And the birth of a surprising economic stimulus package
Back in 1991 I moved to the USA. It was a big, brash place and full of a hope that today seems utterly misplaced. As a would-be entrepreneur I naturally gravitated to the San Francisco Bay Area, where I remained for the next twenty-seven years.
Early on, I learned that it’s impossible to parody anything in the USA because no matter how absurd or surreal your parody may be, it’s almost certain that someone, somewhere in the USA, is doing it for real.
Evangelical Christian pastors duping their flocks in a variety of painfully obvious scams? Check that box! TV programs so atrociously mindless you’d think they were a retarded child’s parody of a inept adult pilot show? Check that box too! Products so unhealthy that you’re surprised they aren’t being used by the US military to destabilize enemy countries? My friend, just walk down any supermarket aisle in any US town.
So much, so obvious. But back in the early 1990s, before the dot-com madness swept due diligence into the trash can and substituted mindless enthusiasm in its place, the world of venture capital was full of people who’d run divisions, started companies, and generally knew how hard it is to go from concept to serious sales revenue. These old-style venture capitalists were often deeply flawed. Don Valentine of Sequoia Capital probably destroyed billions of dollars of value because of unrelenting emotional insecurity that led him to fire every CEO he possibly could in the name of “running the company the way it ought to be run.” Presumably old Don’s father had a lot to answer for.
But after a while even the most complacent VCs had to notice that despite Dynamite Don’s personal quest to fire startup CEOs, the most valuable companies all had their founding CEOs firmly in place. And so, slowly, VCs learned from their mistakes. But they kept their core focus on funding companies that had real business models, which meant they had a path to profitability.
For the most part, by the time an acquisition or an IPO occurred, the company in question was valued on the basis of its revenues and margins. Wild post-IPO fluctuations were largely unknown. You could parody VC-speak (“put your wood behind the arrow but keep your powder dry”) but you couldn’t parody the fundamental business model.
Then, toward the end of the 1990s, a classic bubble had formed and investors were chasing returns in an environment where up was seemingly the only way to go. As is always the case with bubbles, boosters and pundits proclaimed “it’s different this time.” And so a number of VCs began to get greedy. They abandoned due diligence. They abandoned profitability. The wisdom of the day was that a “land grab” was in progress and billions had to be spent in order to stake a claim.
The fact that the analogy was deeply flawed seemed not to trouble the “smart money.”
Which is why, of course, we had the dot-com crash. Because economic fundamentals always win out in the end, despite the boosterism and the invariable belief that “it’s different this time.”
Those who’d dumped over-valued stocks before the crash mostly retired to live in their Hawaiian mansions. Those who remained were raked over the coals by very unhappy LLPs who wanted to know where their money had gone. And so the wonderful world of venture capital attempted to return to its roots, albeit this time round with a crew mostly comprising wet-behind-the-ears MBAs who’d never run or started anything in their lives.
For about a decade, some measure of sanity prevailed. Revenues and profits were fashionable once more. But then….
For reasons that to me have always remained obscure, there’s something in the human brain that just can’t hold on to reason and logic when dollars seem to be floating in the air. As money piled into venture capital and stock markets began yet another bull cycle and as people once more began to believe there was a land grab going on, valuations rose and rose and rose.
Everyone wanted at least a few “unicorns” in their portfolios, and the easiest way to get a unicorn is to boost its valuation beyond any measure of sanity.
Want to fund a ride-sharing company that loses money with every ride? Take your pick, but Uber is the sexy beast of this particular fiscal menagerie. Want to buy shares in a company that loses money with every meal it delivers? Oh, baby, do we have a few companies for you! What about urban transport? Well, pick-up-and-drop-off electric bikes have failed everywhere they’ve been tried, so naturally we’ve got a fantastic investment opportunity here too!
My personal favorites include a company that bought vans which they turned into mobile pizza-making-and-delivery vehicles so they could lose approximately $100 with every pizza they sold. Oh, and the pizzas were awful, because a moving van is no place to try to make anything, never mind pizza. But hey, there’s a land grab going on and it’s different this time!
Another favorite: WeWork, which of course didn’t work at all. Funny how boring old commercial real estate remains boring old commercial real estate even when you pour billions into enabling the founding CEO to live a cocaine-and-private-jet fantasy lifestyle for a while.
Today of course everything is blockchain. No doubt there’s a company out there working on making a blockchain-enabled hamster for the incredibly desirable under-fives pet-in-a-cage market.
But my current Number One Favorite is DoorDash. This company has a business model that is totally beyond all parody.
DoorDash’s business model is based on the realization that the average person is so indolent and so addicted to their screen that getting up and making food, or driving to the nearest take-out restaurant, is now beyond human capacity.
Thus, food needs to be transported from restaurant to doorstep. So far, so obvious. The problem arises from the fact that restaurant margins are wafer-thin, so restaurants aren’t going to be falling over themselves to act like Internet unicorns (e.g. endlessly bleeding cash). Thus they aren’t going to carve out a chunk of their revenue to recompense DoorDash.
Customers, meanwhile, are notoriously unwilling to cover the real cost of transportation, believing that if a pizza costs $25 on the restaurant website then it ought to cost them $25 when delivered to their doorstep. Maybe a dollar on top, just to be nice.
Trouble is, delivery vehicles, driver time, and fuel all cost money. DoorDash solved this problem by (you guessed it) raising a boatload of VC cash to burn. And so their brilliant model is to lose money forever in order to reach a huge valuation. If you think there could be a teeny tiny flaw in this reasoning, you’re clearly not in the venture capital game.
But it gets better.
DoorDash wants restaurants and customers to love and embrace its loss-making model. So someone came up with an absolutely brilliant (e.g. brain-dead stupid beyond belief) marketing strategy: scrape restaurant websites without their knowledge or permission, put them onto the DoorDash website, and offer whatever the restaurant is selling but at a huge discount.
So if a restaurant is offering its Super Supreme Cheesy Artery Clotter for $25.99, DoorDash will advertise it at $16.00 with free delivery. As the restaurant is expecting to be paid $25.99, DoorDash pays the restaurant $25.99 and collects $16.00 from the customer, thus losing somewhere in the region of $100 by the time all relevant costs are factored in.
Even if by the magic of naughty accounting (the gap between GAAP and today’s shell game of guess-which-beaker-the-money-is-under) we ignore the vehicle depreciation, fuel costs, and driver salary, DoorDash is still committed to losing $9.99 on every delivery.
Their delightfully optimistic hope is that once customers become accustomed to the convenience of DoorDash they’ll be willing to pay the full price for the food that’s being delivered to them.
And, one far distant day from now, maybe even pay a dollar or two on top.
Which will reduce DoorDash’s loss on each and every single delivery to a totally sane $50 or so, once all costs are properly accounted for.
This brilliant business model will ensure that DoorDash can dominate the world of food delivery to the home, provided Softbank and other clueless venture investors continue to pour billions into a never-ending stream of catastrophic losses in perpetuity.
You’re probably expecting me to condemn DoorDash for having a totally mindless model. Or at least for being beyond parody.
But no! The fact is, restaurants go out of business all the time even in the best economic climate. Today, with our hysterical over-reaction to the non-threat of covid-19, restaurants are going bust at an alarming rate. DoorDash, therefore, offers a lifeline.
One canny restauranteur recently decided to test just how stupid the DoorDash model really is. He saw they were offering his $24 pizza for only $16. So he ordered 10 of his own pizzas to be delivered to the house of a friend. He paid DoorDash $160 and they promptly paid him $240, thus enabling him to make an instant profit of $80, which is a 50% return on his money nearly overnight.
This offers a much faster and more direct means of subsidizing restaurants until such time as the economy recovers. Forget about Federal and State bureaucracies, which are all failing to get their act together: DoorDash remits funds within a few days! If you know a better legal way to grab a whole bagful of dollars I’d like to know about it.
So I heartily encourage restaurants everywhere to take full advantage of the DoorDash business model.
Get yours while supplies last.