On-Demand Business Model Not Sure Cash Flow
December 23, 2016
The on-demand car service Uber established a business model that startups in Silicon Valley and other cities are trying to replicate. These startups are encountering more overhead costs than they expected and are learning that the on-demand economy does not generate instant cash flow. The LA Times reports that, “On-Demand Business Models Have Put Some Startups On Life Support.”
Uber uses a business model revolving around independent contractors who use their own vehicles as a taxi service that responds to individual requests. Other startups have sprung up around the same on-demand idea, but with a variety of services. These include flower delivery service BloomThat, on-demand valet parking Zirx, on-demand meals Spoonrocket, and housecleaning with Homejoy. The problem these on-demand startups are learning is that they have to deal with overhead costs, such as renting storage spaces, parking spaces, paying for products, delivery vehicles, etc.
Unlike Uber, which relies on the independent contractor to cover the costs of vehicles, other services cannot rely on the on-demand business model due to the other expenses. The result is that cash is gushing out of their companies:
It’s not just companies that are waking up to the fact being “on-demand” doesn’t guarantee success — the investor tide has also turned. As the downturn leads to more cautious investment, on-demand businesses are among the hardest-hit; funding for such companies fell in the first quarter of this year to $1.3 billion, down from $7.3 billion six months ago. ‘If you look in venture capital markets, the on-demand sector is definitely out of favor,’ said Ajay Chopra, a partner at Trinity Ventures who is an investor in both Gobble and Zirx.
These new on-demand startups have had to change their business models in order to remain in business and that requires dismantling the on-demand service model. On-demand has had its moment in the sun and will remain a lucrative model for some services, but until we invent instant teleportation most companies cannot run on that model.
Whitney Grace, December 23, 2016
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