Wary investors asking whether gig-economy emperor is naked
● Venture capitalists are pulling back from startups that promise the rapid delivery of everything from groceries to dog walkers as the companies face pushback from workers and policymakers critical of their business models.
Funding for start-ups providing “on-demand” services across the world plunged 22% to $16.3bn (about R237bn) in the 12 months ended September, according to a report by analysts at Goldman Sachs. The drop largely affected ride-hailing, food delivery and “other services with internet convenience advantages”.
Private investors have soured on the start-ups as politicians scrutinise their use of contract workers and public investors become sceptical of loss-making consumer businesses.
Ride-hailing companies Lyft and Uber have faced pressure on both fronts. In September, California legislators approved a bill that challenged the ability of ride-hailing and other gig economy companies to classify workers as independent contractors, thus avoiding paying higher wages and certain benefits.
Venture capitalists said on-demand companies may have to raise prices and cut expenses as funding dries up. The sector had previously raised $87bn of private investment from 2014 to 2018, according to Goldman.
“What we’re seeing is an increased scrutiny on unit economics that’s being imposed by investors,” said Jordan Nof, head of investments at Tusk Venture Partners.
“Unit economics” refers to revenues and expenses associated with a company’s products. This year’s renewed focus on profitability has led to turmoil at some of the highest-valued on-demand companies. Instacart, the grocery delivery start-up valued at near $7.9bn in December last year, recently faced strikes from workers protesting against its tipping policies.
Bastian Lehmann, CEO of San Francisco-based food delivery company Postmates, said last month the company pushed back an expected IPO following a “somewhat lukewarm reception” for tech companies this year.
Last week, the dog-walking app Wag, valued at $650m after a deal led by Japan’s SoftBank Group in January 2018, announced CEO Hilary Schneider would leave. Wag has recently received takeover offers after it reportedly failed to attract customers as quickly as hoped. Wag declined to comment.
Troubles at on-demand companies could spell difficulties for investors who had set up funds to focus on the sector, Nof said. “Everybody now is revisiting those with a different lens, which unfortunately they should have had on this whole time.”
Everybody is now revisiting [on-demand start-ups] with a different lens