These billion dollar companies lose 100's of millions a year

Some crazy numbers for you to try to digest...

DoorDash

2019 Revenue: $900M

2019 Net Loss: $450M

Valuation: $12.6B

Grubhub: 

2019 Revenue: $1.3B

2019 Net Loss: $18.6M

Valuation: $5.3B

UberEATS

2019 Revenue: $1.46B

2019 Net Loss: $461B

Valuation: $20B (Last valuation pre-IPO in 2018)

A smart person would ask:

Why are these companies worth billions of dollars when they are losing 100's of millions of dollars a year?

A very smart person would ask:

WTF are these companies spending so much money on? They literally don't even manufacture anything. They take a fee from the restaurant and give the driver a portion of that fee to pick it up. How could they possibly lose money? Let alone hundreds of millions of dollars?

An absolute genius would say:

So I did some research on these companies and I found ridiculous stories about ALL of them. All these stories are so good they deserve their own newsletter, let's start with DoorDash. Check out this well-written piece from Margins:

In March 2019 a good friend who owns a few pizza restaurants messaged me. For over a decade, he resisted adding delivery as an option for his restaurants. He felt it would detract from focusing on the dine-in experience and result in trying to compete with Domino's. But he had suddenly started getting customers calling in with complaints about their deliveries. Customers called in saying their pizza was delivered cold. Or the wrong pizza was delivered and they wanted a new pizza. Again, none of his restaurants delivered. He realized that a delivery option had mysteriously appeared on their company's Google Listing. The delivery option was created by Doordash. To confirm, he had never spoken with anyone from Doordash and after years of resisting the siren song of delivery revenue, certainly did not want to be listed. But the words "Order Delivery" were right there, prominently on the Google snippet.

Doordash was causing him real problems. The most common was, Doordash delivery drivers didn't have the proper bags for pizza so it inevitably would arrive cold. It led to his employees wasting time responding to complaints and even some bad Yelp reviews.

But he brought up another problem - the prices were off. He was frustrated that customers were seeing incorrectly low prices. A pizza that he charged $24 for was listed as $16 by Doordash.

My first thought: I wondered if Doordash is artificially lowering prices for customer acquisition purposes.

My second thought: I knew Doordash scraped restaurant websites. After we discussed it more, it was clear that the way his menu was set up on his website, Doordash had mistakenly taken the price for a plain cheese pizza and applied it to a 'specialty' pizza with a bunch of toppings.

My third thought: Cue the Wall Street trader in me…..ARBITRAGE!!!!

If someone could pay Doordash $16 a pizza, and Doordash would pay his restaurant $24 a pizza, then he should clearly just order pizzas himself via Doordash, all day long. You'd net a clean $8 profit per pizza [insert nerdy economics joke about there is such a thing as a free lunch].

He thought this was a stupid idea. "A business as successful a Doordash and worth billions of dollars would clearly not just give away money like this." But I pushed back that, given their recent obscene fundraise, they would weirdly enough be happy to lose that money. Some regional director would be able to show top-line revenue growth while some accounting line-item, somewhere, would not match up, but the company was already losing hundreds of millions of dollars. I imagined their systems might even be built to discourage catching these mistakes because it would detract, or at a minimum distract, from top-line revenue.

So we put in the first order for 10 pizzas.

He called in and placed an order for 10 pizzas to a friend's house and charged $160 to his personal credit card. A Doordash call center then called into his restaurant and put in the order for those 10 pizzas. A Doordash driver showed up with a credit card and paid $240 for the pizzas.

It worked.

Trade 1

We went over the actual costs. Each pizza cost him approximately $7 ($6.50 in ingredients, $0.50 for the box). So if he paid $160 out of pocket plus $70 in expenses to net $240 from Doordash, he just made $10 in pure arbitrage profit. For all that trouble, it wasn't really worth it, but that first experiment did work.

My mind, as a combination trader and startup person, instantly had the though - just run this arbitrage over and over. You could massively even grow your top-line revenue while netting riskless profit, and maybe even get acquired at an inflated valuation :) He told me to chill out. Maybe this is why he runs an "actual business" while I trade options while doing brand consulting and writing newsletters.

But we did realize, if you removed the food costs this could get more interesting.

Trade 2

The order was put in for another 10 pizzas. But this time, he just put in the dough with no toppings (he indicated at the time dough was essentially costless at that scale, though pandemic baking may have changed things).

Now suddenly each trade would net $75 in riskless profit ? $240 from Doordash minus ($160 in costs + $5 in boxes).

This got a bit more interesting. If you did this a few times a night, you could start to see thousands in top-line growth with hundreds in pure profit, and maybe you could do this for days on end.

So over a few weeks, almost to humor me, we did a few of these "trades". I was genuinely curious if Doordash would catch on but they didn't. I had visions of building a network of restauranteurs all executing this strategy in tandem, all drinking from the Softbank teat before the money ran dry, but went back to work doing content strategy stuff.

Was this a bit shady? Maybe, but fuck Doordash. Note: I did confirm with my friend that he was okay with me writing this, and we both agreed, fuck Doordash.

This is wild. DoorDash is acting like the US Government and recklessly giving away free money to random small businesses.

In the case of the US government, it is backed by you, the taxpayers.

The US government gets to throw around free money because they can just print more with their money machine.

So who is footing the bill for DoorDash? 

A. The American Taxpayer

B. Jeff Bezos

C. Jeff Bezos's wife who got $38B in their divorce

D. The same idiots who invested $18.5B in WeWork at a $47B valuation and less than a year later are saying WeWork is only worth $2.9B

If you guessed D, you are correct. Those idiots go by the name of SoftBank and they recently came out with a presentation on how they are going to survive corona. Here is a real slide from their presentation. Seriously. I couldn't make this up if I tried.

 I understand their logic, but everyone knows unicorns can't fly. 

Thanks for reading my longest newsletter yet, in future newsletters I am going to show you how sketchy Gruhhub is and how I hacked Google to get a free year of Uber Eats!

If you want a sneak peak, check out our most recent episode of Behind Closed Doors:-

Taylor "if you ain't losing money, you ain't trying" Offer