The Second Wave of the On-Demand Economy

By Jeremy Cai, Co-Founder and COO of OnboardIQ

2016 has been a challenging year for on-demand companies — to say the least.

A number of high profile startups shuttered, including Sidecar ($45.5 million raised), Karhoo ($39 million), Kitchensurfing ($19.5 million) and Washio ($17 million). Amidst investor losses, venture capital investment into on-demand startups slowed to a “relative trickle” in the second half of the year, according to a recent Reuters analysis. Just $50 million was invested in Q4. Outside of Uber and Chinese ride-hailing service Didi Chuxing, overall investment in the on-demand sector was down 50 percent in 2016, CB Insights data suggests.

But this sour funding year paints only half of the story.

The growth of the on-demand economy is no longer driven only by venture funding. Rather, a fundamental change in consumer purchasing behavior is forcing companies large and small to adopt or outsource a mobile delivery force to remain competitive with newcomers.

Over the past few years, consumers have become accustomed to faster and faster delivery. Driven by same-day or on-demand delivery experiences from companies like Uber and Amazon Prime, customers have started demanding the same from traditional companies.

The second wave of the on-demand economy is here. We expect three things: 1) incumbent corporations will lean on newcomers to help reinvent their delivery experience, 2) existing on-demand startups will use data to improve their operations and strive for profitability, and 3) the proliferation and success of on-demand services in densely-populated cities around the world, especially in Asia and Europe.

What will this mean for workers and employers? Going into the new year, our analysts have identified two key trends.

The Workforce: Strong growth in hires

According to two studies that look at the on-demand workforce, there is still substantial growth in the worker side of the on-demand economy.

The JPMorgan Chase Institute looked at income its customers received from online platforms, which include labor platforms like Uber and TaskRabbit and capital platforms like Airbnb and eBay. While the growth in the number of people earning money from capital platforms slowed by 3 percent from June 2015 to June 2016, the number of people earning money in labor platforms increased by 102 percent.

At OnboardIQ, where we build hiring automation software for companies building hourly workforces, we analyzed 250,000 job applications and more than 27,000 hires to gain insights into the application and hiring trends among a broad cohort of our on-demand clients. Our findings mirrored those of the JPMorgan Chase Institute. From January through October, monthly on-demand hiring increased 101 percent. Versus a year ago, monthly hiring in October jumped 125 percent.

Some suggest that this growth comes from high churn, but the data points otherwise. The JPMorgan Chase Institute noted that in any given month, one out of six employees falls out of the on-demand workforce. Within 12 months, half of employees leave.

Instead of being a bug, that mobility is a feature of the on-demand economy — and it doesn’t seem to be hurting on-demand growth at all. Throughout 2016, the hire rate at on-demand companies (percentage of applicants that were hired) was steady throughout 2016, at 10 to 13 percent, even as the total number of applications fell.

And while that is compelling evidence of strength in the on-demand economy, it’s against the overall economic backdrop that the data becomes even more impressive. In 2016, the U.S. economy continued to expand. By October, the economy added more than 2.1 million net jobs, and the unemployment rate fell below 5 percent — its lowest level since August 2007. But even though more “traditional” jobs were available, individuals flocked to on-demand companies to either add supplemental income or as full-time employment.

Consumer Behavior: Consumer demand for new delivery methods boosting workforce size

Over the course of 2016, more traditional companies realized the need to have an internal or external on-demand arm to remain competitive.

In retail, there is a battle to win “last-mile” delivery, with Costco, Nordstrom, Target and Macy’s all eyeing to dethrone Amazon and its Prime Now service. UPS is in the process of internalizing more last-mile deliveries, something it previously contracted with the U.S. Postal Service. What was once seen as expensive is now a serious source of growth.

For some on-demand startups, that corporate interest provided opportunities. Nordstrom turned to UberRush for its last-mile services, Macy’s inked a deal with Deliv, and Target partnered with Instacart for its grocery deliveries.

Those types of partnerships will accelerate in 2017 as more and more retailers work to better serve consumers. And more and more companies will establish internal on-demand arms to solve issues beyond last-mile delivery.

While the boom in creating the next “Uber for X” certainly fizzled in 2016, it would be wrong to conflate that with the outlook for the industry. We look forward to the on-demand experience continuing its growth and penetrating more and more industries to address growing consumer demand.

Jeremy Cai is the co-founder and COO of OnboardIQ, which provides hiring automation software for the hourly workforce. Jeremy is also a recipient of the Thiel Fellowship and a Summer 2015 graduate of Y Combinator.