Challenges of the Contractor Market
Recently, we announced with heavy hearts that we would be closing down Zen99. In the spirit of transparency and helping others learn, I wanted to provide some additional insight. (This is broken into three parts; Part 2 and 3 coming soon.)
Let’s clear the record
Unfortunately, when I posted the original message, journalists immediately tied us to other recent news (primarily “the on-demand economy is failing!” and “another funded startup shuts down abruptly!”). This is partially my fault for not writing this post with the announcement.
My personal favorites were one article that called me “Zachary Trier”, and another that used this great stock photo:
To clear things up:
- The on-demand economy lawsuits did not cause us to shut down. ODE workers were <50% of our users and are likely <5% of the US contractor market. The problem lied more in the addressability of that 95% and general uncertainty about labor laws.
- It was a very “in control” shutdown. I had talked to investors on an ongoing basis for several months before, in addition to our normal monthly updates (which were very in depth with our progress and strategy). We let the team know in mid-July, and found new homes for them and users before announcing it publicly mid-August. We’ll be returning about 75% of investors capital.
- It was not due to giving up. As an entrepreneur, my most valuable asset is time. Spending time on the wrong thing minimizes my chances of making a large, impactful product. We wouldn’t have Uber if Travis Kalanick was still working on Red Swoosh.
This first post addresses some of the challenges we faced in the market that led to our decision. The next post will be about some alternatives we considered and the shutdown process.
So what happened with Zen99?
Zen99’s story sold well. But a good story doesn’t always lead to a good business. A few of the bigger reasons:
Contractors aren’t a homogenous group
We thought we could treat all contractors as homogenous; hence why we chose taxes and health insurance, which are relatively the same for most contractors. Furthermore, these were things that (a) all contractors are required to do, and (b) companies can’t legally help with themselves due to employee/contractor misclassification concerns (however, they can refer their contractors to a third party).
But a web developer’s wants and needs are very different from an Uber driver’s. Trying to service too many different groups leads to a product that isn’t a magical experience for anyone. Trying to service too few of them can lead to too small a business. We made the former mistake while trying to avoid the latter.
A related issue is that they don’t identify themselves as a “contractor” if you ask them what they do; they likely respond with “I’m a designer” or “I’m an insurance broker”. That may mean that they’re more open to verticalized tools that are designed specifically for them (e.g. tools just for insurance brokers’ needs) versus generalized contractor tools (e.g. a bank made specifically for those with contractor income).
There are a lot of tools contractors “need”,
but that doesn’t mean they “want” them
As I mentioned, every contractor “needs” to do their taxes and “needs” to buy insurance; both are required by law. They “want” help with these when asked, but the reality is that:
- Bad things rarely happen when they don’t follow the applicable laws. The IRS has never had the resources to go after individuals, and has had recent budget cuts that will reduce that ability even further.
- When something bad happens, it normally happens once a year (e.g. they forgot to save for taxes and are stuck with a huge bill) or several years out (e.g. they have a serious health issue). The pain point is not frequent enough to inspire ongoing action to prevent it — similar psychology to why people are bad at saving.
For example, if you’re an employee, imagine if you were paid 100% of your gross wages, and were responsible for submitting taxes to the government…plus you had a very low chance of getting caught if you lied. Would you? A large enough number wouldn’t, and this is why the IRS requires companies to withhold and remit taxes on employees’ behalf.
For us, this meant high usage around quarterly tax filing due dates (usually 3 days before), and low usage in between (plus a frantic rush in April for year-end taxes, for those who didn’t know about their quarterly tax obligations). Although we could have built a product that capitalized on that behavior, it’s extremely difficult to iterate quickly (a major advantage of startups) when you only get data points every 3 months.
(Side note: I think the IRS will put the withholding requirements for contractors on companies within a few years. We already see this in some cases, like W8-BENs for countries with which the US doesn’t have a tax treaty, or statutory employees. Companies are more likely to be compliant and are easier to audit, and it will force contractors to better track their expenses if they want to get some of their earnings back from Uncle Sam.)
We had a user acquisition problem,
and the best route involved a competitor
We tried a lot of routes. Company partnerships were slow and didn’t lead to great conversion. Ads were expensive. Salesperson models are too expensive when going after individuals. SEO/content worked well for us, but is highly dependent upon Google and scales unpredictably.
The best acquisition method I saw was tapping into an existing network of people who had filed 1099s: like Intuit’s hundreds of millions of tax returns, many with 1099 income. Unfortunately, Intuit released an identical competing product to us. It’s not ideal when your best user acquisition strategy is partnering with a company who has a competing product.
Competitors (even big ones) shouldn’t be cause for discouragement, and startups can be faster and smarter in most cases. A great product can also overcome distribution issues. But this problem compounded with the others.
Opportunities in the contractor space exist,
but are still murky
Contingent / part-time work is going to continue to increase. It’s now easy for someone to get part-time work in a matter of hours or days, instead of weeks or months as with most other jobs.
Whether that’s under the guise of contractors, employees, or a third class of workers remains to be seen. It’s clear that there needs to be legislative change to address our changing work habits. Unfortunately, a mix of an upcoming election year plus government being historically slow means this probably won’t happen for a while. When there’s more certainty, there will be tons of opportunity (e.g. how to manage these large workforces that have higher than usual turnover, the potential for a multi-payor benefits system, etc.)
There were several other items that played into our decision, but the above are the main challenges we faced in the market.
Exploring alternatives and making hard decisions
In the next post, I’ll go into some alternatives we explored, plus more on how we came to the decision to shut down. Follow me on Twitter if you want to be notified!
Special thanks to Kent Goldman of Upside Partnership for his help on this post.