Lenny's Podcast: Product | Career | Growth
00:42:36 · Casey Winters, Lenny Rachitsky
If you wanna get better at personalization, guess what? You're recommending content by leveraging, you know, data network effects. [00:42:44] S1: I love that. No. You you nailed it. I imagine Marketplace founders listening to this may be wondering, hey. How do I... Can I add on these additional network effects? Can I evolve towards one of these? And what you're saying is not only can you, you need to eventually. [00:42:58] S0: I agree. Right? I think, you know, they're a great form of defensibility, first off. Off. So do they make sense for every business? No. But in a lot of cases, in order for you to evolve properly and continue to grow, they can become [00:43:09] S1: a necessity. Are there any other examples of Marketplace companies that come to mind that did a great job evolving or adding one of these network effects or just, like, interesting? [00:43:18] S0: Let's take some inventory. Right? So I think Zillow is really interesting in that a real estate listing site is not particularly an interesting product, but the ability of saying, very rarely do, you know, both sides of this network, people who are buying homes and selling homes, need to connect. But I can find a way for the brand to connect with both of them by giving real time pricing information on the value of homes. And that creates a much stickier product for both sides. I think that was a a pretty genuine, innovation, you know, that other people have tried and and rarely been successful with. So that's that's one that definitely, sticks with me, you know, off the top of my head. Great.
00:43:18 · Casey Winters, Lenny Rachitsky
[00:43:18] S0: Let's take some inventory. Right? So I think Zillow is really interesting in that a real estate listing site is not particularly an interesting product, but the ability of saying, very rarely do, you know, both sides of this network, people who are buying homes and selling homes, need to connect. But I can find a way for the brand to connect with both of them by giving real time pricing information on the value of homes. And that creates a much stickier product for both sides. I think that was a a pretty genuine, innovation, you know, that other people have tried and and rarely been successful with. So that's that's one that definitely, sticks with me, you know, off the top of my head. Great. [00:44:05] S1: We've been talking about Grubhub a lot, and Grubhub had some pretty strong network effects and Yep. In large part thanks to the work you did. And one of the benefits of network effects is it creates a barrier to entry. It's hard to replicate and compete with a company where they already have all this network effect. But famously, Grubhub got disrupted by DoorDash and Uber Eats. And I need to talk about how that happened and why that happened. And it'd be cool to hear just, like, what do you think they could have done differently and what happened where their network effect got eaten eaten for lunch, pun intended?
00:44:34 · Casey Winters
[00:44:34] S0: Sure. It's a great question, and I think people do mistake any form of network effect as this perfect form of defensibility. They're the best form of defensibility, but that doesn't mean they're immune to disruption. And I think the main way this happens with cross side network effects that we typically talk about for marketplaces is when a disruptor dramatically expands selection. So I wanna be clear. I left Grubhub at the end of twenty thirteen before said lunch was evil. So what I'm communicating is more like public knowledge of watching these amazing companies compete rather than, like, being inside the fire at the time. Great. One important thing to remember is Grubhub was an asset light marketplace model. Restaurants did their own delivery through their own delivery drivers that they hired. And I wrote this post for, you know, Andreessen Horowitz a few years ago about supply strategies and marketplaces. So, in that, like, you really need to be comprehensive or have exclusive inventory. And, Grubhub strive to be comprehensive. We'd show every restaurant that delivered to you, even if we didn't work with them directly for online ordering. So what happened about a year before I left Grubhub was that these competitors started to raise their C rounds or series As to build delivery networks. Postmates and and DoorDash were the the first two that rose to prominence. Uber Eats would come later, but they actually started with a pretty different business model. And this is an extremely different business. You're hiring drivers. You're managing logistics. So we call this a heavily managed marketplace model as you are now facilitating the transaction versus just connecting buyers and sellers and taking payments like like Grubhub did. So on the one hand, you have Grubhub, this extremely high margin business, and these businesses coming up are actually negative margin businesses, at least they were for a long time. So in 2013, Grubhub acquired Seamless, its closest competitor at the time. And, you know, Seamless still had a lead on Grubhub in New York partially because it had this corporate program where law firms and banks and consultants got lunch stipends you had to redeem by ordering the food through Seamless.
00:46:47 · Casey Winters
So Grubhub operated in these dense cities and and suburbs like like like in New York because those were the only places that had restaurants that had delivery. DoorDash, when it started, operated in less dense suburbs and worked with restaurants that had never done delivery before, and they would provide, you know, the delivery drivers themselves. So this allowed DoorDash to grow without much competition in the early days. And these companies also took some real gambles. One of the things they did is they delivered from restaurants they didn't have an agreement with, and that caused controversy and lawsuits. But what it meant is when these companies did launch in the cities to go after Grubhub, it felt like DoorDash and Postmates and Uber had dramatically larger selection of restaurants to choose from, and Grubhub was definitely no longer near comprehensive. And, you know, back when we talked about cross site network effects, the more selection of restaurants, the more attractive it is to users, you know, and vice versa. So at that point, you know, Grubhub's put in a very peculiar position. It had gone public after raising $80,000,000 in venture capital and raising a $100,000,000 in an IPO, telling investors it's an extremely profitable, high growth, asset light marketplace. But now it's got disruption pressure from operationally intensive negative margin delivery services that were raising a $100,000,000 every six months from the private markets. So what Grubhub assumed is that these businesses were just structurally unprofitable and that VCs would stop subsidizing them eventually. Of course, that didn't happen. They kept raising more money. DoorDash eventually raised, you know, multiple billions of dollars in in this market. And part of what they used that money for was to lock up agreements with national chains, which Grubhub never worked with. It was always like the local mom and pops and promotions and discounts on the demand side. So all of this is happening, and then the pandemic hits. And all of those negative margins turn positive for DoorDash for the first time, if I understand things correctly. And on top of that, all this corporate ordering that we got from Seamless no longer mattered because no one goes to the office anymore. So this gambit really paid off, and DoorDash just took the market.
00:49:05 · Casey Winters
Grubhub then tried to copy the approaches of DoorDash and Postmates, and they wrote kind of this famous letter saying that they still thought the approaches were stupid, but they were... Their hand was forced, which is kind of funny to read in retrospect. So, you know, a lot of armchair thinkers are like, how could Grubhub have been so stupid to let DoorDash take the market that they built? And look, I'll admit, Grubhub made some mistakes. But I think it would have been extremely hard for Grubhub to come out on top here. So let's say in 2014, after you IPO, you do actually think what DoorDash, Postmates, and Uber are doing are smart. What do you do? Go to investors that you promised high growth and high profits and say you need to raise more money and debt to compete with negative margin upstarts in a way that will destroy all that potential profit you mentioned, the stock would drop 90%. A lot of your employees would leave because their stock is now worthless. And on top of that, building a delivery network is a heavy operations play that matches none of your core competencies. So to me, that feels like a death sentence. So I think the only play here was to buy DoorDash as early as possible. And let DoorDash and their operationally heavy culture eat Grubhub from the inside out. I think Grubhub probably could have acquired them multiple times for whatever reason it ever happened. It would have seemed pretty risky had Grubhub done that. Investors probably would have hated it, but it would have been their Netflix moment where, you know, Netflix bet it all on streaming, and they bet right. And this is all incredibly easy to say in hindsight. But I think what I've learned, you know, now that I'm more senior in my career, is during existential threats, you know, it's like when Nassim Taleb says the only rational reaction is overreaction. Unless you have a real viable reason to assume otherwise, you gotta assume the disruptor is right and base your strategy on them playing an optimal game. And I... Whereas I think, you know, Grubhub assumed the disruptor was wrong and that it would all play out eventually in their favor, and it clearly did.
00:51:14 · Lenny Rachitsky, Casey Winters
[00:51:14] S1: Wow. I have never heard that full story. That was amazing. Thank you for getting in so much detail there. [00:51:19] S0: I don't know how much of it is right. [00:51:21] S1: Seems right from the outside, And it's interesting that it's like a version of Innovator's Dilemma. Usually, Innovator's Dilemma is people come and do something cheaper at the low end of the market. And in this case, it was more they were doing something that they didn't believe would scale. Was, like, just much more inefficient even as a better experience. And is that is that Innovator's Dilemma, or is that some other version of Innovator's Dilemma? Because to your point, they couldn't almost go after it. [00:51:45] S0: I I think it is in spirit, for sure. [00:51:47] S1: The takeaway there that you've learned is don't underestimate someone that's trying to do something that's gonna eat your lunch eventually even though it feels like a terrible business model.