After its initial public offering (IPO), DoorDash started trading publicly on the New York Stock Exchange (NYSE) in December 2020. An IPO occurs when a corporation sells stock to the general public for the first time. The DoorDash IPO raised over $3 billion when investors purchased its stock on the first day of trading. Notable investors in DoorDash include SoftBank and venture capital firms CRV and Kleiner Perkins. SoftBank, which is known for investing in ByteDance, Fanatics, and Slack, is now the largest shareholder in DoorDash with a 20 percent ownership share after the IPO. The money from this IPO could be used to pay down corporate debt, expansion of services, or any legal business expense.

DoorDash offered three different classes of stock. While all three classes of stock are the same as far as profit distributions are concerned, they have different voting rights. Class A has one vote per share, Class B has 20 votes, and Class C has no voting rights. Offering multiple classes of stock that give different voting rights to different groups of investors has become a common practice in Silicon Valley. As a result of a voting agreement between co-founders Tony Xu, Andy Fang, and Stanley Tang, Xu, who is the company’s CEO, will have significant influence over actions requiring the approval of DoorDash’s stockholders. These actions, for example, can include electing individuals to the board of directors, making changes to the corporate charter, and approving mergers or acquisitions.

Because of a potential increase in its user base and encouraging projections for future revenues and profits, investors were anxious to purchase shares in DoorDash’s IPO. To understand the “why” behind the investor frenzy to get DoorDash stock, it helps to look at how the delivery company earns revenue. A substantial amount of its revenue comes from fees paid by customers and commissions and fees charged to merchants—usually restaurants and grocery stores—for orders completed through the DoorDash marketplace.

In addition, the company’s DashPass program, which costs a flat monthly delivery fee of $9.99, also generates revenue for DoorDash.

Another factor that encouraged investors was the effect of the COVID-19 pandemic on revenues for food delivery services. DoorDash, which is the leading food delivery app with a 50 percent market share and more than 18 million customers, benefited from an uptick in deliveries during the pandemic. Even after the temporary shelter-in-place orders were lifted, the surge in demand for food delivery continued.

DoorDash quickly surpassed its competitors Uber Eats and Grubhub to become the number one food delivery service.

To strengthen its position in the industry, DoorDash acquired on-demand food delivery and catering business Caviar in a deal worth $410 million. While these facts are good news for investors, DoorDash has warned that it may not be able to grow at the same pace that it did during the pandemic.

For investors, risk factors include DoorDash’s ability to continue to grow and compete, avoid interruptions in services, and attract and retain dashers (delivery workers).

In fact, many experts believe that DoorDash’s success depends on the success of the restaurant industry. As a result of the pandemic, a significant percentage of restaurants have closed. At the same time, the availability of food delivery services like DoorDash has given rise to restaurateurs that don’t have brick-and-mortar locations. Once food is prepared by the restaurateur in a “ghost kitchen,” it is picked up by a food delivery service and is delivered to the consumer.

Over the long-term, DoorDash’s growth may also slow as more individuals venture back into dine-in restaurants.

Additionally, there is intense competition in the food delivery service. And to make matters worse, there is little differentiation between the big players in food delivery. It’s very easy for consumers to switch between food delivery providers, and there is very little brand loyalty. In fact, most people have several food delivery apps downloaded to their phone and will compare prices, merchant selections, and promotions before placing their orders.

Another challenge DoorDash faces is keeping its dashers happy. Like the customers who use food delivery services, there is little loyalty among delivery workers. DoorDash operates in an industry where independent contractors (dashers)

provide on-demand services for the company’s clients. To maintain an adequate supply of dashers, DoorDash must provide its independent contractors with flexibility, compelling opportunities to earn money, and other incentive programs that meet or exceed those of its competitors.

Despite these challenges, DoorDash is confident that it can become a profitable company. The company continues to innovate and identify trends in the rapidly changing food delivery industry. For example, DoorDash has focused on growing its business in suburban areas, which typically have larger ticket totals and lower costs. So far, the company’s strategies have paid off because it now controls a 58 percent market share in suburban areas.

Even though it currently is the recognized leader in the food delivery industry and is experiencing growth in both revenues and its user base, DoorDash will have to continue to innovate to maintain its healthy market share in order to earn a profit for its investors. Like many corporations that use an IPO to raise money, DoorDash can expect that the next few years will be interesting for both management and investors.

Questions

1. For a company like DoorDash, what are the advantages and disadvantages of using an IPO to raise capital?

2. Why do you think DoorDash issued three different classes of stock with different voting rights for each class of stock? As an investor, how important is the right to vote on issues that affect the future of the corporation?

3. Although DoorDash currently has 50 percent of the market for food delivery services and more than 18 million users, it must continue to increase both its number of users and its revenues. What are the challenges and obstacles that could affect DoorDash’s plans for future growth?