The Business Of

Deliveroo | What Do They Do With Their Profits?

Morning All!

We’ve covered a decent amount over the last couple of days (click here to see the previous newsletters) so let’s have a little recap…

• In 2021, Deliveroo made £1.82bn in revenues. This comes from the commissions it take from restaurants and the fees it charges us consumers.

• However, 73% of this revenue (£1.33bn) went to pay riders and credit card fees.

• And 34% of revenue (£629m) went to marketing and overhead costs.

• This meant that Deliveroo lost money in 2021. And we saw that this isn’t something surprising - Deliveroo has never made a profit since it started as a company!

So, what we’re going to try and answer today is… how can a company that’s not making any profits continue to survive? Or in other words, where are they getting the money from to continue operating? Without further ado…

Venture Capital = Essential Capital

So first of all, whilst it may be incredibly obvious, it is incredibly important to recognise that in order to launch and grow a business, you need money to pay for things - employees, materials, office space, marketing, etc.

However, most companies aren’t profitable straight away and so they rely on external funding to help pay for these costs. In 2004, the now giant, Facebook received $500k from Peter Thiel and continued to raise millions in fundraising in order to fund the company’s growth (more employees, more marketing = more costs). In 2009, Airbnb received $600k from Y Combinator and Sequoia Capital and ended up raising well over $3bn before they IPO’d.

Food delivery companies are no different (see the charts below). Deliveroo has now raised a total of £2.8bn (including IPO). While Doordash (the main food delivery company in America) has raised an even more incredible $4.5bn (including IPO).

So that’s clear! Almost all companies need external funding in order to launch and grow their business.

But Why Do Investors Give Them This Money?

Whilst some investors may be incredibly generous, warm-hearted angels, their kind-heartedness isn’t the reason why they part with their money. The reason they do so is for a stake in the company they’re investing in. In the case of Facebook/Peter Thiel mentioned earlier, Peter Thiel (pictured below) received a 10% stake in Facebook for his $500k investment. Mr Thiel did pretty well from this deal.

Deliveroo in Series A (click here to learn more about funding rounds) received £3m and gave away 23% of their shares. A few years later, the company needed more money and so raised £467m in funding in exchange for 22% of their shares. The final round of funding, its IPO in 2021, saw the company receive £1.5bn in exchange for 22% of shares. After giving away so much of his business, the founder, Will Shu, now only has 6% of the company’s shares. Don’t feel too sad for him though… it is still 6% of ~£1.5bn (~£90m)!

By the way, don’t worry if the funding rounds (Series A, Series B, Series C, etc) confuses you - we’ll be covering that in tomorrow’s Career Talk video!

So, Are Investors Okay With The Company Not Making A Profit?

Well, yes and no. Investors give funding to companies like Deliveroo, knowing full well that the company won’t become profitable overnight. And in many cases, investors don’t want the companies they’ve invested in to focus on profits straight away. Growing customers and revenue, gaining market share and building scale are often the initial priorities.

After all, Deliveroo could stop all marketing and slash employee numbers in order to become profitable straight away… but pretty soon Uber Eats would start taking customers away from Deliveroo and leave Deliveroo worse off in the longer term.

Saying all that, the expectation for investors is that their invested companies will become profitable at some stage in the future. In the case of Deliveroo, the company had ~£1.3bn cash on its balance sheet (at the start of 2022) to make that happen!

That’s a wrap for today! We’re back tomorrow with the final part of Deliveroo where we’ll be looking at the outlook for the company and whether they can reach profitability soon!

We’ll also be posting our next Career Talk video! This week we’re exploring Venture Capital and we’ll hear from my friend, Alex Stroud, Associate @ Concentric (https://www.linkedin.com/in/alexanderstroud/).

After graduating from the University of Warwick in 2015, Alex worked at HSBC and then Mastercard before breaking into the world of Venture Capital. Tomorrow he’ll be talking about…

• how he got into venture capital,

• what his team actually do,

• advice he’d give to students who are interested in venture capital, and,

• how his team would consider investing in a company like Deliveroo.

If you have any questions you’d want to ask him, then please feel free to ‘Reply’ to this email and I’ll be sure to ask him. A lot to look forward to… have a great day!

The Business Of Team

2nd Mar 2023

Nigel Jacob CFA