Want to start an on-demand business? Read this before you think further!
Introduction
For the last few years, the “On-Demand Economy” has become a category that investors have focused on and is how entrepreneurs have defined their startups. When my co-founders and I started Valet Anywhere in early 2014, we wanted to make a difference in the parking world because we were sickened by the price garages were charging to park a car in Manhattan. A typical 2 bedroom apartment in the Upper East Side costs about $54 to $56 per square foot while we have found garages charging more than $60 per square foot. We were disgusted by the fact that it is more expensive to park your car than it is to live in the city on a square foot basis. Initially we set our eyes on creating On-Demand Parking in NYC. Later that year, after raising our Seed round (thanks to AngelPad’s “entrepreneurial bootcamp”), Valet Anywhere officially launched on-demand valet parking in Midtown Manhattan.
Since then, we’ve learned valuable lessons in running on-demand parking (ODP) and decided to pivot away from ODP about 13 months ago to on-schedule, long-term, urban parking. Below is our reasoning and thought process on why ODP doesn’t work and can not scale as a business and ultimately led us to pivot back in Dec of 2014 (about 5 months after running on-demand parking).
If you are thinking about starting your own on-demand business, make sure you consider some of the factors that led to our slight pivot.
NOTE: I frequently will use ODP (on-demand parking) as example when referring to “not a market place” on-demand business.
On-Demand Economy as a Marketplace
Many on-demand startups are a marketplace, bringing customers and suppliers together. UBER (brings riders and drivers together), PaintZen (brings home owner/renters and painters together), ZEEL (bring customers and massage therapists together), UpCounsel (brings lawyers and legal advice needing people together). All of these startups are pure marketplaces because they do not own the supply side of the marketplace.
Why is this key?
Operational cost. When you don’t own the supply side, your operating costs are MUCH lower than if you do. For example, a traditional used car dealer has to first buy inventory of cars before they open the sales office and owning the inventory is capital intensive! On the other hand, AutoTrader doesn’t buy and own the used cars they list on their website because they are a marketplace that bring car owners and buyers together.
Is On-Demand Parking a Market Place?
On-demand parking is NOT a marketplace! The first supply you have to own is the labor. Sure, you can argue that UBER started the black car business by hiring black car drivers to start so customers can see black cars and order rides when they open the UBER app, but they got away from it when enough drivers came on the platform. However, in valet parking, you want to make sure you have quality, logical (have common sense) drivers that won’t cause any incidents and/or accidents. Meaning, even at a SCALE of 2000 parking tasks a day, you don’t want anyone to come on the platform and potentially start parking a customer’s car when they are not in the best condition. Meaning, at scale, ODP operators would still have to own a (large) portion of the labor pool.
What about parking supply?
When we started ODP in Midtown Manhattan, we didn’t have to buy parking spaces in advance, but we had an hourly deal (a pretty good deal by Manhattan standards) from the garage operators and paid after the customer cars were in the garage. Many people thought we could actually pay for monthly spots and then just turn over that spot with different customer cars, but garage operators would not allow that. If you ever visited Manhattan with a car, you probably wondered why 98% of the garages have valets park your car? It is because they use the valets to squeeze as many cars as they can to maximize square footage. The idea of a reserved physical parking spot within a Manhattan garage is illusive.
So what does this all mean?
The economies of scale do NOT work in the On-Demand Parking operator’s favor. Parking price doesn’t go down as you scale up your business because inside CBD (central business district) like Midtown Manhattan parking supplies are limited (they are not building more public parking garages in Manhattan).
Operational cost of running an On-Demand parking operation doesn’t get cheaper as you scale (even in just one city).
To hit the point home, think about a traditional business like a burger joint. Just by economies of scale, an order of 100 buns and beef (or chicken) patties is more expensive than an order of 250,000 buns and patties. If the 250,000th set of buns and patties costed more than the first set of buns and patties, then there is a big problem!
The only way for the parking cost to be cheaper is to find parking supply as far away from CBD as possible; however, with ODP when a customer needs the car back the same day, this is just not possible. In Manhattan, we used to park .2 to .4 miles away, any further than that, we lose on the valet labor time as it takes too long to return customers’ car in traffic plagued Midtown Manhattan.
Expansion Plans
We just raised our first institutional round, so we are ready to expand to another city! — Founder that just raise Series A financing
On the surface, one sign of success of a startup is the ability to expand to another location or city. Mayors and people in the new cities are excited. People are wowed and impressed by expansion. However, new city expansion is the WORST thing a startup can do when they are not ready (more below on what I think is ready). Lots of startups think they are ready for expansion when investors are wowed by the growth and traction numbers and hand them a large check.
If your startup is a pure marketplace, expansion to another city when you are NOT ready isn’t so detrimental (I don’t recommend it). Again, for a pure marketplace that does not own the supply side, the largest expenses in a new city expansion are likely to be marketing and local staff (GM and community manager).
If you are an ODP operator and expand when you are NOT ready, your operating cost sky rockets through the roof. It is simple: if you are bleeding money in 1 city because you have not found the right operating / business model at scale, going out to another city will ONLY bleed you more money.
Examples of expanding too fast when company isn’t ready
Luxe pulls out of Philly and Boston (less than 6 months)
http://commonwealthmagazine.org/transportation/luxe-backs-out/
Zirx pulled out of 4 cities (NYC, DC, SAN DIEGO, LA, Chicago)
Sure some will say that businesses expand and contract all the time. For example, Walmart and Macy’s announced recently that they are closing stores around the country. However, when startups pull back a city within six to nine months of expanding there, it suggests fundamental problems.
Economies of scale don’t apply in ODP in a single city. This is even more so in multi-city expansion because the parking operator relationship that the ODP operator built in one city likely does not apply in the new city. From an operational perspective, you have to start all over finding parking supply. Supply of parking doesn’t get cheaper because most traditional garage operators are local, which means all the parking spots you pay for in one city won’t get you a “bulk discount price” when you enter additional cities. Imagine that a burger chain opens a new restaurant in a different city and each of the new restaurants has to buy buns and patties individually from separate vendors. Instead of getting pricing power of all of the restaurants combined, every single one has to negotiate or pay the standard rate. Crazy right? Yes, that’s what it is like for ODP operator starting a new city.
So why do startup expand?
Startups often compare themselves to unicorns like UBER or Facebook or Google when trying to justify giving their products away or charging extremely low prices for an extended period of time. For example, UBER is giving away ride credits so we should do that too! Or, let’s just get bunch of parking customers by barely charging for our product (i.e. $15 a day parking) and we will figure out a business model later once we have tons of parking customers!
When you are a pure marketplace, giving a coupon for a first time customer and/or having a discount per transaction, both are great ways of acquiring customers, promote frequent usage of the marketplace.
However, when you are not a pure marketplace, giving your stuff away and/or charging unsustainably low prices for your goods is a very expensive way of acquiring customers.
What is Expansion Ready?
Since December of 2014, we decided to move away from On-Demand Parking in Manhattan and turned our attention to Manhattanites and Brooklynites that are car owners and we offer them best car ownership experience.
I have 3 major criteria for expansion ready and they are pretty easy to understand (this applies to On-demand market place as well as non-market place):
1. Is the management team ready?
Can the management team go on vacation during the high operation season?
Does the management team have a playbook in what makes an expansion grow like wild fire and become profitable?
Does the management team have a playbook in hiring drivers and the operation team?
2. Has the first city reached positive contribution margin?
Is operation in the first city generating profit and contributing positively to the company’s bottom line?
3. What are the major benefits of expanding to another city BEFORE first city is saturated and dominated?
As a founder, I admit that the concept of expanding IS very exciting and I am a proponent of the term “growing your business uncomfortably”. However, I think any founder should self-evaluate his or her business with internal team and stakeholders before jumping into another market!
Should you start your business even if it isn’t a pure market place?
Just because your business isn’t a on-demand marketplace business, it doesn’t mean it won’t work. If you are the founder, make sure you are the chief cashflow officer (you should do this in any business) and don’t let other tempt you into expansion unless you have a damn good playbook for your business, nearly have a business that run itself, and you are reaching market saturation.
Leave you thoughts below, love to hear from you!
