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 Now, with public markets on a see-saw and venture capitalists
thinking the turmoil may hit private markets, many investors are
wondering if more Homejoys lie ahead. That is leading them to look
extra hard at companies that hold similar characteristics to Homejoy:
on-demand, logistics-heavy businesses that cater to consumers rather
than businesses.
"They are caught on a treadmill" because to keep running requires
more cash infusions, though often without an accompanying move to
profitability, said Venky Ganesan, a venture capitalist at Menlo
Ventures. He said he looked at about a half dozen such companies in
the spring and early summer, passing on all of them, only to see all
raise money elsewhere.
While the failure of one start-up might not seem like much,
Homejoy's folding attracted outsized interest because it had already
raised more than $35 million from high-caliber firms. Most start-ups
fail, of course, but they generally do it at earlier stages and
lower cost to their backers.
Homejoy is one of at least four high-profile collapses or
retrenchments so far in 2015, counting those that raised at least as
much cash, also from top firms. In recent years, among
consumer-oriented tech companies, just one or two such start-ups
have failed each year. See Factbox:
Earlier in 2015, assets of two onetime highflyers, social network
Path and online retailer Fab, sold for a fraction of the money
invested in them. In the world of venture, such sales are how most
start-ups fail.
And in July, upscale grocery delivery service Good Eggs closed all
locations except San Francisco, after raising more than $50 million
from backers including Sequoia Capital.
Still, venture capitalists say they don't expect an implosion in the
startup industry given that many high-growth, no-profits companies
have recently raised enough money to give them a cushion thick
enough for months, if not years.
"It may not be a 10 percent correction overnight," said Roger Lee,
general partner at Battery Ventures, describing one scenario for the
valuations of those companies. "It may be a long steady correction
over time."
And for certain categories of companies, including those seeking
funding at their earliest stage, or top performers at the late stage
of the start-up cycle, raising money is no problem. A few weeks ago,
ride-hailing service Uber raised $1 billion for its China service.
RISING VALUATIONS
Rising valuations at those high-flying companies, including
accommodation service Airbnb and data analysis company Palantir,
helped venture funds attract $10 billion last quarter, more than any
quarter in almost eight years.
For the start-ups, immediate challenges to fundraising face
companies in between, including those with revenue in the low single
digits that previously raised between $10 million and $20 million,
venture capitalists said.
Six months or a year ago, that kind of performance might have
quickly attracted another funding round on decent terms, but not
today.
Some start-ups that fit that middling profile - and thus in the
current environment might take longer to raise money, on less
generous terms - include laundry service Washio, now fundraising,
and clothing exchange Threadflip.
Washio, with $16.8 million raised to date, has developed a strong
business model that has led to steady growth and no trouble
retaining customers, a spokesman said.
Threadflip, with $21.1 million raised so far, is increasingly
focusing on its concierge model, which resells clothing on behalf of
customers instead of depending on them to handle sales themselves.
As a result, it is seeing improved growth and customer retention,
said chief executive Manik Singh.
Longer-term trouble may lie ahead for companies that have recently
raised $20 million or more but lack the profitability to attract
more cash. They have more time, but will have to focus on profit to
attract further rounds of venture money.
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Start-ups that raised large sums this year while spending heavily
for new customers include delivery-service Postmates, which raised
$80 million in June from investors such as Spark Capital and Tiger
Global Management.
Venture capitalists say they plan to watch startups in that category
closely to see whether and how they reach profitability.
Postmates usually offers a few weeks of free delivery when it first
enters a market and a $50 delivery credit for some new customers.
Then, high charges kick in; earlier this week, ordering a $13 salad
in San Francisco required fees of more than $6.
Chief executive Bastian Lehmann said his company grows largely
through word-of-mouth, has just a small marketing budget, and is on
the path to profitability.
"You've got to parse out, who are the ones who save people money in
a downturn?" asked Paul Holland, a venture capitalist at Foundation
Capital who recently backed Luxe, a valet-parking services company.
"The ones that save people money are not going to be vulnerable."
Because using Luxe typically costs less than going to a parking
garage, the company will thrive, he said. Other VCs flag the
category for trouble, saying while they may be cheap for consumers,
parking services cost too much to operate relative to fees charged.
In general, VCs search for companies offering a service that
customers decide they can't live without rather than companies
juicing sales through overly rapid expansion or deep discounts.
"The more you spend on customer acquisitions, the worse your
customers are going to be," said Ann Miura-Ko of Floodgate Ventures.
Homejoy, for example, offered an initial 2.5-hour house-cleaning for
$19, leading to too many one-time-only customers.
At Good Eggs, "the single biggest mistake we made was growing too
quickly, to multiple cities, before fully figuring out the
challenges of building an entirely new food supply chain," wrote
co-founder Rob Spiro in an early August blog post.
Still, the allure of growth at high cost continues to draw startups,
in part because of the success of companies like Uber and Lyft.
One recent entry to the marketplace that is aiming to spend its way
to success is Jet, a shopping service which delivers discounted
products to members. It is currently offering new users a free
six-month membership. Armed with the $140 million it raised earlier
this year from backers such as Accel Partners and Andreessen
Horowitz, it can afford the hit - for now.
A Jet spokesman said the company's business model would allow it to
cover customer acquisition costs after its second year.
Of course, if enough customers return to fledgling startups, the
discounts pay off.
"That is where the good businesses separate from the almost good
businesses," said Tod Francis of Shasta Ventures.
(Editing by Stephen R. Trousdale and John Pickering)
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