Why lots of 'Uber for X' startups like HomeJoy may be in trouble
J Thoendell stashed this in Tech
Homejoy raised $38 million in venture capital 18 months ago, but it’s still a young startup, and it doesn’t have the kind of deep pockets that typically accompany an aggressive pricing scheme. (The reason that Rupert Murdoch, for example, was able to sell newspapers at a loss during the nineties is because he had billions of dollars flowing in from elsewhere.) Because Homejoy failed to gain Uber-like popularity or develop a successful premium strategy, the startup either needed to raise its prices and fatten its margins — which it tried to do last year — or go back for more VC money to keep the subsidies flowing.
The classic case of price dumping gone awry, of course, is the failed urban delivery company Kozmo.com, which famously lost $1.50 for every $1 it took in during the first dot-com boom. Kozmo wasn’t able to expand its service network quickly enough to grab market share from traditional rivals, and it didn’t upsell its customers effectively — and as a result, it died.
Thanks to technological advances and a more mature startup ecosystem, you probably don’t need as much money to price-dump today as you did in 1999. But you still need money. And lots of “Uber for X” startups could be encountering Kozmo-like problems very soon.
Just look at this CB Insights chart showing how many of these startups were funded in mid-2014, about a year ago:
About as much time has passed since those startups got their funding as passed between Homejoy’s last venture round and the point at which its margins became a problem. So if they’re subsidizing their services at the same rate as Homejoy, they may be starting to feel the crunch already.
Most of those funds were for seed or A rounds, meaning that the startups likely hadn’t yet gained significant traction in the market and so won’t be able to start raising their prices.
HomeJoy is a star of the YCombinator, First Round, Redpoint, and Google Ventures portfolios.
If they can't make this kind of aggressive subsidy business model work, I don't think anyone can.
Except for Uber. They are the exception that proves the rule.