How To Raise $127 Million In A Downturn

It’s a challenging time to be in the on-demand industry. Not only is the market more competitive than ever, the category is also under a deluge of regulatory threats and lawsuits from employees. Throw this on top of a depressed funding environment and you have an entire category of startups under pressure to survive.

That’s why all eyes were on Tony Xu last week. The founder of food delivery upstart DoorDash, Xu successfully raised $127 million – one of the largest fundraises in the on-demand category since the market turned south. Xu started fundraising for his Series C round during boom times at the end of last year, but wasn’t able to complete the deal until recently. The round, led by Sequoia Capital, values the startup at $700 million -- roughly 16% lower than after its Series B.

But when I spoke with Xu about how he felt about taking a down round, he told me something I am all of a sudden hearing all the time: Valuations don’t matter. After unicorn-mania hit the private markets last year with 174 companies reaching or surpassing the $1 billion mark, entering the Unicorn Club is no longer a badge of honor. In an interview, Xu and I talked about his recent fundraise, the on-demand economy and the parts of building a company that get easier in slow times.

Edited excerpts: 

Caroline Fairchild: Do you feel like raising money is something to celebrate?

Tony Xu: You do get a lot of people writing in congratulations. It’s just one step along the road. I don’t think of it as a congratulatory final outcome of any form. I think of it as a step along our journey. This most recent financing was always part of the plan. We were always planning on fundraising at the end of last year and beginning of this year. It was a milestone on the plan and less something to celebrate. It is more like a to-do list, and you have to go up and down the to-do list. You can congratulate yourself when you complete that list with a beer or something. That is what this feels like. 

CF: What is the environment like for fundraising right now?

TX: We always planned on fundraising during the time that we did. We cannot control external circumstances, whether it is what is happening in the macro public markets or private markets. But you can’t run a company based on what is outside of your control. You need to over index for things that are inside your control. I saw caution in the market whereas maybe a year ago the word might have been greed. I’ve seen investors swing from greed to fear and investors are somewhere in the middle with caution. That means it takes longer to achieve a decision with investment. The bar gets raised. What we forget, both as entrepreneurs and investors and the press is that investors are human. When something in the external environment provides a shock, we course correct.

 CF: What were the conversations like around taking a down round?

TX: The way I have always thought about financing is asking the question first and foremost of why are we doing it and then what do we want this financing to help us achieve moving forward. So you need to know how much money you are raising and why. Then I think about how to do it in the best way for all employees. When the market shifts toward the caution and fear part of the spectrum, investors want to protect against that fear. They introduce all these terms that protect certain outcomes or results. For me, instead of chasing a headline valuation, it was about making sure in this market where investors are being very fearful that we can still make sure to get the clean terms for our employees. Then the score will take care of itself. The valuation is something is an intermediate number at best. We are playing for the long haul. We always have.

CF: So you don’t think that startup founders should be concerned with their valuation?

TX: It’s interesting that people think that entrepreneurs would seek valuations. They know that investors have way more information than she does about the market because for the entrepreneur, her worldview is just her company. For an investor, her worldview is lots of investments and lots of comparisons can be made. So we never sought a valuation or sought a headline valuation.

CF: Do you expect to see other on-demand startups go under soon like SpoonRocket?

TX: I do believe that our space for a while has been overfunded and as a category has underperformed. This is a case where many companies have been built by analogy. I don’t think that is a bad thing, but it is not the way we think about building our company. We are building our company on first principles. For us it was always about helping local businesses. It wasn’t about food delivery. We always believed from day one that we had to do our best to serve all three audiences in our marketplace. We serve: Consumers, dashers [couriers] and merchants and we actually have to serve all three audiences on every single transaction. This is unique because most markets are two-sided, so if we can do that better than anyone else, that puts us in a strong position. It builds a defensible position for a technology company.

CF: Doom and gloom aside, can you think of anything that it is easier to do in this environment?

TX: It is easier to attract talent. The best companies will certainly attract and concentrate more talent. The problem with a market that supports greed is that everyone wants to become an entrepreneur, or becomes an entrepreneur because of this overfunded environment, even if they didn’t want to be one! I think that there won’t be as many hobby-based entrepreneurs so the best companies will emerge and show why they are the best companies. 

CF: What would be your advice for other founders looking to raise capital now?

TX: My advice is the same in a greed market as in a cautionary environment. You have to build a great business, and it starts way before a downturn. If you are waiting for the downturn to raise you are likely too late. It is like you are trying to cross a traffic stop and yellow is quickly turning to red and you are thinking about how to get to green. That is tricky. My advice is to make sure that regardless when you plan on fundraising that your company is great. What we have always been focused on is sustainable growth. That is the foundation of building a great business. If you are running a business to the tune of what outside investors or the market wants you to do that can be pretty difficult proposition because the market can change. Focus on things within your control.

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