This Meal Delivery Company Was Just Another Struggling Startup Until Wooing Restaurants Paid Off

(Bloomberg Businessweek) -- A year ago, DoorDash Inc. looked like just another meal delivery app maker on its way out. The company was burning cash as it struggled to differentiate its software from that of Uber Eats, GrubHub Inc., and other competitors, and it had recently sold shares that valued the company at less than its previous funding round. Then something strange happened: Excluding overhead expenses such as salaries and rent, DoorDash started turning a profit. Granted, that's a generous definition of the word “profit,” but it was enough for Saudi-backed SoftBank Group Corp., which swooped in to lead a fresh round of investment totaling $535 million.

DoorDash used the money to expand from 600 cities to 3,000, and another round of venture funding tripled its value, to $4 billion. Researcher Second Measure says DoorDash is now the ­fastest-growing business in its field. The delivery company says it tripled annual sales in 2018 and recorded net revenue of $107 million in November. “We've been working on the same strategy for five years,” says Chief Executive Officer Tony Xu. “Now some of these things are bearing fruit.”

While most rivals spend their time trying to appeal to the people ordering the food, Xu has consistently focused on the businesses making it. “He was asking the question ‘How can we help this restaurant increase its sales?' ” says Sequoia Capital partner Alfred Lin, an early investor. With Chief Operating Officer Christopher Payne, previously an executive at Amazon.com, Microsoft, and EBay, Xu has developed software that restaurants can use at their own cash registers and embed on their websites. The company has signed on national chains including Wendy's, Chipotle, and Cheesecake Factory. “DoorDash became our lead horse because of their focus on quality,” says Kurt Kane, Wendy's chief concept and marketing officer. “The food almost always arrived hot.”

Xu grew up in Champaign, Ill., after emigrating from China at age 5. His family often relied on food stamps. Dad worked as a graduate aeronautical engineering researcher at the University of Illinois, while Mom waited tables and eventually took part ownership in a nearby restaurant. “To me, my mom was the epitome of the American dream,” Xu says. “She came to the U.S. with a ­little more than $250 to her name and worked hard to create a small business.” He started his own while at Stanford Business School in 2013, with two friends on the undergrad side, taking ­fellow students' orders over the phone for ­restaurants that didn't deliver and making the deliveries themselves.

Steady demand made DoorDash's early revenue impressive enough for the startup incubator Y Combinator to connect Xu with venture capitalists including Lin, but in 2016, Xu had trouble persuading venture firms to keep investing at a higher price. Still, executives stayed on, joined by Payne in 2016, and by the end of 2017, Xu's strategy was starting to pay off. A greater selection of restaurants helped attract more users, driving down costs. Profits in key markets became a realistic goal, then the norm. DoorDash says it's profitable—again, not accounting for overhead expenses such as salaries and rent.

The $535 million funding round came in March, with capital from Sequoia and Singapore's sovereign wealth fund, along with SoftBank. The cash has allowed DoorDash to push into smaller markets, from Chico, Calif., to Pensacola, Fla. Over the summer, shortly after Xu hired Chief Financial Officer Prabir Adarkar away from Uber Technologies Inc., venture firms Coatue Management and DST Global plowed in an additional $250 million. Adarkar, who helped Uber work on its initial public offering filing, declined to comment on competition with Uber Eats or say when DoorDash will go public, but he says the company is already preparing for an IPO. This year, the company says, its full-time staff has increased 82 percent, to more than 1,000 employees.

DoorDash still has a long way to go to beat out Uber Eats and GrubHub. The latter, which owns brands including Seamless, Eat24, and LevelUp, has America's largest ordering audience, making 530 million deliveries in the past five years, according to data compiled by Bloomberg Intelligence. In the same amount of time, DoorDash says, it's made more than 100 million. For now, Xu says he'll stay focused on what restaurants want, including providing satellite kitchen space for those needing more capacity. The goal remains to help small businesses survive, he says: “We built this company for people like my mom.”

To contact the editor responsible for this story: Jeff Muskus at jmuskus@bloomberg.net

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