Wall Street Journal reported that the venture DoorDash,
which is backed by the prestigious venture capital firm Sequoia Capital,
recently raised an additional $127 million in capital. We are used to seeing
high numbers for Silicon Valley firms (DoorDash is from Stanford), so this is
not so surprising in itself. But, the story has some interesting details.
What interested Wall Street Journal is that this was a
so-called “down” round in financing. A down round means that the company is
valuated below the earlier round, so the earlier financiers are taking a loss
(again, Sequoia). Finally, $40 million of the new capital came from – you have
guessed it by now – Sequoia. This looks a bit like a problem.
So what exactly is DoorDash? It describes itself as a “software-enabled
logistics company”, but more concretely, you would normally use it to order
food deliveries from various restaurants that don’t operate their own delivery
service. Given the value, it obviously delivers a lot of food, so far 22 urban
areas.
Beyond the fact that so many million dollars seems a lot for
delivering food, what exactly is the problem? The practical problems are that it
is not profitable (yet, as they always say) and that it has problems retaining
employees. But perhaps a more serious problem is in understanding what kind of
company it is. Delivering food to someone is clearly logistics, but there is a
catch: the deliveries are actually done by contractors, not DoorDash itself. So
the logistics company is really a contracting company.
A contracting company can actually be a good thing -- Uber
is very valuable and is also a contracting company, not a taxi company. In fact,
one may wonder why DoorDash don’t just describe themselves as an online delivery
network, like Uber calls itself an online transportation network. As a first
cut, that seems like a good metaphor, although it immediately brings to mind an
important difference between the two. Cars move around, and Uber gets a big
advantage from knowing exactly where they are. Most restaurants stay put.
This gets to the core of the DoorDash dilemma. Companies
form identities, which in turn influence how customers think of them and what
other companies they compare them with. It also influences how other companies
get founded and choose to compete with them. DoorDash can’t have an Uber identity
because Uber’s greatest strength is their weakness. But the inside looks pretty
Uber-like, so having another identity of logistics is also a thin story. Finding
a good identity will be important for them because it will affect their value
now and later.
Identities and their consequences is something that
researchers have worked on for a long time. For a good sample of research on
how identities are formed and what they do, I would suggest looking at research
by Navis and Glynn on the emergence of new market categories, published in Administrative Science Quarterly. Many
of the practical problems of forming identities and living with the
consequences are nicely developed there.
