze piece, things continued to escalate with executive turnover at Uber Eats (Feb 25), the launch of Grubhub’s aggressive loyalty/reward program (Feb 26), and curiously “well timed” write-ups about the industry (Feb 26).

Due to this escalation, I speculated (Feb 27) we’re approaching an industry reckoning sooner rather than later ([Premium] Food Delivery Reckoning):

Grubhub CEO Matt Maloney believes we will see more “clarity” on rationalization and consolidation in food delivery by midyear. With markets selling off due to coronavirus, zero appetite for cash-burning startups, and Grubhub recently announcing the launch of their aggressive loyalty program, the timetable may have moved up.

Shortly after writing Food Delivery Reckoning, DoorDash announced they confidentially filed IPO paperwork. Needless to say, that caught my attention and alarm bells went off that things may indeed be accelerating.

I could be mixing up who influenced who, but all the players definitely have a pulse on what the others are doing and are reacting accordingly (in my opinion).

Anyway, if you’re interested in a deeper dive on the situation and how I think everything connects, definitely check out the premium write-ups.

That said, this summary pretty much covers the high-level takeaways.

Media Communications

It’s never my intent to come up with “conspiratorial” narratives, but often times it’s the only way I can make sense of the information being “leaked” through the media.

When I worked at Relational Investors, we made it a priority to monitor and understand media communications.

How information flows and is presented in the media (especially in an activist engagement) is more art than science. While Relational generally took a behind-the-scenes approach when engaging companies, that didn’t mean private conversations (or interpretations of those conversations) stayed private.

Information has a way of reaching the media and it becomes a game of “Usual Suspects” speculating on who the source is and interpreting what they are trying to accomplish/communicate by releasing certain pieces of information to the media.

Media can also be a form of negotiation and the “leak” is meant to reach counter-parties as part of the negotiation process. Even the most innocuous statements can carry a lot of meaning between the participants.

I don’t consider myself an expert in media communications, but I find it super interesting and my time at Relational definitely shaped the way I interpret and digest news flow.

Food Delivery’s Media Agenda

In my opinion, every online food delivery story has an embedded agenda. Keep this in mind when you read any online food delivery related article. Who are the likely sources? What is their agenda? What are they trying to accomplish?

Often times, figuring out the answers to these questions is much more value-add to the investment process than simply taking an article at face value, especially when some articles are intentionally meant to contradict or distort the meaning of a previous report.

This is not to say journalists are purposely pushing an agenda or trying to distort things. I mean some publications make me wonder, but I’m not going to call them out here.

Anyway, much of the recent (significant) news flow on online food delivery is coming from The Wall Street Journal. They broke the news on Grubhub considering strategic options and continue to cover all the major U.S. online food delivery players as they evaluate strategic options.

Given The Wall Street Journal runs a very professional operation with very high standards, their reporting has market moving ramifications since it’s much harder to distort/refute their information and (to me) The Wall Street Journal’s increased coverage hints at the escalating seriousness by U.S. online food delivery players to “get something done” regarding rationalization and consolidation.

DoorDash vs. Negative News

While it’s easier to “kick the can” and dull the impact of negative news as a private company (relative to public companies), the negative news flow on DoorDash can’t be understated. DoorDash notably spent much of 2019 fighting the media over their gratuity practices (which was a bad/unsustainable policy in my opinion) only to capitulate after months of resistance and announce changes to their gratuity policy in August 2019.

What’s interesting is negative news flow didn’t improve after changing their gratuity policy, and actually intensified throughout Q4 2019 and into 2020 as the focus shifted to DoorDash’s “growth over profits” burn rate and lofty valuation.

I have no direct insight into DoorDash’s fundraising efforts, but I think it’s fair to say the negative news flow is impacting those efforts and could “break” DoorDash’s IPO.

DoorDash Positions Itself for Future Public Listing

To understand why and how DoorDash’s IPO may “break”, we need to go back to August 2019:

By August 2019, DoorDash is riding a lot of momentum and positioning itself to go public. They arguably started the go public clock the moment they added Shona Brown to the Board for check-the-box ESG/diversity purposes. That sounds harsh but that is literally how Bloomberg reports the reasoning behind the addition:

Brown’s addition to the board preempted any request from Goldman Sachs, a person familiar with the matter said, while also satisfying a California rule that can impose a $100,000 fine on public companies with all-male boards.

Between adding a female Director and changing their gratuity policy, it appeared DoorDash was trying to tie up loose ends in preparation of going public. The timing feels about right too.

I don’t know DoorDash’s exact runway, but I’d guess they had 14 to 16 months of cash runway at the time after adjusting for the Caviar acquisition ($310 million cash outlay). If they can raise another $400 to $600 million at a flat valuation, DoorDash is in great position to go public and a massive win for early investors and management.

The risk is if investor sentiment turns against DoorDash’s aggressive, cash burning growth strategy things get dicey for the Company quickly. Unfortunately for DoorDash, sentiment began to turn against them following WeWork’s IPO filing.

WeWork IPO: Food Delivery’s Watershed Moment

While DoorDash was showing a lot of (albeit unprofitable) momentum and market share gains in August 2019, market sentiment began to turn against the Company (in my opinion) following the release of WeWork’s highly anticipated IPO prospectus.

WeWork is obviously not in the online food delivery business, but their IPO filing was a watershed moment for the industry as it put a massive spotlight on Silicon Valley’s “go for broke” cash burning growth strategy which was notably pushed by SoftBank (also a DoorDash investor).

After much scrutiny and limited public investor appetite for WeWork shares, the Company pulled its IPO in September 2019 and underwent at SoftBank-led restructuring.

In many ways, WeWork’s initial public offering turned into an initial public restructuring and would set the table for DoorDash’s current predicament.

Playing “Valuation Jenga” With DoorDash

As it stands (pun intended), everyone is been playing an aggressive game of “Valuation Jenga” with DoorDash.

Note: This is a silly explanation but I’ve always wanted to use this meme/photo.

Think of DoorDash’s ~$12B valuation and aggressive growth strategy as a Jenga tower:

  • DoorDash’s goal is to keep it upright and as stable as possible so it can stay the course and keep raising capital.

  • Everyone else is “removing blocks” (i.e. releasing negative news, introducing aggressive promotions, etc.) to destabilize it and hoping it eventually falls over.

  • If it falls over, DoorDash will be forced to rebuild and restructure at a much lower valuation.

Since August 2019, a lot of “blocks” have been removed from DoorDash’s “tower”:

  • Note: Feel free to skim and read the bolded sentences. Apologies for the wall of bullet points. It’s a lot but captures just how intense the public fight in online food delivery has been the last few months.

  • WeWork pulls their IPO after limited market interest casting doubt on the sustainability of aggressive cash burning growth strategies.

  • Gig worker bill AB-5 is signed into law in California (home to key DoorDash delivery markets). DoorDash CEO Tony Xu said the bill would have disastrous results on the California economy (and negatively impact DoorDash) if it were implemented.

  • Grubhub releases their infamous October 2019 letter to shareholders and destroys their own stock in the process. Grubhub’s willingness to shift strategy and play the VC “cash burn” game to drive growth (at the expense of returns) put the rest of the industry on notice. For the foreseeable future, food delivery would be a miserable war of attrition.

  • The Wall Street Journal reports DoorDash is projected to lose $450 million in 2019. In a 2015 presentation to investors, the company projected that it would have gross annual profits of $450 million at the end of 2018. This reporting also puts a spotlight on DoorDash’s shrinking cash runway.

  • The Information reports that goPuff quietly raised $750 million in August 2019 from SoftBank. What’s interesting is the news comes out (January 2020) around the same time it’s reported that DoorDash is gearing up to test a (total addressable market expanding) service that will put them in more direct competition with goPuff.

  • Grubhub continues to pressure VC-funded competitors by highlighting how “bad” non-partnered and QSR partnered orders are in their Q4 2019 letter relative to their profitable “core” partnered independent restaurants.

  • Uber is also pressuring VC-funded food delivery players with their own non-partnered strategy launched in Q4 2019.

  • Benchmark’s Sarah Tavel provides a nice breakdown of the food delivery ecosystem, how it boomed, and why it’s at a crossroads. The write-up also mentions that DoorDash’s unit economics are “rumored” to be the worst behind Grubhub, Postmates, and Uber Eats. “Time will tell whether the model DoorDash used to grow was an innovative way to grab market share, or a way to do so subsidized by venture dollars that structurally won’t translate into the IRR numbers its investors hope for.”

  • The New York Times does an analysis on the price mark-up consumers pay when they order food off of the various food ordering apps. It’s (in my opinion) incrementally positive for Grubhub. 

  • Grubhub announces (February 26) the launch of their membership and rewards program Grubhub+ which includes giving 10% cash back.

One day after Grubhub announces their aggressive new loyalty program, DoorDash confidentially files their IPO paperwork. Financial transparency may end up being the “final block” that finally causes the valuation to collapse and breaks DoorDash’s IPO.

DoorDash at a Crossroads

Why would DoorDash confidentially file for an IPO in the face of all this negative news flow and during the worst week on Wall Street since the financial crisis?

They don’t have much of a choice.

Grubhub’s new loyalty program is an attempt to turn promiscuous diners monogamous (via cash back rewards) and challenges DoorDash to match their offering (and increase cash burn) at a time when the market has little-to-no appetite for funding “growth at any cost” initiatives.

As mentioned by Benchmark investor Bill Gurley, DoorDash does not have much cash runway remaining:

Assuming the Company’s burn rate is similar to 2019 (it’s hard to reverse these things on a dime), DoorDash has less than 12 months of cash remaining and probably needs another $500 million (in my opinion) to stay the course.

Put it all together, DoorDash is at a crossroads and needs to make hard strategic decisions right now. To me, DoorDash’s IPO filing is less about going public and more about narrowing choices and officially confirming the issues they’re already aware of.

DoorDash insiders realize they can no longer “kick the can” (financially or strategically) on what to do, and need to go through the IPO process to achieve agreement on:

  • The go forward strategy

  • Rationalization vs. growth

  • Capital raise needs

  • Appropriate investor cap table to reflect market reality

  • Strategic options (IPO vs. M&A)

Once DoorDash understands the market’s appetite (or lack thereof) for an IPO, other essential strategic and financial decisions will cascade from there.

DoorDash: Initial Public Restructuring?

While the WeWork saga isn’t directly related to DoorDash, I wouldn’t dismiss the possibility that SoftBank’s experience at WeWork completely changed the way they approached DoorDash.

And given how volatile the market currently is, it’s hard to see DoorDash pulling off a non-disastrous IPO. We’re more likely to see “WeWork 2.0” with DoorDash pulling its IPO to restructure the cap table and the Company.

Realistically, it’s going to take 18-24 months to properly “reset” DoorDash for current market conditions and become an enduring Company. Uber is going through this process right now, but they have the cash cushion to do so. DoorDash still needs cash and whichever investor gets involved will want to be appropriately compensated for the risk.

We’re in the Endgame

DoorDash and the rest of the U.S. online food delivery space is in the endgame now.

There’s a very good chance DoorDash is running a dual-track process right now between going public or merging, which means the other players are running a process as well.

Who’s buying? Who’s selling? Is there a white knight? At what price is DoorDash willing to sell instead of go public? Would someone rather own Grubhub for the price it takes to acquire DoorDash?

Regardless, I think Bill Gurley is correct when he says: “Looks like [Tony Xu’s] day of reckoning is here”

Tony Xu and the rest of the online food ordering industry will need to make important decisions and soon.