Promising startup Homejoy closes its doors.

Its no secret that although there are several startup companies that have received insane billion dollar valuations and seem to be flying, that there are hundreds of VC back companies that end up faltering. This can even happen to the most promising startups, one of these is Homejoy who provided on demand home cleaning services such as cleaners, plumbers, gardeners and painters who could be booked with a click of a button through an app.

The CEO announced that the startup company would be closing their doors despite being able to raise $40 million in venture capital funding. However they were facing a barrage of lawsuits which has affected there ability to stay afloat financially.

The main lawsuits in question were filed as a result of them claiming their employees were independent contractor. Google has been a winner in all this as they have moved quickly to acquire Homejoy’s engineering team which has ignited rumours that Google are preparing to enter the home cleaning industry.

Homejoy disrupted the traditional home cleaning services market by creating an innovative app and efficient processes. After securing $40 million in Venture Capital it was touted as the next big thing however the CEO Adora Cheung claimed that the second biggest factor for the startups closure was the shortage of funding.

This has highlighted the issues the not just home joy are facing, but other on demand services such as Taskrabbit are also facing. Regulators and politicians are currently in deep discussions about how workforces should be tread and classified.

A recent court ruling in California has ruled that a driver should be considered as an employee rather that a freelance worker. Whilst this ruling was only made for a single individual this has made the overall national situation even more uncertain.

If this became a national ruling then the companies like Uber would have their operating costs sky rocket and they would have to classify all its drivers as full employees which then incur further costs such as insurance and social security. This situation may be easily absorbed by companies as large as Uber but for smaller startups like Homejoy this is a very important issue.

This also highlights how risky centre capital can be and how investors made a clear mistake by backing Homejoy.

In hindsight it is clear that homejyo may have failed because is margins were just too low because they needed low prices to enable them to secure a large part of the market and gain a customer base. Another issue was that customers didn’t return to the site to make repeat purchases which meant the customer lifetime value was lower than the customer acquisition cost.

There were 2 main reasons for customers not returning to the site. The first was because they had a bad experience with the cleaner they used, which could a be a bad clean, theft or not even turning up. Homejoys pay rates were low so cleaners had less incentive to provide a top quality cleaning service.

The other reason was that once a homeowner found a good cleaner they had no need to order repeat booking through the website and could eliminate Homejoy and complete transactions directly with the cleaners. Homejoy could not find a way to get customers to come back to the site.

Also their rapid expansion plans sucked a lot of cash from the company as they quickly expanded in canadian and european markets despite not having locked down their own markets yet.

Whether this is the start of decline for on demand services remains to be seen, but it is definitely a wake up call.