• Four VCs on What’s Happening Now in On-Demand Startups

    Now ButtonLast week, at the On-Demand conference in San Francisco, StrictlyVC interviewed a panel of venture investors about the many companies they’re seeing – and funding — that deliver food, massages, and medical advice in real-time. We talked about the opportunity presented by these startups, as well as the many open questions that on-demand companies have created.

    The panelists – Patricia Nakache of Trinity Ventures, Satya Patel of Homebrew, Simon Rothman of Greylock Partners, and Steve Schlafman of RRE Ventures – each had thoughtful points of view. And while our recording of the event wasn’t crystal clear, owing to the room’s acoustics, we were able to piece together parts of that discussion below. Hope you enjoy it.

    So many on-demand companies have now been funded. How is that impacting what you’re seeing? Are there fewer on-demand startups knocking on your doors or more?

    SR: I actually counted. If you look at marketplaces, [we’ve been pitched] by about 1,000 of them in the last 18 months.

    SS: We’re seeing them every single day. It’s across the board: B2B, B2C, infrastructure, some more horizontal apps in platforms; we’re not seeing any let up at all.

    SP: We see 200 new companies each month and probably a quarter are related to the on-demand economy.

    What are they centered around? Anything really novel?

    PN: They come in cohorts, seemingly, so a couple of weeks ago, it was alcohol delivery on-demand and on-demand massage startups. But we’re also seeing more companies in transportation, in food delivery, in health and wellness and finance.

    SP: We’re not seeing any slowdown in transportation [and food delivery] companies. We’re kind of seeing things in every single vertical.

    Does that make sense? Is there enough untapped opportunity to support more food-delivery startups, for example? Where are we in the grand scheme of things?

    SR: There’s definitely too much money [funding these me-too startups]. The odds of five companies ahead of you falling apart is probably not a good business [strategy]. It’s okay not to be the first in a space, but once a space feels like [earlier companies are] approaching liquidity [meaning they’ve established both supply and demand], it’s probably time to move on to another space.

    How narrow can these startups go? Would you back a startup that’s say, delivering dairy products exclusively?

    PN: It’s the age-old debate from the software world: Do you invest in a platform or a best-of-breed solution, and I think it depends on how big the problem is that you’re solving. I think you can go too narrow to justify a standalone service, but does Uber eat the whole world? No, I don’t believe that.

    SS: It’s not just obvious industries like transportation and food. Pretty much every industry where there are service-based professionals is up for grabs. One of the craziest ideas [I’ve heard] is private investigators [which is] this weird market that exists probably on Craigslist and on the web and [a startup is now] taking it and making an experience out of it.

    Certain white collar professionals might argue that their industries can’t be too thoroughly disrupted because of their relationships with clients.

    SP: I don’t think there’s any professional service or product field that can’t benefit from improved efficiency.

    SR: It’s about quality. Take medicine, as an example. The outcome matters; it can mean the difference between life and death. Not everyone lives in a market where you can get a great doctor. Technology can remotely deliver that care, giving you truly efficient access to the world’s best [physicians], and I think that trumps anything having to do with your relationship with a mediocre doctor.

    Would you rather fund a telemedicine or other business that doesn’t require rolling out locally, versus startups that have to physically tackle city by city?

    SR: It’s a lot easier. Anyone who has tried to build a marketplace nationally will tell you [that] every local marketplace is almost like doing another startup. You [may have] a playbook, but you have to get supply and demand in every city over and over again, you have to customize it, sometimes you have to have a local team. The footprint may be smaller of [that distributed] team, and the demand may be centralized, but you still have decentralized supply.

    For companies that do go the city-by-city route, what are the top things they should have down before expanding into new markets?

    SR: Well here’s the one thing to avoid. I think everyone is trying to take Uber’s local rollout playbook and just copy it, but it doesn’t work.

    Why?

    SR: I don’t think local presence is mandatory. I see a lot of companies with a local presence in every city they’re operating in, without any good reason other than, that’s how it’s done. That’s actually not how it’s done. It’s how Uber did it and that’s fine and it works for them. But the default should always be to keep it in-house if possible.

    SP: You’re going to better understand where things are likely to break in remote cities if you take the time to understand your own operations.

    SR: The push right now is to get big fast in lots of markets. But if you haven’t unlocked the core market you’re in and really made your experience amazing, your chances of success declines with every city you expand into. Being first to the market isn’t winning. Being right is winning. It’s a race to liquidity; it is not a race to geography.

    Speaking of which, from a logistical standpoint, how do these on-demand startups address everyone who doesn’t live in an urban center? Would it make sense for more of these startups to launch early trials outside of major cities?

    SP: It’s more about more use that’s being addressed. If a company is solving a universal [problem] and its way of doing that is clean and focused, it doesn’t really matter where it starts. Operationally, it’s easier to build liquidity in more densely populated areas. There’s a question of whether some of these work in suburban areas, but operating early in urban environments gives you the flexibility to figure out suburban environments.

    What if they don’t work in suburban areas? Is there enough supply and demand in cities to justify these investments and valuations?

    SR: If you can get a meaningful percent [of the overall market] in those large areas, you can build a very large company.

    On-demand companies are dependent on contract workers. What happens if regulations change in such a way that companies have to treat them as full-time employees? Is that a concern, and either way, do you think these companies have a responsibility to turn these contract workers into full-time employees at some point?

    SR: I personally think the 1099 [tax classification] framework is broken. It existed in a world of monolithic, centralized corporations, not in a world of distributed companies, so I think there needs to be a third class of worker [and that we’ll eventually have one], though it will take a while.

    [I think these] decentralized environments are the future, and [that’s a good thing as] they enable assets to be decentralized, too. Uber doesn’t need to [own cars], for example, and that produces more money that can be pushed back to the company and customers and its employees [so that we’re eventually seeing] high-wage jobs with a lot of control.

    SP: I think regulation is going to change, but in the short term, as a business, you can decide your responsibilities will be dictated by a framework, or you can decide that your responsibilities are dictated by what’s right. And [these companies] need to do what’s right, which is to take care of workers and provide them not just with benefits and uniforms and living wages, but real career paths with the ability to grow their careers.

    SS: [Our portfolio company] Managed by Q [an on-demand office cleaning company], said early on that ‘We’re actually going to hire the workers and give them a great culture and train them and give them career advancement,’ and I think that’s brilliant . . . because at the end of the day, those employees are who your customers are interacting with, and you want to make sure they’re as good as your product.

    SP: When workers are getting all the [traditional benefits they’ve enjoyed], they’re likely to stick around longer, too.

    Connie

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  • App Annie Rakes in $55 Million as It Races Away from the Pack

    App-AnnieAccording to Comscore, activity on smartphones and tablets now absorbs 60 percent of our digital media time, driven predominately by apps. Yet, for the most part, anyone hungry to know how — and how often — those apps are used has been left in the dark.

    Onavo, an app analytics company, was widely seen as providing better insights into app usage than most analytics startups. But when it was acquired by Facebook last year, its insights were moved behind a curtain.

    Now, App Annie, the five-year-old, San Francisco-based mobile analytics company, says it has developed everything Onavo featured and much more.

    To an extent, it’s following Onavo’s playbook.

    Onavo’s mobile measurement product evolved out of a couple of applications designed to do something very different – help users reduce their expensive data consumption. Once the company gathered enough user data, it shifted gears, turning itself into a market intelligence product.

    Similarly, App Annie is rolling out a tool today called Usage Intelligence that provides customers with detailed analytics about individual app usage and engagement – information that largely comes from its free, five-month-old VPN Defender app, which offers encrypted and secure access to a user’s favorite sites and apps.

    Conveniently, VPN Defender also gives App Annie a window into its users’ app usage.

    The development is a big deal for app developers and investors who’ve been unable to accurately gauge how apps fare on the open market, as well as how people use them after they’ve been downloaded.

    It’s a huge boon, too, for App Annie, which makes money by selling yearly contracts for its analytics and says its broader tool sets are already being used by most top mobile app developers, giving it insights into 675,000 apps as a result.

    The company — whose average contract is $80,000 per year — isn’t yet profitable, says cofounder and CEO Bertrand Schmitt. “I’d be sad if we were,” he says. “It would mean we don’t know where to invest next.”

    App Annie is clearly an IPO candidate, though. In fact, the 300-person company has just raised $55 million in Series D funding led by Institutional Venture Partners, a late-stage investment firm that just saw its 101st portfolio company go public in December. “Among the reasons we chose to work with IVP was their extensive experience with IPOs,” says Schmitt, who says an offering isn’t in the cards for 2015 but suggests it’s not too far off either.

    In the meantime, App Annie — which has now raised $94 million altogether — remains focused on growing its business as fast and as wide as possible. The company already has 10 offices around the world. And it expects its headcount to reach 450 by year end as it pursues several new markets more aggressively, including India and South America.

    Schmitt says App Annie intends to create more of a social network around the business that makes it easier for developers to share and collaborate on App Annie.

    Unsurprisingly, the company also plans to release many more apps like VPN Defender from which it can continue to wring valuable and lucrative insights for its customers — and break further away from competitors in the process.

    “If we keep improving as we have done, how do you fight?” says Schmitt. “There’s no other company with the same ability to execute.”

    Connie

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  • Troubled Payday Lender Wonga Still Has a Chance, Insist Insiders

    wonga_2368090bIn the span of seven years, Wonga, a London-based online payday lender, managed to become one of the best known Internet brands in the U.K, with half the buses in London plastered with its ads, along with a good number of soccer players, through Wonga’s sponsorship of the English Premier League team Newcastle United.

    Then, late last week, the company disclosed that it was writing off some $350 million of debt – at a cost of roughly $56 million to the company — following a “voluntary agreement” between the company and the U.K.’s Financial Conduct Authority (FCA), which took over regulation of the consumer finance sector last year. Wonga’s implicit admission: That despite the more than 8,000 pieces of information that its algorithm takes into account when assessing a potential borrower, the company had lent money to people (330,000 of them) it should have declined.

    Andy Haste, an executive chairman who was installed at Wonga in July to rehabilitate the company, said that going forward, the company is committed to lending only to those who can “reasonably afford” a loan. Haste – who was hired into Wonga after it was caught sending bogus letters from nonexistent law firms to customers in arrears – also added that he “agreed with the concerns expressed by the FCA and as a consequence of our discussions we have committed to taking these actions.”

    So when did things go south at Wonga and can the company — which has raised roughly $145 million from Balderton Capital, Accel Partners, Wellcome Trust, Oak Investment Partners, Greylock Partners, Dawn Capital, Meritech Capital Partners, and Index Ventures over the years — ever recover? Unsurprisingly, it depends on who you ask.

    Insiders generally paint a picture of a company that’s been the victim of a changing regulatory environment. When Wonga was launched, its business was lightly regulated by the Office of Fair Trading (OFT), which was “not a banking oversight function that had a great deal of power or was intrusive,” observes one investor. Wonga suddenly faced a much more stringent set of checks and balances when the regulation of consumer credit was transferred last year from the OFT to the FCA.

    The FCA’s regulators have been overly harsh, too, insists another source, who suggests its cozy relationships with established players is primarily why the FCA almost immediately began poring over the fine print at Wonga. “Wonga’s business was always regulated,” says the insider. “From the first day, it was licensed; it had its own underwriting agents and was being reviewed by regulators. But becoming such a large brand so quickly was hurting the established banks, which are very influential in a country like the U.K.”

    Still, those who spoke with StrictlyVC also concede that Wonga made plenty of mistakes – not working earlier with financial services authorities, “running the business a lot looser than they should have,” and those threatening debt collection letters among them. (The latter proved an especially big embarrassment to the Church of England, which said it had unwittingly invested in Wonga through an investment fund; it ditched its stake in July.)

    The company’s once-renowned algorithm also appears to have failed the company – a lesson, possibly, to many newer lending companies that believe the sophisticated algorithms they’re developing are akin to impenetrable moats.

    As says one insider: “With algorithms, you always think you’re doing the right thing until the sh_t hits the fan. You ask the guys involved in Long Term Capital Management [the famous hedge fund that collapsed in the late ‘90s] whether they knew there was a ‘black swan’ in their algorithm; they didn’t.”

    The question now is whether Wonga stands any chance of surviving. Haste has said he believes Wonga, which serves 1 million customers, can succeed as a small company. Others close to the company aren’t so sure about its fate. Says one source: “Will Wonga be a big business again? I doubt it because of the damage to their brand reputation.”

    Say another: “If Wonga can afford to pay the penalty and stick around, they have a business to build. Consumers in the U.K. don’t have a lot of other good options. The banks are still doing a sh_tty job.”

    Sign up for our morning missive, StrictlyVC, featuring all the venture-related news you need to start you day.

    Connie

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