Niklas Östberg, Founder @ Delivery Hero: Competing with Uber and Doordash in a Capital Arms Race

If you take our Thailand business, we scaled from a couple of thousand orders a day up to 400,000 orders a day in less than a year, but it was not sustainable.

Nicholas Östberg, the CEO and co-founder of Delivery Hero, the largest delivery platform in the world, thought they were unbeatable, unstoppable. Therefore, we felt it was a clear path to being a 100 billion company. So why would we want to dilute on 30 billion? We got greedy. Stock fell 5% and 10 or 15%, and then shortly after more than 50%. Then it was truly too late.

Great leaders follow their beliefs. When they do, people follow them. What public market often does is that it values things one or two years forward, and of course it compares with other companies. We were definitely overvalued, and we are probably undervalued today.

Ah, thank you very much, very kind of you.

I think some of it comes back to my childhood. I was a cross-country skier, and for anyone who's not a cross-country skier, it's exhausting. You train every day, you go out in the dark, two hours interval training in the dark forest of Sweden. That's kind of how regular days look like, and I think it built some resilience there. So I think that came from there. But I think the other thing that also builds resilience is if you feel like you have a purpose and you actually do something where you add value. And I think over the years I've also learned to focus on what I can impact rather than all other things. And I know that is hard, but I really try to stop caring for what other people think or pleasing others, so that helps. And then I would say, yeah, having a team around that is supportive, that also helps a lot. But it probably comes down to those things, but the skiing definitely makes a difference.

It probably builds a certain confidence that what you're doing is right, that you got something right. It probably also helped that when you have success, you also get a lot of positive encouragement or people being supportive and they celebrate success. It's also very easy to... you have to be careful that it doesn't take you off your feet, off the ground. But I do think that some level of success is probably helpful as well.

Oh, I probably all said many times. I remember back in the 90s, I was investing in the stock market. I thought it was amazing. I made a lot of money. I lost it very quickly and realized that maybe I'm not that great after all. I think I had it also in business. I think we all thought that we were better than we were back in the COVID pandemic. Business was going through the roof, probably also a time when we felt that we were better than we actually were. So I think you constantly get reminders that maybe we have to stay on the ground. You're not as good as you think you are in the good times, and probably not as bad as you think in the bad times. So yeah, I had many times.

It's hard to say. Of course, it's easy to say with benefit of hindsight because it was not only that COVID ended, it was also that the whole capital market and the interest rate and many other things that happened when COVID died out, that all came together at one point. And that of course put a lot of pressure into companies to cut cost and so on. If we would have known that, we would have cut cost faster, earlier. We would have probably taken down risk a little bit. We would have saved as much money as we can. We probably would have raised equity instead of debt during the time when we thought that we should be worth hundreds of billions and we were undervalued back then when we were at 35. So of course it would have helped if we had taken on equity instead of debt.

Yeah, I think the learning for me is that you have to be careful with it. Coming back to the point before, we thought they were unbeatable, unstoppable, and therefore felt it was a clear path to being a 100 billion company. So why would we want to dilute on 30 billion? We got greedy and didn't want to dilute those couple of percentages that would have cost us to raise a billion or two. And we were about to do it, but then stock fell 5%. They felt, well, now it's too late. Then the stock dropped another 10 or 15%, and they felt now it's definitely too late. And then shortly after the stock fell more than 50%, and then it was truly too late. So I think it's easy to get greedy in those times. You feel like you're on top of it, and yeah, you have to be careful. It's better to dilute and not think too much about it.

I think it wasn't that hard in the beginning because I think everyone thought that it was just temporarily and it would come back, and all the numbers, all KPIs were good. I think we took fairly fast action as well back in end of 2021. We felt a little bit worried about the market. We shut down Germany and Japan. We cut 100, 200 million out of our budget before the year even started. So we actually came in, and I think things crashed down in January, February, March, so a few months later after we did that. So I'm lucky we did that. But I think the morale of the company was still very good. They felt it was temporary. They felt that we have taken the action we should have taken already before, ahead of time. I think the hard part was then to not grow valuation for another three years, and we're almost where we were three years ago if you look at our stock today. And I think at some point some people start to lose hope.

I think it depends how you see it. I think what public market often does is that it values things one or two years forward, and of course it compares with other companies. And I think, yeah, we were definitely overvalued if you just look at it from a couple of years down the line. Fast forward, I think if for anyone who rather think of it as a DCF, cost of capital over X number of years, maybe we were not that overvalued back then, and we're probably undervalued today. Maybe truth is a little in between. I definitely think that we're undervalued today though.

I think great leaders, they follow their beliefs, and when they do, people follow them. And I think that also means that they will be contrarian. There will be occasions when they go against the stream, and if they have a good judgment, and great leaders have good judgments, then they usually come out very strong afterwards. And every time they succeed there, they will build the follow base and trust. And I think it's very dangerous when leaders don't follow their belief. I think it drives skepticism in the organization. I think it usually will not be getting the respect. It will be inconsistent. Their leadership will not be consistent when they don't do what they think and what they believe in. So I do think that great leaders have to follow their instinct and the belief, even if there are sometimes contrarian views.

I think there are a lot of smaller things. There could be anything around hiring, anything around certain small investments. But I think a few that comes to mind as big differences was around logistics. No one believed in logistics back then. This was back in 2015, and we doubled down in logistics. The first initiative we did, we lost 6 million. It looked terrible, and most people have probably given up there. But we shut down that company and rebuilt it again and invested tens and hundreds of millions in logistics. And I think everyone says now that that is a better customer experience. It's clearly better for customers, and I had a strong belief that we just have to figure out how to make the economics work. I think the same, selling our home market was clearly a contrarian decision. Maybe some investors thought it was okay, but I think in the company there was a very contrarian view to sell your home market. But I think that made us incredibly strong.

And back then, this was 2017, and I felt that the market is not as big as it looks. It has a strong comparator there, and there would be no way to consolidate that market later on given regulation around M&A and so on. So I thought this is going to be value maximizing, and then I did believe that we could use that money to actually double down the markets which I consider to be much larger. I think it turned out to be larger markets outside of Germany. I also believed in a different thing, which is I felt we will be a stronger operator internationally if you're not getting distracted by our home market, because back then everything we did, as soon as something happened in Germany, we will drop the ball on everything else because it's so close to our heart where we sit. So I felt we were very mediocre executor outside of our home market because of that. And once we sold Germany, there was no excuse for not delivering outside of, like, in the rest of the world. So I think we became much stronger in our execution, operations outside of Germany once we sold Germany.

No, I don't think it's a winner takes all market. I probably changed my view there, proven wrong frankly. I know you see in US that there are two players making a lot of money. Look at UK, there are three players making a lot of money, all of them. France, two players making good money.

And Uber Eats, and they all make money in UK, I would say, decently so. Same with France, I think both Deliveroo and Uber is making money there. And Delivery Hero also operate a few markets where we have two or three players making money in that market.

Yeah, we can argue if Delivery Hero is correctly valued today. I would argue they are too low valued today. I don't know, it's a profitable business, it's growing and will continue to grow and will make more money. So I do think that it's clear value in that business. You can argue would it be even more valued if it would be possible to consolidate? Now, I don't think that it's possible to consolidate UK and a few other markets due to antitrust reasons. So you can probably not consolidate Delivery Hero and Just Eat and Uber and Deliveroo and so on. So anyone who would buy Delivery Hero, they will still have a three-market market in UK, and so it wouldn't really resolve, it wouldn't really change anything there. The only thing would be that someone else is operating than Delivery Hero, and I guess then it's more a question of can someone else operate it better than Delivery Hero themselves? Can someone else pay more money for it than what it's worth? Probably. Would it make sense for Delivery Hero to sell if someone offers a higher price but still a lower price what a business is long-term worth? Then probably not.

There is a clear advantage. So the big advantage is being large, and if you're large, customers stay incredibly loyal to your product. They are not as price sensitive as people think. So we don't see that customers move because they get a 5 euro voucher somewhere or 10 euro voucher. They might do it one order, but then they go back to where they usually order and what is top of mind for them. Therefore, I do think there's a strong lock-in on customers as long as you deliver a good service. The day you don't deliver a good service, yeah, well, then they can be disrupted fast. And we have disrupted a lot of companies. I know in Spain, Italy, Poland, Norway, we entered as number two or number three, number four player in those markets, and we're now the largest. There are occasions when the leader is not delivering good quality, but if they do, it's incredibly hard to gain the customer base of someone else. So I think there is important in the early stage that you get a strong lead, but then once you get scale, it doesn't really matter if someone else also has scale. It's not that if a competitor is half our size or double our size, it doesn't make our economics worse if they're bigger or smaller. So it's more relevant that we have scale and that we deliver a good service. And I think in the past I saw it more as 80% competition, 20% our own execution. I think what I've learned over the years is 80% our own execution that is going to matter for how big we get and how much we make, and maybe 20% driven by competition. It's not vice versa. So yeah, as long as you get scale, you will make money regardless if you're number two or number one. Of course, if you're number two, you will have less scale, you will make less money, but you will still be able to make money.

Probably many things. I don't know, it's a constant learning progress, like how you evaluate people, what is the key driver for the business. I think one thing that I realize over the time is the importance of simplicity. I think in the past it was a tendency of wanting to do more than what the organization can actually handle, and I think focus on a few things and really doubling down on those makes a world of difference. So complexity is a killer of speed.

I do agree that the best CEOs are exceptionally good capital allocators, but I don't think it's the most important part of a CEO's job. I think it is an important job, but by far not the most important. I think more important is that you drive the culture, you drive the speed of the organization, you drive the organization in direction of, yeah, pace and data and direction. And if you do that right, capital allocation will be very easy. And capital allocation is also a decision everyday type of topic. Most decisions of capital allocation could be: should we invest more in this product, should we invest more in this area, should we invest more in this country? And if you have good data and if you have good culture, it will be obvious what is the right investments. You just have to look at the returns and so on. So I think that's probably more important that you drive the organization, the speed of the organization and the culture of it is more important than allocation itself. Then of course it comes times when there are big decisions where you actually have to make a bet. You don't have the data, you don't have the information, and you just have to make a bet: are we going to go in this direction or that direction? And I guess that's what good CEOs have a good feeling. They know their industry, they know their organization, they know the strength of the organization, and they will dare to make sometimes the bold decision. It could be doubling down, it could be shutting down, it could be your product line.

I think, yeah, quick commerce is an interesting space. I think we have been exceptionally happy with the performance of how we have been able to scale the whole quick commerce side, and that was also a contrarian belief to double down in this. It was not a very popular one, but we felt that if you want to build what the customers really want and what they're asking and demanding, then we have to be able to deliver groceries and other items in a short fashion. And I think right now that's a big part of our business, and long term is going to be more than 50% of our business, so larger than food for sure. So that was, I don't know, that turned out to be a right bet. At the same time, we also did a bet in a company called Gorillas because we felt we cannot do quick commerce ourselves in every geography. We can't afford it, it's too expensive to build up. So we rather felt let's take some of the money, put it in another company, and see how we can learn and see how they can succeed and potentially certain opportunities in the future. Unfortunately, the business model probably could have worked out in normal for Gorillas, but the challenge is that the market changed and it was not possible to raise capital anymore for these companies, and they burned too much.

Yeah, we put in close to 200 million. We got some of it back, a small portion back, but yeah, most of that was lost. I think the big learning I've made there, as well as a few occasions before, in the end when you look at cohort, user acquisitions, and then the data in depth, it's almost like gravity. It always works. It always worked, but for some reason they kept acquiring more customers than I thought every month. They kept course coming up every month, and therefore also growth coming up faster than I expected. So when I looked at a few months earlier, I felt this makes no sense, they will never make it. And then they outpaced the expectation I had, and I felt, ah, maybe I was wrong, but now it's too late. And then it happened again and again, and the next month and next month. And at some point I felt maybe I'm wrong, maybe my models don't work, maybe the data somehow it seems to work because I've been wrong so many times now that maybe I'm just wrong. And that's when we made the investment in the end. It is, as I said, it's almost like gravity. In the end, cohort models work, acquisition models work, prediction there works temporarily. You can boost it for various discounts and other means, but in the end, you have to look at the core of the business and then see. And I've done that mistake many times, where also in some markets, I don't know, we have a market in Asia where they beat their plan every month, and at some point I realized like maybe I'm not a good forecaster, maybe I'm just wrong, maybe they are right. But then it turned out it was built on a little bit light foundation, and eventually what comes up needs to come down. I've seen the other way around sometimes. You keep investing, you feel like everything is right, but the business doesn't grow, and you feel like maybe I'm just wrong. But eventually that tailwind that you're building in is eventually kicking off. So I think the learning there is to stick to what you believe, or stick to your core principle on investing, stick to your core belief in what works and what doesn't work, and don't get too excited by the outside environment and kind of getting dragged into something that kind of goes against what you believe in truly.

Yeah, and probably shouldn't. And of course, we have a lot of momentum traders, and they make a lot of money by just staying with the momentum. So if you're not part of that momentum, you're also going to lose out. So of course, there are occasions when you also have to play along. When the music is there, you dance, but you got to be careful.

Yeah, so and of course going back to this 200 million mistake, also done here, that we were a 35 billion company, so this was back then less than a percent, was a half a percent of our market cap that we felt like we are willing to take this bet on this. Of course, if that valuation falls from 35 billion to 5 or 10 billion, then of course losing 200 million is a lot, especially if you don't have the cash in the balance or have enough cash in the balance sheet. So I think that is also part of the learning that you have to take yourself a little bit out of this speed mode and think it through on a more fundamental basis than getting too caught up with your current value or your current growth.

So I do think for an organization, speed is really what matters. And but the good part is for most organizations and most decisions are reversible. So you move, you take a decision, you get data and you change direction, and the faster you can iterate and do that, the faster organization is going to move. In the end, the reason for saying that that's the only thing that matters is that all the speed and all the things that you're building towards customers or other things that are priorities is compounding. So if you can get 25% more of your organization in a year, that feels like, yeah, that's good, but it's not game-changing. If you do that for 10 years, you're effectively compounding up a 10 times better product. So I believe in this moving fast and driving organization fast and kind of compounding that is key. Then there are of course those non-reversible doors where you have to be very careful that you think it through and so on. And I guess making large investments is kind of non-reversible. So I think you have to be a little bit more cautious there.

I think you have to divide the organization responsibility, ownership very carefully and making sure that everyone can see their impact very clearly. So for example, the setup we have, for example, we make sure that there's a clear ownership on a country level and making sure that they have that autonomy and that ownership. So for them, they can really make an impact in that country. It's very tangible what they do and outcome. If it was set the goal of driving overall business to size, then each individual cannot make really that impact and cannot be that visible what they do. So you have to find a way that you can actually divide the goals in a way that is clearly measurable what you do and every part of the organization, every person in that organization, and making sure that you drive that accountability and visibility and clarity. And if you do that, I think it's very easy to manage organization. It's very clear who's a strong performer, who's not, if goals are very tightly aligned to what the people actually do and the organization set up such that you have that accountability, responsibility on a smaller basis and smaller buckets. And I think that comes back also into the whole culture, the culture of actually driving an impact. And I think what you see in many companies over time is that they get too big, they get the goals are too large, it's not divided, it's very intransparent what everyone does and how they contribute to their goals, and they start inwards looking. They don't look at what actually the output that they're driving, they rather look at how much they work to what they deliver, but it could be for not for consumer customers but for, I know, maintaining the organization or so. So I think building a culture with output really matters and making sure that you divide organizations such that you have ownership and accountability on very low level.

I think most of the beliefs I have are fairly conventional. I don't think there is anything that stands out. But maybe one thing is that you got to find your own way of running the company, and there are many ways to run a successful company. And if you look at the best CEOs, there's a huge difference between a Steve Jobs and a Warren Buffett or a Bill Gates or a Steve Ballmer and so on. They all have different styles, different philosophies. I think what is more relevant is that you're authentic in what you do and you leverage what you're good at. So if you're very good at pushing hard and driving hard, well, then you should leverage down on pushing hard and get into deep. If you're more a visioner, you should leverage that you're a big visioner and then hire team members who can drive your org and do the other part. But I think yes, I think you have to build that, you have to double down on what you're good at, and you have to be authentic in what you do.

I think had into early days. I was still young, and the organization got very large very fast. I probably had a view that I was too young for being CEO. I didn't have the experience, the wisdom of being a CEO of that size. Probably felt I had to be something I'm not. So I probably at some point in those early days kind of pretended to know more than I knew, pretended to be someone I'm potentially not. And I think it was a little bit of an aha moment the day that I somehow gave up on that, and I was, here are my weaknesses, here are my strengths, take it or leave it, that's who I am. And somehow it's met with such a positive response. And yeah, I felt once I start getting authentic, the followership grew way larger. So and I realized the weaknesses were maybe not that big after all because can always be compensated with someone else having that strength. So I think for me it was the day I realized that authenticity is a core for leadership, was probably one of those moments. I think it's the same with investing. I thought for a long time there was a right way to be an investor, and then you realize there's no right way, there's just kind of your way and to lean into your strengths in that respect.

I don't know, there've been a lot, but I think it's over 35.

Yes, but I think a little bit misconception. Yes, we have done a lot, but most of them have been very, very small. And what we believed in is that we believe in those local entrepreneurs who knows the market better than anyone, and we can leverage the fact that we know how to scale things and we know how to measure things and we know how to get good returns. So if I give some of the examples, Pia was acquired when the company did 60,000 orders per month, and today does maybe 20 million orders per month or close to at least. So of course it was very small businesses back then. Or Talabat, I know you know Talabat is a company, and back then I think they did 70,000 orders per month, so literally nothing. But we were good at elaboration, what we were good at, which automate, drive efficiency, knowing how to invest, taking over, building on, scaling that, while we felt that we had a big benefit of having those local entrepreneurs and that we can plug into. And I think that has been a big success of Delivery Hero, but we rarely made big M&A. That's been one or two big M&A like Glovo, but most M&A have been rather small and rather being like you're acquiring a team and you require yourself one year of head start and double down.

I think for most companies it's harder to buy a company and be successful there. I think the hard part is not buying a company, the hard part is to make something good out of that company. And I think that's probably something Delivery Hero has been very good at. We have been good at fostering this entrepreneurship and getting them on board, and that's probably a success.

I think in the past we knew that we have to build scale very fast, and probably wrongly so. We looked at Just Eat back then, it was this huge company when we started, it had been operating for 10, 15 years. We had another company called Takeaway that is now one company, Just Eat Takeaway, but that was the gorilla back then, and we felt we will not stand a chance unless we scale fast. And in order to scale fast, we just have to buy and we have to build and we have to do that in aggregate. I think over time the industry changed, logistics came, Uber and others entered the market and proved that you can start this business way later than we did. But we believed that the only way to build scale fast enough was to buy back then. I think if...

You look at things right now, we probably prefer to build. The main logic for that is buying something now will be, well, at the time will be extraordinary expensive given that we still consider delivery to be undervalued. But also, even if you buy yourself another 3, 4, 5% business in size, if that distracts us with 2, 3, 4%, then effectively we didn't achieve anything and we only spent money on it. So in order for us to buy, it really needs to be something where we feel here we have a very strong team and we can plug it into a machine and it will make the rest of Delivery Hero better.

Of course there are occasions where you have to think it through very carefully and not make a mistake. But I think overall, we can see the cohort, we can see the acquisition growth, we can see the customer experience, we can see all the data in the world to know if this is a good acquisition or not. If you take Glovo as an example, it was very clear from us from the very first day that this will be an unbelievably profitable company.

For us, it is very, very simple. And as I said, we see the cohort, we see like what is the repeat rate of our customers, and then how many customers are acquiring per month, and how is that, yes, how do the existing base evolve over time, and how many do we add to that. And that would very clearly give you a certain growth trajectory from there.

Yeah, I do. But the benefit we have here is that we are also owners of assets in Delivery Hero with more than 20 years of cohort development where we have an enormous amount of capability from 70 different markets. So and we have seen in every single market, not a single exception where it has deviated over time.