Surprisedly, the Deliverr deal didn't work out for Shopify

Back to last October, the first original article I wrote is analyzing the acquisition of Deliverr by Shopify, and I was reasoning about how this deal was making sense and it would create a win-win situation.  However, by hearing the news today, I realized how much I was having a slap in my own face. By comparing what I wrote in that post with what happened today, I am writing this special edition to extract some further principles when examining and reasoning about a business.

So what happened

Reported by The Information article, Shopify recently announced that it won't invest anymore into the logistics area, and had sold Deliverr to Flexport, in exchange of 13% equity of the latter. This basically means it admits it's losing $1.5 billion for this deal which is just less than one year. Ironically, this basically echoed the roller coast ride of e-commerce in the last 3 years, and valuation/market-cap of both Shopify and Deliverr in these period. As I spent 2 years working in the e-commerce vertical during the pandemic, we had seen Deliverr as a north star company from outside in the industry, so lots of things are resonating with me.

The principal/management dilemma

Based on the above the Information article, back to last Sep., Shopify was still assuring their employees that all the branches of logistics of theirs that they are all in this efforts and are investing three of their huge warehouses across the country. Even this early spring, in the earning call, they admitted they were still investing extensibly to logistics. In hindsight, management should had made the decision last winter to sell the unit.

This reflected again the interesting dynamics between company's management and shareholders. Since middle of last century, it's a common consensus the sole goal of public companies is to maximize the interest of shareholders. That being said, the company is still managed by a few c-suite management people anyway. They are supposed to tell everything they know inside the company to the share holders; however, in practice, they only share limited information for the sake of "long term strategy" (so-called) of the company. So this natural doubting from investors to management is inevitable and you never know what really happens inside the company.

We're all seeing through a glass, darkly

When I was working at e-commerce vertical, Deliverr is a star company. Founded in 2017, they raised a round every year and highlight praised by all kinds of tech media. We used to share a slack collaboration channel with them, I have witness the drastic growth of their sales team through the years.

However, when Shopify conducted its due-diligence on Deliverr, they realized Deliverr actually lose money on a lot of deliveries, even $3-$4 per delivery. Only 75% of the delivery actually reached destinies within 2-day as well as their lots of their customer complaint that it could take a few month for Deliverr to in-stock and distribute their inventory across their rented warehouse and it's lack of visibility during that time. In contrast, the standard in-stock in the industry in within 1-2 weeks for self-managed warehouse.

I guess during those mega fund and Covid craziness, this is another example of all costs on growth. Company striked for an excellent top line number despite the underlying cost at the moment, with the promises to investors and their own employees at another scale, it will turn to profitability, in future, easily. So what needs to do is to get on buses early, don't miss out something big and this drove those investors keep pumping their money in the pool.

There's a distinguish between a software company and operation company

It has been proved there exists a barrier between a software business and logistics operation business, and the only successful penetration is Amazon who spent more than $50 billion to build their logistics network. There're lots of ambitious companies to try duplicating this, but this needs to leverage investors to keep investing, and strong leaders and believers in the company to build this during a long period. Shopify is not ready for this, at least not fundamentally, they retreated back to the area they were more familiar, under this tough economic environment.

Acquisition is not the ultimate goal

When joining a really early startup, founders typically promote their companies by saying – we target to raise two rounds and at that moment, we will be attractive to companies XYZ, and we will all have a relatively quick and substantial financial returns. Facts proved that it will never be easy, and it will never turned out as what was previously predicted. The story of Deliverr further taught us even the company is acquired by a such famous public company, what will happen down the road is unpredictable. Hopefully the employees there did receive something concrete as early on this was an all cash deal.

The above are my quick reactions of the newest development of this business news. Let's further observe how Deliverr is involving under Flexport, especially their website UI has reflected that already.