As an way of making up for the fact that I have no formal tertiary education to speaking of, I’ve recently been filling that gap by a different sort of education – binge-watching Billions, the drama series set in New York and telling the stories of Manhattan monied types. In particular Billions depicts the life of Billionaire hedge fund manager Bobby Axelrod and the machinations and Machiavellian mindgames that go into creating a multi-billion dollar personal fortune.
It’s a series that doesn’t exactly mold with my personal view of the fiscal system – it does away with even the pretense of trickle-down economics and instead aligns itself with a Gordon Gecko-like Greed is Good perspective. In my defence, it’s a programme quite aligned with my twenty-something sons’ interests and hence my watching it is a great way of bonding with them.
Lately I’ve been thinking of Bobby Axelrod and his ability to bet on both upside and downside of a deal to ensure maximum profit for himself and his fund. My pondering of this trait comes courtesy of a story I read recently about on particular financial situation – in that case an example of the perverse and illogical impacts of what truckloads of cash can mean to a business.
But before I get into that, a quick precis of the last decade or so in the early-stage funding world. Ever since the GFC, the theme for startups, and especially technology startups, has been to grow at all costs. Companies like Uber and Lyft, AirBnB and WeWork have followed a model where scale is the only metric that counts. Their backers, the venture capitalists who regard themselves as Bobby Axelrod-esque masters of the universe, put pressure on them to grow, grow, grow.
Part of the reason these investors push growth at all costs is because it is an expensive way of doing business. That might sound counter-intuitive but when you consider that every time a company ramps up its spending, it brings forward needing to go back to those VCs to ask for more funding. And every time VCs put more funding in, their share of the company increases. They perversely want their portfolio customers to run at a loss and to burn through cash as soon as possible.
Of course there is a modicum of method to the madness. The idea is that scale wins and that the company in any sector who dominates (ie gains maximum market share) will then be able to leverage that scale to generate eventual profits. Or that’s the theory, anyway.
Of course, in practice this strategy sometimes comes unstuck. it does so when economies slow down and all of a sudden that metrics that justify their plans and heady valuations come unstuck. We’re seeing that right now as markets have suddenly begun to reward profitability rather than simple growth. But even without macroeconomic headwinds, this strategy of growth at all costs can have some unintended and, frankly, hilarious outcomes.
The sector currently displaying a brazen disregard to economics and the realities of life is one which is attempting to not only disrupt an entire field, but also to subvert the laws of physics. I refer, of course, to the instant delivery service companies who, despite offering their service in metropolitan cities where traffic is often in gridlock and getting anywhere fast is virtually impossible, promise super-quick delivery to their users.
And so it is in the case of DoorDash, the delivery business that specializes in offering lazy millennials (and others, to be fair) the ability to acquire whatever they want without having to, you know, walk to a store to buy it. In this example that a friend shared, I heard of a chap who owns a few pizza outlets. Said businessman was perturbed to see that an increasing number of customers were complaining about the slow delivery from his outlets. The only problem was that his restaurants didn’t offer delivery. How, pray tell, does a restaurant that doesn’t offer delivery all of a sudden get criticized for the lack of efficacy of its delivery?
Well, it seems that DoorDash, in following its growth at any cost strategy, was crawling the website of various restaurants and listing the food supplied by those restaurants on the DoorDash platform. The idea would seem to be that people are increasingly unable or unwilling to walk the distance between home and their local restaurants and would therefore flock to DoorDash to do the heavy lifting for them.
In this case, and in its haste to simply grow at all costs, DoorDash had priced the restaurant’s $24 pizzas at a sale price of… $16. In a unique twist on the Bobby Axelrod Wall Street style, DoorDash had taken a big short position, albeit against themselves.
The enterprising restaurant owner did the natural thing and took advantage of this opportunity and started on an extended programme of ordering his own pizzas through DoorDash. The first benefit of this was to obviate any necessity to actually make the pizzas. Since DoorDash is a just a middle man that, in the parlance of the kids with side hustles, drop ships pizzas to customers, they never actually see the actual items. The restaurant could “buy” pizzas on DoorDash and then mark them as sent, also on DoorDash. For their part, DoorDash would be none the wiser.
The second advantage is one that Bobby Axelrod would also love – arbitrage. Since DoorDash was selling pizzas to customers cheaper than the restaurant was selling them to DoorDash – every pizza purchased would actually net the restaurant a profit of eight dollars.
Now for the vast majority of business people reading this – ie the huge percentage of businesses who are sole traders or who only have a handful of employees – this would be a horrific situation. In the normal course of business, this sort of loss would be recognized quickly and resolved. That isn’t however, the way the venture capital world works. DoorDash is funded by SoftBank. SoftBank’s CEO, Masa San, is the guy who famously told Adam Neumann, founder and CEO of ill-fated startup WeWork, that he wasn’t really crazy enough to go huge (believe me, Neumann is plenty crazy). DoorDash didn’t notice and the loophole remained unclosed.
To put this in perspective, and for those who think this example is simply an outlier, DoorDash last year made revenue of $900 million. It also lost $450 million to generate that revenue. The model is completely broken and is focused on propping up solutions to problems which are hardly even real. As was commented upon in the original article:
If your business doesn’t have the traditional incentives — to reiterate, the point of a capitalist business is to make money — and only has to focus on scale, entire industries can collapse or at least end up confused. The thing about all of this is that the old ways weren’t inefficient or even that inconvenient.
There are two takeaways from this sorry tale. Firstly, if something sounds too good to be true, chances are it’s not legitimate. Offering cut-price instant delivery only works because it’s propped up by VC money or is going against generally accepted labour practices (or both).
The second takeaway is that which those billions of dollars of VC money can prop up a loss-making venture for awhile, eventually those chickens will come home to roost. It’s at times like those that real-life Bobby Axelrods will laugh about the shorted positions they’ve taken and count their windfalls.
Ben Kepes is a Canterbury-based entrepreneur and professional board member. He quite likes it when chickens come home to roost.
