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WeWork's Collapse may be a warning for food delivery apps

The unprecedented collapse of We Company, which went from a $ 47 billion debutante to the brink of failure in just a few short weeks, marked a turning point in the stock market.

Investors have since become fighters of several other recent IPOs, which sent stock prices for a number of them, including Uber (NYSE: UBER) and Lift plunger. The market has become skeptical of expensive stocks, especially cloud computing companies, and has also bailed money losing stocks that show little sign of gaining profits.

The settlement of WeWork parents could signal a metric in another industry: food delivery. Although companies that rush to dinner at your door may seem to have little in common with the office-sharing real estate juggernaut, both WeWork and the food delivery boom were driven by a tidal wave of venture capital and have little in the way of entry barriers that allow a given company can establish a sustainable competitive advantage. Let's take a closer look.

  A food delivery app open to a smartphone

Image Source: Getty Images.

Softbank effect

WeWork's sudden rise would not have been possible without Softbank [1[ads1]9659009] (OTC: SFTBY) the Japanese technology conglomerate became venture capital firm. Led by CEO Masayoshi Son, Softbank has pledged $ 10.4 billion in the now troubled office-sharing startup, allowing it to expand around the world and populate global capitals such as New York and London with dozens of office space, making the company far the most famous brand in the industry.

Softbank did not start investing in We Company until 2017, but it was largely responsible for lifting WeWork's valuation from $ 21 billion in August 2017 to $ 47 billion in January.

Following the withdrawal of We Company's IPO, Softbank has been facing potential losses in the billions; We have to feed more money into We Company to keep it afloat, as we had been expecting funding from the IPO to provide fuel for that cash-burning expansion. Softbank, which owns about 29% of WeWork parents, is in talks to lend $ 5 billion in rescue funding to the coworking specialist, which could run out of cash as soon as next month.

The Japanese company has become the world's most productive venture capitalist, and while the WeWork collapse is the company's highest profile to date, this is not the only time Softbank has inflated the valuation of a rapidly growing startup.

The Food Delivery Association

Like We Company, Uber entered its IPO with significant support from Softbank, Uber's largest shareholder. The Japanese company has poured in around $ 8 billion into Uber, coming in at the end of 2017 to pump up the ride-sharing giant's valuation after co-founder Travis Kalanick was forced out of the CEO's chair following a series of scandals.

Softbank's cash helped boost Uber's growth and expansion of food delivery service Uber Eats, which quickly gained a share in 2018, but Uber is also bleeding cash, and will lose more than $ 3 billion in adjusted EBITDA this year. Since the May listing in May, Uber's valuation has received a dose of reality in the form of the stock price falling by almost a third. As a result, Softbank has lost more than $ 600 million on its investments in Uber.

However, Uber did not represent Softbank's sole investment in a food delivery app. It also invested hundreds of millions of dollars in DoorDash, now the market leader for food deliveries in the US and valued at $ 12.6 billion. Softbank's decision to plow money into both Uber and DoorDash is astonishing, as the two companies compete against each other in a brutal market share battle, essentially spending Softbank's cash on advertising and customer purchases.

More importantly, Softbank has supported both Uber and DoorDash, signaling that the industry is overvalued, thanks to easy money from the Japanese financier. As it did with WeWork, the market will gradually catch up with the industry.

Where the Delivery Contest Goes

Profits are becoming harder to come by in the food delivery industry. The chart below shows what has happened to the profit margins of Grubhub (NYSE: GRUB) the only market for the supply of food delivered to the market.

 GRUB Profit Margin (TTM) Figure

GRUB Profit Margin (TTM) data by YCharts

As you can see, the seamless parenting profitability was relatively steady in much of the story, over 8%, but that number has plummeted in recent quarters, mostly due to. competition. During the first half of this year, Grubhub's sales and marketing expenses jumped 61%, compared to just 37% sales growth, a sign that it will be more expensive for the company to find new customers and retain them, thanks in part to billions like Softbank has cast on Uber and DoorDash. CEO Matt Maloney told the Wall Street Journal "We see a lot of activity being funded by late-stage money [venture capital]," suggesting that such competition is not sustainable.

Grubhub is profitable and targets adjusted EBITDA of $ 235 million to $ 250 million this year, but competitive dynamics in the industry are likely to continue to push down profitability. Not only are the big players, including postmates, who spend aggressively on advertising, but restaurants are starting to push back delivery apps, frustrated by the charges that reduce their margins.

A number of restaurants have canceled exclusive partnerships with individual delivery apps, robbing them of one of the few ways they stand apart. For example, McDonald's ended its exclusive relationship with Uber this summer, adding DoorDash as a partner and later Grubhub in New York.

Industry dynamics also look bad that Amazon gave up food delivery in June, shuttered Amazon Restaurants, and Postmates also said it would delay the stock exchange listing it announced back in February, a sign that Investor enthusiasm for the sector may wane in the wake of the WeWork debacle.

While app-based food delivery has been popular with customers as well as restaurants in need of a boost like Chipotle for investors, it is starting to resemble a minefield. The WeWork saga shows how stripping billions of dollars into an unprofitable startup can inflate value assessments and unsustainable business models that inflate for investors.

The billions that Softbank poured into Uber and DoorDash appear to have a similar effect in food delivery. Both Uber and Grubhub shares have plunged this year, and Grubhub's profitability is rapidly evaporating.

Considering that Uber and DoorDash still have a lot of money to spend on this market share campaign, the fallout from billions of funds in the food delivery industry seems far from over.

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