The Delivery Hero IPO and the consolidation strategy

Apostolos ApostolakisJuly 3, 2017

The 5 billion euro Friday IPO of Delivery Hero, which was founded just at the end of 2010, was an incredible event that shows how much can be achieved within a few years while following an uncommon growth strategy.

What is really striking is that Delivery hero achieved this tremendous growth and vast international presence mainly through acquisitions. The acquisition spree created in the process liquidity events for several local food delivery founders, including in which I was a co-founder and thus had a first-hand experience. The strategy, that has been often criticized, for the seemingly high prices paid for smaller companies’ acquisitions has proven successful and offers valuable inferences for tech startups. Of course, one should note that the most successful acquisitions were the ones where the companies bought out were the local leaders. In marketplaces, with strong network effects, the leader has a significant advantage.

The main takeaway is that often consolidation in the b2c marketplace space makes absolute sense both for operational as well as for financial engineering reasons.

The first reason should be straight forward because operationally a larger company, contrary to a bootstrapped startup, has the resources and can invest heavily in any area like marketing or product that makes economic sense.

Furthermore, a larger entity can leverage its product and marketing learnings and transfer them across consolidated startups saving significant cost and time that would otherwise be spent in experiments. At a later stage, a common product can replace the disparate platforms creating even higher savings on the product development.

Another aspect to be kept in mind is that a larger organization has more leverage and can achieve better pricing when buying various services. Whether it is global IT services like mail marketing or web hosting, or local services like TV buying, size and international agreements play a favorable role.

Finally, a multinational startup can use its global footprint to achieve more easily, valuable integrations with large companies/products (Googlemaps, Foursquare etc) who prioritize integrations with partners who can enable them to service more geographies.

But what makes the consolidation game even more compelling is the financial engineering part.

A startup at a one or a few countries level does not have many options for an exit and even if it does, the value it can command as a standalone company is lower than the value it can get as a strategic part of a multinational entity in the same vertical.

For instance, based on the revenue contribution of e-food in the total Q1 2017 Delivery hero numbers, the Greek business was responsible for around 3% of Delivery hero numbers.

Based on the 5-billion-euro valuation the market has provided to Delivery Hero, e-food is responsible for 150 mil euro of the market cap. Obviously, the company was not acquired for that amount but this gives an idea of the value created by the e-food acquisition. The implication of this exercise is that there is significant value to be created by an acquisition and founders now have the additional benchmark of the public multiples when considering a sale. Naturally, in order to reach that stage, founders first need to work relentlessly and with urgency to create the lucrative national champions.

If the founders are driven, and willing to expand quickly then they can also run the consolidation process themselves in which case they should better start the acquisition process sooner than later.

It is very powerful when one realizes how much value an acquired company contributes to the acquirer. It is useful to keep in mind, and our marketplace startups at VentureFriends certainly do, both regarding the timing as well as the price when negotiating a potential sale.

A consolidation at some stage, not too early if you are acquired and not too late if you are acquiring, can create significant value both for the acquirer and the acquired.

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Supported by InnovFin Equity, with the financial backing of the European Union under Horizon 2020 Financial Instruments and the European Fund for Strategic Investments (EFSI) set up under the Investment Plan for Europe. The purpose of EFSI is to help support financing and implementing productive investments in the European Union and to ensure increased access to financing.

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