This is Kristen O'Brien, Managing Editor at NFX, and this is the founder list. Audible versions of essays from technology's most important leaders selected by the founder community. Pete is the original memo to investors put together by Sequoia partner Alfred Flint breaking down their investment in DoorDash. Red by n f x. Introduction. DoorDash graduated from the summer of 2013 class with the dream of building a real time local delivery network for local commerce.
Their first entry into this vision was to focus on local delivery from restaurants that offered takeout but did not have the infrastructure to do their own delivery. And quickly found that restaurants that managed delivery were also more than happy to outsource their operation to DoorDash. Morgan. According to Grubhub's s 1 and the National Restaurant Association, there is over a $67,000,000,000 restaurant takeout volume in the US.
Only 15% of restaurants deliver, suggesting $57,000,000,000 is addressable by the company. DoorDash's T AM in revenue would be 11 point $4,000,000,000 if take rate is 20 percent or $8,600,000,000 if take rate is 15%. Team. The founders are smart and scrappy. They started out driving for Papa John's, Uber X, Lyft, sidecar, to learn how these companies operated and how they recruit drivers.
They observe that local delivery is a different business than the transportation business and that logistics software around batching will become a competitive advantage for them. They tested out their own system by being a driver for busy shifts. Founder Tony has a heart to help local merchants, as his parents operate a small restaurant. In 8 to 9 months, the company has proven an incredible amount while being capital efficient. They raised $2,400,000 and still have $1,700,000 in net cash.
Business diligence. The company has gotten to an impressive gross processing volume GPV, which is the sum of order volume, commission, delivery charge and driver tip that now exceeds a $10,000,000 annual run rate. The company's take rate of GPV is over 21%. Which gives the company an annual revenue run rate of over $2,000,000. Stacked revenue by cohort suggests an almost subscription like revenue stream after the 1st month.
After that initial month, DoorDash's returning user base dropped to 40% of the initial month cohort size. Future months, however, declined, but all stay above 30%. Until perhaps consumers reach their limit of takeout food from restaurants, all of this suggests a very sticky business where returning users continue to spend more and more. Key questions. We have a few questions and concerns that we would like to address before making an investment decision. One, competition.
There seems to be an increasing competition in this space. We looked at Grubhub in the past, and the company is now public. We have a marketplace approach of taking orders and passing it onto restaurants that do deliver. This might be a superior business financially, but offers a less compelling value proposition to restaurants. Postmates and caviar were established before DoorDash. In some sense, taskrabbit also serves this market.
Irrational competition destroys value and we are concerned that this market may lead to commoditization and a race to the bottom. 2, unit economics. While the company claims 20 percent contribution margin before marketing, they continue to burn more and more cash. Customer acquisition is the main driver of Byrne, as well as driver and merchant acquisition. Will this be one time acquisition costs or recurring costs, especially to get customers and drivers to come back? And 3, capital intensity.
DoorDash has been capital efficient and claims to be a 3 sided marketplace that will have natural network effects and will continue to be capital efficient. Will this be the case? Will competition lead to irrational investments in growth? Will our margins compress? Will all this lead to massive capital consumption? Pete parade. If everything goes right, DoorDash will emerge as the leader in the restaurant delivery space.
Their local logistics network and know how will allow them to expand their use case to other areas and allow all local merchants to deliver to customers. DoorDash could become the hyper local on demand delivery network. Pete Morgan. Consumers love the value proposition, but are not willing to pay for it. Merchants grovel about DoorDash's take Pete. Intense competition drives the business to economic profit of 0 or worse.
We have middling hyper local business that only works in rich neighborhoods. Deal dynamics and recommendation. The company is likely to get a number of term sheets today. We recommend leaning forward. And getting our questions answered. However, from what we know today, we continue to be enthusiastic and recommend investing 7 to 10,000,000 for 25%.
For more audio essays from the people who've built companies like Instacart, Facebook, TrelloHubSpot and Dropbox, visit the founder list at nfx.com Omri subscribe to the n f x podcast at podcast dotnfx.com Omri wherever you get your podcasts. I'm Kristin O'Brien, and this is the founder list.