An Overview of The On-Demand Landscape: Rise of the On-Demand Economy
A DATA DRIVEN LOOK AT EMERGING TRENDS
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Below is a transcript of our Webinar, Rise of the On-Demand Economy, led by CB Insights Analyst Matthew Wong.
Today we're going to be covering five main topics within the on-demand economy. The first is exactly how hot the on-demand economy is from a financing perspective. So we'll be diving into some of the deal-size trends, which stages we're seeing the most deals, as well as a quick look at the exit climate.
Next we'll look at the growing class of investors in the on-demand economy. Who are the VCs doing the most
THE BOOMING ON-DEMAND SPACE
deals? Who are the unusual suspects and who are the crossover investors? The mutual funds and the hedge funds that are moving in quickly. Next, we'll look at some of the hot areas within on-demand and which of the companies there have traction. Fourth, we'll do a case study on Whole Foods Market. So, if you look at resource allocation as key to strategy, where has Whole Foods deployed its resources, where has it made strategic partnerships? We'll also look a little later at some of the other incumbents who are validating on-demand models as well.
And lastly, we'll take a quick look at where the universe of on-demand startups is headed next. Where can we expect the next big on-demand startup to come from? Where is the next innovation gonna come from in this universe of on-demand?
When we look at the on-demand mobile universe, it's important to start with a definition. On-demand is a thematic category which encompasses global startups in a lot of different verticals. So the definition we use is: companies that provide an application that aggregate demand on mobile devices but fulfill that demand through offline services.
"On-demand startups aggregate demand on mobile devices but fulfill that demand through offline services.”
So this can span from a number of different use cases, from apps to ship things with a few clicks to ordering chef cooked meals, picking up laundry, having your apartment cleaned. And, yes, when we talk about on-demand we really mean everything being on-demand now. So this now spans a number of different verticals ranging from parking to shipping, health and wellness, travel and even now spanning into healthcare with on-demand house calls and medical marijuana.
THE ON-DEMAND ECONOMY: $9.4B RAISED AND RISING
From $57M in 2010 to over $4B in 2014. YoY funding jumped 514% to hit $4.12B in 2014.
When we look at the funding trends, what really stands out is just how much of a boom there was last year. In 2010 we saw just $57 million in funding to companies in on-demand mobile services. In 2014, that number jumped to over $4 billion. As you see here, the current run rate is on track to do well over that this year, possibly over $15 billion at the current pace.
THE ON-DEMAND ECONOMY IS BIGGER THAN UBER…
On-demand startups minus Uber have raised $3.89B across 250+ deals since 2010.
This year is on pace for a funding record that could more than double 2014’s total.
One thing that we hear a lot is that funding in the on-demand economy is really made up of Uber and everyone else. But I think the data here really shows that the on-demand economy is much bigger than Uber. This chart shows funding to all on-demand companies besides Uber. Since 2010, these other on-demand startups have raised nearly $4 billion in total, probably actually over that now in new deals since we compiled this
data. And if you look at the run rate of 2015, that's also on pace for a funding record that could more than double what we saw in 2014 to on-demand startups besides Uber.
…BUT UBER HAS RAISED MORE THAN ALL OTHER ON-DEMAND STARTUPS COMBINED
Uber’s $5.5B raised is 28% more than all other U.S. on-demand mobile services combined. The chart below highlights the “power law”-like distribution of funding totals to U.S. on-demand companies.
That said, Uber really is the juggernaut in this space and is the one company that everybody looks to. Look at this chart we compiled a little earlier this month: Uber's actually raised--between its funding and convertible debt notes--it's actually raised 28% more than all other U.S. on-demand startups combined. In venture, people like to talk a lot about power laws, and the
power-law-like distribution of funding totals to U.S. on-demand companies. A few other companies that have raised over a billion dollars include Lyft and now Airbnb. But really a whole slew of companies are my much smaller in terms of capital raised.
FOMO VENTURES? VENTURE CAPITAL INVESTORS ARE HERDING INTO ON-DEMAND STARTUPS
In 2010: 20 unique VC investors in the on-demand economy. Now: 198 and rising.
We used the CB Insights Business Social Graph to gauge the level of investor interest within on-demand. This chart looks at the number of VCs, not angels or hedge funds like Tiger Global (which just invested in Postmates). It's the number of VCs within the on-demand economy. And if you fast-forward to 2015, it's now close to 200 different VC investors invested in the space versus fewer than 25 in 2010. Investors are jumping in very fast in on-demand startups as we know, sort of venture as a home run game where the most value accrues to those who got in early. So the most value will go to those
earlier investors in this space.
Shervin Pishevar was an investor at Sherpa Ventures, a venture fund that invested in a lot of these companies. He used this term, FOMO Ventures (or "Fear of Missing Out" Ventures). It certainly looks that way. Within on-demand we see a lot of investors now that appear to be logo chasing within on-demand, chasing after the big apparent winners in the space. We're seeing that a lot now.
ARE THE BIGGEST ON-DEMAND COMPANIES ALREADY IN EXISTENCE?
In 2010, 7 of every 10 deals in the on-demand economy came at the angel or seed stage. But the space is maturing. In 2014, 31% of deals were at the Series A, while Series B deal share hit a five-year high in 2014.
When we break down the funding trend by stage, the one thing that really stands out is how the space has matured. In 2010, seven out of 10 deals we tracked in the space went to seed and angel rounds. Now fast-forward to 2014, you're seeing a lot more activity at the Series A. And Series B hit a five-year high in 2014. So there's this issue now that within the mass consumer on-demand space, the data appears to indicate that the biggest consumer on-demand service may already be funded
or at least be in existence. What will be the next big use cases for on-demand? Where are the other startups going to come from? That's something we'll take a look at later.
ON-DEMAND DEAL SIZES BLOW PAST TYPICAL MOBILE DEALS
On-demand mobile startups have seen larger checks than the average mobile software deal size – most notably at the Series A and Series B stages.
Another trend that's very interesting that's born out of the financing data is just how big some of these rounds are. If you look at the data here, this compares to funding rounds to on-demand mobile startups versus just average mobile startups raising Series A, Series B and seed rounds. And what we see is a notable spike in the deal sizes for on-demand startups. Most
notably at the Series A and Series B. A lot of this is because a lot of these companies are focusing on the Uber city-by-city playbook. That requires huge resources and capital devoted to marketing as well as supply-side, sales and support and also just supporting a lot of local regulatory risks and market dynamics that, moving from city to city, you happen to have.
ON-DEMAND HAS SEEN FEW EXITS TO DATE
Fewer than 10 to date.
So funding is booming to this on-demand universe. But what does the exit landscape look like? Well, actually what we see is there really isn't much of a landscape at all. There's been a handful of small-ball acquisition in the space. Perhaps, the most notable deal was Square's acquisition of the food-delivery company Caviar last year. But really, there's just been very few exits. Mostly, activity in this space has been limited to funding and follow-on funding.
However, there have been a lot of casualties and startups that have lost momentum. Here we'll see some of the slew of headlines about companies in the space. And this is all actually . . . these headlines are all since the start of last year. So while on-demand is a relatively recent trend, consumer interest really can just come and go. And there won't be room for a lot of these players who are maybe the fourth or fifth company within certain on-demand verticals and we're seeing that sort of born out already.
THE INCREASINGLY CROWDED FOOD-DELIVERY MARKET
Dozens of U.S.-based companies are following the same two basic business models: delivering either prepared meals or “cooking boxes,” with ingredients and instructions.
In the first slide, we highlighted how crowded some verticals in on-demand have become. But within venture, if you think about, it only be a couple winners within each category or vertical. One of the most prominent categories where we've seen an explosion of startups is food delivery. This chart looks at the timeline of first fundings to a bunch of different food-delivery companies. What we're seeing is dozens of companies using the same two basic business models. They're either delivering prepared meals or boxes of ingredients with instructions to prepare the meals yourself. And while we see big valuations to companies
in this chart (Postmates, Doordash, Munchery) there are still companies that are just raising their seed round in 2015. Bento, company that does Asian meal delivery just raised a seed round this year. The pace and the number of startups in the space that are getting funded is beginning to resemble a little bit like daily deals and the bigger number of undifferentiated business models and companies that are trying to make waves in food delivery.
ON-DEMAND STARTUP WATCHLIST
Using CB Insights company search, we identified a few startups that haven’t raised funding in more than a year and who may be worth keeping an eye on for hiring/M&A purposes.
So when we look at some of the companies in different verticals, we use the CB insights Company Search to look at a few companies that haven't raised funding for a while. And these are four companies that stand out who may be worth keeping an eye on for either maybe hiring or M&A purposes. All these companies haven't raised funding in over a year. HomeJoy, for example, is already reported to be on the block. Others which are seeing companies sprout up in different
verticals, rivals with huge funding rounds and these are just a few names. Keep an eye out for moves here as you study the on-demand economy.
ON-DEMAND IS A GLOBAL PHENOMENON: $2B RAISED IN 2015 YTD
Over 55 deals to international on-demand startups so far this year.
Thus far, we primarily looked at U.S. funding. But on-demand is really a global phenomenon. I think global on-demand startups have seen nearly a billion or more in funding in each of the last three quarters. Q2 marked a record high for the number of international deals. We've had over 50 deals so far this year, and surpassed a billion dollars or more per quarter over the last three quarters. So international is really seeing a lot of activity as well.
CHINA AND INDIA LEAD THE WAY
China and India dominate international on-demand financing with 40+ deals each since 2012 and a combined $4B in equity financing raised.
When we peel back the layers of countries where these on-demand deals are happening, we see China and India leading the way. Each of those countries have seen over 40 deals each in terms of on-demand startups that have been funded, in a combined $4 billion raised by those startups. Some names that come to mind obviously are the ride-sharing apps in China and India. Ola in India and some other names that come to mind. But we're also seeing deals from Brazil, the U.K.,
France as well as Germany.
UBER ALSO OUT-RAISED ALL INTERNATIONAL ON-DEMAND STARTUPS
While a few international taxi-hailing apps have raised huge sums, Uber has raised 6% more funding than all international on-demand startups combined.
This chart reiterates the point we made earlier: Uber has also out-raised all international on-demand startups combined. So a lot of these companies here have raised big rounds in terms of Kuaidi, GrabTaxi and Ola. This data is from a little while back . . . Uber's actually out-raised those companies by 6% in terms of the international market for on-demand. So we're really studying capital raised by Uber and seeing how this landscape is playing out.
AN ATTRACTIVE MARKET MEANS MORE ACTIVITY BY "SMART MONEY"
Some VC investors (top decile funds) are good at seeing around corners .
Next we'll look at the investors within on-demand, and we'll highlight both who was most active as well as who were the most unusual suspects. If you're trying to understand emerging business models, technologies and disruptions in on-demand, one of the smart ways we're seeing a lot of strategic people do this is by following deals flowing into on-demand by the smart money. These are big-name VC firms who traditionally are good at seeing around corners to find out what's next.
What we see in this chart is actually a host of big-name VC's. You'll see the Andreessen Horowitz, Sequoia Capitals, News Corp Ventures of the world who are all doing deals within
different verticals and companies in on-demand including syndicating different companies. It's a little hard to see in this chart but DoorDash, you'll see multiple investors, Airbnb obviously, some different investors. So tracking that is definitely a good way to see who's good at seeing around corners.
ON-DEMAND IS ATTRACTING A WIDE RANGE OF STRATEGICS (AND SOME UNUSUAL SUSPECTS)
But on-demand now is a lot bigger than VC. We're seeing a wide range of strategic investors within the U.S. on-demand universe. So some of the names here you'll see are some of the companies that have raised funding from different strategic players including Volvo and Google but also even players like UPS, Comcast and even Major League Baseball, as well as Asian investors who are doing a lot of deals to Uber, and Rakuten who just invested in Lyft and it took a board seat there.
MAJOR CORPORATIONS ARE PLACING BIG BETS
Google Ventures has done 11 on-demand deals to 5 companies in the last 5 years.
Here is a closer look at some of the corporates in on-demand. Notably here, we see Google has participated in 11 deals to 5 different companies in the last five years including a $258 million investment in Uber's Series C round, at a $3.5 billion valuation. So that was a big, notable round in the on-demand economy. That was a huge jump from its early evaluation and one of the defining deals in this space, and you'll see some of the other corporates here that are also invested.
PACK OF HEDGE FUNDS & MUTUAL FUNDS DOING LATE-STAGE DEALS
And in some cases earlier.
And now one of the broader trends we're seeing in tech investing is the rise of hedge funds and mutual funds within tech. A data point we tracked earlier was that there's almost 9 times as many quasi-IPOs or what's called "private IPOs" now in 2015 than actual tech IPOs. And we're seeing that same group of hedge funds and mutual funds move into this on-demand universe as well.
More often than not, this has been at the late stage. But in some cases it's also been earlier. For example, Tiger Global, which is a notable tech investor in this space, they did a Series A deal to Caviar which was later acquired. Just recently Tiger led Postmates Series D and then Instacart, in its Series C round announced at the end of last year. We saw some hedge fund investors there in terms of Valiant Capital, Dragoneer. So now you're seeing this group of cross-over investors really take aim at the on-demand universe as well.
TIGER CUB BUSINESS SOCIAL GRAPH HIGHLIGHTS E-HAILING INTEREST
Hedge funds Valiant Capital, Glade Brook, Lone Pine, Falcon Edge, Coatue Management and Tiger Global have made bets on e-hailing startups in the U.S. and internationally.
Here is a closer look at the Business Social Graph among this group of what's called the "Tiger Cub" hedge funds. In the lower-left corner, you see e-hailing is a big focus for the hedge funds in the U.S. but also internationally. A lot of funds are targeting international ride-sharing companies as well as big names like Uber and Lyft.
Quickly to finish off this portion, we'll look at some of the most active VC firms.
First Round Capital is a very active firm this space. They just released their LP letter yesterday actually on rising seed prices. First Round was the Series A investor, in Uber . . . actually seed round investor in Uber just recently invested in a flower delivery startup, Bloomthat, at the Series A.
Another investor, Sherpa Ventures, is
WHICH VC INVESTORS ARE MOST ACTIVE IN ON-DEMAND?
very active so that's the venture fund co-led by Shervin Pishevar, and he led Uber's Series B deal when he was at Menlo Ventures. And now he's an investor in companies including Shyp, Luxe and Munchery at Sherpa, and that's the new fund where's he's at where on-demand is a central piece.
These are some of the most active investors and a few more names here: Greylock, General Catalyst. We'll send this to you later, don't want to spend too much time on this but you'll see just a host of different on-demand deals that a lot of investors are doing.
So I'm going to go through these pretty quickly but these are some of companies in transport. Obviously Uber and Lyft are big names. But you'll see Getaround which is partnered with Ford for its car-sharing program. Shuddle, which is trying to do an Uber for kids and replace parent driving to school.
Within parking, we're seeing a lot of activity. Zirx raised a big $30 million round from Bessemer Venture Partners. Luxe also, in this valet space, just raised a big Series A. And you'll see a few other names here in
parking SpotHero, ParkWhiz. These are all companies that are ranked in the top 10% of companies based on their CB Insights Mosaic Score.
And finally, food delivery. As we mentioned it's an earlier increasingly crowded space. A number of these companies have raised over $40 million rounds this year.
HIGH COMPANY MOSAIC SCORES - TRANSPORTATION, PARKING & FOOD
These transportation companies have strong momentum. They’re in the top 10% of companies based on their Company Mosaic scores.
CASE STUDY: WHOLE FOODS
So next we're going to be looking at Whole Foods and their approach to the on-demand economy. I think is important to look at, not just at what a company says but where they allocate their resources. Those are the partnerships, the investments and the acquisitions that they're pursuing. Whole Foods today is a big player among online grocery delivery. But just a few years ago it was literally a nonexistent in this category. So let's look at what Whole Foods is doing.
This was a quote from 2013 by Whole Foods CEO John Mackey. He's talking about Fresh Direct, the online grocery company. I'll just read part of it.
"FreshDirect is definitely a serious competitor for Whole Foods and they price against us. We pay attention to them and study them. I'm not going to say that we're going to get into the grocery delivery business but if anybody figures it out, it'll probably be them."
So this is at the beginning of 2013 and you definitely see the interest by Whole Foods, at least the prepared statements that online grocery's an area they really want to tackle.
So here we see the timeline of notable partnerships that Whole Foods did since that talk. In late June 2012, they were a early partner for Postmates Get It Now app program. You see they were a early partner for Google Shopping Express, but the big move I think was really at the end of 2014 where they partnered with
Instacart to do one-hour delivery in 15 different markets. Since then, Doordash has been testing Whole Foods delivery. No partnership there but Instacart is the one that really stands out. But it came after they tested a lot of different opportunities in the space and you see how quickly Whole Foods has been able to move.
Fast-forward to 2015, I think what we see now is Whole foods is now a major grocery delivery player and I think this faster pace of disruption is causing companies like Whole Foods to move quickly.
Instacart, as you'll see, has helped them increase the size of digital shopping carts and also passed $1 million each week in online grocery and that got them a mention on the earnings call. So you really see how fast this universe is moving, and Whole Foods is a player that has been quick to jump on this secular trend of on-demand and figure itself out.
INCUMBENTS ARE VALIDATING NEW ON-DEMAND MODELS
What we're seeing now is a lot of incumbents are really paying attention to on-demand. This is a story from the Wall Street Journal, CEO of GrubHub Matt Maloney and he validates the prepared meal delivery model a la Munchery and Sprig as a new opportunity. And he says . . . he expects the segment to grow exponentially in the near future, right now it's only the low single digits of orders for GrubHub. But this space now with prepared meals where you don't have to own the real estate, and you can leverage your resources elsewhere is really disrupting how food delivery is working.
And that's also manifesting itself in short-term rentals. Hyatt recently just invested in One Fine Stay, and you'll see here Hyatt CEO looks at companies like One Fine Stay as where they can learn about customers' experiences and find different ways in which this information is affecting them.
This is going beyond just Hyatt. Wyndham also just invested in Love Home Swap, another home swapping startup. The CEO of Acore, I think, recently admitted that it was a mistake not to invest in AirBnB. So you see a big change in attitude from just a few years ago where a lot of these incumbents, especially in hotel chains didn't view home sharing as a competitive threat but now are changing their tone.
MOBILE ENABLES ON-DEMAND TO EAT AWAY AT NON-TECH INDUSTRIES
AirBnB is poised to become more valuable than Marriott, Starwood, and Expedia.
Obviously a big part of this is the mobile element. The ability to book a room in just a few clicks is changing hospitality drastically.
AirBnB's new private valuation is actually the public market caps of Marriott, Expedia, Starwood and many others now, and you see just how fast that happened. You see in 2011, its valuation was in the single-digit billions and now its valuation in the private markets is surpassing these big-name public players. So again, just an example of just how fast things are moving within on-demand.
That's also manifesting itself in logistics and shipping. Here we see almost a death-by-1,000-cuts type example where . . . this is FedEx's homepage, a graphic we did a while ago. Different startups that are attacking the individual services in various aspects of FedEx's core business. So I think for companies like FedEx, it's important not to just pay attention to one startup but a lot because they're really making themselves apparent in different aspects of the business.
WHAT'S NEXT? ON-DEMAND INFRASTRUCTURE & SERVICES
A growing set of emerging companies now provide tech and software to enable and facilitate the end-to-end marketplaces that make up the on-demand economy.
So with that, we're going to move to what is happening next in on-demand. So where is innovation going to happen next? Where are the startups going to come from? Where are they? So one of the areas is on-demand infrastructure and services.
What we mean by this is there's a now growing set of emerging companies that are providing tech and software to enable the on-demand marketplaces that make up this new economy of companies. And this is a quote by Chris Dixon, a VC at Andreessen Horowitz talking about the pickaxes and shovels. A lot of people are paying attention to the mass consumer
products, the apps that are in a space. But for most technology trends, there's actually a number of successful companies that are created in terms of the companies that are enabling them. Those are the companies that are providing infrastructure, different services help enable these companies, and those companies tend to get a lot less attention. That's definitely an area we're now seeing in a host of different areas from route, vehicle optimization and logistics.
A few companies now are sprouting up and receiving seed funding. Background checks, Checkr and Onfido both raised a Series A recently. And then a whole host of companies within the "1099 economy" as well as companies that are providing extra supply-side optimization for areas like short-term rentals providing ways to manage those rentals as well as onboard contract workers and employees into these on-demand models.
Lastly, we're also seeing some companies within mobile who are helping provide app promotion and deep linking. Button is one company that just recently powered the cross integration between Foursquare and Uber, and we're seeing a lot of companies there as well. This universe of on-demand infrastructure and services, at CB Insights we’re seeing the data in terms of seed deals in early rounds, but this is a universe that we're interested in because it's growing very fast.
The rise of mobile healthcare on-demand. Converting bits to atoms (pharmacy delivery, house calls, marijuana delivery and more).
Next is healthcare. This is sort of a next frontier for on-demand as well. And what we're seeing now is startups that are tackling a wide range of areas and covering companies now doing physical healthcare powered by on-demand. So not just pharmacy delivery but also on-demand house calls, medical marijuana delivery. And this is an area that's also growing and seeing some early-stage activity that were seeing in the data. PillPack actually just recently raised a $50 million round and it's going to use part of that to build a native iOS app. So we're going to see pharmacy delivery also grow with that.
We’re seeing a lot of companies now target more B2B use cases. So there's a lot going on in delivery and logistics but also other areas. Managed by Q, an office cleaning startup, just raised $50 million to help power office cleaning nationwide with the Managed by Q app. We're also seeing, within customer service directly, one company that just raised $10 million last month, and they basically build on-demand apps for their expert users and companies like Pinterest, Airbnb, Lyft to answer customer service questions on-demand and earn rewards through that. So different new B2B models that were seeing in on-demand and those are also changing this this universe of companies.
New modes of applying on-demand business models to corporations rather than individuals are sprouting up.
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Postmates is the most recent but also Munchery, Sprig, which is also in this prepared meals vertical. You'll see all these companies are making different moves within food delivery.