Uber is now valued at almost $51 billion, a valuation that puts the “on-demand mobile service” (ODMS) leader at the level of Facebook in 2011. The company’s fund-raising success has spurred a vast number of “Uber for X” start-ups that are building corporate empires with legions of outsourced contract workers. But the “gig economy” seems to be operating the same money-losing business model as the “Dot-com Bubble.”
The on-demand mobile services start-ups were so hot last year that 80 companies raised over $1.46 billion, according to CB Insights.com. That number does not include the $2.37 billion raised by the real Uber, which meant ODMS raised $4 billion in 2014.
Most of the VC start-up deals averaged about $8 million. But the biggest start-up deals were Shyp, Breather, Washi.io, Handy, DoorDash and Favor. Second stage ODMS financings included Instacart, DogVacay and Postmates.
These private companies heavily advertise across social media to get clients and are enthusiastic to tell you about their business model. But it is very difficult to get information on ODMS companies’ financial data, usually held in strictest confidence.
But a rare window opened up into ODMS profitability when Homejoy.com put itself up for sale after the on-demand house cleaners for the Bay Area acknowledged they had slower-than-expected growth that left its finances in a “dismal” state.
Homejoy advertised extensively on Facebook that its contract workers would clean houses for $19 an hour. The company described itself as a cleaning company that uses tech. After a couple years of battle with another ODMS cleaning company named “Exec,” who said it was a tech company cleaning houses, Homejoy.com acquired Exec and claimed to be booming on $38 million in venture capital fundings.
According to the San Francisco Chronicle, Homejoy.com has about 70 full-time employees in San Francisco and recorded gross revenue of about $25 million in 2014. But that seemed like a very small headcount for a company that “trumpeted its expansion to 33 major markets worldwide.” However, the most interesting statistic is that Homejoy lost “$12 on every cleaning before even counting the cost of customer acquisition.”
Subtracting Homejoy’s 20 percent of the cleaning charge as an “app fee,” that would only leave $4 to pay the contract house cleaner, travel to the client’s location, pay the Bay Area’s outrageous parking costs and buy equipment and cleaning supplies. Homejoy might make that up on extra-hour jobs, but apartments in San Francisco average less than 1,000 square feet.
The business model for on-demand mobile services start-ups’ seems to be using their venture capital cash to subsidize below-market rates on their services. If their goal was to offer home cleanings for less than cost to drive competitors like Exec out of the business, Homejoy was a fantastic success story.
Homejoy sent out an email on Friday to its users letting them know that the three-year-old company will go out of business at the end of August. In an interview with Re/code, CEO Adora Cheung said the main challenge was a spate of lawsuits that had been filed against the start-up for treating its cleaners as independent contractors rather than making them employees. But that seems like a convenient excuse for a company that blew through all of its investors’ cash.
The “Uber for X” industry sounds allot like the “Dot-com Bubble” start-ups, such as Pets.com. The San Francisco-based icon of its era raised $300 million in venture capital and delivered a February 2000 initial public offering. It spent $1.2 million on a Super Bowl ad, and then nine months later filed for bankruptcy after blowing through all the cash.
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