The remarkable public debut of food delivery service DoorDash this week has sparked considerable discussion and, for some, bewilderment. Despite experiencing substantial growth, the company has faced scrutiny regarding its labor practices and remains unprofitable, yet its initial public offering, similar to those of other gig economy businesses, leaves key economic questions unanswered.

What explains the valuation of $55.8 billion assigned by public market investors to a company that reported a $667 million loss in 2019 and a $149 million loss in the first nine months of 2020 – a period of accelerated expansion driven by the pandemic? Is there a disconnect between market perception and financial reality?

Saar Gur believes he can offer insights into this situation. Gur, a long-standing general partner at the early-stage venture firm CRV, made early investments in DoorDash, participating in its seed, Series A, and Series B funding rounds. He anticipates that CRV’s stake in the company will yield significant returns on its initial investment. He shared his perspective in a recent conversation, which has been lightly edited for brevity and clarity.

TC: Your firm provided seed funding to DoorDash. Was this a proactive pursuit of the company, or did the DoorDash team approach CRV?

SG: I actively sought out Tony [Xu, DoorDash co-founder and CEO]. The delivery service Postmates had launched two-and-a-half to three years prior, and I was impressed by its founder, though I wasn’t certain about investing. Another company, Fluc, led by a resourceful entrepreneur named Adam, was gaining attention in Palo Alto, and I was intrigued. We had connections within the restaurant industry, and my wife operated a chain of homemade yogurt shops called Fraiche, giving us valuable insights.

I contacted a friend, Misty, who was the general manager at Oren’s Hummus on University Avenue in Palo Alto, to get her opinion on Fluc. She indicated that while Fluc’s technology was competent, they lacked a deep understanding of the challenges faced by restaurants. She suggested speaking with the team at DoorDash, a group of students from Stanford University.

If there’s a key element to successful investing, it’s the ability to recognize when to adjust course. We shifted our focus to DoorDash and met with them at Fraiche in Palo Alto. From that initial meeting, we found ourselves readily aligned in our thinking.

TC: What were the key topics of discussion during that initial meeting?

SG: From the outset, the team articulated a vision of building a comprehensive logistics company. They demonstrated a clear understanding of businesses like Oren’s Hummus, which had a popular following but limited seating and a substantial kitchen. Tony and Evan Moore [co-founder and current VC] expressed their intention to focus on serving customers of thriving establishments with constrained space and ample kitchen capacity, integrating directly with the kitchen operations to avoid interacting with front-of-house staff.

At the time, Postmates had transitioned from delivering iPhones to delivering food, including from Fraiche, but their approach involved sending a representative to the store to place the order and wait. DoorDash, in contrast, provided an iPad directly to the kitchen.

TC: You’ve mentioned that CRV missed the opportunity to invest in Uber, with Travis Kalanick ultimately choosing Benchmark. Do you believe Uber could have, or should have, been DoorDash? You met with Kalanick in 2011, before DoorDash was founded, and he described Uber as a logistics company capable of delivering food and various other goods. Considering DoorDash’s current market dominance, do you think Uber delayed its entry into the delivery sector for too long?

SG: The initial concept behind Uber was centered on ride-hailing, not food delivery. Its Series A presentation focused on the difficulty of hailing a taxi, with no significant emphasis on food – at least, that’s my recollection. Over time, Uber expanded into a broader range of services.

However, DoorDash initially launched in Palo Alto. Several competitors were based in San Francisco, and Tony and the team debated whether to expand to San Francisco or pursue another city. After careful consideration, they decided to focus on San Jose.

Many are unaware that San Jose is the 10th largest city in the United States, and its urban layout is more representative of mid-sized cities and suburban areas than San Francisco. This strategic decision proved crucial. At the time, established rivals like Grubhub and Seamless had demonstrated success in densely populated cities. It wasn’t immediately apparent that their model would work in San Jose or similar suburban environments.

TC: Investors are clearly enthusiastic about DoorDash, as evidenced by the surge in its stock price. Are you, like Bill Gurley, concerned that the underwriters may have left money on the table? Do you believe the traditional IPO process is flawed?

SG: I began my career at Lehman Brothers in investment banking, so I’m familiar with the IPO process. While I understand the frustration of potentially underpricing a company, accurately predicting market response is challenging. It’s difficult to gauge what the market will accept once shares are available to retail investors.

What I find particularly exciting is that DoorDash is raising capital to fuel its continued growth. I believe this company has the potential to become a $500 billion-plus enterprise. There’s a great deal to be optimistic about. Regarding the capital-raising event, it’s difficult for investment banks to accurately predict market behavior, so I’m not as critical as some others.

TC: A $500 billion valuation is substantial. What is the pathway to achieving that level of growth?

SG: Let’s begin with food delivery. DoorDash’s market share in suburban areas has surpassed 60%, and its overall U.S. market share exceeds 52%. They have established themselves as the leader in food delivery. Looking at companies like Meituan in China and other global food delivery businesses, this alone suggests a potential valuation of $100 billion, assuming they maintain their current trajectory.

However, the more significant opportunity lies in the broader context of logistics. Consider the U.S. Postal Service, which once took two weeks to deliver a letter. Then FedEx emerged, and suddenly the postal service seemed slow. The customer satisfaction scores for USPS were high until FedEx arrived. Or consider dial-up internet, which was adequate until broadband became available.

This is an ambitious vision, representing a business model distinct from ridesharing and Uber’s core operations.

TC: You’ve drawn a comparison between DoorDash and Amazon, a business that requires significant capital investment and physical assets. Do you foresee DoorDash moving in that direction? Furthermore, what types of acquisitions might DoorDash consider?

SG: The company consistently prioritizes technology. DoorDash Drive is a product that many overlook, but it powers delivery services for merchants who don’t want to build their own delivery networks. For example, if you order groceries from Walmart.com, DoorDash may be handling the delivery. Macy’s is using DoorDash Drive to offer one-hour delivery. DoorDash also offers a software solution that allows larger chains to manage their entire delivery process with their own drivers. Jimmy John’s, a sandwich chain, is now using DoorDash software to run its complete order and delivery operation.

DoorDash has elements of a true software business, akin to AWS, and also capital-intensive components, such as Dashmart, the convenience stores owned and operated by DoorDash. Could they acquire a company like 7-Eleven? We recently saw goPuff acquire BevMo; such a move isn’t out of the question. With Dashmart, they are already leveraging data to understand consumer demand for immediate access to various products.

TC: DoorDash has also explored the ghost kitchen market, opening a facility in Redwood City, south of San Francisco. Could this become a more significant part of their strategy?

SG: I believe it aligns with their overall direction. DoorDash can use data to identify opportunities, such as the lack of a pizza restaurant in Palo Alto, and launch a new concept like “Saar’s Pizza Company” to fill that gap cost-effectively, without the need for a traditional storefront and associated building codes.

TC: Concerns have been raised regarding the fees charged to restaurants for using DoorDash.

SG: Having experience as a restaurant owner, even my wife, who holds an MBA from Wharton, found it challenging to manage all the financial details. It’s easy to feel like you’re being overcharged, especially when running a small business. However, if you consider the incremental revenue DoorDash generates and understand the concept of marginal profit, continuing to sell through the platform can be beneficial as long as you can profit from the margins on the food, given your existing kitchen capacity. 

That’s why DoorDash has partnered with approximately 45 of the top 50 quick-service restaurants. These are data-driven organizations, and they wouldn’t maintain these partnerships if they weren’t seeing positive results.

However, sticker shock is inevitable.

TC: Regarding these quick-service restaurants and ghost kitchens, there’s a concern that they may ultimately displace smaller, independent restaurants. How do you view this issue?

SG: I believe we are fundamentally social creatures and value experiences. Sharing a meal with others is a practice that will endure. I anticipate that successful brands will adopt a hybrid approach, combining physical locations with online presence, much like we see in retail. Savvy concepts will understand how to build their brands across multiple channels. Furthermore, I expect that high-end restaurants like Saison and The French Laundry will continue to thrive as people seek out unique and memorable dining experiences.

TC: What is the key to DoorDash achieving profitability?

SG: The company was actually profitable this summer, if you examine the facts. Moreover, they allocated $120 million in credits to support small businesses during the COVID-19 pandemic. Had they not done so, they would have generated a substantial amount of cash.

A company like DoorDash requires a compelling vision and the ability to attract talent, but also a strong quantitative approach. Tony has consistently demonstrated the ability to provide accurate data and set measurable goals. While they may not be profitable in newer markets due to rapid growth, they have the data to demonstrate profitability in established markets and how that profitability expands over time.

They could choose to slow their growth and prioritize profitability at any time, but that’s not their current strategy.