FRANCISCO — Last summer, flower delivery startup
BloomThat was in an enviable position.
2-year-old San Francisco company had raised more than $5
million in venture capital funding. It had earned a tech
world pedigree after graduating from the prestigious
incubator Y Combinator. And it had its roots firmly
planted in the "on-demand economy" — a
business model popularized by Uber that was the hot new
category in Silicon Valley.
to live up to its promise of delivering bouquets within
one hour in three markets, BloomThat was hemorrhaging
cash. After launching in New York last summer, it was
burning through more than $500,000 a month.
was not good; we probably had around four to five months
of runway left," said David Bladow, BloomThat’s
co-founder and chief executive.
with the prospect of going bust, Bladow and his
co-founders asked themselves: Do customers really need
their service at the press of a button?
a question being asked at a number of startups that
promise instant gratification. As the on-demand business
model strains companies’ finances and the tech
downturn makes investor money harder to come by,
companies are realizing that what works for Uber may not
work for them.
like BloomThat, have changed course from a model that
was, for a time, seen as the easiest way to land funding
in Silicon Valley.
said, ‘grow, grow, grow,’ and someone else parroted
it, then everyone else parroted it, and we fell victim
to the macro trend," Bladow said.
year alone, venture capital firms invested more than $17
billion across 214 companies that had the on-demand
business model, up from $7.3 billion the previous year.
These investments represented nearly 13 percent of all
venture funding that year, according to data gathered by
the pioneer of the on-demand model, also continued to
grow, giving the Valley reason to keep throwing money at
offering rides is different from selling flowers.
Uber to offer on-demand service, all it needs is lots of
drivers using their own cars to log onto the app and
start driving. For BloomThat to deliver flowers in a
one-hour window, it had to set up distribution centers
stocked with fresh bouquets that were ready to be
deployed at a moment’s notice. That takes real estate,
supplies and staff — before even getting into the
logistics of one-hour delivery.
a venture-funded San Francisco startup that offered
on-demand valet parking, found its initial business
model undermined by similar costs.
company was paying a premium to lease parking spots in
cities that have notoriously few parking spots. The more
popular the company got, the more it cost to secure
additional spots. Customers, however, weren’t willing
to pay the premium.
consumers have a price point in mind for a
service," said Sean Behr, chief executive of Zirx.
"The consumer is unwilling to pay for the true
nature of on-demand."
so the first signs of an on-demand exodus have started
to show. Some, like Spoonrocket (on-demand meals),
Homejoy (on-demand house cleaning), and Shuddle (Uber
for kids), have gone out of business because they couldn’t
raise enough money. Sidecar, an Uber competitor, sold
its assets to General Motors last year. And Zirx has
dropped the on-demand component of its business
company needs to look into their own business and ask
themselves what they’re best at," said Eurie Kim,
a partner at venture capital firm Forerunner Ventures,
which invested in BloomThat and supported the company’s
move away from on-demand delivery. "When you do
that, you realize there are probably two or three things
your customer really loves about your business, and it’s
not necessarily the delivery."
BloomThat, the company learned that customers thought
on-demand delivery was nice, but it wasn’t a deal
breaker. People didn’t mind ordering flowers and
getting them in a later window, or even the next day. By
extending the delivery window by an hour, the company
was able to reduce its number of drivers and
distribution centers and cut costs by 25 percent.
company now offers on-demand delivery only in city
centers, and nationwide next-day delivery. The latter
accounts for 50 percent of its orders, and the company
became profitable four months ago.
Behr looked at Zirx’s model, he realized "it
would be a very difficult product to make money."
So he, too, changed the company’s course. Earlier this
year Zirx changed its business to offer a service where
it moves vehicles for other companies, such as rental
car services, mechanics, and car dealers. Behr expects
Zirx to be profitable by the end of the year.
idea that we’re an on-demand company — that was part
of the problem," said Matt Schwab, BloomThat’s
co-founder and president. "We’re not an on-demand
company. We’re a company that builds products that has
on-demand delivery. It seems trivial, but flipping the
thinking changed the focus of the company."
are some industries where on-demand delivery is
critical, said Ooshma Garg, founder of Gobble, a dinner
kit company that delivered on-demand meals back in 2012,
before changing to a subscription model. But that only
applies to two or three industries, not 100.
figured out that on-demand didn’t work for us within
three months of trying it," she said.
its on-demand period, the quality of Gobble’s food and
service suffered. Its target market, which was families,
lived in the suburbs — meaning it had to have delivery
drivers stationed across the Bay Area with trunks full
of food. Any meals that weren’t sold went to waste. It
quickly changed direction to a subscription model. It is
now 20 times larger and is no longer losing money.
not just companies that are waking up to the fact being
"on-demand" doesn’t guarantee success —
the investor tide has also turned.
the downturn leads to more cautious investment,
on-demand businesses are among the hardest-hit; funding
for such companies fell in the first quarter of this
year to $1.3 billion, down from $7.3 billion six months
you look in venture capital markets, the on-demand
sector is definitely out of favor," said Ajay
Chopra, a partner at Trinity Ventures who is an investor
in both Gobble and Zirx.
not lost on venture capitalists that the collective fear
of missing out on investing in the next Uber is what
drove many of the investments in on-demand businesses to
as with any boom, there is a shake-out. Here, it’s
been the realization that on-demand delivery isn’t as
new or groundbreaking as previously thought (e-commerce
firms Webvan and Kozmo.com offered delivery in less than
an hour in the late ‘90s before going out of business
during the dot-com crash), and it’s not actually
crucial to most companies.
lot will go out of business, sell, or merge,"
Chopra said. "And I expect a lot of companies will
pivot to a different model."
while a pivot may be an admission that a company didn’t
get it right the first time, that’s just part of
running a business, Chopra said.
not easy. Gobble, Zirx and BloomThat all went through
awkward transition periods. Gobble spent months
educating its customers on the new business. Zirx had to
cut the consumer-facing part of its business entirely.
BloomThat’s growth flatlined for five months while it
figured out its new model.
not the straightforward overnight success story that
Silicon Valley likes to sell. But it’s far more
sustainable and lucrative than the rush to win at
come out of this fog," Bladow said. "It allows
me to sleep a lot better at night."