DoorDash, the $12.7 billion food delivery startup, could make or break tech IPOs in 2020. Early investors explain why they backed the company and its founder.

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DoorDash, the $12.7 billion food delivery startup, could make or break tech IPOs in 2020. Early investors explain why they backed the company and its founder.

DoorDash CEO Tony Xu (L) and moderator Ingrid Lunden speak onstage during Day 1 of TechCrunch Disrupt SF 2018 at Moscone Center on September 5, 2018 in San Francisco, California.

Kimberly White/Getty Images for TechCrunch

Early investors were impressed with the organization and vision of DoorDash cofounder Tony Xu and his team.

  • DoorDash is one of the most valuable private startups and has recently emerged as the leader in the food-delivery industry.
  • Its also reportedly gearing up for a public offering as soon as next year.
  • Early investors in the company aren't shocked by its success.
  • Even when the company was less than a year old, its business plan and management team impressed them and suggested it had a big future ahead of it, they told Business Insider.
  • Click here for more BI Prime stories.

Paul Buchheit was worried that the team from Stanford wasn't going to figure things out.

It was the summer of 2013, and the four-person team was a part of Y Combinator's latest class of founders of fledgling startups. Months earlier, the group had launched a company that took orders for and delivered food from restaurants located near their university, including a popular Israeli restaurant called Oren's Hummus.

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The team had seen some initial success, enough to get them into the incubator's program, but now they were struggling to determine what to focus on. They seemed to be getting some traction delivering larger, catering-type orders to companies. Meanwhile, delivering meals one at a time to consumers looked like it could be a tough business, particularly in trying to figure out how to attract customers in a cost-effective and sustainable way. Jokingly, Buchheit suggested that they could hand out refrigerator magnets to advertise their company.

"It wasn't clear if it was going to work at all," Buchheit told Business Insider in a recent interview.

But within a few weeks, the group had settled on a plan - they would concentrate, at least initially, on delivering to consumers after all. And after a bunch of experimentation, they had figured out how to reach those customers without blowing their budget. A key piece of that was simply getting more restaurants tied into their service so consumers were more likely to find their favorites.

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The team's turnaround impressed Buchheit, so much so that even though more than six years have passed and he's worked with thousands of other founding teams, the Stanford group's story still stands out.

"Going from me thinking this might not ever work to having confidence in about a month and a half is very fast," he said.

The team and company that so impressed Buchheit? Tony Xu and his cofounders at DoorDash.

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DoorDash is now the most popular food delivery service in the US. Backed by top venture and institutional investors including Sequoia Capital, Kleiner Perkins, and SoftBank, DoorDash has a valuation of $12.7 billion and is rumored to be preparing for a public listing next year.

That makes the six-year old food delivery company one of the key startups to watch in 2020. DoorDash's next move, be it through an initial public offering or a direct listing, will test whether public investors can still muster an appetite for a buzzy gig-economy startup with an impressive founder at a time when several earlier offerings from the same Silicon Valley cookbook have been decisively rejected.

DoorDash has taken off

From its small-scale origins delivering meals from restaurants near the Stanford campus, DoorDash grown to a national, even international giant, offering food delivery in some 4,000 cities across the United States and Canada. It's now the most popular food delivery service in the United States, according to market research firm Second Measure, accounting for 35% of delivery transactions this October and surpassing that of longtime leader Grubhub. It's expected to pull in as much as $1 billion in sales this year,according to a report by The Information.

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Only a tiny fraction of startups achieve the kind of success DoorDash has seen. But early investors in the company say they aren't surprised at how the food delivery startup has turned out. To them, the company just made sense, and its founding team, particularly Xu, stood out even among all the high-achieving Silicon Valley entrepreneurs.

Xu "was just an execution machine," said David Lee, who invested in DoorDash in the fall of 2013 while a managing partner at SV Angel. "His pace of getting things done is just really impressive."

"Every time I would speak to him," continued Lee, who is now the chairman of Refactor Capital, "he had done so much. He had accomplished so much."

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DoorDash representatives declined to comment for this story.

Palo Alto residents had few delivery options

Several of DoorDash's early investors lived in or near Palo Alto at the time and were well aware of the paucity of food delivery options there and in other suburban areas. With Grubhub and similar companies primarily focused on big cities at the time, the only food consumers in less dense areas could get delivered was pizza and sometimes Chinese or other Asian food.

Even in areas when consumers could get food delivered, the service was typically bad, Lee said. The deliveries were often late. The food was frequently cold. And the delivery charges were expensive.

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So when Tony and his team offered a wider range of options for Palo Alto residents - including food from Oren's Hummus, one of Lee's favorite restaurants - it didn't take much to convince Lee to back the company.

"It was a pretty easy investment," he said. "I was kind of looking for something like this."

Buchheit was so excited about the service DoorDash was offering that he asked Xu and the team, while they were still in the Y Combinator program, to redraw their service area to specifically include his house.

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Including DoorDash in the Y Combinator and investing in the company was "not too hard of a decision, because it was literally a thing I had been wanting," Buchheit said. Before DoorDash came along, he continued: "It seemed a little bit mysterious that the only food that could be delivered to my house was pizza."

But early investors weren't just enthused about DoorDash because they could suddenly get Oren's falafel pita sandwiches delivered to their doors. Many saw that it could have appeal far from Stanford's campus.

Early investors foresaw big potential for DoorDash

US consumers collectively spend hundreds of billions of dollars each year on food made outside the home - and that amount has been rising steadily. With many people short on time, it made sense to some of those investors that a growing number of consumers would pay for the convenience of having food delivered to them, particularly in the suburbs where they hadn't had many options in the past. And the advent of smartphones and apps for them promised to make it much easier for consumers to place orders.

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semil shah

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DoorDash's business plan made sense to Semil Shah and other early investors.

"There's a very strong desire among consumers to eat, and consumers are lazy," said Semil Shah, who invested in DoorDash in fall 2013 as a general partner of Haystack. The company's general business plan "made sense to me," he added.

And some investors saw even bigger possibilities. Other companies in the food delivery market at the time, such as Blue Apron, were intensely focused on the food itself, said James Currier, now a managing partner at NFX. In pitching investors, they would talk about the quality of the food they would be delivering and how it would differ from that of other services in terms of the amount of salt or fat or who their target customers were, he said.

By contrast, Xu and his team weren't fixated on the food DoorDash was delivering, said Currier, who also backed DoorDash in the fall of 2013 as the CEO of Ooga Labs. Instead, they were much more focused on building out a delivery network that could be eventually be a new kind of logistics company, a sort-of next-generation UPS, that could deliver much more than just food, he said.

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"It just made sense," Currier said. "It made sense that with the high frequency of food ordering, you could build out a network. And once you got a network in place, that network would allow you to provide greater value at higher speed and lower cost to all other deliveries that you might want to do on that network."

Tony Xu and his team stood out

Early investors saw other things to like about DoorDash, namely its team. Many investors point to founding teams as the reason why they backed particular companies. After all, Silicon Valley has more than its share of energetic entrepreneurial wunderkinds ready to conquer the world. But even in that environment, Xu and his cofounders stuck out, early backers say.

SV Angel Founder and Managing Partner David Lee judges onstage the Startup Battlefield Finals at TechCrunch Disrupt at Pier 48 on September 10, 2014 in San Francisco, California.

Steve Jennings/Getty Images for TechCrunch

Some of DoorDash's early investors, including David Lee, then of SV Angel, were disappointed in the delivery options in Silicon Valley and were looking for a service like DoorDash.

Part of what stood out for investors was Xu organization and his grasp of even the smallest details about his business. He could succinctly make his pitch, articulating what the business was all about, the early backers said. But he also had a command of the facts.

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Xu is "just really organized and really focused," Shah said. "If you meet him, in two to five minutes, you just feel that immediately."

"It's very different than meeting other people day in and day out," he continued. "Occasionally you meet somebody where you just kind of go, 'whoa!'"

Early backers were also impressed with how quickly Xu and his team were moving. By the time they entered Y Combinator, they'd already started their service in Palo Alto and had paying customers, mere months after coming up with the idea for the company. They then quickly sorted through their struggles in Y Combinator and pressed forward.

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By that fall, when the company raised a $2.5 million seed round, it already had an operating service to tout to angel investors.

"They had accomplished so much in such a short amount of time," Currier said.

Another thing struck Currier about Tony and his team. Even in DoorDash's earliest funding round, it attracted investments from a virtual all-star team of investors. The company's earliest backers included Khosla Ventures' Keith Rabois; Andy Rachleff, who had cofounded Benchmark; Charles River Ventures' Saar Gur; not to mention Currier himself. That group had extensive experience investing in, launching, and running startups.

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"These guys stacked - just at their seed round - they stacked themselves up with operators," Currier said, continuing, "There was a preponderance of people who knew what we were doing."

There are still plenty of challenges ahead

To be sure, for all the excitement DoorDash generated early on and all the success it's had since, the company still faces plenty of challenges. According to a recent report from The Information, it's on track to lose some $450 million this year - or about 50 cents for every dollar of revenue it brings in. And that's on an adjusted basis, not its net loss, so it excludes things like taxes, interest, and amortization of assets.

That kind of loss could put a damper on DoorDash's expected public offering. Other so-called unicorns - startups with a private valuation of $1 billion or more - have faced intense scrutiny from the public markets this year over their ongoing losses. Uber, Lyft, and Slack - all of which have consistently operated in the red - are each trading well below their public offering prices. The public investor pushback against WeWork and its massive losses was so intense that it had to cancel its IPO.

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DoorDash's potential listing comes as the spotlight is on other Softback-backed companies, following the upheaval at WeWork and the collapse in its valuation, revealing further troubles at those firms. In recent weeks, struggling dog-walking service Wag bought back its shares that were held by the Japanese conglomerate, laid off numerous workers, and saw the departure of its CEO. Robotic pizza-making company Zume saw the departure of four top executives and announced a reorganization.

The company's plan to expand beyond food delivery to become a delivery network for all types of goods sounds a lot like what other companies, including Uber and Amazon are already doing.

Meanwhile, DoorDash is contending with other concerns, particularly with its network of delivery drivers. The company faced a backlash from drivers and customers earlier this year over its practice of using customers' tips to cover part of the fees it had promised drivers. It later announced it would change that policy so that any tips customers paid would go directly to drivers and would be in addition to the fees DoorDash itself paid them.

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Starting next year, a new law in California could force the company - as well as competitors including Grubhub and Uber Eats - to classify many of its delivery drivers as employees. The move would generally increase wages and benefits for those workers, while raising costs for DoorDash. The company, along with its rivals, is trying to overturn the new law with a ballot measure.

Still, the company's early backers are thrilled with what the company has achieved so far. Thrilled, but not necessarily astonished.

"With Tony, I'm not surprised," Shah said. "If you told me in five years, DoorDash is public and worth 100 billion bucks, I wouldn't be surprised," he continued, "Maybe I'd be a little bit surprised ... I wouldn't be shocked."

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Got a tip about DoorDash or another startups Contact this reporter via email at twolverton@businessinsider.com, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop.

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