Jag Bath, an e-commerce veteran of Gilt Groupe and RetailMeNot, became CEO of the Austin-based on-demand delivery service Favor in 2015, fully prepared to execute the Silicon Valley playbook of growth at any cost. But it wasn't until he made a series of painful decisions, and took a much different approach, that the company really succeeded. --As told to Tom Foster
In 2014, around $4 billion of venture capital--that's $1 billion a quarter--poured into the on-demand app industry. That's not including ridesharing companies like Uber. It was food delivery, grocery delivery, housecleaning, dog walking--you name it. No other industry came close. And it didn't peak until the third quarter of 2015, when a little more than $2 billion was raised.
That's when I joined Favor as CEO, with a mandate to scale the business. It's also when fundraising went off a cliff.
Going into 2016, we needed to raise more money. We had launched early in our space--in 2013--but we were losing our advantage to better-funded competitors in Silicon Valley. Those companies were expanding rapidly into more and more cities, which is expensive, especially if there are multiple companies trying to do the same thing. When you enter a new market, you have to get your name out there. The best way to do that is to spend more than the other guy. And our pockets weren't as deep.
Tech startups have swung toward the idea of growth at all cost: "Let's conquer the world, and then we'll figure out how to make money." It's a trap. Companies then start to treat how much money they've raised as a key metric, because that money fuels their growth. But if you don't have a good underlying business, it's irrelevant.
Investors were starting to see that the economics were upside down for on-demand delivery companies. Those businesses brought in lots of revenue and were adding lots of users, but they lost money. That's why funding had taken a nosedive. We were trying to raise money--spending a lot of time in hotels in California--but there was a cloud over our sector. Investors were questioning whether any of us were viable. Eventually, you realize you have to do something different.
Our largest competitors were focused on first-tier cities--New York, Chicago--because that's where the population is. We were playing in some of those as well, but mostly we were in second- and third-tier cities--like Austin, where we started. Around the middle of 2016, we decided to pull back from the first-tier cities. We were in about 25 cities at the time, and pulled out of five.
But we still needed to raise money, or face the possibility of not making payroll. And all around us, smaller competitors were folding or getting acquired for pennies. By the end of 2016, our mindset had shifted from thinking strategically to thinking about survival.
I had a lot of sleepless nights. You're thinking about all of the employees who gave up whatever they were doing to put all of their effort into a startup. But then you start thinking about the business the way you should have been from the very beginning: It has to make money.
More than 90 percent of our deliveries were in Texas. The unit economics looked really good there, and they looked atrocious in every other state, where we weren't as well known. Yet we were spending the vast majority of our time, effort, and capital in those states, because that's where we thought we had to grow.
I realized the way to survive was to close all markets outside of Texas and double down here.
It was the hardest decision I've ever made. You worry a lot about the people you have to let go, but you also worry about the people who stay, because you have to continue to motivate them. The hardest thing to communicate was that deciding to close all these markets didn't mean we were deciding to stop growing.
We started talking about three examples that everyone here knows. One was H-E-B, the $26 billion Texas-focused grocery chain. Another was In-N-Out burger, which spent the vast majority of its history in California. The third was Alamo Drafthouse, which became very successful in Texas before expanding.
We also announced that our first priority would be to become profitable within a year. With the new strategy, we did it in six months, and turned a profit for the first time in July 2017.
The irony was that funding for on-demand delivery companies started to open around then. It takes one player to hit profitability to unlock an industry. We were the first. Later, a couple of international companies became profitable too. When VCs saw that, they started investing again. Suddenly, we were getting a lot of attention from investors and competitors interested in acquiring us. DoorDash, Postmates, Uber, Deliveroo--they all called.
We also started getting calls from more established companies. One was H-E-B, which we'd held up as a model internally--and which acquired Favor in February 2018.
At that time, we were in 50 markets across Texas. Today, we're in 130--all in Texas. We had 130 employees then, and we now have more than 300.
A lot of venture-backed companies have reached massive scale and raised hundreds of millions of dollars--sometimes billions--but aren't profitable. They reach a size where it's very difficult for anybody to acquire them, so they look to the public markets to pay back their investors. Once they go public, the scrutiny comes in: What's the line to profitability?
At that point, and at that scale, it's a lot harder to make necessary changes than if you'd focused on it earlier.
Which we're all seeing play out in front of us right now.
Delivering a Win
Favor was founded in 2013 in Austin by Ben Doherty and Zac Maurais, but it struggled to grow like its better-funded competitors. Favor raised $34 million, while DoorDash has raised $2 billion and Postmates has raised more than $680 million (and at presstime was readying IPO paperwork). Those two companies rapidly escalated an expensive race to dominate as many markets as possible, and fend off Uber Eats, which launched in 2014. Meanwhile, countless smaller on-demand startups arose to deliver everything from dry cleaning to prepared foods. Many soon shut down: Two key competitors in the latter niche--Maple and Sprig--folded in 2017; that year, the U.K.'s Jinn folded too, unable to compete with the far-better-funded Deliveroo. So Favor redefined its game, by focusing on Texas markets and ceasing operations everywhere else. Profitability, and a big sale to Texas grocer H-E-B, followed. Sometimes, the way to win big is to think small.