Legal · On-demand

Is the Homejoy shutdown a bad signal for all on-demand services?

Anonymous

July 18th, 2015

Homejoy (the on-demandish cleaning service) announced it was shutting down yesterday in case you missed it. They had raised $40M so it was a pretty big move. And they claimed it was because of lawsuits of whether to make workers (the ones that do the cleaning) employees instead of contractors. There has been a lot of press about this lately and now wondering if as an early stage entrepreneur thinking about the sharing economy I need to be worried about this or if this is a cover?

Ethan Anderson Founder & CEO at MyTime

July 18th, 2015

The main reasons for Homejoy's failure went beyond just the contractor issue, although that was part of it.  The way I see it, the primary causes of failure were:

  • Poor quality cleaning service (I personally tested it several times and was shocked how bad the quality was). People didn't want to use it again. Just check the Yelp reviews.
  • Selling the service below cost (there is no way they could profitably provide cleaning services at $20-$25/hr)
  • High CAC (lots of ad spending, daily deals and other forms of customer acquisition that was higher than their lifetime customer value)
  • Lawsuits that scared off potential investors (the cleaners were contractors but may have been treated as employees in the eyes of the law)

Homejoy did do a number of things right that we can learn from, including awesome customer retention marketing and well designed websites/mobile apps that customers loved. This is partly why they grew so quickly. In fact, it was the fastest growing company out of the famous startup accelerator called Y-Combinator (which also launched successful companies like Dropbox, Airbnb, Zenefits, etc).

See: https://www.quora.com/Y-Combinator/In-June-September-2013-which-company-is-Paul-Graham-referring-to-as-the-fastest-growing-YC-company

David Schwartz Multi-Platform (Desktop+Mobile) Rapid Prototyping + Dev, Tool Dev

July 18th, 2015

Like it or not, companies built around hiring independent contractors to fill their employment base are basically putting a target on their backs that say, "Sue me!"

They have a simple option: hire them as employees! But if their business model doesn't work to even pay their workers minimum-wage, then it begs the question: if the costs are the same, how can workers possibly be earning minimum-wage after expenses as contractors?

Unfortunately, most of the people being hired as ICs are not savvy enough to realize the same extent of tax deductions that a typical company can realize, let alone a more sophisticated business owner. In the end, I'd call this a "false economy", and I believe it's simply a matter of time before Congress enacts legislation that plugs the holes. This will probably happen in 2017-18 timeframe as the GAO releases tax data for 2-3 years showing the horrific losses both the IRS is facing, as well as the losses being suffered by ignorant workers thinking they're getting a great deal working as ICs.

That is unless Congress goes the other way and decides there are no limits on the lower-end of what people can earn working for themselves as ICs vs. employees.

Personally speaking, I think everybody is far better served if these companies treat their workers as employees and pay them a fair wage for the time they're working. Uber was giving minimum hourly guarantees for a while in many cities after they'd cut fares so low that it was impossible to drive profitably. They know what's involved. They just don't want to do it.

It might help if these companies were required to publish a guide to prospective workers that explain the basic financial issues, including income taxes, FICA, FUTA, and other stuff that the law requires, then show how it's accounted for when they're an employee vs. an IC. Then show how this works out at their current pay structures given to ICs vs. if they were employees, and let the person choose which option they want. What will become quickly apparent is that the fees being paid to ICs by most of these companies work out to less than minimum-wage for most hours worked. Right now, it's invisible and being kept at bay through a bunch of hand waving and back-door politicking.

As someone who drives for Uber, Lyft, and several other services, my perception is that the needs of their workers takes a back-seat to everything else. It astounds me, for example, that while Uber can hire the smartest marketing minds in the known universe, the only strategy they seem to think works best for increasing ridership is to cut fares. This was entirely unnecessary this past winter here in the Phoenix area; while it might have appeared to boost ridership here, I think it did far more harm to drivers who were anticipating a lucrative and extremely busy season along with everybody else. As it was, we got squeezed while Uber made all of the additional profits. This only supports my contention that they don't care about their drivers, only their bottom-line profits.

Peter Horan Founder, Horan MediaTech Advisors

July 18th, 2015

This is a legitimate issue and has been for years. Microsoft had a major fine on this issue. When I was CEO of About.Com ten years ago we were very aware of maintaining our guide's status as Contractors. Uber hasn also been under scrutiny. It should not be a deal killer but it is something that internet companies need to respect. Peter C. Horan T: PeterCHoran S: PCHoran M: 650-274-4692

David Schwartz Multi-Platform (Desktop+Mobile) Rapid Prototyping + Dev, Tool Dev

July 19th, 2015

Uber calling their service a "lead gen" service is disingenuous at best, and borderline fraudulent at worst.

Uber sets their fares and drivers have no say in the matter. Some drivers love surging, some hate it. And drivers universally hated it when they cut fares during our peak season here when very few riders noticed or even cared.

I'm happy to pay for "leads" but not when the lead source controls what I can charge. That's BS.

Also, both Uber and Lyft implement policies that incentivize driver turnover and do nothing currently to reward drivers for long-term service. However, Uber has started taking a higher percentage of initial rides (30% instead of 20% for the first 20 rides) from new drivers, probably because they have such a fast drop-off rate.

If they want to charge for leads, fine! They can act like any other lead source and let us set our own fees, determine whether we want to participate in surges or not, and give us volume discounts or rebates for sticking around.

Anyway, the point is that when you try to redefine your business model this way, it can up-end the entire business.

Someday there will be an app that integrates all of these services in a vendor-agnostic way. You'll want a ride somewhere and enter your destination, and it'll show you the cars around you and what their offers are, regardless of service. You'll want your home cleaned and you'll enter the date, time, and how much cleaning needs to be done, and you'll get a list of options and their prices and reviews. You'll want a meal or something picked up at point A and delivered to point B (possibly with specific time-frames), and you'll get a list of services, their availability and price offers.

Today we're at the very beginning of these kinds of services. Uber may well end up being the 3000 lb gorilla in the market, but where they're at today is not where the market is heading. Today they want to control far too much of the overall end-to-end transaction, but don't want to shoulder any of responsibility that enables that degree of control.

Steve Simitzis Founder and CEO at Treat

July 18th, 2015

The problem with Homejoy was that there were no efficiencies to be found, and no technology leap to be made. The only profit would have been by delivering a commodity service at the lowest labor cost. Even if you could somehow cram workers down below the minimum wage, they would leave the platform. 

If they found a way to mix robot cleaners with human cleaners, thereby cleaning more houses more efficiently at a fair wage, then they'd have a technology business and a valuable company. Otherwise, house cleaning doesn't scale.

Reem

July 18th, 2015

Re. Homejoy closing down

I think there's going to be recognition that companies that guarantee a) response time &/or b) quality of service are agencies, not peer-to-peer marketplaces. In a peer-to-peer marketplace each side makes its own decision and both parties are truly making free & autonomous contracting decisions. 
As soon as a company guarantees that they will send plumbers/ house cleaners /... selected among the top [10]% out there, then they need to be routing the hiring decisions, guaranteeing supply of services and quality of service, etc. They're hiring. They're an agency. They typically take a 20% cut. Notwithstanding the marketing spin, they're a web-enhanced agency, not a peer to peer marketplace.

It's much harder to start a true marketplace, because you can't guarantee the supply or quality of services. You have to be willing to take that risk as you expand that demand will not find its supply. And find ways to feed both sides without steering the transactions. It takes incredible nerves and steadfastness to pull off. Craigslist has done it beautifully. HelpAroundTown is doing it in the Greater Boston area.

Karl Schulmeisters CTO ClearRoadmap

July 24th, 2015

The "Sharing Economy" is a misnomer. You really are talking about a "Piece Work Economy". There really isn't a question of whether these are your employees. They are. You are vetting them, they receive their pay from you, the contract through you. You provide the tools of work, youset the quality standard and even in some casesrequired procedures.

.

That they do not necessarily work a 40hr work week doesn't really change that.

.

So the reality is that the primary reason to treat them as "contractors" is to improve YOUR profit margin. And essentially that is at the cost of compensating them less ( you avoid having to pay into their FICA and Workers Comp and pocket that revenue ).

.

Calling it the "sharing economy" is essentially putting lipstick on this rather ugly pig. And this is why CA is demanding that companies properly reflect this relationship. The Employee vs Contractor regulations were historically put in place precisely to prevent this sort of "race to the bottom" exploitation. And yes the government very did actively opt to fight Piece Work because it was harming both citizens and the economy as a whole.

.

What this means to me is that businesses like InterSchola need to rethink their business model from the outset. because they are either

  • pricing too low to be profitable and compensate employees fully
  • not delivering sufficient value to sustain a price that is profitable and compensates employees fully
  • they are trying to game the system because they really are not comfortable as a contractor/client matching platform and the lower profits and image that go with it.

There is no need for a middle ground. Employees need notbe Full Time. You can have Part Time employees that have exactly the same flexibility as "contract workers". The main difference is that you have to pay Worker's Comp and FICA for them and withhold taxes.

Given the prevalence of automated solutions for these, this is not a significant cost.


  1. Bottom line, if your business is based on matching employees to clients you have two options:
  2. Really be a Lead Gen company and nothing more (but take the risk of poor quality of service as a result, and have very little brand control)

Hire workers.

Anything else is essentially an abuse of what is known as the Tragedy of the Commons


BTW it is not that ICs in large companies do not have recourse. One of the most common forms fo recourse is simply file a complaint with the IRS. And the IRS is something that even the Google's of the world are concerned about

Melissa Skehan Passionate, Mission Driven, Strategy, Growth & Impact Leader - Founder, CEO, President, Executive Management

July 23rd, 2015

Below is a post I wrote on my personal FB page immediately after reading about the demise of Homejoy (I service I admittedly never used).  To put this in perspective - my post was visible to my FB friends, family, colleagues, advisors and yes - former staff members. 

This hits very close to home as InterSchola's model was challenged by similar regulatory issues after we had created the first full service solution to help school districts and local agencies create a much needed revenue stream through the sale of their surplus assets and obsolete equipment through eBay style online auctions. Our model generated over $20 million in revenues for our clients (largely school districts and other local agencies), repurposed idle assets into the community and kept over 30 million pounds of surplus from going directly to landfill. Equally important, we created flexible work opportunities for many individuals in areas where similar jobs were not readily available. Our team enjoyed the work and found it rewarding.  Although not challenged by a single staff member (unlike Uber or Homejoy - both facing litigation from staff members), in 2011 the state of CA challenged us to convert our project based, flexible IC staff to employees. We did. That shift contributed significantly to our company's demise. We absolutely support workers rights and wished to provide a safety net, but the loss of InterSchola  infrastructure following our business closure left our staff scrambling to try to continue to support clients with no net at all. I sincerely believe the country needs to consider an alternative to the employee/independent contractor distinction - a middle ground that supports flexibility for those that want it or need it while also providing company sponsored support for workers. This is a new economy. Think what you will of the Uber's of the world - but small companies are trying to innovate. Meanwhile large companies have been using highly paid ICs for decades with NO recourse because they have the legal resources to structure these relationships to sidestep their transgressions. A middle ground is needed. Interesting to watch both parties presidential candidates struggling to address this topic in their campaign efforts.

There is some good advice in the thread above.  Certainly this topic is one that is and will increasingly be under scrutiny.  To be sure, if thinking of using the sharing economy as a backdrop for your model (our business predated this term - and likely looked more like Homejoy than Uber), please be aware of the multi pronged tests (differ by state) to understand the classification distinctions.  If the government wants to fight this  - they can and they will as the tests are nothing close to black and white.  Happy to share my experience...

Brian McConnell

July 18th, 2015

This is just the beginning. A lot of these companies just offer a thin rind of web/mobile "bling" on top of an existing service business. Now that they are being forced to play by the same rules as incumbents, and not systematically screw their workers, many advantages they had will evaporate. Long term winners will be companies that develop enabling technologies for existing operators (Flywheel for taxi dispatch is a good example, as they focus solely on improving dispatch and payment, not competing with the taxi companies they serve). There are probably decent opportunities in this area, but since you can't count passthru revenue as your own, the business won't be valued as highly, and investors will probably be less interested. My $0.02.

Joe Milam CEO AngelSpan, Inc.

July 19th, 2015

It would be interesting to see how may other 'sharing economy' companies, and specifically home based services like cleaning services, were already funded or in the process of being funded at the time of the last round. These investors need to be held up in the proper light, and then maybe folks would stop focusing so much on 'how to get vc funding', as it is clear this is not 'smart money'.