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Startups

SoftBank-backed DoorDash sued over food delivery tips

DC attorney general says company pocketed cash meant for drivers

DoorDash is accused of taking millions of dollars of tips meant for workers in Washington, D.C. (Photo courtesy of DoorDash)

NEW YORK -- DoorDash, SoftBank Group's food delivery bet valued at $12.6 billion, is being sued by Washington, D.C.'s attorney general for more than two years of alleged "deceptive trade practices."

The complaint, filed Tuesday, is seeking millions of dollars in restitution. It alleges that DoorDash misled customers into thinking tips would go to delivery workers, while in reality they went to subsidizing the company's "guaranteed" payment to said workers, also known as Dashers.

The lawsuit says that DoorDash, whose valuation shot up from under $1 billion in early 2018 to its current decacorn level, has reached the age of growing pains where consumer- and worker-related problems are subjecting the startup to public scrutiny, much like they once did for Uber Technologies.

According to the suit, for the vast majority of orders, DoorDash customers' tips made no difference at all to workers' pay, despite the app's claim that "all of your tip goes to your Dasher." DoorDash allegedly pocketed millions from the practice just from customers in Washington.

In September, following media coverage on the issue, DoorDash updated its pay model. 

"We strongly disagree with and are disappointed by the action taken today" by Attorney General Karl Racine, a DoorDash spokesperson said in a statement. "We believe the assertions made in the complaint are without merit and we look forward to responding to them through the legal process."

SoftBank first invested in DoorDash in March 2018 in a round that minted the delivery startup's unicorn status. DoorDash then raised $400 million this February and another $600 million in May, both backed by SoftBank, which sent its valuation skyrocketing.

The food delivery company, which fits right into SoftBank's road map to dominate the future of transportation, earned 34% of U.S. market share in September ahead of GrubHub and Uber Eats, according to data analytic company Second Measure. 

This January, DoorDash announced a partnership with General Motors' self-driving unit Cruise Automation, to which SoftBank has committed billions in funding, to test driverless food delivery in San Francisco. DoorDash is not thought to be profitable.

Unlike ride hailing, where none of the major players has yet moved into the black, profitability in food delivery seems attainable, as evidenced by publicly traded GrubHub.

Yet competition has also become increasingly cutthroat. After Grubhub's disappointing earnings release last month, the company's stock plunged 40%. In a letter to shareholders, GrubHub CEO Matt Maloney said that "the easy wins in the market are disappearing a little more quickly than we thought."

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