Jan 19, 2016 ยท 8 minutes

On Friday, Wall Street Journal and others reported a story we’d also been tracking: Whatever happened to that supposed $1 billion funding round for Doordash?

The numbers the Journal reported matched exactly with what we’d heard: Unable to raise at a $1 billion price tag, Doordash had gone back to the markets seeking to raise at a $600 million price. This time with the addition of a new COO, Chris Payne.

The round is still in progress, and it’s unclear what price it may ultimately get done at. From what we’ve heard -- even from investors who passed -- Doordash is a fundable company, just not at the prices originally discussed… and maybe not even at $600 million.

And yet, here’s the thing: Arguably Doordash is one of the “lucky” company in the current climate.

Doordash certainly won’t be alone in these kinds of struggles this year, and has a lot going for it other startups don’t. The biggest plus: A committed lead investor in existing backer Sequoia Capital, who early on said it would be willing to do the deal at a price as high as $1 billion. It was others who balked. That’s a big sign of confidence from arguably the best investors in the Valley right now. Rounds lead by insiders typically sport smaller valuations than going to an open market.

But Doordash faces three very difficult headwinds in trying to get this deal done.

The first is the one everyone is facing: The funding markets just fell apart in the fourth quarter, about the time Doordash started to raise this round. Late stage rounds in particular fell some 45%. It was possibly the worst time to try to become a unicorn.

The second is that the helping-feed-you-dinner space has become insanely crowded, and having already flooded the market with entrants, investors are suddenly concerned about it. Doordash -- and investor Sequoia’s Alfred Lin-- are careful to insist they aren’t merely a food delivery company. That may be true in the long term, but right now it’s the bulk of what they do.

You can argue they don’t “compete” with a Munchery or a Blue Apron, in that they don’t make you food or deliver you ingredients. But you only have one dinner a night, and all of these companies are fighting to be the one that makes it easy and painless. And Doordash most definitely competes with GrubHub-- differentiated as the offerings and models may be-- and most definitely competes with Postmates and increasingly Uber.

The third: As we’ve written before, these are brutal businesses to build and scale. As Doordash CEO Tony Xu discussed in our recent PandoMonthly interview, he has to keep three wildly fragmented groups happy: Small businesses, couriers, and customers. The software that Silicon Valley loves so much and is so good at building is “the easy part,” said Xu. A lot can go wrong getting an item from one place to another at enough of a mass scale to build a $1 billion stand alone company. And there will always be downward pressure on prices. Doordash has already been dinged by rivals for charging so much. On demand companies aren’t mere apps.

Ridesharing is the most mature and proven of the on demand categories, and let’s see how that’s doing. Uber and Lyft are both losing huge sums of cash, and Sidecar was sold today to GM for a fraction of what it raised. The largest ride sharing company isn’t even in the US-- it’s in China. And the shakeout in ridesharing, home cleaning and other categories started even before the funding markets fell apart this past winter.

It’s telling that in the last few years of high prices, in the incredibly crowded food delivery space, there’s only one unicorn: BlueApron which has a $2 billion valuation. That’s a price it may not be able to match today.

In short: Doordash has found itself not only with the problem everyone is going to face in 2016 of valuations suddenly cut by one-third to one-half what they were six months ago. Doordash picked the exact wrong time to start raising this round. And it found itself in the most crowded category, and the hardest one to scale in a profitable way.

The point of this story isn’t the beat up on Doordash, but rather to show how quickly sands have shifted in the venture world. For what it’s worth, our understanding from talking to various sources is that Doordash is in decent shape. We’re told it’s a real business with real demand, real technology, and some real talent on the executive level. Six months earlier, the company conceivably could have completed its round at $1 billion, even if it had to accept some ugly terms to get there. Today, we don’t know that $600 million will be an option.

The clearest sign there isn’t something fundamentally broken about Doordash that we don’t know: Sequoia’s outspoken and clear commitment to the company. It was Sequoia who first floated the $1 billion price, saying they were willing to invest at that level, according to insiders. And last December, we were supposed to do a PandoMonthly with Lin and Instacart’s Apoorva Mehta who had a last minute conflict. I asked Lin to suggest another entrepreneur in his portfolio he had a close relationship with and was bullish on, and it was Lin who recommended Xu. There are few firms better to have as your lead in any climate, especially a challenged one.

Here’s the real question: If Doordash does survive, in the long run, did they actually dodge a bullet by not becoming a unicorn?

We’ve written at length the potential dangers of downrounds. Because someone related to Doordash was foolish enough to talk up a funding round that wasn’t completed, Doordash is getting a psychological and public relations downround right now. But it could well still raise money higher than its last valuation, even with all of its challenges. And that matters to actual shareholders and employees. It’s no fun, but it’s better than an actual downround.

There’s always two schools of thoughts on raising money in what you know is a frothy time. One is that you should raise as much as you can before things collapse, whether you need it or not. The other is that you should raise money as the business is ready for the next step. The former can cause a lot of problems. Entrepreneurs over-staff, over spend and a culture of solving problems by throwing cash at them, can hurt a company’s execution. When a climate changes and layoffs and austerity comes into play, it can hurt the culture. None of those are things you want.

But the potential downside of waiting to raise money when the business is ready amid a shifting funding environment is so much worse: You just can’t get the capital you need and you go under.

The former can wound a company, the latter can kill it. It’s a gamble. The latter is a better way to build a company in the long term, provided you can survive.

So what’s going to happen? My prediction-- for all that’s worth-- is that Doordash will raise the money. But I think it will either be less than $600 million in the end or will be bulked up by family offices, overseas funds and non-traditional investors. Or maybe, both. My understanding is that all of those options are being explored right now.

I wish Xu and his team luck. He’s in a particularly brutal corner of the on demand/non-demand world where there is going to be an absolute bloodletting. But it is-- at least-- a real thing people want. If he can hold on, and survive this market, he’ll be well positioned to build something valuable. Ditto for rival Postmates. Unlike ridesharing, they’ll have to prove they can grow without paying huge subsidies. This one won’t be a war of the warchests like Uber and Lyft, it’ll be a war of management execution.

But this story illustrates why the announcement of fundraising isn’t the same as completing it. It was reports of that unclosed round that gave people confidence markets were still strong for late stage funding. We know now that round wasn’t done, and funding was collapsing. (Elsewhere most of the press keeps saying Uber has raised the amount it said it was going to raise in December...) It also makes clear just how fast the market has fallen for late stage deals. For every investor waving off concerns in the market, “great companies will still get funded” or “valuations are just gonna come down 20-30%”, Doordash shows reality of how hard navigating a market like this is.

This is a good company that is struggling to raise money, distracting the team in a crowded space for months in the meantime, and the initial valuation they’d sought has fallen by at least 40%. And we are only a few months into this correction. It’s easy for investors to say we’re merely letting air out of the balloon. They aren’t the ones whose companies are on the line.

Xu should be a cautionary tale for other entrepreneurs on just how fast this market has changed. Doordash had the pedigree of Y Combinator, Sequoia, and Kleiner Perkins behind it. It has a real business with real demand. It started raising this round with a committed lead investor who is one of the best VCs in the Valley.

How many companies can say that?