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Every startup’s goal is growth - and, when funded by venture capital, there is often an immense pressure to grow widely and as fast as possible.
Many startups that have established a strong foothold begin with narrow markets and then have to decide if and when the time is right to broaden their product and expand their market. So, how do you know when, and how, to make that move?
My recommendation is to start with evaluating your strategy and answering a series of questions that focus on what, why, when and how.
A Competitive Edge
Before jumping into expanding your Total Addressable Market (“TAM”), take the time to assess what companies may already exist in your potential broader markets. Are there any pre-existing businesses dominating the space where your company would likely broaden? Are you able to offer customers enough unmet needs to convince them to make a switch? Or is there already another tech-enabled competitor out there that will stifle your expansion and make broadening difficult?
A company that has demonstrated this type of innovative thinking time and time again is Uber. As the world’s largest ride-sharing company, Uber was founded in 2009 and quickly grew to become one of the world’s most valuable startups with a $78 billion valuation in 2020. What originally started as a solution to the unfulfilled needs of traditional taxis and car services quickly grew into a tech company with many business lines–now even offering a rewards credit card.
When expanding into the food delivery game, UberEats came a year and a half after Grubhub and DoorDash. But with an already massive network of drivers, a huge brand with tens of millions of app downloads, and world-class delivery logistics, it was a no-brainer. They essentially just switched from transporting humans to sandwiches–and succeeded knowing their tech and process were better than competitors.
Make it your top priority to provide genuine solutions to problems the competition may have overlooked before broadening, or at the least very, know your product is superior. Find ways to leverage the dominance of your core business in order to win new adjacent markets.
Operational Needs
Unsurprisingly, if you’re intent on broadening your market and service, you’ll need the cash to pursue it. Do you have enough money? Do you need to consider an additional raise? How will that affect valuation?
If you do have enough capital, and there is room in the competitive market lane, it may be time to scale. Additionally, does your broadening expand on your pre-existing tech stack, or are you essentially starting a new business? If you are expanding to a space where you need to significantly change or augment your tech stack–or to a space that is unfamiliar–you may need to again consider hiring the right people to help you.
If you don’t have enough capital, focus on your core vertical.
Exit Opportunities
While your strategy will certainly evolve over the years, it’s critical to identify potential exit paths and plan accordingly. What type of exit do you want? If an IPO is in the cards, expansion may make sense. However, don’t overlook acquisition.
Funding expansion requires a lot of money, and continually raising more money–subsequently raising your valuation–could make you less attractive for acquisition by a single vertical incumbent. Is your core vertical attractive on its own to be acquired and tacked onto a pre-existing company’s software or service?
Leaning into your niche vertical could equal an easier exit. For example, if Uber expected that its exit would be a sale to a competitor in the ride-sharing space, then expanding into other businesses would have made them less attractive for an acquisition. Entering new markets will likely force you to have to raise more money, increasing your company’s valuation and diluting your equity as a founder (i.e. in a lower price acquisition, you make less money).
Have a Plan
As entrepreneurs, growth can be the one thing that challenges and drives us the most. So whether you’re considering tapping into a new vertical or expanding on an existing one, it’s important to assess the environment and reflect on your current strategy. The most important aspect of vertical expansion involves understanding the reasons behind it.
Protect the Core
Beware when expanding into new adjacencies not to neglect the core business which got you to where you are. Ideally the adjacent businesses help strengthen, not weaken, your core business. An obvious example is Amazon expanding beyond books into other categories of ecommerce, which grew its selection, its scale and its customer base, and therefore strengthened its core. But there are many counterexamples where expansion distracted rather than strengthened, including Amazon’s launch of physical bookstores which it recently reversed and shut down.
Organizational Structure
When entering adjacent businesses, determining the appropriate org structure is critical. In a future post I will explore this important topic.
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When the coronavirus struck, Jerry Garbus was compelled to close all but one of the three of the Manhattan Beach restaurants he managed: a steakhouse called The Arthur J. He funneled all the orders from his new takeout business to their kitchen and hoped for the best.
"Nobody had any data as to what kind of support or what kind of demand there would be during the pandemic," said Garbus, a director of operations for Manhattan Beach-based Simms Restaurants.
As part of the revamp, the upscale restaurant, which is co-owned by Michelin star chef David LeFevre, invested in new packaging Garbus called "vessels" to keep food from wilting and turning soggy. It also added family meals to its menus — plates ranging from $60 -$90 to feed four to six and a new farmer's market box was added to the lineup as well.
Garbus fared better than some of his peers. Simms eventually reopened the other two restaurants, Fishing with Dynamite and Manhattan Beach Post. Part of the reason the business was successful is because it had a loyal local following in an affluent neighborhood. But Garbus also knew, if the business was to survive, he had to do something different.
The company retooled their entire model, moving takeout from an afterthought to the center of their business. Garbus watched as delivery orders went from 1% of his business to nearly 100%.
Garbus was already using delivery apps, but he knew he couldn't rely solely on them; many orders required special handling so that the presentation and the food's freshness wouldn't be compromised. Moreover, there was a cost and efficiency factor.
"A lot of companies are paying 20% to 30% fees, which is extremely prohibitive," he said.
Garbus wouldn't say how much the cut is for the popular upscale restaurants he manages. It hardly mattered before the pandemic because delivery was such a small slice of business.
The company found itself needing to do more to automate their takeout orders.
"We signed up with ChowNow as soon as we were shut down for dine in," he said. "We needed to pivot very, very quickly and they were a big part of that."
Delivery Apps' Run on Restaurants
man with Uber eats backpack
Photo by Robert Anasch on Unsplash
The lockdowns spurred by coronavirus have been a boon for delivery apps. With diners trapped at home and many too nervous to return to dining in, restaurants have had little choice but to rely on the apps for distribution. Still, the apps — and many of the restaurants they serve — have been losing money and are struggling to make their business model work. Grubhub just agreed to be acquired by Just Eat Takeaway.com, a European food delivery company, in a $7.3 billion deal that would make it the largest food delivery platform in the world outside of China. Many see the move as a sign of more consolidation to come in food delivery.
Earlier this month, Postmates, Uber Eats and other apps got hit with another blow. Citing longstanding complaints from restaurant owners, Los Angeles capped service fees they could charge at 15% for the duration of the pandemic.
The move has put even more pressure on the delivery apps and follows similar efforts in other big cities, including San Francisco and New York, where demand for at home dining has spiked.
It's also opened up opportunities for competitors like ChowNow, a platform that helps restaurants build out their own ordering platforms, rather than rely on those built by services like Postmates and UberEats. The company has seen a surge in new business.
The Playa Vista-based company offers a flat-fee service that begins at $99 and offers online ordering for pickup and delivery through third parties. It has about 12 million diners on its platform and processes $200 million in orders monthly, and it has added thousands more restaurants as owners scramble to add delivery and takeout service.
"We were typically doing about 500 signups a month. Now we are doing 2,000," chief executive and co-founder Chris Webb said.
Webb took advantage of the moment to grow his nearly decade-old business. As ChowNow added members, the company hired nearly 100 new employees and is working on a series of new features that will make pickup and delivery services easier, including adding contactless orders and doubling down on building marketing for business.
The company had been in growth mode — having $62 million in venture funding under their belt— when the virus broke out. The recent surge in business helped it get to profitability, although Webb said he's not making any prediction for the year's end.
Still, he thinks coronavirus shifted the paradigm.
"Takeout is going to be a much larger percent of restaurants' business going forward," he said.
Some diners will be too nervous to head back to restaurants while the coronavirus rages; others who never purchased food online have now been converted to mobile ordering.
Takeout is Here to Stay
Garbus agrees. ChowNow helped him transform his business toward takeout. It's set up to be compatible with Instagram and Yelp, which allows restaurants struggling to gain visibility to build a profile on social media.
With some restrictions lifted, his restaurants are once again packed, but now at only 60% of their capacity. Takeout accounts for about 20% of his business and he said there are some menu items created during the pandemic that have gained popularity as to-go orders, including a giant shareable seafood plate named the "Mother Shucker" and a cheese and charcuterie spread.
"It's a huge, huge change. There is still a lot of demand (for takeout order)," Garbus said.
Webb thinks ChowNow can become the Shopify of the restaurant world, the ubiquitous ecommerce platform that powers online storefronts for small businesses and processes billions of dollars in sales worldwide. Its approach has made it simple for companies to set up an e-commerce infrastructure without having to give away a percentage of sales.
But its standalone nature is arguably the platform's biggest weakness, said Jared Drew Coven, co-managing director of LDR Ventures, which invests in consumer products, food and beverage, as well as online marketplaces.
"Shopify was a SaaS platform that allowed anybody to create a website. The problem is awareness," he said. "These bigger platforms (like Grubhub) create a lot of awareness" for small restaurants.
These delivery apps provide powerful marketing features for small companies that a simple app or software application can't match. That means that deep-pocketed restaurants and chains will always have an advantage.
ChowNow has been trying to counter that by developing better engagement tools for restaurants to keep customers coming back, working on contactless orders for open restaurants and making pickup more seamless.
Elyan Zamora, the owner of Cooks Tortas — a popular Mexican sandwich shop in the San Gabriel Valley — said she came to ChowNow because she didn't want to have to pay delivery apps.
"I like the fact they don't charge 30 percent," she said.
Zamora, who is in the process of franchising her restaurant, said the application helped her during the pandemic, when phone orders might have overwhelmed her staff because they can take longer to process. The company maintained most of its pre-COVID-19 business and she didn't have to lay people off.
With a software system in place, she could process pickups faster and she set up a pick up spot in front of the store.
"The phone is a lot more time consuming," she said. "They want to know what ingredients there are.
With this everything is right in front of them."
Do you have a story that needs to be told? My DMs are open on Twitter @racheluranga. You can also email me.
**Editor's note: This story has been updated to reflect more recent data on the number of users on the ChowNow platform. An earlier version also mis-stated a comment from ChowNow's CEO. It's since been corrected.
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The Los Angeles City Council capped service charges third-party delivery services like Postmates, Grubhub, Uber Eats can pass on to restaurants at 15% of the purchase price during the pandemic following similar moves in San Francisco, Seattle and other major cities.
Restaurants have long complained about charges from the popular apps as high as 30% are eating away at their business, and those worries have grown during the pandemic, as owners find themselves relying more heavily on the services.
Even as dine-in restaurants slowly reopen, many are still devastated by the months-long closure. During that time, those that managed to stay afloat could only offer customers carry out and pick up services in order to keep business alive.
"Any arbitrary cap – regardless of the duration – will lower order volume to locally-owned restaurants, increase costs for small business owners, and raise costs on customers. Delivery workers would have fewer work opportunities and lower earnings," said Jenna DeMarco, a spokesperson for GrubHub in an email. "We also believe that any cap on fees represents an overstep by local officials and would not withstand a legal challenge."
Chris Webb, the CEO of ChowNow, an online order platform that offers restaurants a flat fee, said restauranteurs have long been frustrated with the fees.
"What we are hearing from a lot of restaurants," he said. "' We cannot afford to stay in business and take around 30% commissions consistently. It's driving us out of business and now this (pandemic) is the motivator for us to move.'"
He said he saw business skyrocket as many restaurant owners shifted away from delivery services that relied on percentage-based fees and to his flat-fee model. Webb said he was signing up as many as 2,000 restaurants a month.
The effort to cap the services was driven in part by pressure from the United Food and Commercial Worker Union Local 770, which is organizing the drivers. The order, which must still be signed by Mayor Eric Garcetti, also prevents the apps from taking tips from drivers.
"This smart policy will prohibit these companies from taking tips from drivers and gouging restaurants with fees," said John Grant, president of UFCW 770 in a statement."Food delivery drivers are essential workers who provide meals for the residents of our City, especially to seniors and others who are sheltering at home or under quarantine."
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