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Aftershocks From The On-Demand Fault Lines

I wanted to write a brief post on changes founders and current investors can expect in the on-demand sector. I realize that a well-known startup which raised venture capital from prominent firms has shut down. I do not know much about that particular company, and I have never used that particular service, so the following notes below have little to do with a specific company and all to do with general terms founders and early investors should keep in mind:

  1. Worker Classification: On-demand founders will now encounter investor questions around their philosophies and strategies toward classifying workers. I am not a lawyer, but the most rational explanation I’ve heard so far is that in a true marketplace, the service provider can assign a monetary value to their work, whereas in a managed marketplace, the marketplace itself regulates the payment. In the former, those are probably contractors; the latter begins to sound like employees.
  2. Frequency of Use: I’m a broken record here, but aside from managed marketplaces which can have a subscription component, it requires a strong, weekly active use case to justify the upfront costs these things inevitably require. Predictable frequency is a trump card.
  3. Geographic Expansion: My standard line to founders is, a team has be so operationally excellent that it can, at some point in the future, have systems in place that enable them to launch two (2) geographies in the same week. Lately, I’ve met founders with ambitions to open up international cities after the first cut of U.S. cities, and those conversations excite me.
  4. Unit Economics: Looking at top-line revenue without digging into the unit economics will likely kill any investor discussions unless the team makes the case for going into the red for a while. Mastery of unit economics is a must to convince a big VC to take on the risk of models that require more cash to expand city by city.
  5. Soft- vs Hard Landings: Theory would suggest that with huge companies like Google, Amazon, Uber, eBay, Walmart, Costco, Baidu, Tencent, Alibaba, and others who are interested in providing on-demand services, there would be a soft landing for companies that didn’t make it to being an independent company. Well, that hasn’t really happened yet, so people will be skeptical. However, that could happen in the future, and if it’s perceived to be a big/good outcome, that could then re-energize comfort with the sector. Always worth keeping in mind that VCs run exit profiles of potential investments in their diligence and higher valuations in the earlier stage begin to limit exit options. And, with most of these businesses being “tech-enabled” vs pure tech companies, the harder landings could be quite harsh from how M&A departments value existing assets.

As a founder or active early investor in this space helping companies prepare for downstream VC, these issues must be anticipated and addressed. I’d make sure to include 1-2 slides on each issue above. Again, to be clear, I am still looking at this space and more deals will be done in the sector by big VCs. But, issues surrounding these businesses have bubbled up, the gig economy and worker classification, and the lack of real exits in businesses that aren’t wholly defensible in the classic sense of the word. When bits collide with atoms, now we should expect those reactions to ignite more scrutiny.