What is fundamentally wrong with On-Demand startups? Any Inputs

What is fundamentally wrong with On-Demand startups? Any Inputs

So now you are ready with an amazing on- demand app which is certainly going to change the lives of many? There is no doubt in saying that on-demand businesses have brought drastic changes in people’s lives. It has now become a thing that people could have never lived without. May be when the first idea hatched inside your mind, you experienced the moment of rejoice and you must have uttered, ‘Why didn’t anyone think of this before?’…
… but actually it is not true.
Today, on-demand businesses are mushrooming and increasing exponentially. It can be a travel app or a food ordering app or may be a local city guide app. But, many entrepreneurs are following the business model which explains, that scaling consumer base with an amazing on-demand app can bring local businesses at your door.
Surveys tell that with an annual attrition of more than 50% at delivery staff level, the logistics and on-demand business sector are facing a massive retention challenge. Hence, there are many on-demand businesses who have tried and failed. Let’s check out why this space is so challenging?

A- Areas of Concern:

  • 1- Changing consumer behaviour resulted in the dip and fail of such businesses. From among the 1,000 startups that began businesses, only few actually survived with rough patches.
  • 2- Most of the food based on-demand local businesses gained initial traction in certain pockets of city and which cannot be expected from all parts of the country.
  • 3- Bringing forth a consistent change in behaviour requires a minimum of ten years of push.

B- Reasons for fail of on-demand businesses:

1- Low Entry Barrier: With huge competitiveness and demand of on-demand businesses many startup entrepreneurs are jumping into the business without actually having clear passion for such businesses. There is no high level degree required to start these on-demand businesses. All you need is to manage low cost of delivery labour, inexpensive transportation and minimal infrastructure. This results in less experienced and less capital-rich competitors. Anyone can easily start the business by fulfilling minimal requirement which demands for relevant workforce in abundance. This results in high employee cost.
2- Paper-thin margins: The low barrier entry leads to many new entrants into the field, which leads to slimming of margins to a greater degree. Start-ups are not even able to meet the break-even hence no cost optimization. As there is huge competition in this business, there are less number of orders which any business earns and with these less number of orders the company fails to attain break-even resulting in failure. Experts says that this high competition in this space can’t make money in this market without reaching scale and you just can’t reach scale without burning cash. The firm struggles for sustenance and funding . Due to massive competition, salaries of workforce gets skyrocketing and therefore makes delivery cost much higher than the margins.
Localbanya, temporary shutting down of online grocery delivery firm completely indicates that engine which is driving such online delivery food and grocery services at local level is losing the steam. Localbanya is just one of the many failed. Other honorable mentions are Bengaluru based-Dazo, OrderSnack of Chennai, Langhar of Delhi which met with the similar fate.
3- Venture Capitalists FOMO Factor: One deadly question which is hovering these on-demand startups is that whether the funding-boom ending for start-ups? Investors now are stepping back and asking questions about how these startups are planning to make money before writing the cheques. They are very much skeptical about the investments they will be making in these start-ups. To be on a safer side there is some Fear of Missing Out (or FoMO) at play in this domain for local investment to be made. VC’s expects from startups to have more nuanced business models in order to succeed in these markets. They believe what works for one , may not work for another. VC firms, such as Sequoia Capital India Advisors and SAIF Partners India believe that inventory model can work well with grocery as margins in this business are paper thin for marketplaces to succeed. Helion which is an investor in online retailer Big Basket which sells its own groceries, shares the same viewpoint.
Investors believe that it’s not that funds are drying up at all, the winners will be getting significantly cash and will continue to prosper, but start-ups from biggest to newest will have to work hard to get funds and fetch higher valuations. Of course the on-demand startups like food, grocery, home services and real estate have to prove their worth and come up with their factual working models otherwise they will fail to get higher valuations in their next rounds or they may not find fresh funds altogether.
4- No Value Addition: The market size of these on-demand businesses is large and some analysts even raised concerns that such on-demand start-ups will find it difficult to make profits. These businesses are mushrooming like anything and hence all these start-ups including the big players Flipkart and Snapdeal have to model themselves to in order to sustain in the market. Instacart, the popular US groceries delivery start-up, is yet to prove its profitable business.
These on-demand business players have to add value to the local marketplace. Instead of choosing the options of couponing, discounts, big bargain offers, sale and many such strategies, these start-ups have to now pull up their socks and look for more refined ways for gaining trust and loyalty of customers. Investors are not finding any value addition in these on-demand start-ups as these startups are failing to maintain their market value rather stooping to low levels, in order to reach out maximum customer visits. Startup companies have been discounting heavily to acquire customers therefore margins are at pressure and investors are skeptical in funding such startups as these companies are lowering their market value by using such marketing tactics.
5- Hampering World Economy: Nearly 490 active venture capitalists across the world who have invested in these mushrooming on-demand startups are very much skeptical about the future of these establishments. Venture capitalists were very much encouraged by the possibility of the billion-dollar startups and have started aggressively betting on multiple segments by the fear of missing out (FOMO). Few investors were doing this with perseverance and therefore were hoping that with raising more capital they would be able to double their user metrics, defeat some competition and can emerge as large player, but things are not turning out the way they should be.

C- Final Word:

Conclusively, investors are looking forward for more premium services which these on-demand businesses are missing out. Investors are looking forward to charge from consumers for premier services and products instead of offering more discounts. Also, as investors will now not be allowing companies to expand so aggressively and will be holding themselves back for investment unless there would be much capital involved. Investors, look forward to these companies to focus more on making unit economic work, instead of looking for options of couponing, discounts, sale offers, bargain offers to gain customer traction.
With choosing the right technology partner, on-demand businesses can have a good strategy in order to establish themselves on a local level and as well build great trust and connection with consumers. A great technology partner will benefit in branding and it will be both measurable and rewarding.
Article Resources
http://fortune.com/2013/08/21/why-hyperlocal-has-mostly-flopped/
http://www.financialexpress.com/article/economy/much-ado-about-hyperlocals/132045/
http://yourstory.com/2015/10/foodtech-startups/
http://articles.economictimes.indiatimes.com/2015-09-07/news/66297187_1_delivery-boys-attrition-orios-venture-partners
http://streetfightmag.com/2013/08/23/why-your-hyperlocal-consumer-oriented-startup-is-going-to-fail/
http://streetfightmag.com/2013/03/27/6-things-i-learned-about-local-by-failing-in-local/
https://bn.co/how-to-increase-retail-sales-using-hyper-local-social-media/

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Ambuj Tayal

Ambuj Tayal

Director - Consulting Services
In the past, Ambuj has held consulting roles with various global technology leaders, such as Infosys, Fiserv and Xchanging in India. He holds a graduate degree in Chemical Engineering from the Indian Institute of Technology, Roorkee.
Ambuj Tayal

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