SAN FRANCISCO — Last summer, flower delivery startup BloomThat was in an enviable position.
The 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.
But 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.
“It was not good; we probably had around four to five months of runway left,” said David Bladow, BloomThat’s co-founder and chief executive. Faced 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?
It’s 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.
Some, like BloomThat, have changed course from a model that was, for a time, seen as the easiest way to land funding in Silicon Valley.
“Someone said, ‘grow, grow, grow,’ and someone else parroted it, then everyone else parroted it, and we fell victim to the macro trend,” Bladow said.
Last 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 CB Insights.
Uber, the pioneer of the on-demand model, also continued to grow, giving the valley reason to keep throwing money at on-demand businesses.
But offering rides is different from selling flowers.
For 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.
Zirx, a venture-funded San Francisco startup that offered on-demand valet parking, found its initial business model undermined by similar costs.
The 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.
“Most 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.”
And so the first signs of an on-demand exodus have started to show. Some, such as 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 entirely.
“A 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.”
For 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.
The 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.
When 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.
It’s 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 on-demand.
“We’ve come out of this fog,” Bladow said. “It allows me to sleep a lot better at night.”
