A Q&A with Mike Ghaffary & Grace Isford of Canvas Ventures
Mike Ghaffary is a General Partner at Canvas Ventures, and has invested in Superhuman, Strava, Flyhomes, CloudKitchens, Optimizely, Padlet, and several others. Previously, he was CEO of Eat24 post Yelp acquisition, and Vice President of Corporate and Business Development for Yelp. Grace Isford is an Investor at Canvas Ventures, where she is actively involved in several portfolio companies including Airvet, Flowspace, and Flyhomes. This is a transcript of a conversation between Mike and Grace, and has been edited for clarity.
Eat24 was one of the fastest growing food delivery marketplaces from 2012 to 2017, experiencing growth to $700M gross transaction revenue from a much lower baseline in that 5 year period. Yelp acquired Eat24 in 2015, then sold the company to GrubHub as part of a broader Yelp/GrubHub strategic partnership 2017. This month, Just Eat’s acquisition of GrubHub was announced as part of continued consolidation in this industry.
In this Q&A, we talk about what was unique about Eat24, what made Eat24 so successful, and why the Yelp acquisition was synergistic.
Grace Isford: How did you meet the Eat24 Team?
Mike Ghaffary: In 2010 I was working at Yelp, which was still a startup but growing really fast. I was in charge of Business Development and Corporate Development, which meant partnerships as well as acquiring companies. Yelp hadn’t done any acquisitions before I arrived, and over the time I was there I helped lead about 200 business development partnerships.
One of the early partnerships was with this little company called Eat24. At Yelp, we wanted to launch a transaction platform to allow startups that were doing local transactions with local businesses to transact right there on the Yelp platform. So if you did want food delivery, rather than having to look up a restaurant that offered delivery on the Yelp app, we had a little flag that said “offers delivery” where you could read about the ratings. Then, you would go on another app, like Eat24 or GrubHub and finish your order. We thought, why not let people do the delivery ordering right there in the Yelp app? The same logic applied to other categories as well. You could book hotels via Hipmunk, golf tee times and excursions, like hot air balloon rides. We had many other categories. But we knew food delivery would be a big one — restaurants were about 50% or more of Yelp’s traffic at the time, even if they weren’t a majority of revenue because some other categories monetized better.
So I went looking for food delivery startups, and we found this little company called Eat24, co-founded by Nadav Sharon, Haim Erez, Morani Hacmon, and a few other guys who were all immigrants to the United States. And they were extremely scrappy. When I met them in 2012, they had about a dozen employees and were still early in revenue. But there was something about them. The product was really good. It was really impressive — it was the best user experience we had seen, with a great product flow, and they were signing up restaurants pretty quickly.
So we decided to give them a shot as a launch partner on the transaction platform, and then as they say, the rest is history. So that’s how we first met, and it led to a lot of exciting things as the relationship continued to escalate.
GI: Taking us back to that time, why did Yelp choose to partner with Eat24 versus some of the other platforms? Was it just a really great founding team?
MG: We partnered with a few companies, so it wasn’t only Eat24. We also partnered with Delivery.com. We actually had a signed partnership with GrubHub, who was the biggest in the space at the time, but they never ended up wanting to do the implementation we wanted. We wanted to have GrubHub allow you to order right there in the Yelp app — we signed a partnership and I learned a lesson that we weren’t as crystal clear on timelines for implementation. And they never ended up building it. GrubHub said it was easier for them to just link users over to the GrubHub app to complete their order, even if that was harder for users. Yelp said hey that defeats the purpose of saving the user from create two accounts, creating two passwords, putting in two credit cards, etc. That’s not the vision we had for a really easy user experience, and we were at a standstill, so that original Yelp-GrubHub partnership of 2012 never got implemented.
Years later, Yelp ended up acquiring Eat24 and then selling it to GrubHub, for quite a big markup. But the only reason we were willing to sell the company is that GrubHub finally agreed, five years later, to the partnership where you could actually fulfill the order for food delivery right in the Yelp app powered by GrubHub and Eat24’s combined inventory. So we joked that we had to go build this transaction platform, acquire Eat24 and grow it, do all this stuff, just to get that GrubHub integration that we had agreed on five years prior.
GI: That’s awesome! Circling back to the beginning of this story, what are the two or three biggest reasons for the impressive gross transaction volume growth? What were the three keys to success?
MG: To give more granular numbers, we had $700 million in annualized gross revenue at the top line in 2017. Earlier, when Yelp acquired the company in early 2015, they had hit $150 million in annualized gross transaction revenue. So we grew it very quickly under Yelp in two years, but even independently, it went from a standing start to $150 million. So the question is, how did that happen?
1: BD Partnership with Yelp
One major part of the story was that Yelp became Eat24’s number one external source of new users, and in turn, Eat24 became Yelp’s biggest transaction platform partner, across all these verticals that I told you about outside of just food delivery, because it was the perfect place to discover your new user.
So I think there’s a lesson here that sometimes, early on founders of consumer apps typically get the advice not to over-focus on business development. Sometimes, however, if you choose the partnership very carefully and really work hard at it, you can create outsized value through BD as an early stage startup.
BD can really be a rocket ship for your company. And I think related to sub-bullet number one is that Eat24 was by far the fastest at making product iterations and taking full advantage of the Yelp platform. We would tell 10 platform partners across food delivery and other categories, “Hey here’s a new change. Here’s a new way you can process a credit card for example. We would suggest other ways to make transaction flow more efficient. Can you please do this? And this will get you more traffic, more revenue, more momentum on our platform.” We would come out with these ideas and Eat24 would code overnight, and implement the ideas we talked about by the next day. They would run circles around our other partners.
Eat24 had this amazing ability to do extremely fast engineering turnarounds without product quality suffering and without major bugs. Our other partners would take one to three weeks, sometimes drag their feet for months going back and forth. So if you can find a rocket ship to hitch onto with the BD partnership and you can become their kind of preferred partner, that can be extremely valuable.
2. Scrappiness and Unique Marketing
Number two, one of the key defining features of Eat24 was an extreme scrappiness and a complete sense of independence from the norms around the typical playbook of how to build a consumer app.
Just because everyone was advertising on Facebook and Google around 2014 or 2015, didn’t mean they were going to, in fact, when they saw the rates on Facebook advertising kept going up and up and it didn’t seem economical, they pulled back and famously did a blog post and said, we’re not going to do CPA advertising on Facebook at all. We’re breaking up with Facebook! It was a really funny blog post that got a lot of attention. Instead they did all this awesome guerrilla marketing across paid TV, radio, PR stunts, and email marketing.
They would do late night, cable television spots, buying remnant inventory through Comcast Xfinity, and produce low cost television ads. And then they’d re-syndicate the same ad spots on YouTube, and with video what’s interesting is, you know, most people think that, producing a television spot costs upwards of $10k all the way up to $50k or a $100k, depending on talent production, quality. They would produce this video content for maybe $1k. Then they would get the spot out there, very authentic, using computer graphics and really funny content, and then they would just publish it and it would really connect.
3. Creative Team
And that gets me to number three, which is a focus on creative.
Eat24 to this day still probably has the best creative content generation team that I’ve ever met. They did exceptional work. And I say this before my time and the acquisition — they get all the credit for building this amazing team that we used to liken to a writer’s room for The Daily Show or The Simpsons.
The team was led by a really smart Berkeley English major with a dry wit and an amazing sense of humor. And you wouldn’t know it normally when you were talking to her that she was able to produce this great comedy, but when the team got together, the jokes they would write were incredible.
They would write a weekly email that pretty quickly got to an audience of 2 or 3 million users reading it every week and those users would order food again. It was magic and a big part of reactivation of users, instead of paying to reacquire existing users, a problem that many transactional startups have. Eat24 didn’t have to spend a dime on that — people were just reordering for free, and a big trigger was reading that weekly email.
And then that same creative team could be repurposed to go do those funny television spots for cheap audio spots and funny PR content and it was so entertaining that naturally built an audience. So to me that was really interesting. You asked for three things, but if you had asked for a fourth, the product was just really clean, really dead simple to use.
And I think the founder was just so laser-focused on removing all obstacles and making the lowest friction easiest app that he could, with a kind of no BS style of building the company and running the product team that really worked as well.
GI: Interesting — those aren’t necessarily things I thought you were going to say! Partnerships, scrappiness, creativity. Oftentimes we get so focused on, company revenue growth, and how they have all these great customers and acquire them really cheaply. But I think the lesson for me here is focusing on your strengths and just focusing in general on who your user is and how to acquire them in the lowest friction way possible.
MG: 100%. I mean, it got to $150 million gross revenue and I don’t even know that they measured their CAC or CPA in a traditional sense (for offline marketing channels). By the time we acquired the company and then we grew to $700 million gross revenue, we had figured that all out. But still, to get to that kind of growth before the acquisition and not even be on top of your CAC math would get you kicked out of the room at a lot of VC pitches, but, by the way, they never needed to raise outside funds. The team never raised a dime of outside venture capital because it was profitable with 30% EBITDA margins and they were able to grow off their own cash, which was also incredible.
GI: A lot of people like to say that the acquisitions are where companies go to die, and post-acquisition just don’t really work out. Why was the Eat24 acquisition successful?
MG: Yeah. I think McKinsey did a study that 70% of M&A fails. So this is certainly the exception rather than the rule to be able to go from $150 million to $700 million post acquisition in two years. And we went from about 150 employees to 500 employees in that same time. That’s not easy to do, but it was a lot of fun.
Once we did the acquisition, the founding CEO of Eat24, Nadav, asked me to take over as CEO. He said, “Mike, I’m not a corporate guy. You should do this thing.” Like we talked about, he was totally avant-garde. He had never raised venture capital. He had never worked for like a tech company in his life. He said, I’ll help out as long as you need me, and then when I’m not needed anymore, I’ll go out and I’ll support from the sidelines. He gave me a whole team and all his direct reports and they all stayed on at Yelp. Both the founders and the Yelp Board asked me to run Eat24 as a subsidiary — so I did that!
It was trial by fire. There’s also another interview we can do on all the mistakes I made and all the battle scars and hard knocks I learned so not to sugarcoat it. But today we’re talking about the kind of growth trajectory and the good stuff.
Part of Yelp’s acquisition thesis in the first place was the value we could unlock by all being one company. When you have a BD partnership that’s really working, that’s when Corp Dev can make sense, and we thought we could really double down on this thing and grow it like a rocket ship. Before Yelp was worried about, “Hey, this is a third party company, and if we help them too much, what are the risks, or we can’t give them, for example, data back on which restaurants we’re seeing have better retention when we send certain new users there.” There was a lot they could see, but there were some data that Yelp had that Eat24 couldn’t originally get to. Now post-acquisition we could just go full blown, fully transparent on which restaurants have the most traffic on the front end in the first place or the most delivery searches, which was a real advantage, so that Eat24 sales reps could go call these restaurants. There was so much we could do when it was fully integrated and I think that helped unlock the next part of the growth curve.
By the way, a risk when you’re doing a BD partnership with a larger platform is for the other companies partnering with us, frankly, they weren’t very happy about it. I got calls and I had to call proactively as we were announcing the acquisition and said, “I know you’re probably not thrilled. We’re going to leave the transaction platform up, but we will be owning a company that’s a direct competitor.” But it unlocked a lot of value for us, and so that’s the lesson for startups out there too when you look to have these early BD conversations. They might lead to M&A interest that could be interesting to you later on, or the public company might end up acquiring your competitor. You have to bet on yourself and whether you can be the most compelling platform partner.
We were also able to just dump a ton of resources into the team to professionalize the management. We brought a world class business analytics team and the power of the Yelp sales team, which was really accomplished and great at opening up the top of the funnel on the restaurant side, as well as extra consumer acquisition, so there were all these resources to be able to dump in.
That’s part of why GrubHub was interested to acquire Eat24 for $287 million just two years after Yelp had acquired it for $134 million. That’s also how Yelp finally got the partnership with GrubHub we wanted, and we thought that would be an even better user experience to pool those two resources and let GrubHub focus fully on delivery while Yelp focused on top of the funnel.
The next chapter for food delivery is being written now. Thanks for a fun interview!