Lately, there’s been a steady drumbeat of accusations that on-demand startups are unfairly wringing profits out of independent contractors. The concern: no one is withholding their taxable wages for them, they aren’t being given health care, and they have almost none of the same protections as full-time employees. In fact, one of the only protections independent contractors are provided under federal law is from race discrimination. In 2008, California’s Fair Housing and Employment Act was amended to give independent contractors protection against sexual discrimination, but many states don’t even go that far.
Maybe it’s no wonder that, to deflect such criticisms, a growing number of on-demand management teams and investors have begun suggesting that a third classification of worker – one poised to enjoy both flexibility and greater worker protections – is around the corner.
During a panel that StrictlyVC moderated in May, Simon Rothman of Greylock Partners, whose bets include the food-delivery startup Sprig, told attendees, “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.”
Longtime employment attorneys say not to count on it.
For more of this story, read on.
Four VCs on What’s Happening Now in On-Demand Startups
Last 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.