Aug 9, 2017 · 19 minutes

No category has seen a greater volume of deals in recent years than the money companies trying to “solve dinner.”

Exactly two have gone public: Grubhub and Blue Apron. And only the former has made being public look pretty doable.

Analysts have continually worried about the competitive landscape surrounding Grubhub-- which is arguably the least innovative, least disruptive, least wildly-over-promising in its rhetoric. Grubhub raised a total of some $84 million in private capital in its pre-IPO life-- less than a single mega-deal.

Grubhub isn’t creating a new market. It isn’t destroying existing incumbents. It’s merely making it easier to order takeout online, in a way that restaurants fully cooperate with. It will let restaurants deliver, or its network will deliver. The benefit of that structure, says CEO Matt Maloney, is that over 10,000 restaurants have no delivery fee. “That’s impossible to offer and have a sustainable business with anyone else,” he says. “It’s a $10 fee on the VC-funded platforms and we see more than 10,000 restaurants with no delivery fee on ours.”

I’ve argued before that Postmates, for one, is appealing because it doesn’t require partnerships with restaurants. But increasingly, restaurants are banning Postmates deliveries during peak times or at all. As the category ages, Grubhub’s un-disruptive partnerships with restaurants, its focus on only delivering hot food in less than an hour from local restaurants, and its investment in customer service seem to be paying off.

As a public company, Grubhub is worth some four times more than the more “innovative” Blue Apron. It’s even worth more than other major players in the local and restaurant space like GroupOn and Yelp too.

And those latter two have become Grubhub’s latest allies.

Last week, it announced two strategic deals, that include two acquisitions: It’s buying OrderUp from Groupon and Eat24 from Yelp, retaining a strategic partnerships with GroupOn and Yelp as well. This comes just a few weeks after it announced its intention to acquire Foodler.

The three deals done within the space of a summer show how serious Grubhub is about scaling up. But the Eat24 deal was the big one. It was worth some $288 million-- more than double what Yelp paid for it two years ago. But astoundingly, analysts thought it was as big of a win for Grubhub as Yelp.

The stocks of both companies have traded up since the news. Morgan Stanley upgraded Grubhub on the news, saying in a research note, “To be clear, we do not expect Uber and Amazon’s competitive pressure to let up...and expect GRUB’s marketplace take rate to fall over the next few years. The difference is we now believe that GRUB’s larger revenue base will enable it to scale faster…. With stronger EBITDA and cash flow.”

Even Grubhub bears who say the company had to make this move to bulk up and stay independent…. Still acknowledge it was a smart move. Richard Windsor of Edison Investment Research is hardly bullish on Grubhub, still, he noted the deal would make Grubhub more than double the size of its next nearest rival, Uber. He wrote: “It is not difficult to make the case that this could be the most important move Grubhub has made in its history.”

It’s also worth noting that the two “big threats” analysts cite that create so much volatility in Grubhub’s stock are Uber and Amazon. Sure, the latter looks a lot more scary with the Whole Foods deal, but given Maloney’s relentless focus on restaurants that’s far worse news for Blue Apron than Grubhub. And, well, Uber has much bigger problems than pouring its resources into making UberEats a serious player.

Maloney is the rare CEO happy to take shots at his competitors even when his market position didn’t look this good. At last year’s Pandoland, he said, “We are 10x larger than Eat24 and Eat24 is about five times larger than Postmates and Postmates is probably four times larger than UberEats and Amazon is totally irrelevant because they are doing hundreds of orders a day. [Uber would] have to grow faster than us in our own industry which we invented and which we continue to own.”

So, I wondered, what’s an interview with him like now that Grubhub has added to its lead, flipped Yelp from a competitor to a partner, and looks pretty steady next to the turmoil at Uber and Blue Apron? I hopped on the phone with him early this week to find out.

The following are edited excerpts of our conversation.

Sarah Lacy: So the rationale of this deal seems to make sense to investors. Clearly, it’s a scale game as you have bigger competitors like Uber and Amazon threatening to enter this market. Acquiring Seamless gave you more marketshare, so a deal with Eat24 gives you more scale. I guess the question is why now? What was the impetus?

Matt Maloney: So the logic of the deal is clear and the market realized that. If you calculate what the deal is worth to us and worth to Yelp financially, the valuation makes sense. The scale perspective makes a ton of sense.

But I think what people may not be fully appreciating yet is the value of the Yelp partnership, because everyone is tied up on the acquisition and that alone is a great move.

It’s delivery. The reason it makes more sense now is we do delivery very well and the benefits of delivery on the Eat24 network is a dramatic synergy. Eat does not do delivery and has no partner to do delivery. Grubhub has more restaurants than Eat, and better restaurants. So diners will transfer eventually to a superior product.

Together, we can increase the performance of Eat’s diners by layering delivery on the platform and adding incremental restaurants. That more than pays for the headache of integration and M&A.

From Yelp’s perspective, they’ve already calculated the conversion ratio of Yelp diners ordering online. If you have double the footprint in terms of restaurants but the restaurants coming from Grubhub are better than self delivery, you can’t expect that conversion ratio to stay constant.

If 45,000 restaurants become 75,000 restaurants, with better quality, those same links are going to be making money off the same pixels. And if they aren’t paying the overhead, it all drops down to the bottom line.

We are just renting space on their site, if you think about it in economic terms. We have worked out an economic arrangement with Yelp.

SL: This seems like an extraordinarily complex transaction. What was the impetus for it?

MM: Jeremy [Stoppelman] and I have known each other for years, and I think that as competition is increasing, we are always trying to get better and smarter with new diner acquisition.

The reality is the majority of people in the US have never tried online ordering and so how do we access that pool.

This is the farthest thing from a zero sum game. The growth in Uber hasn’t been detrimental to Grubhub. It will be when the market is saturated, but it isn’t saturated. An analyst survey recently said only 12% of people have ever placed an online order. Of that 88%, 44% are planning to do so in the next year because there is increased awareness of the industry. So we want to be everywhere diners are as that transition is starting to happen. That’s the impetus for all these affiliate deals: With Groupon, TripAdvisor and now Yelp.

The problem with doing that with Yelp was they had Eat24, and they were busy building out teams and working on their marketing strategy. I think when Jeremy looked at the industry he saw a highly, highly competitive industry where they don’t have delivery or a significant competitive advantage. They are already pulling in three directions. They have broad-based reviews, now building out a deep transaction funnel in reservations, salons, and take out ordering. When you look at the whole “building a logistics network” on top of that, that’s the least attractive thing in the world.  

They could invest another $10 million in Eat and probably be a losing bet, or sell to Grubhub and double your money in two years? They get cash and don’t have to worry about this and double their footprint and bring delivery. I think he came to that realization. One of the few things driving the growth of Eat was that Yelp partnership. That was more valuable than we ever gave it credit for. So we started talking in the first quarter.

It was complicated. We complicated it more by doing an affiliate deal with Groupon at the same time. Both strategically made so much sense.

SL: So it sounds like the Yelp partnership was almost more interesting than getting more scale and taking out a competitor?

MM: Both deals were required by both parties. Neither of us would have done either deal without the other part. Frankly, we can make more money off the same asset than they can.

SL: The “solving dinner” space has been one of the most overfunded categories in recent years, and many people have been saying there needs to be consolidation-- particularly with a company like Amazon buying Whole Foods.

You’ve made two savvy acquisitions, which puts you ahead of almost everyone in the consolidation game. Do you intend to continue to focus on restaurant delivery or do you want to get into adjacent spaces like general logistics and meal kits? What else might you buy?

MM: Sub-hour delivery of hot food from restaurants is where we see the most opportunity. As people start placing more orders online, they are going to leverage local restaurants more than before. There is convenience, price, and quality.

Expanding into logistics is a losing game. You are just becoming a courier. You are not bringing any value there. You aren’t differentiating your core assets. Right now we are doing food delivery better than anyone else from an execution perspective. It’s just working for us because of two years of intense focus.

I’m not going to distract the team by picking up crap from other stores. The drivers we attract want to deliver food. They don’t want to transport other people. They don’t want to go into an Apple Store and pick up a plug. We are not going to differentiate in that direction. I think it brings a lack of focus. There is so much more opportunity in front of us as the consumer behavior starts to change.

As far as meal kits go, they are very fun and for the individual who wants to have a fun night at home, it’s like doing a puzzle. It’s great, but you aren’t going to subsist off that. The bet that more people will migrate to cooking their own food if you make it dead simple is probably true, but you won’t take over all their eating. You won’t grow faster than the sub-hour restaurant space, when you realize someone else can make the food for around the same price.

It will always be a novelty and it is an absolutely different use case from the diner’s perspective.

SL: What about already prepared food delivery services like Munchery or some of the others that have already gone under?

MM: I have a more nuanced answer to that. I gave a national restaurant association talk two years ago about how the advent of delivery-only restaurants and mass commissaries are the next wave of restaurant innovation. The concept they came out with originally to mass produce the same five items probably isn’t that great. But the concept of a restaurant that prepares a menu on demand or fast preps a whole bunch of stuff to toss together…. I still think that’s a massive opportunity. It’s not competitive with me, because I can drive demand for that. They can come to me and say, ‘I’m going to execute the back of the house as efficiently as possible and let you execute demand generation and delivery as efficiently as possible.”

SL: I don’t always agree with your views of the competitive landscape, but as a consumer who has tried almost all of these services, I will admit that your customer service is better than anyone else’s when things go wrong. I will admit that the logistics part seems to work the best with Grubhub, so I’ve needed customer service less. It’s usually been an issue with the restaurant, but Grubhub has still made it right. I will grant you that that focus has paid off.

But what has always been lacking for me is the site experience of using Grubhub. Discovery is incredibly hard. It isn’t engaging. Are you working on that?

MM: You are right and two years ago it was clunky. I’m not making excuses, I am just explaining what happened. The evolution of our company, with the Seamless deal it was like a python swallowing a goat. It took a lot of work. We were focused on the back end stuff, arguably too much.

Eighteen months ago, I said, ‘We have to roll off this backend transition. We have to go back to the front end.’ We saw user activity decreasing. We saw new diners being less productive than in the past for the first time.

The entire restart we’ve had in our growth, half of it was because of this focus on the lifetime value of the diner and A/B testing this stuff. We threw away what didn’t work and we have gotten better. We are not where I want to be yet. We have multiple teams executing on this. I’m in a two hour meeting every week on it: What’s working, what’s not working, why didn’t it work?

The point you just made about discovery is particularly astute. I’m not sure if we’re still A/B testing it or we’re rolling it out everywhere, but we’re trying to create a visual browsing hierarchy, once you click on Asian, we show you subcategory cuisines, and specific items and even specific restaurants in a visual way -- not to engage you in a vertical sorting paradigm, but what are you feeling right then. If we can make you hungrier and follow your intentions into what you really want, we are far more likely to convert you.

I talk a lot about personalization, what do you actually feel like you are in the mood for? Sushi or fried chicken? How can I tease that out as fast as possible?

SL: You don’t seem to have as much angst as other entrepreneurs about becoming a public CEO. What is different with you? Other than perhaps not raising too much money at way-too-high valuations?

MM: My perspective has always been when you take an investor, you are making a commitment and the commitment isn’t just to do a good job, it’s to return their money. That’s why they are investing.

So you can do that overtime by continually raising more capital in the private markets and paying out your investors or you can do that by going public. The benefit in going public is that you are giving the authority for the ROI back to your investors.

The first answer only works when you have copious late stage capital, but it has tightened up. Most companies can’t do that over time. Going public does bring more headings, but it’s total liquidity.

Our company specifically has a very clean and easy to understand model, that’s one of the most important things. Chosing the right metrics to go public with and making sure those metrics allow investors to build accurate models. You have problems when you see companies where the quarterly revenue is dependent on a sales pipeline. If one deal doesn’t close or two deals do close, there’s volatility. That’s not something investors reward.

Our volatility has been more about investor fear and competitive dynamics. We’ve not missed our own guidance once, and we’ve frequently exceeded expectations.

So an element of this was that Grubhub was a strong candidate for a public company to begin with.

But think about that commitment that I started out this answer with. We took on new investors in the IPO process and it was a recommitment to those investors. When we went public, I talked to them and said, “Here’s my plan for doubling your money.” We execute against that plan. You make sure you are continually making money for your investors.

There’s a lot of that that is not what startups are comfortable doing. When you are a private company, you have four-- maybe six-- board meetings a year, a couple of people you are cloes to, and a couple of people you have to make sure are clear what is happening. But you don’t have 500 investors. It’s different. The companies you see that have a hard time out of the gate, I don’t think they quite get that.

SL: Earlier you articulated the value of your restaurants being on Yelp’s platform pretty convincingly. If discovery is something you’ve struggled with on the front end, why stop at the Eat24 deal and a partnership? Why not just merge with Yelp?

MM: It’s the classic partner versus acquisition conversation. It only makes sense for two public companies to merge if there’s strategic benefit you can’t get separately. So what could be the benefit for consolidating and what’s the cost of consolidation.

I don’t know what else we would get. We have a preferred partnership for everyone of Grubhub’s restaurants to show up on Yelp. Yelp will only show another partner’s restaurant when Grubhub doesn’t have that restaurant. We have an economic relationship we both find profitable.

We both feel good. There’s no additional efficiency in terms of data. I don’t know what the extra strategic element would be by putting them both together.

Right now, Yelp is at the top of its game with local search. I know nothing about that business. I would probably be a friction to them in making the right decisions.

They do know something about online ordering, but in ceding the asset to me, they’ve said I can do more with the asset than they can. I don’t see the benefit of doing it unless there is a significant financial reason. That’s a hard argument to make.

I can not do Jeremy's job better than he can.

SL: Ok last thing. I want to ask you about these culture wars that have been on display in Silicon Valley all year, mostly this summer. You’ve had Travis Kalanick losing his job and Uber reportedly losing almost half of its value because of discrimination and alleged law breaking. You’ve had VCs losing their jobs and firms going under because of sexual harassment. And now, the Google manifesto-- which half of the people at Google seem persuaded by, based on internal polls. And now, the Alt-Right is coming after Google, threatening a boycott.

You have been a leader in building a diverse workforce, I can hear one of your kids playing behind you as we’re doing this call. And you had your own run-in with the Alt Right after it was reported that you were encouraging Trump supporting employees to resign.

What is your view watching all of this?

MM: Yeah, it’s kind of a shit show. It’s hard to pass judgement. It’s tricky. I can tell you my perspective, which you know I think. To solve really hard problems, you can’t have a team of like-minded, like-experienced individuals. It has always been really important to me to bring people to bring people together from different walks of life and different experiences, not just gender and ethnicity. There’s more to it than that.

We brought on someone very early on who was from a bank. They had specific experiences we thought were valuable. I like that that person didn’t come from a startup. They brought to bear experiences around rigor and process and controls. We were all a bunch of crazy hacker cowboys. Duct tape and bubble gum was the mantra. To have someone saying, “You are managing millions of dollars of other people’s money, don’t you think you should have some control over that?

Different perspectives have extraordinary value. You can’t have that without fundamental respect. That’s part of the problem. We are just experiencing a dramatic lack of respect for other people. I don’t know why that is. I don’t think it’s purely politics. It’s politics reflecting society. I don’t know how we solve it.

Google was the most respected company in the Valley at one point, if not in the world. People flocked there, because it was an organization dedicated to changing the world for the better with technology. I have never worked for Google, so I can’t say if that’s changed, but something else is at play. And you can see it percolating in multiple companies in the Valley right now. The impacts to female entrepreneurs are terrible.

I just hope this is a wake up call for the broader population. You will not have the success the Valley has had in the past if you act like this.

SL: Given your experience with the Alt Right, did Sundar Pichai do the right thing in firing him?

MM: They are executing at a magnitude greater complexity than I was or I am. I don’t know. I really don’t know. The way I think about it is, if you don’t have your culture, you don’t have anything. If I were him, I’d be executing to protect the culture. I’m not sure if that supports his decision or not.

I would hope that over time respect and good decisions win out regardless of temporary setbacks…. But the world is a crazy place as you know.