GrubHub closes an $11 million round, and we learned something

SandhillGrubHub recently closed an $11 million funding round. Check out our official post here.   This is the third VC financing we’ve gone through, but it was the first time I’ve done the Sand Hill road show.  The process of seeking investment is incredibly valuable for a growing business.  It forces the executive team to take a step back and evaluate their business, progress and future plans.  Then you take those things and expose them to the scrutiny of very intelligent, engaged and motivated skeptics.  It’s the best consulting money can’t buy!  During the course of talking to some of the sharpest minds in Silicon Valley, Chicago and Boston, a number of themes came up repeatedly:

Mobile is the future king

The growth in the late 90s and early 00s in web adoption is happening in a compressed 2-3 year time scale right now.  If you’ve got an investment pitch that doesn’t mention mobile before the 4th slide, you’ll walk away empty handed.  This goes both ways; investors that showed no interest in mobile were filtered out of the process very quickly.

One of the strong indicators for GrubHub is that our mobile traffic will go from 0% to 10% of our order volume in 9 months.  That’s $7 million in takeout orders placed on iPhone, Android and HTML5 mobile browsers from NOTHING in 9 months!

Another strong indicator for mobile is that repeat purchase use occasions are higher on a mobile phone than on a consumer facing website.  This makes sense intuitively: there are more opportunities to transact on a phone because it is always in your pocket.  The investors we spoke to backed up this intuition with anecdotal evidence.  Unfortunately, I don’t have sufficient sample set of actual data across multiple industries to support this. But hey, it passes the gut check, so I’ll play along!

Know your cohort analysis

Every single investor.  Every one.  They all asked us to see our cohort analysis.  By investor number 3, we had figured out not to say “what’s a cohort analysis?”  By investor number 4 it had become a slide in our pitch.  Thanks to our great marketing analysts.  So what is a cohort analysis?

Basically, take all the people who engaged in your website (or mobile app!) in a given month.  Then look how they behave in the next month as a group, and then the next month, etc.  You’ll end up with a graph that shows how engaged a group of people stays over time.  For strong businesses, this starts out high, drops dramatically over the first 1-3 months and then stays steady for a very long time. Think 2-5 years, which is an eternity for a startup.

The cohort analysis shows several actionable things. First, it is a legitimate mechanism for estimating lifetime value of a customer.  Second, it shows the impact of product decisions over time and suppresses the impact of initial marketing.  Third it shows the impact of long term engagement tactics (such as loyalty programs and remarketing) Check out Fred Wilson’s post. Lightspeed ventures also has a more how-to article.

Superior customer service is a great strategy (and Zappos hasn’t filed a patent)

“We’re going to be differentiated by giving great customer service just like Zappo’s”  That is pretty much a losing strategy.  However, “We’re going to be differentiated by giving our own style of great customer service” is a winning strategy.  Customer service is our central strategy now, and we expect to improve it over time.  We did hear some folks say “Zappos already did that”.  Well, so did Nordstrom, and about 100 other fantastic companies since about 1825. It’s still a good strategy.  Few companies do it well.

We have been and will continue to be successful because we take care of our customers.  Hungry people want to make sure they have great choices and they get fed.  So, leave all the analysis and business speak on the side for a moment and go with some olde-timey advice:  Take care of your customers first. Everything else will work itself out.

SEM is not a long term competitive advantage

SEM is hard. Doing it well is a crucial part of any businesses tactics. Having said that, it isn’t long term defensible simply because your competitors can potentially also hire a great SEM team.   Furthermore, there is always the chance that your competitors just have more money.  Zynga does this. They crush everybody with SEM and facebook ads and don’t leave an inch for competitors.

Digging deeper, we got a lot of anecdotal evidence that users who discover a website from SEM exhibit the worst loyalty among all acquisition channels.  Say what! That doesn’t even make any sense! Why would people who click on the right side of Google have less loyalty over time?  Well, honestly, I don’t know. Four investors said it, so there is probably some element of truth to this.

SEO is getting harder

First, SEO is getting harder because there are proportionally more companies focused on this over time.  There are just more people doing aggressive and intelligent things competing for the same eyeballs every year.  Compounding this problem is that the search algorithms change at a pretty quick pace. This puts the natural advantage for SEO to the newest and most innovative companies and biases away from companies that are entering the growth stage of their business.

Second, organic search Google results are taking up less and less of the page.  In most searches, the first web result is actually below the fold now.  Several things have replaced it.  The “7 pack”  local search and search results personalization have been putting pressure on the location of organic results for some time now.  The introduction of Google places just compounds the issue.

Published by Mike Evans

Founder of Founded GrubHub in 2004. Rode my bike across the US. Wrote a sci-fi novel.

2 thoughts on “GrubHub closes an $11 million round, and we learned something

  1. “Users who discover a website from SEM exhibit the worst loyalty among all acquisition channels.” That’s interesting, and I agree it seems counterintuitive. I can think of a possible explanation, though:
    To me, SEO is like social proof. When I find a product up there in Google I tend to think the product probably deserves to be up there. When I find it in paid results, that doesn’t mean it’s a good and popular product, they just paid to be there. Of course, coming up on Google’s first page does not make your product good…
    My humble two cents…

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