Who Runs Growth at Lyft

Growth company Doordash could suffer the fate of Uber and Lyft

The food delivery service Doordash has benefited from the Corona crisis. Now he is going public. As the examples from Uber and Lyft show, investors run the risk of paying too high prices and waiting long for returns.

With Doordash, the largest American food delivery service wants to go public. It should now be quick. Doordash has profited massively from the lockdowns in the USA and, according to the IPO prospectus, more than tripled its turnover this year. CEO Tony Xu probably doesn't care that there is still no profit. In his letter to the future shareholders, Xu rasps in the usual Silicon Valley prose about his mission to strengthen restaurants and small shops while also offering employees even more freedom.

Also on the IPO menu are the rapid growth and the, according to Xu, mature customers, who should have finally understood that you no longer cook yourself, but will in future order the food at home via the app. Although Xu admits that the Corona crisis has accelerated this change in behavior, he assumes that customers will continue to prefer the app to their own kitchen even if it normalizes after the lockdown. In this respect, the IPO is quite understandable. Despite the good growth figures, however, the greatest caution is required here.

Doordash belongs to a generation of Silicon Valley startups that, according to skeptics, should never have been founded. They do not follow the strategy of reducing costs through technological innovation and thus offering the customer more value. On the contrary, for years they waged an elimination competition through artificially low prices. There was also the hope that at some point, when the competition disappears either through bankruptcy or consolidation, the company would be able to raise prices and thus finally become profitable.

From a restaurants perspective, Doordash doesn't really feel like a savior either. At first glance, the delivery platform actually expands the market for the local Chinese or Italian. But in the long run, Doordash means much tougher competition for local gastronomy and will likely lead to the death of smaller restaurants.

From the investors' point of view, however, the fundamental business situation is of particular interest. And thanks to the many lockdowns, this has actually gotten better. However, two fundamental questions arise. On the one hand, the valuation is likely to be inflated by the massive growth in sales. Those who pay too much for a growth company run the risk of having to wait a long time for returns. Examples such as Uber or Lyft show this. On the other hand, a shareholder here has to ask himself how sustainable this business model really is. The delivery of pizza or curry has been around for decades. However, this business has never really been profitable because the labor costs are far too high.

Doordash wants to solve this problem according to its own statements by establishing efficient logistics. But at its core, the Doordash business model consists of driving the competition out of the market, securing such high market shares and then later increasing prices. Competitors like Uber are trying to do something similar. So far, Wall Street has tolerated this strategy. It is entirely possible to make money like this. But without real technological innovation, the best case scenario for shareholders is a tip.