And just like that, the once hot “On Demand” world, triggered by the inarguable success of Uber, has ascended the apex of the hype-cycle, and come crashing down, leaving a trail of “Uber-for-x” companies in its wake. Where does it go from here? Are On Demand startups doomed?
On-demand companies today remind me a lot of the e-commerce 1.0 companies of the late 90’s. A disruptive innovation (the internet then, mobile now), a compelling customer value prop, an indomitable market-leader, and for most players in the space, terrible unit economics.
Just like we’re seeing today with on-demand companies, most of the first generation e-commerce companies consumed hundreds of millions of venture capital, raising money at ever-increasing valuations. But just as they burned bright, they faded quickly. The VC money eventually runs out.
This didn’t mean e-commerce itself was a flawed model. It’s just that, you can’t always scale your way into profitable unit economics. Companies like Amazon and Blue Nile understood this, as did Zappos, Diapers.com, Zulily, and many others a decade later.
And then there’s the giant sucking sound coming from the dominant player. For e-commerce, that has and always will be Amazon. Many a startup has tried to compete with Amazon by being very specialized vertical competitors, only a handful succeeded in making a dent. Amazon’s economies of scale are just too great — you couldn’t compete with Amazon, even if you had better customer experience like Zappos, or faster delivery like Diapers.com. Although both were wonderful successes in their own right, relative to Amazon, they were small. Eventually Amazon’s massive scale makes the exit strategy clear.
Any startup that has played in the e-commerce world knows that the #1 rule of e-commerce startups is do something that doesn’t directly compete with Amazon. This has led to more vertically integrated companies like Bonobos and Warby Parker, as well as e-commerce concepts like Birchbox and Dollar Shave Club.
In on-demand, it’s hard not to see echoes of the same characteristics, it’s just that now Uber takes the place of Amazon, and decentralized logistics takes the place of centralized delivery. Anyone competing in the on-demand food delivery space no doubt shuddered when Uber launched Uber Eats. Uber has massive scale — as someone said to me recently, they already have two sides of a three-sided marketplace: the consumers, and the drivers. Adding restaurants is hard, but not impossible, especially when Uber has such other massive scale advantages and most restaurants are more than happy to take orders from multiple providers. Uber can scale demand faster than any newcomer can, and has the advantages of deep pockets and relatively cheap capital. That gives them incredible advantages to win market share in food delivery, if it’s a prize they decide they do indeed want. To be clear, it’s not without its challenges: delivering food is very different than delivering people. You need to on-board restaurants, keep them behaving, etc. And does Uber prioritize ride quality, or food delivery, during peak times?
Companies like our portfolio company Sprig have smartly taken this lesson and instead of competing head on with the same product, have gone down the Warby Parker route of vertical integration to enable quality+price+ speed. You need to play a different game to win.
Of course, e-commerce and on-demand have their differences, and there is still huge benefits to focus. For one, on-demand companies benefit from local network effects, whereas e-commerce has always been an economies of scale play. Second, while Amazon’s UI always favored a search-driven approach that can cross all verticals, Uber’s UI is necessarily vertical. One app for transportation. Another for food. The further Uber goes from connecting people to cars, the trickier the operations and logistics will be for them. Uber’s network effect is stronger, but their job is harder. This makes expanding into new verticals a bit more challenging for Uber, but also gives them the ability to create a customized experience for each vertical.
So in summary, just like a massive winner emerged in e-commerce, and a number of strong other players, if Uber can continue to execute as flawlessly as they have already, over the long term, they’ll enjoy most of the spoils of this space. But this doesn’t mean that there won’t be plenty of opportunity for startups to generate important businesses, nor does it mean Uber will indeed be able to execute flawlessly in an increasingly complicated space. The key is finding the way not to compete with Uber in their own game.
So who is the BlueNile of today? Who will be the Zulily, Zappos, Quidsi (fka Diapers.com), or Bonobos? On demand is no more tapped out now than e-commerce was 10 years ago. We’re still in for a lot of innovation which will push Uber to evolve its service, and… become more acquisitive in the medium to long term.