Tech Brew Ride Home - Mon. 05/18 – Pizza Arbitrage Shows How The Food Delivery Space Is Broken

Episode Date: May 18, 2020

The tech trade war is really heating up again, in case you missed it. What if Coronavirus is what helps Google win at messaging? Clubhouse is an interesting raise raising eyebrows. And why Pizza arbitrage shows that the food delivery space is not only broken, but basically spits in the face of efficient market theory. Sponsors: Metalab.co Mintmobile.com/ride Links: TSMC halts new Huawei orders after US tightens restrictions (Nikkei Asian Review) China Injects $2.2 Billion Into Local Chip Firm (Bloomberg) General Atlantic to invest $870M in India's Reliance Jio Platforms (TechCrunch) Google Meet surpasses 50 million downloads on the Google Play Store (9to5Google) Andreessen Horowitz Wins VC Sweepstakes To Back Clubhouse, Voice App Still In Beta, At $100 Million Valuation (Forbes) London-based Fly Now Pay Later raises £35 million Series A to provide flexible financing to travellers (Tech.eu) Austin-Based Real Estate Startup Homeward Secures $105M In Debt & Equity (TechCrunch) Doordash and Pizza Arbitrage (Margins, by Ranjan Roy and Can Duruk) Subscribe to the ad-free feed! Learn more about your ad choices. Visit megaphone.fm/adchoices

On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. Welcome to the Tech meme right home for Monday, May 18th, 2020. I'm Brian McCullough today. The Tech Trade War is really heating up again in case you missed it. What if coronavirus is what helps Google actually win at messaging? Clubhouse is an interesting raise, raising eyebrows, and why pizza

arbitrage shows that the food delivery space is not only broken, but basically spits in the face of efficient market theory. Here's what you missed today in the world of tech. I don't know if this got noticed late last week or if it got swept under the carpet of news, but I did tell you that the U.S. has taken additional steps to basically cut off Huawei's air supply. Already, Huawei was denied access to U.S. produced software, but now the U.S. is looking to ban sales of semiconductor and semiconductor designs produced by U.S. firms to Huawei. So I guess it's a matter of cutting off the hardware air supply along with the software air supply. Well, there have already been some repercussions from that. Taiwan Semiconductor, also known as TSM, the biggest contract chipmaker in the world,

has halted new orders from Huawei in response to U.S. export controls, although orders placed before the new orders came down are apparently not affected. Quote, Huawei, the world's biggest telecom equipment maker and second biggest smartphone maker, relies heavily on TSM to manufacture its advanced chip designs, including all of the mobile processors used in Huawei's flagship smartphones. The Taiwanese company, which also produces artificial intelligence processors and networking chips for Huawei, has been viewed as a vital lifeline for the Chinese company in its efforts to resist U.S. pressure since Washington placed it on a trade blacklist last May. The tighter U.S. controls were announced the same day that TSM unveiled plans

to build a $12 billion plant in the state of Arizona, a move that U.S. Secretary of State Mike Pompeo said will, quote, bolster U.S. national security at a time when China is trying to dominate cutting-edge tech and control critical industries, end quote. At the same time, apparently Chinese state-backed funds have just so coincidentally invested $2.25 billion in a new chip factory being set up by local Chinese company semiconductor manufacturing international, which seems like maybe emergency funding to provide an emergency solution to the above problems that Huawei is having certainly seems like it. A few follow-up stories now.

First, the gold rush into India and into Reliance Geo Platforms specifically seems to be continuing a pace. Now it's the turn of General Atlantic, which is investing $870 million in reliance geo platforms at a $65 billion valuation. joining Facebook, Silver Lake, and Vista Equity Partners, which all had recent investments that we told you about in the last few weeks, all at around that $65 billion valuation mark. Quoting TechCrunch, Sunday's announcement further illustrates the growing appeal of geo-platforms, which has raised $8.85 billion in the past one month by selling about 14.7% of its stake to foreign investors that are looking for a slice of the fast-growing world's second largest internet market.

General Atlantic, a high-profile investor in the consumer tech space that has invested in dozens of firms such as Airbnb, Alibaba, and financial box, bite dance, Facebook, Slack, Snapchat, and Uber has been a key investor in India for more than a decade, though it has avoided bets in the consumer tech space in the country, at least thus far, end quote. And I guess that adding that little icon to the sidebar in Gmail is working out for Google, because Google Meet, which became free to use if you have a Google account only at the end of last month, has already surpassed 50 million installs on the Play Store, while it had only gotten 5 million installs at the beginning of March. So that's around 45 million new installs in just about a month,

quoting 9 to 5 Google. The recent issues with Zoom and Google Meet marketing campaigns might have helped push the download figure and user base higher, but COVID-19 has undoubtedly been the catalyst for this massive recent growth. As more businesses have shifted to remote work, Meat will offer a great free option that is actually far more secure than Zoom. Dropping the G Suite limitation will also have made Google Meet a far more enticing download for many people out there looking to host larger online gatherings, meetings, and more. Google Duo has increased the group calling limit to 12 in recent weeks, but for bigger gatherings, meat proves to be a much better option, end quote. Mustafa Hamoui tweeted, I think Google Meat will do to Zoom what Instagram stories did to Snapchat, end quote, which huge is true.

I want to do an interesting raves Monday, but I need to start off with Clubhouse. The hot startup of the moment successfully raised a 10,000. million dollar series A late last week exclusively from Andresen Horowitz at a $100 million valuation. I do encourage you to click through to read the background on this because there was reportedly a heated bidding war between A16Z and benchmark, as well as an independent angel syndicate. Clubhouse reportedly turned down more money and a higher valuation to go with Andreessen Horowitz. And also Kevin Hart was involved. and also the founders were able to cash in $2 million in secondary shares, which is a bit

nutso for a series A. And also, let's not forget, Clubhouse didn't even exist a few months ago, and it currently only has 5,000 beta users. So there's basically no real indication or guarantee at this point that this thing will ever actually get traction outside of the early adopter echo chamber, which seems to love it for the moment. P.S. Clubhouse, I did. Send in my Google Doc requesting beta access. I'd be happy to report on my own experience with your app at any time. But having said that, let's do the other two interesting raises that I found interesting because they have sort of a similar theme. First up is London-based fly now, pay later, which provides flexible financing for travelers by doing exactly what the name implies. And it just raised 35 million euros in a series A, even though, you know, no one is flying right now, quoting TechEU. A few industries have been affected as significantly as tourism in the wake of COVID-19. Many companies have been affected and we are not different, said the startup's CEO, Jasper Dykes. This investment is a welcome boost to the sector and provides us with adequate cash flow to help steer us through

these challenging times. Dykes predicted that as travel restrictions ease and airlines seek to recoup lost revenue, the cost of flights will rise and more people will need to finance their tickets. The company allows travelers to pay for their bookings over monthly installments. After a quick credit check, the platform suggests payment options to the user, offering loans that range from 100 pounds to 3,000 pounds, end quote. And even more interesting is Homeward, a web-based service that helps homeowners buy a new home even before they put their existing home on the market. Homeward has raised $20 million in equity and has secured $85 million in debt,

and I should point out that combining equity and debt rounds is something that's very common for real estate-based startups, quoting CrunchBase News. CEO Tim Hyle founded Homeward in late 2018 after having worked in the industry for the previous decade, first as a broker, then as the owner of a title company. During that time, he said he saw firsthand many of the problems in the industry. One conundrum he frequently ran into was people not wanting to make an offer on a home without knowing for sure their current house would sell in a certain amount of time. To address that, a number of companies in the I-buyer market, such as Open Door and Offerpad, will buy homes, usually at a discounted rate, to give sellers the freedom to move on quickly. But Homeward is tackling the problem from

another angle. Homeward will make an all-cash offer on behalf of a customer wanting to buy a house. Meanwhile, that customer can hire an agent to list their home without feeling pressure to sell it in a certain amount of time or at a discount of price. Once Homeward, buys a home, it will lease the property back to its customer until they sell their house, get a mortgage, and can buy the property back from Homeward. During the process, Homeward offers a predetermined, guaranteed price for its customers' home with the promise that if it's unable to sell the house for at least that amount, it'll buy the house from them. Hyle believes Homeward's alternative I-buyer model is a better deal for customers

since it doesn't purchase a customer's old home for below market value, end quote. Finally today, you might have seen this making the rounds, but it is every bit as wild as you've probably heard. One of the two dozen or so newsletters I subscribe to religiously is Margins, which is written by Ranjan Roy and Ken Daruk, and their latest missive from last night is quite a doozy. Ranjan has a friend who owns a pizzeria. And remember those stories about how DoorDash and Grubhub were allegedly caught creating fake listings and fake phone numbers for restaurants in order to, well, gin up business is the polite way of saying it. Allegedly scam users and steal business away from vulnerable small businesses is the

impolite way of saying it. Well, Ranjun and his friend discovered that sure enough, if you went to DoorDash and you looked up the friend's pizzeria, you could order a pizza for delivery from the pizzeria, even though the friend's pizzeria doesn't do delivery. But what was more interesting was this, the prices on DoorDash were wrong because probably DoorDash's scraping software messed up. The upshot was, a pizza that the friend charged $24 for was only listed on DoorDash as costing $16. But if you know how DoorDash works, that kind of wouldn't matter to the restaurant, because when a Dasher shows up to take delivery of what appears to be a takeout order, they obviously have to

pay up front for the goods. So as Rajun puts it, hello arbitrage. Quote, if someone could pay DoorDash $16 a pizza and DoorDash would pay his restaurant $24 a pizza, then he should clearly just order pizzas himself via DoorDash all day long. You'd net a clean $8 profit per pizza. Insert nerdy economics joke about there is no such thing as a free lunch here, end quote. So guess what? They ran this exact experience. experiment, 10 pizzas at a time, and sure enough, it worked time and time again. The business owner used his own credit card to order pizzas delivered to himself, and every time he did so, he made pure, magical risk-free profit, the definition of arbitrage.

And DoorDash never even noticed, so the pair started to do things like baking in extra margin, if you will, by making the pizzas in the restaurant with only dough, no toppings, that sort of thing so that when it was delivered, they were making even more money for each essentially bogus order. As Ranjon puts it, quote, if you did this a few times a night, you could start seeing thousands in top line growth with hundreds in pure profit, and maybe you could do this for days on end. So over a few weeks, almost to humor me, we did a few of these trades. I was genuinely curious if DoorDash would catch on, but they didn't. I had visions of building a network of restaurants, all executing this strategy in tandem, all drinking from the soft bank

teat before the money ran dry, but went back to work doing content strategy stuff instead, end quote. Now, before you just shrug this story off as a small prank that some dudes did for a bit of a laugh, Ranjun makes a deeper point here about food delivery as an industry that a bunch of people have been sort of getting to around the margins. Remember, the economics in food delivery have never really made sense, except for the fact that there's an absolute ton of venture capital behind it all. Like, no one makes money in food delivery, and that's sort of why everyone has known for a while now that this space needed to consolidate, quote, Grubhub just lost $33 million on $360 million in revenue in Q1. DoorDash reportedly lost.

an insane $450 million off of $900 million in revenue in 2019, which does make me wonder if my dream of decentralized network of pizza arbitragers does exist. Uber Eats is Uber's quote, most profitable division, and Uber Eats still lost $461 million in Q4 off of revenue of $734 million. Sometimes I need to write this out to remind myself, Uber Eats spent $1.2 billion to make $734 million $1 quarter, end quote. See, this entire space has sort of never made sense from a basic market perspective. Here's how Business Insider once put it, quote, restaurant owners are losing money, diners are seeing their costs raised,

either by delivery companies that need to pay delivery drivers or by the restaurant owners who raise prices to offset delivery fees, and delivery drivers still make low, unpredictable wages frequently with no benefits, end quote. So what if the whole delivery space is just a case of someone imposing a layer over top a market, all in the name of efficiency, of course, but where the reality is just that one person's efficiency is actually rent-taking, pure and simple, and it's all being made possible because capital has been taught over the last decade to chase only one metric, which is scale, scale to the exclusion of everything else that matters, including actual black ink.

from further in the piece, and this is the real money graph, quote, you have insanely large pools of capital creating an incredibly inefficient money-losing business model. It's used to subsidize an untenable customer expectation. You leverage a broken workforce to minimize your genuine labor expenses. The companies unload their capital cannons on customer acquisition, while this week's Uber Grubhub News reminds us, the only viable endgame is a promise of monopoly concentration and increased prices. But is that even viable?

Third-party delivery platforms, as they've been built, just seem like the wrong model. But instead of testing, failing, and evolving, they've been subsidized into market dominance. Maybe the right model is a wholly owned supply chain, like dominoes. Maybe it's some sort of ghost kitchen slash delivery platform hybrid. Maybe it's just small networks of restaurants with out-of-the-box software. Whatever it is, we've been delayed in finding out thanks to this bizarrely bankrolled competition that sometimes feels like financial engineering worthy of my own pizza trading efforts. The more I learn about food delivery platforms as they exist today,

I wonder if we've managed to watch an entire industry evolve artificially and incorrectly. Arbitrage is about taking advantage of market inefficiencies, and for all the newly minted day traders out there, perhaps it's time to start looking into frontier markets like pizza, end quote. Yeah, if you're a founder of a certain type of startup, all you really need to do to be successful is get your startup hot enough to raise a big round. That's big enough to include some secondary shares to take off the table to make sure you never have to worry about money again.

And then if you're a certain type of VC fund, you just need to get the company hot enough to have a massive Series C or Series D round so that again, money can be taken off the table. And if you're a late stage fund, you just need to get that IPO out the door or convince one of the major platforms to acquire you. And if that IPO happens and the shares stay up long enough, everyone wins. And meanwhile, if the shares crash and the CEO or founders leave, even the turnaround CEO wins because he or she comes in.

And even as the stock goes down to the single digits, because they're compensated very, very well. to quote-unquote turn things around. Who loses, right? You know, Groupon is still a publicly traded company, ladies and gentlemen. Again, thanks to all of you that participated in the listener call-in episode. I think it went well. Although when I listen back, I noticed that I tend to just ramble on and on and on with my answers.

In my defense, I was busy playing whack-a-mole with all those trolls and also trying to figure out in real time how to run a Zoom meeting for 50 or so people for the first time. So all I can say is I'll get better. Also, I do want to evolve how we do that. I don't just want it to be these episodes where you all throw questions at me and I answer like it's a boring sort of one-sided ping pong match. I'd like to get actual discussions going.

So the next time we do it, we'll have people pose questions. And once the questions are on the table, like I'll open up the floor to more people than just one at a time so that, you know, I can give my opinion, then she can give her opinion, he can give his opinion, it'll be like an actual conversation as opposed to just, you know, a one-on-one sort of thing. You know, sort of like how real radio does it. John from Cincinnati, you have strong opinions about 5G. What do you think about the last question? That sort of thing. But also, I will get better at answering questions off the top of my head as well, which I'll admit is not my strong suit. That's why I was hoping for some questions ahead of time so I can at least formulate coherent thoughts before trying to answer. But again, we will try this again probably in a month or so, and we'll all get better at it. Talk to you tomorrow.