cloud over our sector. Investors were
questioning whether any of us were
viable. Eventually, you realize you have
to do something di;erent.
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
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 e;ort 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, e;ort, 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
di;cult 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.
Investors were questioning whether any of us were viable. Eventually, you realize you have to do something different. How I Did It
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 start-ups 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—like
Austin, above, where a customer
receives delivery—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.