A Response To AVC Re: Kozmo

There are a small handful of blogs/newsletters I read daily. The first one of those when I started on this path was AVC. About a week ago, Fred wrote a reflective post about the on-demand economy of today and all the startups who are riding this wave. You can read Fred’s post here, and the picture of Gotham Gal wearing the old Kozmo swag is awesome. (Kozmo was available in NYC right when I moved back after college to start working — I remember ordering from it a lot and how much free stuff they gave away.)

One of the lessons threaded throughout AVC is “history doesn’t repeat itself, but it rhymes.” The implication is the same themes emerge through cycles, even if today’s incarnation looks different from yesterday’s on the surface. In the post, Fred writes:

Kozmo pioneered the idea of same hour delivery in 1998, fifteen years before its time. Kozmo pioneered the idea of raising and spending hundreds of millions of dollars a year long before it became fashionable, even normal to do so. Kozmo nailed the practice of scaling while your unit economics are upside down. They took that practice into almost twenty markets before the capital markets turned on them and there wasn’t money available to incinerate anymore.

As someone who has spent a good portion of the time seeding and helping early-stage companies in the space, I wanted to digest Fred’s post and write out a structured POV on it. Briefly, here goes:

On Unit Economics: There’s a lot of truth to this and the arguments/concerns are sound. Early-stage investors have, in certain cases, given entrepreneurs incredible credit in advance of nailing unit economics. The reason they do so, I believe, is because there is some premium to proving, even in one market, that a team can create and deliver a service which triggers a behavior change. The next venture bet is on spreading out that behavior to other test markets. We will know in a few years if that was too much credit.

On Raising and Burning Hundreds of Millions: Outside of Uber, Lyft, Instacart, and a few others, there are more companies making noise about the on-demand economy than raising gobs of money. Sure, some of it is overfunded, but if you look at the base stickiness of those services, in many cases things can be justified, and many of the firms who are already into those companies have deep enough pockets to stay with them in the event of a turn in the market. Speaking of which…

What if Capital Markets Turn Suddenly? Many arguments here, but if it’s a general turn, and people have less disposable income, they may be more sensitive to overpaying for convenience and speed, and that could depress demand while also putting pressure on companies to raise prices, to price dynamically, and to bundle other services on top of the core. For those who are funded, while opening a city is a serious operational cost, most of these teams are expert in figuring out how much capital and time it takes for a city to become self-sufficient. The ones that can’t do that won’t survive.

Despite the froth in the category and acknowledging there will be some ups and down for companies to withstand, two things make me optimistic about the on-demand concept overall, moving forward:

Today’s Overall Competitive Structure: When Kozmo launched, people weren’t used to web-enabled inventory and delivery triggers. Now, we are, and huge companies like Google, eBay, Amazon, Walmart, and even Uber are all actively thinking about offering on-demand or scheduled services to increase the bond with their customers. These companies will certainly be acquisitive in the category (in this arms race) and provide a soft landing for many startups, assuming they haven’t been over-valued and assuming the core mobile and data teams come along for the ride.

Spreading the Concept to Business, Healthcare, etc: I am shifting my focus in this area to on-demand concepts that serve businesses as their customer (like Boomtown, and others), as well as spaces like healthcare and heavy industry. I am already seeing lots of activity, and there are more opportunities for founders to layer in SaaS+marketplace models into these startups given the customer base. Just like the sharing economy has spread to other industries like construction (Asseta, Cohealo, etc.), I suspect on-demand will as well. It’s just a matter of time.

Haystack is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2018 Semil Shah.

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