Author Topic: This is your brain on venture capital  (Read 3259 times)

LC

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This is your brain on venture capital
« on: May 18, 2020, 09:31:38 PM »
https://www.theverge.com/2020/5/18/21262316/doordash-pizza-profits-venture-capital-the-margins-ranjan-roy

Quote
Yesterday, Ranjan Roy, a content strategist and writer, wrote about the latter in his newsletter The Margins; one of his friends who owns a few pizza restaurants suddenly got an influx of customers complaining about delivery when the restaurants didn’t offer delivery. “He realized that a delivery option had mysteriously appeared on their company’s Google Listing. The delivery option was created by Doordash,” Roy wrote.

Apparently, this is one way that DoorDash does customer acquisition — by bullying restaurants. But what’s funnier about Roy’s friend’s problem (and it was a real problem because of Yelp reviews and angry customers) is that DoorDash priced the pizzas incorrectly. “A pizza that he charged $24 for was listed as $16 by Doordash,” emphasis Roy’s. And then: “My third thought: Cue the Wall Street trader in me…..ARBITRAGE!!!!”

And so the story unfolds. “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],” wrote Roy. They order 10 pizzas this way, and it worked! The money was free, a seamless transfer from SoftBank’s deep venture capital-lined pockets to Roy’s friend’s business bank account. Eventually, in another series of what Roy hilariously calls “trades,” they just ordered pizza dough through DoorDash for $75 in pure profit.

“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,” wrote Roy. “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.” (I reached out to DoorDash for comment and will update this story if they reply.)
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Orange

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Re: This is your brain on venture capital
« Reply #1 on: May 18, 2020, 10:19:46 PM »
Thank you for sharing this. The pizza arbitrage anecdote is funny, and I certainly wouldn't invest in a company like Doordash, but I'll play devil's advocate because this piece is very opinionated and short-sited.

These companies are trying to build a platform with enormously powerful network effects, to become a household name and a major player in a massive global industry like food delivery. Think about the rewards of that if they succeed... To have a seriously durable competitive advantage in such a large market - a business model that is essentially a toll road for restaurant food delivery... think about how incredibly valuable that could be once the market has matured and cost of customer acquisition falls.

It might actually be worth blowing through half a billion a year for a while, while the opportunity exists to corner part of this market. Investing is about laying out money today, not in hopes of making money today, but making money in the future. I think the VC's understand the long term risk reward at play here better than these writers, who are too preoccupied with spinning up articles and tweets that stir up readers, but offer little in the way of insight.

That's my 2 cents
« Last Edit: May 18, 2020, 10:21:59 PM by Orange »

winjitsu

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Re: This is your brain on venture capital
« Reply #2 on: May 19, 2020, 01:03:43 AM »
Thank you for sharing this. The pizza arbitrage anecdote is funny, and I certainly wouldn't invest in a company like Doordash, but I'll play devil's advocate because this piece is very opinionated and short-sited.

These companies are trying to build a platform with enormously powerful network effects, to become a household name and a major player in a massive global industry like food delivery. Think about the rewards of that if they succeed... To have a seriously durable competitive advantage in such a large market - a business model that is essentially a toll road for restaurant food delivery... think about how incredibly valuable that could be once the market has matured and cost of customer acquisition falls.

It might actually be worth blowing through half a billion a year for a while, while the opportunity exists to corner part of this market. Investing is about laying out money today, not in hopes of making money today, but making money in the future. I think the VC's understand the long term risk reward at play here better than these writers, who are too preoccupied with spinning up articles and tweets that stir up readers, but offer little in the way of insight.

That's my 2 cents

I know you're playing devils advocate, but I have to add in a few points:

  • This assumes that once you win the market, you can raise rates / make an economic return on your service. Often times when raising price, companies realizes demand and their desired price point wasn't there to begin with. Given the blow-back already at food delivery services from restaurants on their prices, it seems unlikely they can take more on that end. On the customer side, seeing a $10-$15 order end up as $25+ after delivery fees and tips makes it unlikely they have a lot of room to move prices in that direction either.
  • The prevailing thesis in VC in the past few years, led by Softbank, was the notion of Capital-as-a-Moat. The more money a company has, the faster they can aggressively grow and win and dominate their markets, thus VCs with the biggest checkbooks were in positions to fund and choose market winners. Ask Masa how that has been working out for him :)
« Last Edit: May 19, 2020, 10:39:52 AM by winjitsu »

bizaro86

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Re: This is your brain on venture capital
« Reply #3 on: May 19, 2020, 09:51:44 AM »
I thought Masa was just misunderstood in his own time - like Jesus and the Beatles?

BG2008

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Re: This is your brain on venture capital
« Reply #4 on: May 19, 2020, 10:06:02 AM »
When I used to deliver Chinese food for my family restaurant, I never would've thought that you can "corner the delivery" business.  This new economy is so exciting that it is turning the average American into pizza delivery guy and taxi drivers while Softbank rains dollar bills at the unicorns like a degenerate strip club goer.   

It is a very bizarre world that we live in where you can convince people to scale up a very unprofitable job and convince VC that it has a huge TAM and they can afford to lose billions every year.   

If we invert this, maybe we can buy companies with network effects already that are growing at 2% a year and trading at 6-7x P/FCF.  Instead of believing in the hype, just buy the finish product at a reasonable multiple. 

I introduce to you Univar - A levered chemical distribution company that buys in bulk and sells by the gallon.  I don't think Amazon or other competitors are looking to sell corrosive chemicals anytime soon.  You need licenses, trucks, and lots of warehouses.  It has counter cyclical cashflow generation.  I think it is a much better business than distributing steel/aluminum or building materials such as lumber.  Route density is a real moat.  Look at UPS and FedEx.  The more packages/orders that you can deliver in a route, the lower the unit cost.  Sometimes, investing boils down to a couple key takeaways.

LC

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Re: This is your brain on venture capital
« Reply #5 on: May 19, 2020, 10:14:35 AM »
To echo and perhaps expand on winjitsu's point:

Quote
To have a seriously durable competitive advantage in such a large market - a business model that is essentially a toll road for restaurant food delivery... think about how incredibly valuable that could be once the market has matured and cost of customer acquisition falls.

This is the key point, isn't it? A couple of questions:
1) For most moat-y businesses, do they have to pay their customers to choose their business?
2) For the ones which do, in fact, pay their customers (perhaps just initially) - what do those businesses look like?

In my opinion, for (1) most moat-y businesses do not need to be acquired. You are offering something so special that competition is limited. Either you have some special process to offer sustainably lower costs (i.e. best commodity producer) or you are so differentiated that you are offering a special product (brands, etc.)

Now, yes there are some businesses where you pay to acquire. The question then becomes, which are successful, and why? I would argue therefore the response to (2) is that you are building yourself into long-term customer processes, with high switching costs/specialized service, and a high natural relationship length. It becomes uneconomical to pay for customers if they can just hop to a competitor (low switching costs) in a month (low relationship length).

My problem with the VC world (and perhaps I am wrong) is that they over-estimate their competitive advantages. I am sorry, but food delivery is not a competitive advantage. And access to capital is almost never a competitive advantage. Real competitive advantages come from high skilled activities at least in most cases.
"Lethargy bordering on sloth remains the cornerstone of our investment style."
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rb

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Re: This is your brain on venture capital
« Reply #6 on: May 19, 2020, 11:11:59 AM »
https://www.theverge.com/2020/5/18/21262316/doordash-pizza-profits-venture-capital-the-margins-ranjan-roy

Quote
Yesterday, Ranjan Roy, a content strategist and writer, wrote about the latter in his newsletter The Margins; one of his friends who owns a few pizza restaurants suddenly got an influx of customers complaining about delivery when the restaurants didn’t offer delivery. “He realized that a delivery option had mysteriously appeared on their company’s Google Listing. The delivery option was created by Doordash,” Roy wrote.

Apparently, this is one way that DoorDash does customer acquisition — by bullying restaurants. But what’s funnier about Roy’s friend’s problem (and it was a real problem because of Yelp reviews and angry customers) is that DoorDash priced the pizzas incorrectly. “A pizza that he charged $24 for was listed as $16 by Doordash,” emphasis Roy’s. And then: “My third thought: Cue the Wall Street trader in me…..ARBITRAGE!!!!”

And so the story unfolds. “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],” wrote Roy. They order 10 pizzas this way, and it worked! The money was free, a seamless transfer from SoftBank’s deep venture capital-lined pockets to Roy’s friend’s business bank account. Eventually, in another series of what Roy hilariously calls “trades,” they just ordered pizza dough through DoorDash for $75 in pure profit.

“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,” wrote Roy. “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.” (I reached out to DoorDash for comment and will update this story if they reply.)
This was literally an episode of Silicon Valley!

Broeb22

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Re: This is your brain on venture capital
« Reply #7 on: May 19, 2020, 01:56:12 PM »
To echo and perhaps expand on winjitsu's point:

Quote
To have a seriously durable competitive advantage in such a large market - a business model that is essentially a toll road for restaurant food delivery... think about how incredibly valuable that could be once the market has matured and cost of customer acquisition falls.

This is the key point, isn't it? A couple of questions:
1) For most moat-y businesses, do they have to pay their customers to choose their business?
2) For the ones which do, in fact, pay their customers (perhaps just initially) - what do those businesses look like?

In my opinion, for (1) most moat-y businesses do not need to be acquired. You are offering something so special that competition is limited. Either you have some special process to offer sustainably lower costs (i.e. best commodity producer) or you are so differentiated that you are offering a special product (brands, etc.)

Now, yes there are some businesses where you pay to acquire. The question then becomes, which are successful, and why? I would argue therefore the response to (2) is that you are building yourself into long-term customer processes, with high switching costs/specialized service, and a high natural relationship length. It becomes uneconomical to pay for customers if they can just hop to a competitor (low switching costs) in a month (low relationship length).

My problem with the VC world (and perhaps I am wrong) is that they over-estimate their competitive advantages. I am sorry, but food delivery is not a competitive advantage. And access to capital is almost never a competitive advantage. Real competitive advantages come from high skilled activities at least in most cases.

I think there is potential for significant competitive advantage in creating a network that makes delivery better, if it makes delivery better. Despite what some might argue, I am probably never going back to ordering a taxi because Uber/Lyft are so much more convenient that I would probably pay a premium to a taxi. Uber/Lyft made transportation a better experience IMO. They also made the driver experience better by making it a more flexible job, eliminating expensive medallions, etc.

The open question for me perhaps is how are the food delivery services making the experience better than the status quo? Is calling up my favorite restaurant and going to pick it up that much different than having someone deliver it? I see the two-sided network effects very clearly with something like Uber, but food delivery not so much, especially if restaurants are eating the delivery cost. It is at best another form of advertising for them in that world.

Jurgis

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Re: This is your brain on venture capital
« Reply #8 on: May 19, 2020, 02:06:12 PM »
The open question for me perhaps is how are the food delivery services making the experience better than the status quo? Is calling up my favorite restaurant and going to pick it up that much different than having someone deliver it? I see the two-sided network effects very clearly with something like Uber, but food delivery not so much, especially if restaurants are eating the delivery cost. It is at best another form of advertising for them in that world.

I wrote on this on another thread, so I won't repeat much. But yeah, for me as a consumer Grubhub is making the world a better place (TM). It provides consistent ordering interface, with past order history, easy switch from restaurant to restaurant if restaurant is closed (welcome Covid!). (It could be improved: they should allow me to mark/comment on ordered dishes like "this dish is crap", "this dish is great". I don't want to write reviews, but I want to have notes/flags to remember what I liked where. But then most services don't provide this: I want this on Netflix/Amazon Prime/etc, but can I get it? Noooo. ) And I wrote on another thread if restaurant leaves Grubhub, I'll most likely stay with Grubhub and not with the restaurant.

Grubhub has added a fee for orders, so we'll see how that works out for them and customers. This is something that may make me leave the service if the fee is high enough.

Grubhub is possibly not a benefit for the restaurant, so there's that.
« Last Edit: May 19, 2020, 02:10:02 PM by Jurgis »
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JSArbitrage

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Re: This is your brain on venture capital
« Reply #9 on: May 19, 2020, 02:59:31 PM »
To echo and perhaps expand on winjitsu's point:

Quote
To have a seriously durable competitive advantage in such a large market - a business model that is essentially a toll road for restaurant food delivery... think about how incredibly valuable that could be once the market has matured and cost of customer acquisition falls.

This is the key point, isn't it? A couple of questions:
1) For most moat-y businesses, do they have to pay their customers to choose their business?
2) For the ones which do, in fact, pay their customers (perhaps just initially) - what do those businesses look like?

In my opinion, for (1) most moat-y businesses do not need to be acquired. You are offering something so special that competition is limited. Either you have some special process to offer sustainably lower costs (i.e. best commodity producer) or you are so differentiated that you are offering a special product (brands, etc.)

Now, yes there are some businesses where you pay to acquire. The question then becomes, which are successful, and why? I would argue therefore the response to (2) is that you are building yourself into long-term customer processes, with high switching costs/specialized service, and a high natural relationship length. It becomes uneconomical to pay for customers if they can just hop to a competitor (low switching costs) in a month (low relationship length).

My problem with the VC world (and perhaps I am wrong) is that they over-estimate their competitive advantages. I am sorry, but food delivery is not a competitive advantage. And access to capital is almost never a competitive advantage. Real competitive advantages come from high skilled activities at least in most cases.

I think there is potential for significant competitive advantage in creating a network that makes delivery better, if it makes delivery better. Despite what some might argue, I am probably never going back to ordering a taxi because Uber/Lyft are so much more convenient that I would probably pay a premium to a taxi. Uber/Lyft made transportation a better experience IMO. They also made the driver experience better by making it a more flexible job, eliminating expensive medallions, etc.

The open question for me perhaps is how are the food delivery services making the experience better than the status quo? Is calling up my favorite restaurant and going to pick it up that much different than having someone deliver it? I see the two-sided network effects very clearly with something like Uber, but food delivery not so much, especially if restaurants are eating the delivery cost. It is at best another form of advertising for them in that world.

What makes Uber better than a taxi?  Uber is a taxi service with an app.  There is nothing more to it.  Uber is just the app-ification of a service that's been around forever.  The Uber business model wasn't related to network effects (even if they claimed that), it was about just subsidizing rides relentlessly to get to a scale that local laws didn't apply to them anymore.  In fact, if you read about Uber, everyone can see the network effects never existed.  Even small price increases (or smaller subsidies) causes Uber to lose market share.   

I would argue Uber just took advantage of another Silicon Valley business model - ignoring regulations.  Like how if you throw a Coke can on the ground, you are littering.  If you have a scooter company where 10,000 scooters are thrown on the ground, you're a mobile transportation company.