Trinity Ventures

The Opportunity: Servicing the New, On-Demand Service Worker

While consumers wade through the ever-ballooning list of brands wanting to wash their clothes, clean their homes, park their cars and deliver them dinner, a newer crop of startups has begun catering to the needs of those contract workers who make the on-demand economy possible.They’re smart to be zeroing in these independent contractors. On-demand employees represent a huge and growing wave of people who now operate as free agents, with the freedom and flexibility — and often instability — that’s part of life without a corporate parent. In fact, Intuit has somewhat famously predicted that fully 40 percent of U.S. workers will be “contingent” workers by 2020.

Patricia Nakache, a general partner at Trinity Ventures who has led deals in on-demand companies, including Eat Club, calls 1099, or contract, workers part of a generational shift. “Millennials are much less receptive to the monolithic education or work-experience notion that, ‘I’m going to have this job with a single company for 10 or 12 years or take all my classes from one-four year institution,'” she says. “They’re really beginning to question the boundaries of those experiences.”

And VCs have begun meeting with companies that cater to them.

For example, Homebrew cofounder Satya Patel points to several companies that hope to serve the most immediate needs of contract workers — which, in most cases, is frequent and steady work. Peers, for one, a San Francisco-based, still-in-beta startup launched by RelayRides founder Shelby Clark, wants to make it easier for people to find, compare and manage on-demand work opportunities. (It also points them to tax, financial and legal resources.) Kung Fu, an eight-month-old San Francisco-based company, is similarly building a platform to help people earn income based on their location and skills.

“I definitely think there is a major opportunity” here, says Patel.

Nakache is meanwhile seeing more startups approach contract workers from specific service angles. One such group are applicant tracking systems startups that — unlike predecessors catering to larger companies — are designed for batch processing. OnBoardIQ, an eight-month-old, San Francisco-based outfit, is among the newest startups trying to streamline the process hiring hundreds of people quickly. Playbook HR, a 10-month-old, San Francisco-based company, also began life as an applicant tracking system (though, sorry investors, Intuit acquired it in March).

According to Nakache, WorkPop, a year-old, L.A.-based company that’s been building a marketplace for hourly workers to find food and retail jobs (and which Trinity has backed), is beginning to eye the category, too.

A separate group of companies has sprung up around background checks. One of them is year-old, San Francisco-based CheckR; another is three-year-old, London-based Onfido. While background checks are nothing new, the industry hasn’t traditionally needed to act quickly or process large numbers of people at once; meanwhile, newer companies are only too happy to do both, even if their predecessors aren’t readily ceding the territory. (Uber, the ride-hailing company, uses Hirease, a 13-year-old, Southern Pines, N.C.-based company, to vet its drivers. Competitor Lyft similarly uses a more established company, 40-year-old, New York-based SterlingBackcheck.)

Yet there are other types of companies catering to the specific needs of contract workers.

Don’t be surprised to see more shift-planning startups like five-year-old, San Francisco-based ShiftPlanning and four-year-old When I Work in St. Paul, Mn.

Payroll startups that make it easier for contractors to get paid are also springing up, from four-year-old ZenPayroll in San Francisco, to 1.5-year-old Tiempo in Sunnyvale, Ca.

Of course, healthcare — which most contract workers don’t receive from their employers — may represent the biggest opportunity of all. Among the startups beginning to eye the space: two-year-old, San Francisco-based Stride Health, a health insurance recommendation engine that’s targeting the needs of small businesses and sees 1099 workers as a potential source of business.

There are so many startups beginning to target 1099 workers, in fact, that Nakache says Trinity has yet to pull the trigger on a related investment. She doesn’t expect it will be long, though.

“We haven’t found quite the right fit for the stage at which we invest,” she says. “But it’s safe to say that we’re actively looking and actively engaged in the sector. We have a lot of companies on our radar screen.”

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.

Ajay Chopra of Trinity Ventures: Mine Your Portfolios

Like a lot of venture capitalists, General Partner Ajay Chopra of Trinity Ventures has a number of ways to “turn down the noise” of a clamorous startup ecosystem without, hopefully, tuning out the next billion-dollar opportunity.

Chopra — who joined Trinity in 2006 after selling the company he’d cofounded, Pinnacle Systems, to Avid Technology for roughly $460 million— talked with me yesterday about some of the tactics he uses.

You recently wrote about why it’s important to turn down entrepreneurs the right way. Why spell it out?

The point was that because we turn down 99 percent of the people we meet, it makes sense to be prompt about [a no] — which many VCs are guilty of not doing — give them feedback, and be helpful to them by just pointing them in a couple of right directions. It doesn’t take that long and it really does leave a lasting impression.

How much effort can you put into the process, practically speaking?

Well, first, I think the VC business is about how do you separate the signal from the noise. VCs do it in a variety of ways. For example, if I’m only investing in digital media, I’m not looking at clean tech or healthcare deals. If I’m only looking at Series A and B deals, I’m not looking at growth-stage companies. Even still, you could spend a lot of time focusing on the wrong things, so we focus a lot of building relationships, including mining our portfolio.

Meaning what, exactly?

We talk to employees at the VP level, the director level, even the product manager level while [they’re employed by a startup we’re backing]. We get to know the management teams and we ask, “Who are your best guys?” because we want them to have a relationship with us.

That doesn’t threaten your CEOs?

Not if you do it with the CEOs’ consent. I think most CEOs who are confident company builders don’t have any issues with it. Companies with hidden agendas from their board members might, but then they usually have other issues to worry about.

I do think it’s good for product managers to be meeting with venture capitalists. And I think it’s a good retention tool for CEOs. In fact, I often get an invitation from a CEO, saying, “Hey, this person did a great job. Can you reach out to them or have coffee with them or send them an email?” Everyone knows there’s a board, and there’s a light level of touch whether you like it or not. The best CEOs use it to their advantage and to benefit their employees.

Do you take product managers out for lunch? How does it work?

We invite people in specific areas to events, like marketing people or product management people or infrastructure people or VPs of operations — people who are sometimes underserved and not recognized. We have a speaker usually, and we let the CEOs pick three top people to [send to one of these events to] award them. Recently, for example, we had [Zulily founder] Mark Vadon talk with a group about his background and career development and how to handle conflict. Hopefully, it left a subliminal impression about Trinity, so that three or five or six years from now, when these employees’ current ventures have proven successful and they’re ready to step out, they’ll think, “Let’s call Ajay; I feel comfortable with him.”

Interesting that you think these employees might themselves become founders. So you don’t subscribe to the theory that entrepreneurs are born, not made?

Not at all. Entrepreneurship isn’t about being able to hack or code or build the best [user interface] as a teenager. It’s about passion and the determination to fulfill a vision. The overwhelming indicator of the best entrepreneurs is that they’re passionate and driven by the idea that they’re chasing. I might hate the idea. I might think it’s crazy. I’ll tell someone that, too. But if they say they’re going to chase it anyway, that they aren’t going to give up, well, that’s a good entrepreneur.

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