Saturday, March 26, 2016

What kind of company is DoorDash? A question of identity

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.