Technology

DoorDash and Instacart face brighter IPO prospects after ballot victory in California

A shopper prepares fill his cart at a Giant supermarket in Washington, DC, April 6, 2020.

Evelyn Hockstein/The Washington Post via Getty Images)

Food delivery companies DoorDash and Instacart have a clearer path to the public markets after scoring a critical ballot victory in California.

With the passage of Proposition 22 this week, the San Francisco-based start-ups will be exempt from a new labor law in California that requires companies to classify certain workers — including delivery drivers — as employees instead of contractors. DoorDash and Instacart, along with ride-hailing companies Uber and Lyft, were so committed to winning that they made it the most expensive ballot measure in California history.

Both delivery companies are considered among the top IPO candidates for 2021. In October, Instacart raised $200 million at a $17.7 billion valuation, up from $7.9 billion at the start of the year. DoorDash raised $400 million at a $16 billion valuation in June.

Of the roughly $190 million that companies spent on Yes on Prop 22, close to $48 million came from DoorDash and over $27 million from Instacart, according to the California Secretary of State’s website.

Uber and Lyft, which went public last year, jumped 15% and 11%, respectively, on Wednesday after the favorable outcome.

Even with these gains, both companies are trading below their IPO price and have struggled to gain investor confidence because they lose billions of dollars a year. The Covid 19 pandemic has also hurt their core ride-sharing businesses, as demand for consumer travel and work commutes plunged, although Uber’s decline was tempered somewhat by its growing delivery business.

Uber and Lyft this year

CNBC

Instacart and DoorDash are in a better position financially because they exclusively deliver food (and, in Instacart’s case, groceries). Demand for delivery services has skyrocketed as the Covid-19 pandemic has kept many people at home for the last eight months.

Even so, offering all drivers benefits like paid sick leave and unemployment protection would have been hugely expensive to both companies.

‘Huge cloud’

“There was a huge cloud over hanging over their head,” said Larry Albukerk, managing partner of EB Exchange Funds, which facilitates trades in private tech companies.

Though Albukerk doesn’t transact in their stocks, he said he sees a lot of investor demand for shares of DoorDash and Instacart in the private market and expects that to translate into good public market performance. But he said investors will be more conservative after seeing the poor stock market showings from Uber and Lyft. WeWork was also forced to pull its IPO in September 2019, giving investors another reason to be cautious.

“The fact that Lyft and Uber didn’t quite meet expectations means maybe you have to readjust the expectations,” Albukerk said.

Instacart didn’t respond to a request for comment. In an emailed statement, DoorDash CEO Tony Xu called passage of the measure a win for customers, drivers and restaurants.

“Californians sided with drivers, recognizing the importance of flexible work and the critical need to extend new benefits and protections to drivers like Dashers,” Xu wrote. “We look forward to partnering with workers, policymakers, community groups, and more to make this a reality.”

Natalie Hwang, founding managing partner at investment firm Apeira Capital, said the passage of Prop 22 removes a potential existential threat to the companies and allows them to keep their labor costs in check as they prepare to go public. However, she warned that profitability will remain a challenge, making DoorDash and Instacart very risky bets.

They also will have to provide some added benefits as part of Prop 22, like minimum earnings guarantee and some health-care coverage.

“These are still fairly tough models to operate profitably at scale, and viability is still a question,” Hwang said. “Investors should still look at these stocks with some degree of caution.”

WATCH: What California’s Prop 22 could mean for tech companies in other states

View Article Origin Here

Related Articles

Back to top button