One of the questions in startup circles right now is, “Why did Homejoy fail?” Seriously, how can a Y Combinator backed startup fail, when it had $40m of funding and it was in both:
(a) the Uber-inspired, mega growth, on-demand services industry; and
(b) the $400-800b/year U.S. home services industry?
And what does that mean for the rest of us in the online marketplace space?
A lot of chatter seems to point to the four pending law suits against them on the issue of worker classification for their workforce of cleaners. But was that really all it took to undermine a startup success story as strong as Homejoy?
We weren’t convinced. And it seems we weren’t the only ones. A common theme in Reddit conversations was, “If Homejoy’s unit economics were working, they would have been able to raise the money necessary for the legal battles. VCs would be more than willing to put capital to work to get them through those tough times.”
After all, it wasn’t like they had a shortage of doors to knock on for money. Their previous funding came from high profile names like Y Combinator, Google Ventures, First Round Capital, Redpoint Ventures, PayPal founder Max Levchin and other angel investors.
To look into it further, we took a few hours break from our startup for lawn mowing services, to trawl tech journals, news sites, and forums like Quora and Reddit for answers (…given that we do not personally know Aaron or Adora Cheung or anyone who was in Homejoy’s inner circle). Here’s a summary of what we found:
5 Homejoy mistakes to avoid
1. Holes in the quality of their product/service
In Sam Altman’s How to Start a Startup course (in which Homejoy was featured, ironically), Sam can’t emphasise enough that a successful startup “makes something users love” not something users “like”.
From everything we read online about Homejoy, there didn’t seem to be a sufficient love-fest around Homejoy’s product to keep the ship afloat organically (ie. without the need for another major cash injection) like there is around Uber (whose customers rave about them and continue to fuel their natural growth).
Common complaints included:
- Lack of provider training – which led to quality control issues and platform churn
- Inability to recruit enough quality providers to keep up with market demand – which led to holes in the quality of their product/service
- Inability to retain enough good cleaners – which again led to holes in product/service quality
- Inconsistent quality – Homejoy were not guaranteeing the same cleaner each time
- Sub-standard (and bad) reviews – compared to similar companies on Yelp
- Unreliable service times – too much rescheduling
- Customers were forced to cancel by phone – which was a hassle and left a bad aftertaste
TechCrunch contributor Sam Madden commented, “[Homejoy] attracted young, inexperienced and low-quality pro labor (at times even homeless people) leading to inconsistent and lower-quality work. This mix doesn’t quite cut it for the average homeowner who wants a spotless home, thus leading to platform churn.”
2. Customers and cleaners cut out the middle man
Every intermediary business runs the risk of platform leakage or disintermediation – ie. where customers and providers go around the system and cut out the middle man. To avoid this becoming a sizeable problem, it’s critical to give both customers and providers enough good reasons not to cut out the intermediary. Commentators suggested that Homejoy did not do this in time.
Issues raised included:
- Homejoy was not guaranteeing the same cleaner each time – so when customers found an awesome cleaner, the only way they could guarantee to keep them was to engage the cleaner directly
- Homes are very personal spaces – customers didn’t like having different cleaners
- Cleaners were not paid enough to be incentivised to stay in the system
- Some cleaners were deliberately using Homejoy as a leads-based service rather than long-term partner in business
- Not all cleaners were being given enough hours to keep them loyal
- Cleaners may have preferred cash-in-hand work that was outside of the system completely
3. Hazy line between employee Vs contractor
Businesses have been employing contractors for years. So what did Homejoy do that seemed to have them running scared of the lawsuits and regulators, when it came to the worker classification of their cleaners?
Here are some clues we found in the commentary:
- Cleaners were given and required to wear a uniform (yellow Homejoy t-shirt)
- Cleaners were given equipment to do the job (vacuum)
- Homejoy created and managed entire schedules and routes
- Homejoy expected cleaners to work a minimum number of hours per week
- Cleaners had to fill out a detailed checklist for every job completed
4. Low margins
Even with a 25% commission, Homejoy’s low margins seemed to be a constant balancing act and likely contributed to their inability to raise enough money in their last funding round.
Online commentators tend to attribute their low margin trouble to:
- Ridiculously low price promotions – eg. $19 for the whole house
- The high cost of buying “cleaner kits” (vacuum + uniform t-shirt) for their providers
- Too many Groupons/daily deals – which usually cost money instead of make money – as well as attract the wrong type of customers (namely, one-off/low-value customers)
- Customer retention problems – which meant low customer-lifetime-values – which do not adequately offset high customer acquisition costs
- Unsustainable, rapid expansion costs – which may explain why they pulled out suddenly last year from France and Canada
5. Maybe they were trying to solve the wrong problem
My favourite explanation for the Homejoy failure comes from a programmer by the name of Jayesh Lalwani, on Quora:
“Homejoy was trying to solve a problem that doesn’t exist. The biggest problem in the housecleaning industry isn’t the ease of finding good cleaners, but the difficulty in communicating with them…
A lot of the big chain cleaners exist because they basically manage customer relations… an independent provider cannot compete with the chain because many providers aren’t good in customer relations.
Make an app for customer relations, and you disrupt the housecleaning business. This removes entry barriers for the little guy. We don’t need no app for finding cleaners.”
Food for thought…