We all face many hurdles and problems at home and at work. If money could solve all those problems, we would just print boatloads of money and throw at them. Similarly, startups are born to solve problems. I always wonder how startups can burn a lot of cash quickly to gain customers and yet not succeed in the long term. The most recent ones that come to my mind are Homejoy and Food Panda.
What are these companies about?
Homejoy was an online platform connecting professional cleaners with clients. I was their customer for more than an year. The concept is simple, they are a middleman. You set a schedule on their website, Homejoy takes care of the rest. A cleaner shows up on the schedule time. I was very relieved because it took the pain away from me, of browsing through craigslist and finding a reliable cleaner. Doesn’t it sound like a potential Unicorn idea?
Food Panda is an online local food delivery platform (heard about eat24hrs, grubhub? about the same, and operates more on the eastern half of the globe.) Lookup a restaurant, order something and food will show up. Sounds great too, doesn’t it? (I have never used their service, but have used similar services.)
Both these companies had successful funding rounds, thanks to their on-demand business model. Homejoy raised about $40 million in five rounds, Food Panda raised about $220 million in six rounds. With $220 million raised, though they did not reveal their valuation, we can be pretty sure that Food Panda was a Unicorn.
How are these companies doing now?
Homejoy shutdown its operations in July 2015. There are numerous articles about the failure of Homejoy, especially a detailed one on techcrunch, Airbnb choosing Handy over Homejoy.
Food Panda is apparently in deep trouble, there are news articles saying they could not find a buyer at $10 million price tag, though their CEO maintains that the company is not for sale and they are on their way to profitability. A company that raised $220 million won’t be bought for $10 million? Wouldn’t they have $10 million cash in the bank? May be.
And there has been a lot of negative news about Food Panda recently, the main investor Rocket Internet losing interest in the company, Food Panda has no takers at $10 million price tag, reports of fraud etc. But how can a company burn tens of millions in a short time? Here is my outsider’s perspective:
Burning money to earn money, in the name of grabbing marketshare.
Recent startup boom in India caused cut throat competition in some market segments. And companies are trying to ‘grab market share’, not by offering best customer experience, but by throwing money. There is no limit to the number of offers one will receive on e-commerce sites, ‘wallet’ companies and other startups. These companies are just participating in a proxy price war, it just doesn’t make sense.
John: You and I, we’re salesmen. We just sell. That’s what we do, it’s not complicated.
Sam: Exactly, and you know damn well you don’t sell anything to anybody unless you think they are gonna come back for more.
It doesn’t make sense to burn money to acquire customers, unless you create a compelling experience so that they come back for more. If that compelling experience is not present in the product, the business is just going to see one-time customers attracted to special offers and results in high turnover. That’s exactly what Sam says in the movie ‘Margin Call‘. If you just sell, and don’t know what makes the customer come back, you are doomed. Few companies that are very successful in spite of burning money — Amazon and Uber — because both companies know what they are doing – disruption the right way.
Throwing money at problems, and delaying the real fix.
We have been a Homejoy customer for more than one year, until it was shut down. We had one complaint about Homejoy — perennial rescheduling. We set a regular cleaning schedule every four weeks. But, it often does not happen on schedule. One day before the scheduled appointment, Homejoy rep calls and asks for a new time because their cleaner cancelled. This has been a great source of frustration for us though the service overall is a convenience we don’t want to give up. However, Homejoy had a great idea to solve the inconvenience, a $25 credit. And if it moves another time, another $25. Honestly, the $25 credit made us a little lazy to find a new service. But that can’t go on forever.
Now, look at the problems Homejoy had (pure speculation on what could have happened) — not enough cleaners to take up slots (triggers a death spiral), army of phone reps to handle such situations (added cost), loss of customer trust (attrition/drop-out), probably a penalty on cleaners for canceling (vendor experience), so cleaners make less money (unhappy vendors). From an outside perspective, it looked like Homejoy bought some time by throwing $25 at each such incident, but did not solve the real problems behind it quick enough. Ultimately, they burned the cash and were bankrupt.
Food Panda had a similar episode according to this article on livemint.com. Food Panda started offering vouchers when customers complained about a bad listing — i.e. according to their website the restaurant is accepting orders, in reality that restaurant does not exist or is shut down. Again, they did not fix the real problem quick enough and offered discount vouchers. In another snafu, Food Panda’s vendor said he gave up on chasing Food Panda for a 1.5 lakh payment that was due to him. Reason — Food Panda could not find transactions in their database.
Lack of a good fraud prevention model.
According to this news article, IIIT Hyderabad students tricked Food Panda for more than half a million rupees. This one is partly a fraud prevention problem, and partly being too fast to market with sub-par infrastructure. The root cause, just bad software engineering, the code just did not handle transactions properly.
Also, another ingenious fraud committed by restaurants came to light. Let’s say you are a restaurant. Now, place 10 orders using 10 names or even the same name, each for Rs.300. Every order is a takeaway. Pay online using the BOGO voucher, a campaign (Buy One Get One) run by Foodpanda. So for Rs.300, get Rs.300 free. So for a Rs.600 order, you paid only Rs.300. How much does Foodpanda have to return to you, the restaurant? Rs.600. After deducting 12% as its cut, Rs.528. How much did you make in the process? Rs.228 . Did you have to deliver that order? Nope. So, a straight profit of Rs.228. (Source: livemint.com)
Overall, it feels like some startups are too aggressive in acquiring customers without thinking about the value of product from a customer perspective. They must exercise enough caution and not bring their product too fast to the market without thinking if their product is providing the right customer experience, fraud resistant and sustainable in the long term. Throwing just money at problems is not enough.
(Unicorn picture from www.pixabay.com)
