°Õ´Ç»å²¹²â’s newsletter had an interesting tidbit about and ’s stock:

“Grubhub shares tanked over 43 percent following an alarming earnings report late Monday. Beyond Meat stock also had a terrible day, falling more than 22 percent. Not a coincidence: A restriction on selling stock lifted yesterday.�

This afternoon we’re focused on what’s going on with Beyond Meat. What happened to GrubHub is interesting, but what’s going on with everyone’s favorite fake meat company is illustrative of something we need to keep an eye on.

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A 22 percent fall is a significant dip, one that can be at least partially attributed to Beyond Meat’s early shareholders selling their shares now that they’re allowed to. In other words, its lock-up period expired.

What Is a Lock-Up Period?

A restriction on selling stock is known as a lockup period, or a period of time during which employees, founders or other people who owned shares of the stock before it went public can’t sell those shares.

According to , lock-up periods usually last between 90 and 180 days after a company’s IPO, and they exist to prevent investors from flooding the market with lots of shares, which could make the stock’s price sink. Also, if investors immediately started selling their shares when a company goes public, the optics of that would be poor–it could look like employees and investors are cutting their losses early, and that could affect the stock price.

To be clear, lock-up periods are good in that they try to keep the market fair and prevent early disruption to a stock. But when they lift, we can learn about how insiders feel about the company in question; if they dump their stock, depressing its value, that’s a data point.

2019: The Year of the Unicorn

This year has been a landmark year for unicorns going public. We’ve seen well-known startups like , , and enter the public markets. For the companies whose lock-up periods haven’t expired yet, it’ll be interesting to see what happens when the trading restriction is lifted.

Take Uber for example. The company had a disappointing IPO in May, when its stock opened its first day of trading at $42 per share, lower than its IPO price of $45 per share. It closed its first day of trading at $41.57, and its stock has been a bit of a buzzkill since then–it was trading at $33.75 at the end of trading today.

Uber’s lock-up period ends on November 6. The lock-up period expiration will either cause a flood of employee and investor-owned shares hitting the market or perhaps a much-needed bump for its stock. While Uber’s stock performance hasn’t been great, it’s worth noting that Lyft shares went higher on the day its lock-up period expired, the opposite of what analysts expected, according to .

We’re interested in seeing what happens when a few other companies’ lock-up periods end: Peloton (March 24, 2020), SmileDirectClub (March 10, 2020), and Chewy (December 11, 2019). Check back for more.

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Yesterday as part of its third-quarter earnings report, GrubHub’s described how the online food delivery giant views its market. And its competition.

The letter provides interesting context for the on-demand players, especially those working with food delivery. It’s a space that has attracted oceans of capital (DoorDash, , etc.) and investment from other sorts of on-demand companies, like . The scale of the bets placed in the space by venture investors, , and companies that venture capitalists previously funded is huge. It’s in the tens of billions by now.

And so, when GrubHub warns that growth in its market could be set to slow dramatically, it’s worth paying attention to. Let’s explore.

Warnings

GrubHub is being challenged by private companies who can lose lots of money in the short-term as they have raised ample capital from investors more interested in growth than profits. GrubHub, in contrast, is profitable and has to report its earnings each quarter.

The public company has noticed the entrant of high-growth on-demand companies, as we’d expect. That said, how it describes the entrance of, we presume, DoorDash is interesting (Bolding: Crunchbase News):

Over the last few years, two significant changes on the restaurant supply side temporarily accelerated overall industry growth. First, a new entrant leveraging a national, scaled third-party transportation network brought delivery capabilities to tens of thousands of independently owned and enterprise restaurants that couldn’t or didn’t choose to provide their own delivery services. Second, listing restaurants on platforms without any partnership allowed other players to expand restaurant inventory rapidly. Both of these changes opened up new and unique pockets of restaurant supply and resulted in significant growth in both orders and new diners as previously untapped geographies and additional restaurants in all geographies were now immediately accessible online.

Regarding its own new user growth, GrubHub said that “retention of these newer diners was good” but that their “ordering frequency” wasn’t developing over time to be as strong as seen in “earlier cohorts.” The company then got into the weeds, explaining how it saw the market changing in the wake of the new competition and a changed competitive landscape (Bolding: Crunchbase News):

We spent a fair amount of time digging into the causes of these dynamics. What we concluded is that the supply innovations in online takeout have been played out and annual growth is slowing and returning to a more normal longer-term state which we believe will settle in the low double digits, except that there are multiple players all competing for the same new diners and order growth.

GrubHub next described why some diners weren’t performing as expected. The company wrote that ” online diners are becoming more promiscuous,” using a number of platforms for delivery instead of just one, for example. “Easy wins in the market are disappearing a little more quickly than we thought,” GrubHub continued.

The warnings didn’t stop there, however. GrubHub also took shots at companies looking to find efficiency in delivery scale, writing that (Bolding: Crunchbase News):

A common fallacy in this business is that an avalanche of volume, food or otherwise, will drive logistics costs down materially. Bottom line is that you need to pay someone enough money to drive to the restaurant, pick up food and drive it to a diner. That takes time and drivers need to be appropriately paid for their time or they will find another opportunity. At some point, delivery drones and robots may reduce the cost of fulfillment, but it will be a long time before the capital costs and ongoing operating expenses are less than the cost of paying someone for 30-45 minutes of their time. Delivery/logistics is valuable to us because it increases potential restaurant inventory and order volume, not because it improves per order economics.

Firey stuff, frankly.

Now, GrubHub has a biased view of the market, its place in it, and the dynamics of the space in which it competes. That much is clear. But the company is also trying to explain its worldview to its shareholders, so we’re not just reading some useless hype; this is how the company describes itself to its owners.

Let’s bring this back to startups.

Growth

DoorDash and other prime GrubHub competitors are valued on revenue growth instead of profit. This means that they don’t have to make money in the short-term, but also means that if their growth rate slows, their value can quickly fall. If overall market growth slows, it could crimp DoorDash’s ability to continue the sort of growth that its backers covet.

The news doesn’t really get better from there. GrubHub’s notes concerning easy wins becoming scarce on the ground implies rising customer acquisition costs (CAC); harder wins cost more. This abuts the fact that diners’ budgets aren’t infinite. GrubHub noted in its letter that “the average diner in the United States will not consistently pay over $25 in total cost for a quick service restaurant cheeseburger meal.” So, rising CAC could cut into margins if order size can’t scale further. (SaaS fans can think of the situation as something akin to falling LTV compared to CAC.)

Summing, we could see what makes some on-demand companies attractive become less attractive over time. GrubHub is right in that most customers won’t use the service if they repeatedly have to pay high costs for a regular-quality meal. Also, none of this takes into account a possibly failing macro-climate. Add that in and things become worrisome.

Investors agree. Shares of GrubHub were off 37 percent this morning.

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Thankfully for carnivores, the upscale restaurant industry has found ways around the $20 cheeseburger problem. They’re charging extra for accompaniments, tacking on expensive and tempting beer menus, instituting counter ordering, and adopting all kinds of ingenious methods to ensure that the basic burger price hovers at no more than $15.

Startups should take note. While consumer-focused startups and recently-public unicorns are targeting different verticals, they face a similar conundrum as their food service brethren. There’s only so much consumers will pay for an Uber ride, a scooter rental, a takeout meal, a grocery delivery, and so on.

For now, pricing remains at levels supportive to growth due to a combination of factors. These include investors’ willingness to bankroll continued losses and gig economy workers willingness to accept flexible-schedule jobs with low pay and minimal to nonexistent benefits. Sooner or later, startups may have to charge what it really costs to provide their services. Let’s consider how different sectors might tackle the $20 cheeseburger dilemma.

Ride-Hailing

Of all unprofitable industries, ride-hailing offers some of the most detailed windows into how it loses money, thanks to the recent IPOs of and . It’s not pretty. Uber’s operating loss over the 12 months before its IPO exceeded $3 billion, while Lyft’s net loss for the trailing 12 months was $1.8 billion.

It’s not as if they’re posting huge growth either. For Q4, Uber reported quarter-over-quarter revenue growth of just 1 percent. Lyft, meanwhile, is projecting around 4 percent revenue growth for its just-ended quarter.

Still, ride-hailing remains massively popular in large part due to its perceived affordability. In the San Francisco Bay Area, where Crunchbase hails, a hop of a few miles can often be cheaper (and easier) than parking a car.

Ride-haling, of all industries, also has some of the most developed answers to the $20 cheeseburger dilemma. Surge pricing. A selection that runs from fancy black car to pooled ride. And gamification tools to lure drivers to keep working.

The only trouble is, even with all that business model tweaking – the core service is still not profitable. And it’s not as if Uber drivers are either.

Probably the most foreseeable solution to the problem, at least for the U.S. market, would be for investors to refuse subsidizing continued losses for both Lyft and Uber. If neither could afford to operate in the deep red, they’d be forced to raise prices. And customers would be forced to pay.

Chances are the economics would work out ok for most customers. Just before its IPO, Uber was reportedly losing on each of its 5.2 billion rides last year. Most riders could manage a price hike of that magnitude.

Scooters

Scooternomics seem more perplexing. First off, the scooter industry appears to be a terrible economic proposition by current metrics.

In this year’s first quarter, , one of the biggest players in the space, reportedly lost nearly $100 million while revenue shrank sharply to only about $15 million. While less is known regarding revenue metrics for Bird’s many rivals, they’re also not known to be minting profits, and their prodigious fundraising hints at massive deficits.

Second, scooter companies face a demographic dilemma when it comes to raising prices.  Their high-growth market is young-people, who tend to have less money, particularly teens. If your user base is the dollar menu crowd, it’s hard to envision any strategy to make the $20 cheeseburger work.

There are plenty of suggestions rattling around as to how scooter companies might get to break-even. These include raising prices, offering more day and monthly pass options, and upgrading the fleet with bigger batteries and better durability. There’s also the possibility that the business will eventually pay for itself once revenues are big enough to cover the up-front cost of buying scooters. We’ll see.

Delivery

There are those who scoot, and there are those who sit and wait for others to deliver things. Given that couch potatoes still greatly outnumber scootering humans, it’s no surprise that the delivery space has sucked up a much bigger sum of venture funding.

Delivery has a bit more ways to sneak in costs and add efficiencies too. You can charge an up-front delivery fee, add a over in-store prices, encourage tipping in a way that , and the list goes on.

With , and others in IPO-watchers’ sights after their huge capital raises, they’re under increasing pressure to get their finances in order. That means they’ll likely be putting all those tools to work, potentially with lucrative results. As publicly-traded competitor has demonstrated, it is possible to turn profitable.

Trouble is, consumers have a lot of options to avoid those costs too. You could go out yourself, use food you already have, buy groceries, heat up a frozen meal, and this list goes on.

Finding The Price Point

For now, on-demand startups face so much price competition and have so many resources to fund their losses that it’s tough to say what costs the market really will bear.

To what extent are consumers paying because we’re getting a good deal? The ability to buy a service for less than the cost of providing said service has its appeal.

When the flush venture funding goes away, will we pay what it really costs? And if we do, will we do so regularly? Or will it be more of a once-in-a-while splurge, akin to an overpriced cheeseburger.

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