Skip to content

Podcast

How to Build the Future- Tony Xu

Y Combinator Startup Podcast

Source ↗ ← All highlights
  • Humble Beginnings
    • DoorDash began as Palo Alto Delivery, a simple website with PDFs of local restaurant menus.
    • Orders were placed via a Google Voice number that rang all four founders’ phones. Transcript: Unknown Speaker Was called Palo Alto Delivery previously. Yeah, yeah. Tony Xu A super scalable name, but a name we were able to get for less than $10. Perfect. Yeah, we shipped paloaltodelivery.com under an hour. I don’t remember exactly, but maybe 45, 50 minutes because all it was was a static HTML page with eight PDF menus. And these were menus of restaurants in Palo Alto that we frequented often as students. It had a Google voice number you can call. That’s how you would place the orders. There were no other way in which you can order. Once you call that number, it would ring the cell phones of all four of our all four of the founders cell phones. (Time 0:05:36)
  • Early Adopters
    • Early DoorDash customers, primarily moms, provided valuable feedback without incentives.
    • Their repeat business validated consumer demand for the service. Transcript: Tony Xu Yeah. So the number one thing we were very scared about was whether or not consumers would want this product. And it’s because delivery is not a new idea. It’s been around since horses. It’s been around forever. And so, and obviously the U.S. Is a very highly capitalistic market. So if something doesn’t exist, maybe there’s a good reason why it doesn’t. And so we wanted to make sure from the get-go whether or not consumers would pay us for the service. So that was one big question. The other was whether or not we knew that restaurants had a need for it. We didn’t know if they would pay us. That was a second pillar. And then the third was whether or not there would exist drivers who would actually want access to this. And so early on, we did all the deliveries. One of the best parts of doing all the deliveries, besides teaching us what are all of the steps within a delivery, is what customers wanted. And our earliest customers tended to be families with young children. It tended to be the mom who made a majority of the decisions when it came to meal prep and food. And so they told us what they wanted. They told us what was important. They told us what restaurants that they preferred. But the most important thing was that they kept coming back in again without our throwing advertising at them, coupons or discounts at them. (Time 0:07:27)
  • Driver Motivation
    • Drivers’ motivations extended beyond pure monetary incentives, as shown by an early experiment.
    • This revealed the importance of understanding the target workforce’s values. Transcript: Tony Xu That kind of gave us the checkmark, if you will, on growing organically on the consumer front. With drivers, because we did every single delivery, it was very easy to speak knowledgeably about what it would be. So we would just post ads on Craigslist, who shows up, and then started filtering different segments of drivers. That was one where we weren’t necessarily sure whether or not there would ever exist a large enough workforce interested in this type of work. One of the questions we had asked ourselves was, would drivers only be interested in working for a platform that pays the most? Because obviously, it’s going to be more valuable to transport Gary than to transport a burrito. And so one of the earliest tests we ran was we recruited two groups of drivers, roughly speaking, 20 drivers who drove for UberX at the time and 20 who delivered for DoorDash. The control, if you will, variable was that they both earned $20 an hour each group. I made them an offer to work for $25 an hour, guaranteed, if they were to switch jobs, if the DoorDash drivers would go over to UberX and UberX drivers would come over to DoorDash. Exactly one driver out of two groups of 20. So one out of 40 said yes. Now this wasn’t a very scientific study, but clearly we were missing something or I was missing something. And it was actually staring me right in the face, which was, these were very different groups of people. They self-selected completely differently. And, you know, on the DoorDash side, we tended to skew younger. We tended to skew more female. And so today, DoorDash has over 7 million drivers on the platform. Of these dashers, the drivers on the platform, almost 60% are women. Today, they literally come from every part of the economy, hundreds of industries represented. Back then, they tended to skew younger. They tended to skew from segments like retail or universities and the like, or service jobs. And they didn’t always deliver in a car. Sometimes they preferred working on their scooter or working on their bicycle or working from their motorcycle. Very very different from the ride sharing or the ride hailing segment. (Time 0:08:49)
  • The Stanford Football Game Incident
    • A Stanford football game overwhelmed early DoorDash, leading to late deliveries and upset customers.
    • The team refunded everyone and delivered cookies at 5 a.m. as an apology. Transcript: Unknown Speaker So DoorDash actually almost died, I guess, after a Stanford football game in the fall of 2013. We did. Can you tell that story? Tony Xu Yeah. So it was the first Saturday home game for Stanford football. And it was at an awkward time where after the ending of the game, everybody in Palo Alto decided to order DoorDash for restaurant delivery. Unknown Speaker Normally a good thing? Tony Xu Normally a great thing. You know, no one usually complains of too much demand except when you have no ability to fulfill the demand or to shut off, you know, the website that kept receiving these orders when You didn’t have enough drivers on the road. So that became the complication. What ended up happening was every delivery was at least an hour late, probably more like an hour and a half. It was terrible. And we also at the time, or I at the time, could not raise any seed financing. So you’ve got the cash going to zero. You have hundreds of customers very upset because they either received cold food or received very, very late deliveries. I remember that night, maybe 9 or 10 PM, my co-founders and I looking at what the refund cost would be because we thought the right thing to do would be to refund everybody. But that would take away about 40% of the bank account, which was already quite low. We took maybe 10 seconds to make the decision to refund everybody. We ended up staying up that night and then baked cookies so that we could deliver them at around 5 a.m. Before everybody had woken up. Unknown Speaker That was (Time 0:13:53)
  • Suburban Focus
    • DoorDash focused on suburbs, recognizing a higher need for delivery outside city centers.
    • This contrarian approach, driven by customer feedback, proved successful. Transcript: Unknown Speaker You were not the only player. There were others, especially in urban areas, there started to be a price war. You know, talk to me about how you approached that, because you took a very sort of contrarian view of it and ended up mainly focusing on suburbs instead of fighting it out in sort of battleground Cities. Tony Xu One of the things that we noticed at the time was, you’re right, it was a crowded space, lots of people more successful at raising capital than we were. They all went into perhaps the expected geographies, the San Francisco’s, the New York’s, the areas where people thought you needed order density in order to make the economics work. So it was all hail city centers that had high population density. But because we had done all the deliveries ourselves, and we actually kept that going for about two years straight after, and even to this day, every person at DoorDash, myself included, Does deliveries every year, we kept hearing over and again that the need was very, very strong outside of these city centers. It makes sense when you actually take a step back to think about it from the customer’s perspective. If you and I lived in New York City and we walked outside of the elevator or the building, we probably could walk into hundreds of restaurants. In a place outside in New York City, Long Island, for example, or when we launched here in Palo Alto, you would be walking for miles probably before you would see the first restaurant. And so from the customer’s perspective, not from a unit economics perspective or anything like that, it was quite obvious that the need was higher in these places outside of city centers. And I think that always became, you know, a general mantra we had whenever we were in question of what to build. Listen to the customer, run the test. And that was certainly one of the things, you know, early on that we made a very large bet on that if this industry were to be created, it would actually be created outside of the city centers. If you look back over the last 10 or 12 years in this industry, you know, the majority of the growth came from these places outside of city centers. Obviously, we didn’t have the data to prove it at the time. But what we did have was the conviction in doing these deliveries ourselves that there was a chance that could be true. (Time 0:16:27)
  • Navigating Funding Challenges
    • Focus on internal metrics and long-term vision, even during funding challenges.
    • Persevere through rejections, as market validation can precede investor confidence. Transcript: Unknown Speaker A good job. You just continued to grow. You raised multiple rounds of funding. Your Series C was actually a down round. What was that like? You’re growing the business, raising more money. You’re fighting off competitors. How did you manage that? And what was that experience like? It was very tough. Tony Xu I mean, because on the one hand, you see all of the internal metrics going in the right direction. You’re growing organically. You’re growing quite quickly organically. You see that the market is perhaps larger than you expect. These are all the positive signs on one side of the equation. On the other hand, to your point, we’re also investing in scale because this is a business where you need enough order volume to make the math work. To get there, you have to invest before you get the demand. And so we needed to raise capital. And there were a couple, there were a few years, actually in a row, three years in a row, 2016, 17, 18, where I continue to struggle to raise capital. And I think this was the part that was quite difficult for us, where you have a company whose product seems to be moving in the right direction across any metric, any way you want to cut The data. On the flip side, you know, I’m receiving hundreds of rejections for investment. I think this was certainly one of the most difficult periods so far that we’ve had to overcome. (Time 0:20:30)
  • Responding to COVID-19
    • During COVID-19, DoorDash prioritized safety, merchant liquidity, and community support.
    • They cut commissions and ran ads for the entire industry, prioritizing long-term growth over short-term profits. Transcript: Unknown Speaker So fast forward a little bit. I mean, at the start of COVID, delivery demand cratered and then skyrocketed and you cut commissions in half. You ran a TV campaign that advertised your competitors. What gave you conviction about that? What was that period like? Tony Xu COVID was a bit of a blur. COVID 2020 was a bit of a blur. We were actually in 2019 preparing to go public. Obviously, COVID shelved those plans. But COVID was probably next to 2013. So the COVID year 2020, that is. Next to 2013 was probably the year where it felt most like DoorDash in YC. You know, it was seven days a week, 10am to 2am, all hands on deck, you know, multiple, you know, all company, you know, meetings per day. And sometimes in crises, I actually find that it’s a lot easier operating a company because it’s very clear what to do. Number one, job number one, keep everyone safe, right? Get tens of millions of units of PPE. Make sure that we can ship no contact delivery or contactless delivery. We ship that product in four or five days. Number two, got to make sure that everybody gets liquid. Why? Because the average merchant has 17 days of cash on hand. So every hour of cash is very, very important. Same thing for dashers, who a lot of them are furloughed or laid off because of COVID. And so getting them instant liquidity. Third thing was making sure that we could take care of the community, actually. And so we partnered with dozens of the largest hospital networks from UCSF or Stanford here in California to Mount Sinai on the East Coast, where we wanted to make sure that all the hospital Workers and nurses could get free delivery and also because they were doing the hardest jobs. It was very easy to run the company. Now, you called out a couple of decisions that were made that were more controversial in the company. One was running a national TV campaign where we spent millions of dollars advertising on behalf of the industry, basically saying whether you order on us or any of our peers, just order. You know, the dining rooms may be closed, but the kitchens are open. And the other decision, which we were the only platform to do, we cut our commissions by half, which cost us over $100 million. Now, these things sound inconsequential when you look at our balance sheet today. Back then, DoorDash was not profitable. And it was also when we were thinking about going public, which is not usually the first decision you’d make if that’s what you’re trying to do. And, you know, to me, I think what made it easy was what do you want to build became the question. I think I asked, you know, everybody who worked at the company, you know, and are we just here to build a company that ends in 2020 or ends in an IPO or something? No, we’re here to hopefully build a company that will grow and empower every physical business and grow the GDP of every city if we are successful in doing so. Happen in one year, two years, five years, 10 years. That hopefully can be a forever or an eternal mission. And so when I thought about it from that perspective, I mean, this was a drop in the bucket in the grand scheme of the journey. And that’s how we made that decision. That’s amazing. Unknown Speaker So super long-termist, basically. Tony Xu I think that’s the only way you can make some of these decisions. I think if you’re just purely looking at some of these decisions in the here and now, or just looking at it as a business line item on a spreadsheet or something like that, it’s very difficult, Perhaps, to make the justification. I think sometimes there are moments, it’s not always, but there are moments, whether it’s the start of the company or a crisis situation like COVID-19, where it becomes very clear why You’re doing what you’re doing, or should be very clear to you why you’re doing what you’re doing. And when you have that kind of clarity, it makes it a lot easier to make those decisions. (Time 0:24:12)
  • Becoming an Expert
    • To become an expert in any field, especially emerging ones like AI, immerse yourself in the work.
    • Practical experience builds expertise faster than theoretical knowledge. Transcript: Tony Xu Of the things I would tell the 18-year self is that especially when you’re on the cusp of something new, take AI, there’s no better way to be the expert than just to do the work. And you might be surprised at how quickly you get to become the expert. I mean, that was really my experience with logistics and delivery. I mean, I had no background in any of this, but by doing deliveries two years in a row, three years in a row, even 12 years later, you get to very, very quickly have a strong point of view on How the physical world works. And whether that’s, you know, now in software, in AI, in biotechnology, in whatever field of interest, the best way really to be the expert is just to get started and do the work. (Time 0:28:35)