The On-Demand Economy and What We’re Missing

Posted by Madeline Reddington /September 23, 2015 / Advisors, Entrepreneurial Advice, FounderTalk, Hot Topics

 

odeskEven before people were calling it a collaborative economy, there was Odesk.This week we talked to former Odesk CEO (now Upwork) and current Polaris General Partner, Gary Swart about freelancing, sales, the markers for success in building two-sided marketplaces and what we’re missing with the on-demand economy.

How is freelancing changing entrepreneurship?

Freedom and flexibility for workers and entrepreneurs/small businesses is really helping both sides of  the market. Freelancers can work for multiple clients on the jobs of their choosing at rates that they’re worth from wherever they are in the world. Similarly, the businesses no longer need to hire workers and worry about utilization, domain expertise, skills changing and fighting in the local market.

In the 1099 vs. W2 debate where do you see things netting out? Is there potential for a whole new classification?

We’re still early. The laws just haven’t kept up with the on-demand, online workforce and collaborative economy. The laws need to change to protect the workers and businesses. People should be able to work, have flexible jobs, and whether they’re employees or contractors, they need to be treated fairly. So do companies. That means not classifying someone as contractor just because it’s more convenient for a business model or so we don’t have to pay state taxes, 401(k), health benefits, etc. 

I do think there’s going to be a need for a new classification of worker. Tweet this

Maybe that means a W-2 only when you’re driving for Uber or only when working on Upwork—laws will need to change to keep up with this industry which looks very different today than it did a few years ago.

Does the move to a more distributed workforce affect company culture?

Absolutely, it’s better to have everybody there in one location and actively present all the time. For ideation, it’s really necessary to have everybody in the room together. Other areas of execution like development, coding or product design might necessitate that too. But there are lot of execution projects that can be done remotely. And don’t forget, freelancing can be local too.

We’re moving to a world where a new set of skills will be managing and leading distributed, remote, and on-demand teams. That’s already starting to happen. I met a firm last week that raised funding and are going out for their B round—they have 60 employees and no corporate headquarters. They need people who can manage in this environment – that’s an opportunity.

What’s your reaction to recent closures of companies like Homejoy and Zirtual that didn’t make it in the collaborative economy?

Homejoy raised a lot of money and moved very fast. I was shocked that they took so much money early on—on the other hand there’s a lot of complexity with a business model like that, and I know how expensive they are to build. You have to build supply and demand in hyperlocal markets. Your customers have to allow cleaners into their homes, so you need trust and perform background checks, and on top of all that you have to maintain the quality of service. And once a customer trains a worker specifically on cleaning his or her home, it’s going to be really hard to get them to bring in a different person two weeks later.

Zirtual was more of a service than a marketplace, and I think that’s an important distinction. They’re using what I call a leveraged-talent model to deliver the service that you signed up for X number of hours per month. You’re hiring Zirtual to deliver the task, and however Zirtual decides to get that done, whether it’s employees, contractors, or the like, if they get the work done that works. That’s totally OK, but it’s not a two-sided marketplace per se.

The problem with those businesses is from the beginning the goals are misaligned. Tweet this

You, a customer, want the highest quality work for the lowest price; and they want to give you the lowest quality work at the highest price because their business is one of margin. They make the difference between what they charge you and what they pay the worker. Whereas Upwork is more about  connecting you with the right worker regardless of the price, taking a very thin slice, and hoping you and that worker collaborate for a long time.

04_HomeJoy

People were praising a Homejoy and Zirtual for raising tons of money and growing fast until they failed. What went wrong?

Well, growth is a good thing but has to be scalable.

If you’re getting customers by selling dollar bills for 90 cents, you have to have a be sure they’re going to come back and give you another dollar for free. Tweet this

I don’t know what they did specifically, but in a lot of these businesses, you’re doing that and thinking it’ll be okay because you’ll have retention. Here you had to get customers and cleaners in each individual city and if they don’t stick around or spend more you can only have so much growth without retention.

My guess is that they spent too much to acquire customers that didn’t yield long-term results. The other issue is there wasn’t enough virility. eBay worked because you’re selling stuff to make money to buy stuff. Buyers and sellers brought more buyers and sellers. That’s not the case with Homejoy. People tell other people about great experiences—with home cleaning if anything you would rave about the person who cleaned for you, not about the app you found them on.

So what do you look for when investing in two sided marketplaces?

When I’m looking at marketplaces, I ask several questions:

  1. Is the market big? – I look for a big market of people with a specific pain or problem the company plans to solve.
  2. Are these the people who are going figure this market out?  Even if they don’t have the right business model today, are they likely to end up with the right answer?
  3. Are there some key early proof points? Do customers currently pay for the type of product or service this company plans to offer? So that’s proving product market fit. Then are the economics working out—maybe there’s tremendous growth of users, and they haven’t figured out the economics yet but they customer acquisition is happening cost-effectively. Great.
  4. Is one side of the marketplace viral? You want at least one side of the marketplace to be viral. A network where customers bring other customers. If you have one side, the other side will follow. That way you can have a great CAC/LTV ratio because virility attracts users without a lot of marketing spend and you acquire customers who spend a lot more than it costs the company to acquire them in the first place.
  5. Are value, price and frequency high? -  something you do all the time, over and over again. I need my apartment cleaned, but I have lots of options and it doesn’t need to be done today. But right now I need a ride to get from point A to B, and I might need another ride later this afternoon. Which is great for Uber.

From your experience as Odesk CEO and running sales at other organizations, what are your top 3 sales strategies that you don’t see enough people doing?

In the early days, never hire anybody else to do your selling. If you can’t sell it yourself as a founder, it can’t be sold.  Tweet this

  1. A lot of founders will say “well, I’m not a sales guy”— you’re still better at selling in the earlier days than a sales guy while you’re trying to get the right process and architecture in place so you can repeatedly execute.
  2. Plan your sales architecture. Some people get product market fit and go hire five sales reps—a surefire way to burn cash. It takes you 90 days to find them, 90 days to train them, 90 days to figure out if they’re doing it the right way, and the 90 days to fire them – so you’ve literally burned a year, and you don’t know what was most productive. If a year’s gone by and you still haven’t had traction, the mistake is that you haven’t nailed your go to market strategy. You haven’t figured out the right architecture. Should you do inside sales, outside sales, channels, partners, mostly marketing with some inbound order takers? Structure your plan.
  3. Find your repeatable use case – the cookie cutter approach.  “You get this type of person on the phone, you say this, you demo the product, you install the pilot, you come back in 30 days and collect the check,” et cetera. Without that repeatable process, everybody’s running around and they’re not armed and aimed in the right direction.

So do you think there are some big opportunities out there for companies to manage on-demand workforces and make processes like that work better?

Absolutely. Think about the number of companies, products and tools for communication and collaboration that emerged just over the last couple of years because of this recognized need. Even when we’re in the same office we could be on the other side of the building and not be communicating or collaborating effectively. We ourselves, at Upwork, were able to hire seasoned developers and architects and say “instead of just being an individual coder, we’ll teach you how to manage a distributed and remote teams, because that’s going to be a valuable skill set going forward.” We saw more and more jobs on the platform for managers, team leaders, support teams, development teams, even project managers. People want to hire somebody who can manage a distributed team and deliver projects that way.

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