The Reason Investors Are Pulling Back From Gig Economy Companies

Contract workers essential to those companies,  policymakers overseeing their operation and both venture capital and public investors are becoming skeptical of gig economy business models' sustainability which appear more reliant on underpaying the workforce than on technology. JL

Miles Kruppa reports in The Financial Times:

Funding to start-ups providing “on-demand” services across the world plunged 22% in the 12 months ending September. Venture capitalists are pulling back from start-ups promising the rapid delivery of everything from groceries to dog walkers, as the companies face pushback from workers and policymakers critical of their business models. Public investors have become sceptical of lossmaking consumer businesses. On-demand companies may have to raise prices and cut expenses as funding dries up.
Venture capitalists are pulling back from start-ups promising 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 to start-ups providing “on-demand” services across the world plunged 22 per cent to $16.3bn in the 12 months ending September, according to a recent report from analysts at Goldman Sachs. The drop largely affected ride hailing, food delivery and “other services with internet convenience advantages”, the report found.Private investors have soured on the start-ups as politicians scrutinise their use of contract workers and public investors become sceptical of lossmaking consumer businesses.Ride-hailing companies Lyft and Uber have faced pressure on both fronts, with investors sending their shares down about a third from initial public offering prices.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.On-demand companies recorded new funding highs in both 2015 and 2017, Goldman said in a previous report, despite a dip in 2016 when investors questioned the sustainability of their businesses.“Heavy inflows of capital in these years led to greater competitive intensity, particularly as a number of these businesses underwent periods of discounting/promotions to drive growth,” Goldman’s analysts wrote.But 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 last December, recently faced strikes from workers protesting against its tipping policies.Bastian Lehmann, chief executive of San Francisco-based food delivery company Postmates, last month said 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 chief executive Hilary Schneider would leave and be replaced by Garrett Smallwood.Wag has recently received takeover offers after it failed to attract customers as quickly as anticipated, one person familiar with the discussions said. The company declined to comment.Much of the new investment in on-demand companies has happened outside the US. Goldman analysts noted that, around the Lyft and Uber IPOs, “recent investor focus seems to be on similar   companies in Asia” such as Grab and Gojek.Troubles at on-demand companies could spell difficulties for investors who had set up funds to focus on the sector, Mr Nof said. “Everybody now is revisiting those with a different lens, which unfortunately they should have had on this whole time.”