Notes for TWiST Ep.641 — Tony Xu, DoorDash Co-founder & CEO, on building a thriving business in the difficult on-demand market

Jason calls it “a rocket space at escape velocity”.

He’s talking about DoorDash and on today’s episode of ThisWeekInStartups he’s joined by Tony Xu, Co-founder and CEO of this growing food delivery service about their latest innovations and how they built a successful company in a shaky company and wildly competitive space.

Where others (like SpoonRocket) have failed, they are growing and expanding across the North America.

Watch the episode here or read these notes to know what they do differently.

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DoorDash

• DoorDash is an app and website where customers can order delivery from over 20,000 restaurants
• They are live in 24 markets, across North America including Toronto and Vancouver
• They have small offices in each city they launch in
• Their headquarters are in San Francisco
• At the moment they employ over 200 people, but hiring more — the company is just 2,5 years old
• They graduated from the Summer 2013 batch of Y Combinator
• Notable investors are Kleiner, Sequoia Capital, Kosla Ventures
• They have raised a series C from Sequoia in March for 127 million dollars

The early days of on-demand deliveries

• The on-demand delivery business has always been hard: WebVan (Sequoia backed) tried to crack it with their on-demand groceries delivery in the late ’90 but failed
• Tony believes that the cause of of their failure was the lack of demand, not enough people were shopping online at the time
• Today’s shopping is so common, the demand is much higher
• DoorDash shares three investors with WebVan and they are backed by -Sequoia as well

“Why now?”

• The big question Sequoia always asks: “why now”?
• There is much more demand now
• Smartphones in every pocket provide also the supply that makes DoorDash possible: a workforce of people who wants to work flexible hours, willing to do deliveries (students, stay at home moms and dads, generally people who want to earn a second income)
• Part of the reason is personal: his mom has always been small business owner and he saw the challenges small businesses face
• They built the company, not because of the hotness of the sector but to help small businesses
• Small businesses face the challenge of fulfilling deliveries and most of the times they can’t afford it
• Hiring delivery staff is expensive and hard to get right, even Domino’s has either too many or not delivery guys at their shops because of luctuations in demand

How DoorDash works

• Consumers pay a delivery fee that goes to the Dasher, their fleet of drivers, cyclists, motorcyclists and they get keep the tips as well, netting 15–20 dollars an hour
• Lots of Dashers were coming from Starbucks (they start at 10 bucks an hour and have a cap of hours for the day) — they needed flexible work to fill some extra hours

The competitive landspace

• In the on-demand food delivery space there companies making the food themselves like Sprig, Bento, Munchery
• DoorDash is different cause it has to account for a third party in the equation, the restaurants (merchants)
• They had to find market-fit product with 3 audiences: consumers, Dashers and merchants all to be in agreement
• Postmates are just a delivery service for anything, you can order any errand and the delivery guy will do it for you — including waiting in line and getting you a burger at In-and-Out
• Grubhub doesn’t take care of the deliveries, they are just a lead-generation service and they can only work with restaurants who already do deliveries by themselves
• Problems with that: it’s slower than if you order directly (they basically are middlemen) and they don’t or can’t know the status of your order
• If you call them all they can say is “call the restaurant” and ask them (Jason had a bad experience with them and he doesn’t use them anymore)

Restaurant exclusivity

• They don’t believe in the legal paper granting them exclusivity with restaurants — they strive everyday to be the best at serving them so restaurants would never even think about going with a competitor
• They want to be the best

Costs broken down

• They charge the consumer $4,99 for a delivery
• They also charge a percent on the order to the restaurant (undisclosed yet)

Unit economics and scale

• It’s operationally very difficult but possible to build a profitable company and that was their focus from day 1
• The first 4 markets are cash-flow positive
• You don’t have to get to massive scale to make it sustainable but it’s not easy

New York City

• New York is the delivery Mecca in the US, customers are very educated about the food
• Half of the merchants there already deliver, they are very used to it and the bar is high to fulfill customers’ expectations

No “growth at all cost”

• For the first year and half they were in 2 markets, only
• Their first concerns weren’t to grow at all cost but to validate the idea
• Will people buy food through a delivery service (85% of the restarurants don’t offer it and maybe there’s a reason)
• Will Dashers want to partner with them at a wage they can afford
• Will restaurants pay them
• They do
• They launched in the other 22 markets in the last year
• They have a launch team and a continuously updated playbook — you make each launch better than the previous one and improve as you learn

Hardest part of the business

• For him it’s been shifting his attention from building the product to building and managing the company

UberEats

• They have a limit amount of inventory
• They haven’t seen an impact in the business from the launch of UberEats
• All kind of services are seeing some success because they are relatively small and the market is growing

On food delivery services with their own kitchens

• They are not good at making food, they want to leave that to the restaurants that are in the business of preparing good food
• They are math geeks and good at that: they build technology to solve problems and make choices behind the scenes to ensure everything turns out good — that’s what they are good at
• You always have to strive for the simplest, frictionless products you can build

DeepRed

• DeepRed is the name of their algorithm in the back-end making a series of very difficult decisions
• Decisions like which Dasher to send where (you don’t send a biker up the hills of Bel Air), where he should get the order, how to move people around, calculating expected time for the delivery

Doing deliveries himself

• Before funding DoorDash he drove for several doordelivery services (Domino, FedEx)
• He spent 2 weeks at Domino’s learning how they operate (they do 1.5 million deliveries per day across the US)
• Their smartphone app isn’t fancy, but it’s simple: you just click what you ordered the last time and you are done
• He also does deliveries for DoorDash at times

The slowdown of startup funding

• More emphasis on unit economics and early profitability has come as result of the recent slowdown in funding for startups
• They built the business correctly from day 1 to be profitable on the long run, no matter if the markets were up or down — you have no control over them and they will change, all you can control is your own profitability

What’s next for DoorDash

• Adding to the momentum they’ve already had, launching in more cities
• Laying the foundation for other things they may be delivering in the future
• They are about creating delivery networks for small businesses, not just food deliveries for restaurants
• They’ve recently partnered up with Carl’s Jr and the Cheese Factory, always expanding their network of partnerships

Minimum Wage and Automation

• If raised, in a lot of cities there could be a 50% raise of the minimum wage (from $10 to $15)
• People who choose to work for DoorDash do it mostly for the flexibility as a supplementary source of income
• They might have to raise the delivery fee of 1 dollar (or so)
• With a higher minimum wage will result in more automation of low-skill jobs (i.e. fast food chains getting rid of cashiers and just using kiosk to order and pay

Tips on DoorDash

• Almost everyone tips on DoorDash
• They defaulted to a percentage, but adjusted it higher when noticed people where tipping more
• It’s 10% by default now

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