Homejoy was a marquee US-based on-demand startup that recently shut shop despite having raised a boatload of VC funding.
Forbes came out with a story on the demise of Homejoy that can be read here:
The main conclusion of the post-mortem was that the startup couldn’t succeed because
“retention was really bad” and that was what killed it.
While the contention that retention was poor may well be correct, to believe that this was what killed Homejoy seems like a classic case of mistaking the symptom for the cause.
While metrics like retention are important, they are at best a lagging indicator. And as any founder will tell you, you cannot “plan” to run your startup using lagging indicators – they can perhaps help you tweak some aspects of your solution but they won’t be able to help you fix the issue when there is something fundamentally wrong with your product in the first place. What’s more, focusing on metrics like retention is a rabbit-hole for unsuspecting founders who lull themselves into believing that this “data-driven” approach that is built on metrics tracking is in itself enough for you to build a real company.
The fact of the matter is that tracking metrics like retention or stratagems like “growth hacks” are not a substitute for building a product that is actually valuable to customers in the first place.
This is part of a larger malaise – one where “growth” is valued beyond all else and the only way to get funded for the first time and for every time thereafter is to demonstrate growth on some dimension that an investor can make sense of and can possibly justify to his own stakeholders.
The problem with this picture is that funding obfuscates many critical business aspects by papering over fundamental problems or gaps in your business model. For instance, it seems fairly clear that Homejoy got its first set of customers primarily because they offered deep discounts (funded by VC “subsidy”). Undoubtedly, the company knew that they wouldn’t be able to do this indefinitely and at some point of time attempted to ratchet the prices up to “fair market levels”. Predictably customers saw no benefit in buying these services from Homejoy when there was no pricing advantage like earlier. So while this seems to be a case of not being “able to retain customers”, the fundamental problem was that a discount-driven pricing structure would never have succeeded over the long run in the first place.
When the DNA of the business model is fatally flawed in such a manner, attempting to growth-hack your way out of trouble is akin to rearranging the chairs of the Titanic after it has struck the iceberg. Nothing you do will make any material difference.
It would be uncharitable to believe that Homejoy or indeed its investors weren’t aware of this problem. But one of the wonderful aspects of VC investing and of startups in general is the leap of faith that one takes perforce to imagine the “world that can be”.
In the case of Homejoy and indeed for most on-demand services, this leap of faith is predicated on one of two fronts:
Firstly, there is a goal that once you grow the business enough and take up a leadership position, you can adjust the pricing and still continue business as usual. This is part of the old “hook for price, keep for convenience (laziness?)” playbook – once the customer has “invested” enough time and effort in your service, it would be too inconvenient to switch out even if the original lure – discounts – was not available any longer. The problem with this model is that in today’s world, it is very rare that a single startup can take up a near monopolistic leadership position in any fledgling consumer market. You can be a leader but inevitably there will be one or a few competitors biting at your heels – the moment you let down your guard, they will swoop in and convert customers. So as long as our dear investors keep pumping money into multiple startups chasing the same hot market, this denouement is unlikely to ever fructify.
The second front is that even if you can’t acquire a monopolistic position, there is the possibility that with scale, your unit economics will keep improving until it reaches the point where the company becomes profitable simply by virtue of a large customer base and increased operational efficiency. This seems to be the bet that most on-demand startups and their VC are making. Enter a market that is undoubtedly large but is hitherto serviced by unorganized or fragmented players – use VC funding to build scale rapidly and in parallel, progressively professionalize the service to accrue scale economies.
While the jury is out on whether this strategy will work, it is difficult to see how so many startups, all of which are equally funded (and extremely well at that), can all succeed to reach a scale where these possibilities open up.
The problem of course is that these startups are racing on a hamster wheel – you need to keep running and keep growing to continue to attract successive rounds of capital and as the demise of Homejoy showed us, it is very easy to miss the wood for the trees and find yourself racing to an inglorious demise.
Retention and growth is important but it is far more important to treat these as secondary to your fundamental value proposition – if that sucks, nothing can save a startup.
[About the author : The article is written by Sumanth, founder of Deck.in]
[Image credit : Homejoy website]