Uber and DoorDash bashed for stressing customer growth over
generating profits
By Heather Somerville
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (December 28, 2019).
The discounts and freebies many tech startups have used to lure
customers -- free lunch delivery, $3 beauty products and bargain
taxi rides -- have fallen out of favor with investors who are
losing patience with the failure of these companies to turn a
profit.
The proliferation of subsidized products and services from
venture-capital-backed startups over the past decade reflected a
rush by investors to fund the next behemoth consumer-tech company.
The thesis: Create a market leader with loyal customers hooked by
attractive deals delivered at the touch of a smartphone app. Once
the company got big enough, profits would flow and the subsidies
could end.
Startup investors are re-evaluating that approach. Following a
year of dismal performances from companies that were heavily
subsidized by venture capital, investors and board members are
pressuring companies to figure out a more profitable business
model, tech deal makers and startup founders say.
Investors want startups to become less dependent on raised
capital to cover the cost of customer discounts, such as e-commerce
startup Brandless Inc. selling home and beauty products for a
fraction of the cost of shipping, ride-hailing companies Uber
Technologies Inc. and Lyft Inc. discounting the cost of their
rides, and meal-delivery service Postmates Inc. offering coupons
for $100 off delivery fees.
"The subsidy bubble for raising new money is over," said Wesley
Chan, managing director at Felicis Ventures. "What you are seeing
is a realization that subsidies often lead to disaster for startups
that rely on them."
Meal-delivery service DoorDash, Uber, Lyft and We Co., the
parent of the office-renting company WeWork, this year will lose
well over $13 billion combined. All became top industry players
after raising billions of dollars from investors who subsidized the
companies' costs, but none is profitable.
"You can manufacture growth, and you can't manufacture profit,"
said Ryan Kulp, who formerly worked in venture capital and now runs
a marketing startup, Fomo.
San Francisco-based DoorDash raised in the past two years nearly
$2 billion, cash it used to grow to more than 4,000 markets this
year from 600 markets in 2018, said a person familiar with the
matter. About three-quarters of its markets aren't profitable, the
person said.
DoorDash leads the U.S. meal-delivery market with a 37% market
share, the data firm Second Measure said. DoorDash provides free
delivery to a low- single-digit percentage of its orders, the
person said, and its restaurant partners cover part or most of the
losses from other freebies.
The growth in markets came despite encouragement from some board
members to focus on turning a profit from each customer, according
to another person familiar with the matter. DoorDash is projected
to lose about $450 million this year, before factoring in certain
expenses, that person said. In a 2015 presentation to investors
reviewed by The Wall Street Journal, the company projected that it
would have gross annual profits of $450 million at the end of
2018.
"Four years ago -- more than half of our life as a company -- we
had approximately 100 employees and were operating in fewer than
five states, " a company spokesperson said. "Since then, we've
helped hundreds of thousands of merchants reach millions of
customers."
DoorDash plans to have an initial public offering in 2020,
according to people familiar with the company's IPO plans. The
public markets have been less than friendly to some of its peers,
including Grubhub Inc., whose stock price is down about 30% from a
year ago. President and Chief Financial Officer Adam DeWitt blames
the rampant subsidies by competitors that "appear explicitly and
implicitly all over the place" and have pushed Grubhub to adopt
less-profitable strategies, such as partnerships with restaurants
that don't pay to be on the Grubhub app.
"At the end of the day, the diner is seeing a price that is not
sustainable," Mr. DeWitt said of his competitors.
The delivery service Postmates Inc. has filed for an IPO that
was expected in the first half of this year, but it has delayed
those plans amid a price war with competitors.
The majority of Postmates' deliveries are profitable, the result
of having more restaurants pay a commission to use its service,
according to the company. Those fees often cover the cost of the
delivery driver and allow Postmates to keep customer delivery fees
as low as 99 cents, the company said.
Share Now, a car service, announced this month that it would
shut down its operations in North America and some European cities
in February, ending 30-cent-per-minute car rentals in those
markets. Share Now will focus on those European markets where it
sees the best potential for profitable growth, said Michael Kuhn, a
senior manager at Daimler Mobility AG. Daimler AG and BMW AG are
co-owners of Share Now.
This fall the car-subscription app Fair increased the down
payment on its leases to a few thousand dollars from a couple of
hundred dollars after the company, according to former employees,
overpaid for cars and then leased them out at a discount.
Fair was able to offer customers such deals thanks to investors
including SoftBank Group Corp., which led a more than $380 million
funding round in late 2018, most of which Fair spent in less than a
year, according to former employees.
A Fair spokesperson said the company is purposely discouraging
customers with high prices as it restructures its business to find
a more profitable model. It expects to relaunch its leasing program
with lower down-payment prices early next year.
Even with more investor scrutiny, subsidies aren't going away.
The venture-capital industry has a record amount of money to
invest, and with interest rates staying historically low, many
investors will be attracted to private tech companies even when
they rely on private funding to pay their bills and dole out big
discounts.
Investors had been eager to subsidize companies because of what
Prof. Emeritus Brad Cornell of the University of California, Los
Angeles, and New York University Prof. Aswath Damodaran refer to in
an unpublished paper as " the big market delusion."
Uber's chief executive, Dara Khosrowshahi, has publicly compared
the company with Amazon.com Inc., saying it will be the go-to
provider of all forms of transportation. Lyft's president, John
Zimmer, has said publicly his company would take majority U.S.
market share by creating a transportation "superapp."
In its IPO filings, Uber described its market opportunity as $6
trillion -- the mileage value of all personal cars and public
transportation services globally. WeWork touted a $3 trillion
market opportunity. DoorDash, in its 2015 investor presentation,
gave its total addressable market as $275 billion, an estimate of
the U.S. restaurant takeout industry.
But such market estimates don't account for regulatory backlash
and competitors' offering nearly identical products. Another
problem: Adding more customers to an already-unprofitable business
model doesn't mean profit suddenly appears.
"You can theoretically have an infinite number of customers and
never, ever be profitable," said Daniel McCarthy, assistant
professor of marketing at Emory University and co-founder of the
research firm Theta Equity Partners.
Uber is a decade-old company, but in each of the first three
quarters this year it spent more on excess driver incentives --
where the cost of promotions to attract a driver is greater than
revenue from the ride -- than it did the year prior. However, the
company is starting to clamp down on those costs.
Uber and Lyft have said they would become profitable in 2021
before factoring in interest, taxes, depreciation and amortization.
The companies have for about the past year shown
quarter-over-quarter improvements in how much money they make per
ride sold. While both companies have called for more-rational
pricing in the industry, they have been slow to raise prices and
eliminate coupons.
"As the subsidy bubble pops, prices start to go up," said Jawad
Mian, who writes Stray Reflections, an investment publication for
hedge funds and asset managers. "A lot of these companies are not
going to be able to achieve their milestones necessary for the next
round of funding at a higher valuation."
Brandless, a San Francisco-based online shopping startup backed
by nearly $300 million in venture capital, offers everything from
organic coconut oil to dinner plates and lavender hand soap for $4
or less apiece. A Brandless spokesman said the company is moving to
higher-margin products, such as a $180 blender, and over the summer
suspended its spending on marketing. Its sales volume as of August
had fallen by about half from a year earlier.
"Just because people can afford it doesn't mean people will pay
it," Mr. Kulp of Fomo said.
--Rolfe Winkler and Maureen Farrell contributed to this
article.
Write to Heather Somerville at Heather.Somerville@wsj.com
(END) Dow Jones Newswires
December 28, 2019 02:47 ET (07:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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