The Capital Note

DoorDash Prepares for Blockbuster IPO

A Doordash delivery person rides his bike in the rain in New York City, November 13, 2020. (Carlo Allegri/Reuters)

Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: DoorDash’s $32 billion IPO, GM’s ill-fated deal with Nikola, Ajit Pai’s resignation, and student-loan mismanagement.

DoorDash

Food-delivery app DoorDash is planning to raise $2.8 billion at a $32 billion valuation in its forthcoming initial public offering. That’s double the $16 billion valuation the company offered investors in its most recent private-funding round six months ago. The IPO comes at an opportune time for DoorDash, which has seen revenue triple this year thanks in large part to a spike in order volumes caused by COVID-19 lockdowns.

While the market is frothy for newly public tech firms, with data-analytics startups Palantir and Snowflake both seeing their market caps surge in recent weeks, DoorDash will have to prove that its recent growth is sustainable if it is to maintain that lofty valuation.

Despite pandemic tailwinds, the food-delivery industry is consolidating as large, venture-backed companies see continued losses. Earlier this year, Uber purchased the delivery service Postmates for $2.65 billion, and Grubhub merged with European delivery app Just Eat Takeaway in a $7 billion deal. Those transactions suggested that hyper-competitive delivery companies would move to rationalize their business models after spending years funneling generous venture funding into cutthroat pricing and customer acquisition.

DoorDash, founded in 2013 by Stanford business students, is in many ways the typical high-growth, cash-burning Silicon Valley startup. It reported more than $600 million in losses last year, fueling sales by spending a total of $1.5 billion.

And yet the company appears to have real strengths. It has outperformed its domestic competitors, growing from 17 percent U.S. market share in January 2018 to 50 percent in October 2020 according to IPO filings. Investors see this growth as a reflection of a differentiated business model: DoorDash has grown primarily in American suburbs, where delivery distances are long and few restaurants offer in-house delivery. This geographical focus is a conscious strategy that contrasts with the urban focus of its large competitors. As stated in the IPO filing:

We believe that suburban markets and smaller metropolitan areas have experienced significantly higher growth compared to larger metropolitan markets because these smaller markets have been historically underserved by merchants and platforms that enable on-demand delivery. Accordingly, residents in these markets are more acutely impacted by the lack of alternatives and the inconvenience posed by distance and the need to drive to merchants, and therefore consumers in these markets derive greater benefit from on-demand delivery.

DoorDash hopes to retain its suburban customers with an unlimited subscription service called Dashpass (similar to Amazon Prime), which currently has 5 million customers paying $10 a month. Add that subscription service to DoorDash’s suite of merchant services (credit, payments, etc.) and steadily improving delivery times, and you begin to see how the company could beat Uber and Grubhub.

Sufficiently robust logistical infrastructure could also open the door for DoorDash to enter other delivery services:

We started with food because of the size and footprint of the merchant base and because we were attracted to the unique complexities of delivering food . . . We believe our expertise in food will help us scale to other verticals as more and more local businesses beyond restaurants seek to participate in the convenience economy in search of more consumers and continued growth.

As always with tech unicorns, DoorDash’s investors are betting on virtually unlimited growth, but growth comes with added hiccups. Restaurant owners have complained about being included on the platform against their will, and the company recently settled a lawsuit alleging it pocketed tips that customers believed would go to delivery workers.

For now, the bonanza will go on: Deep-pocketed tech investors are not changing their investment models anytime soon. In fact, DoorDash’s IPO is a big win for the quintessential growth-at-all-costs VC firm: Softbank. But as the share prices of Uber and Lyft indicate, public shareholders may have less patience.

The outcome of DoorDash’s spending spree will be a test case of the Silicon Valley growth model and the resiliency of the gig economy.

Around the Web

Just days before short sellers accused electric-truck maker Nikola of fraudulently overstating the capabilities of its proprietary technology, General Motors announced an investment in the startup. Since then, Nikola has lost more than 50 percent of its market cap. Today, GM pulled out:

Under the revised deal, GM still intends to provide Nikola with fuel-cell technology but it has nixed plans to take an 11% stake in the Phoenix-based startup in exchange for supplying engineering work and other services.

The Detroit auto maker has also scrapped plans to build an electric pickup truck called the Badger for Nikola, a key part of an earlier agreement outlined in September. That deal got delayed after a negative short seller’s report raised questions about the readiness of some aspects of Nikola’s business, allegations the company said were false and misleading.

FCC Chairman Ajit Pai announces his resignation: “The announcement means that the FCC could reach a Democratic majority sooner than it would otherwise be able to. Pai’s term was slated to expire in June 2021, though Biden will be able to choose a Democrat to chair the commission once in office. Commissioners must be confirmed by the Senate.”

Despite continued low inflation, inflation-protected bonds are outperforming:

Investors shuffling trades amid a sputtering reflation narrative may have overlooked a little fact: Bond managers who’ve been bullish on inflation prospects this year have been winning . . . Inflation-linked U.S. Treasuries — known as TIPS — are on pace to outperform their regular counterparts for the second straight year, and some of the world’s biggest investors see scope for further gains.

Random Walk

The election of Joe Biden has set off a renewed debate over mounting student debt, which now stands at $1.6 trillion nationally. Federal subsidies for student loans have fueled runaway inflation in tuition fees and led many young Americans into subpar degree programs.

A recent paper by business-school professors Kimberly J. Cornaggia and Han Xia sheds light on another issue: personal mismanagement. It turns out that borrowers generally don’t avail themselves of the federal-assistance programs that would most alleviate their debt burdens.

Broadly, subsidized student borrower assistance programs include provisions for loan forbearance, loan deferment, and income-driven repayment (IDR) options for financially distressed borrowers. These assistance programs all aim to reduce default, but are not equally beneficial to distressed students, especially among those facing long-term financial difficulty. In particular, interest accrued during the loan forbearance period is capitalized, which increases the size and duration of student debt indefinitely.

In contrast, IDR plans set monthly payments as a percentage (e.g., 10-20%) of discretionary income; many distressed students with subsidized loans qualify for IDR plans that require zero-dollar monthly payments, stop interest accrual, and eventually forgive outstanding principal (after 20-25 years). 1 Likewise, deferment of subsidized student loans affords distressed borrowers a moratorium on both repayment and interest accrual. As such, while loan forbearance is designed to provide temporary relief for students facing short-term cash-flow constraints, loan deferment and IDR plans that stop interest accrual on subsidized loans are superior options for students facing long-term difficulty managing their student loan payments.

The puzzle we find is that of students facing long-term difficulty repaying subsidized loans (who are eligible for superior loan deferment or subsidized IDR plans) the majority continue in loan forbearance for several months – or even years – rather than switch their loans to the superior alternatives. Moreover, the renewed forbearance is associated with higher delinquency rates compared to loan deferment or IDR plans, even after we control observable credit risk factors. We shed light on which students sub-optimally continue in long-term loan forbearance and explore possible explanations for this puzzling behavior.

The authors find that “non-traditional college students (i.e., older students), non-white students, and male students” are most likely to mismanage their loans. They explore a number of possible explanations and find that the behavior of loan servicers “plays a significant role in student loan outcomes.” Because loan servicers see their income decline when students pay off their loans, they are incentivized to keep students in debt. Furthermore, loan servicers often choose not to talk borrowers through the lengthy application process for income-driven repayment programs.

— D.T.

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