DoorDash faces many struggles ahead of its IPO in 2020.
Image: YouTube | DoorDash

Last week, Bloomberg reported that online food delivery service DoorDash is planning an initial public offering (IPO) for 2020. According to the source, several unnamed company insiders claimed that the organization is looking to secure $400 million in financing from JPMorgan Chase. But while the startup leads its sector in terms of overall sales, it’s facing some challenges that might undercut its multibillion-dollar potential.

Meteoric Rise

Should DoorDash go public next year, the corporation has certainly set the stage for a large IPO.

Just four years after being founded in 2013, the company received a total of $700 million in funding from SoftBank and Sequoia. Since then, DoorDash has become the number one on-demand restaurant delivery service in the United States. Following a several-year stint as a perennial bridesmaid, the firm overtook its rivals, Uber Eats and GrubHub, in May.

Advertisement

With a $12.6 billion valuation and a 27.6 percent market share, DoorDash is king of the food delivery mountain.

Even so, the company’s leadership isn’t content to sit back and rest just yet. In mid-July, the firm managed to secure a deal with McDonald’s after the fast-food giant exited its exclusive deal with Uber. Earlier this month, DoorDash consolidated its sector by purchasing Square’s food delivery service Caviar for $410 million.

However, in spite of the firm’s phenomenal success to date, its transition into being a public company may not go as smoothly as planned.

Public Perception

As a private enterprise, DoorDash only has to answer to a few major investors. But when the company goes public, it’ll be held accountable by a much larger group of shareholders. Moreover, new investors will put even more pressure on DoorDash to generate revenue and succeed. That added scrutiny may prove problematic for the six-year-old startup.

For example, ahead of its IPO, market analysts valued Uber at $120 billion. However, when the company went public in May, it launched with a $45 stock price, establishing its worth at $69 billion. Following the IPO, staggering quarterly losses have reduced the company’s market capitalization by 18 percent. The service has also been dogged by public investors complaining that Uber has lost its way.

Admittedly, DoorDash is in a much more solid financial place than the ride-hailing company. In 2018, it generated $107 million in revenue. Even so, the company may face similar problems if outside factors begin to compromise its profit margins.

Shaky Business Model

In recent months, the firm has faced intense criticism for the way it pays its Dashers (AKA delivery people). Several publications criticized the service for using customer tips to subsidize its contractors’ wages. The corporation’s practice doubtlessly benefited its bottom line, but it also upset customers who believed their tips were going directly to delivery personnel.

Moreover, in 2017, the company paid $5 million to settle a class-action suit brought forth by some of its Dashers. The group argued that the corporation misclassified them as independent contractors rather than employees.

In July, DoorDash CEO Tony Xu said the company would adjust its payment model to ensure Dashers received all of their tips. However, Forbes noted that the policy change could potentially make the startup’s business model unsustainable.

Without a clear answer in sight, the corporation is at risk of gaining the reputation of being fundamentally unprofitable. In that case, investors may draw unflattering parallels between it and Uber.

Legal Challenges

Another issue that might threaten the startup’s IPO is its competition. On Tuesday, Domino’s announced that it’s partnering with Rad Power Bikes to provide select stores with new two-wheeled transport for pizza delivery. The firm hopes that integrating bikes into its logistics system will expedite deliveries. TechCrunch framed the pizza chain’s announcement as an attempt to push back against DoorDash and similar services.

Meanwhile, the food delivery startup is also facing push back from restaurants that aren’t interested in partnering up. Last January, Chicago eatery Burger Antics sued DoorDash for listing its menu on the delivery app and website without permission. Similarly, the owner of a Cincinnati pizza shop publicly criticized the firm on Facebook for undercutting its own delivery service.

Legendary burger franchise In-N-Out filed a lawsuit against the firm for trademark infringement and unfair competition in 2015. The restaurant slammed DoorDash for using its trademarks without authorization and for hurting its brand by delivering late and inaccurate orders.

Though DoorDash has performed well against its rivals, the firm can’t operate without the support of partner restaurants. Before going public, the company needs to take steps to convince its suppliers that they are not its competition. A post-IPO strike action by one or more large brands could devastate investor confidence in the service.

Race to the Finish

Along with the many lawsuits, DoorDash must also fend off rival food delivery services. For example, Postmates may beat the company to the IPO punch. TechCrunch reported that it plans to launch an IPO this September.

The firm’s offering could harm DoorDash’s plans, especially if it fails to beat analyst estimates. Potential investors might view such underperformance as a sign that the on-demand food delivery sector as a whole hasn’t reached maturity yet.

Even if Postmates doesn’t win the IPO race, DoorDash still has its work cut out for it. If the sector’s best performer stumbles when going public, those skeptical investors would be correct.

Facebook Comments