SpoonRocket: Why On-Demand Startups Could Be In Trouble

In this article, I look into the factors that led to Spoonrocket's shutdown and its implications for the on-demand startup industry. On March 15th, 2016, Spoonrocket, an on-demand meal preparation and delivery startup with over $13 million in funding, announced that it was shutting down for good. Despite the fact that Spoonrocket had finally reached a positive contribution margin with each meal that it sold, it had done so all too late: its ultimate lack of sufficient funding had led the company to cease operations and scramble to find an exit opportunity, eventually finding a buyer in iFood, a Latin American food delivery platform. With this most recent shutdown of yet another on-demand startup, the industry as a whole across services spanning ridesharing, homecare, and delivery, may unfortunately be seeing even more alarming activity not too far into the future. Venture capital investors are becoming increasingly cautious. With the beginning of 2016, we have witnessed a general shift in investor sentiment, as the optimism of the past few years with the exhilarating success of unicorns such as Uber and Airbnb has now begun to diminish toward caution and concern. According to a report from CB Insights, funding of private companies had fallen 30% in the fourth quarter of 2015 - an indication of the investment slowdown in the face of the speculated tech bubble looming ahead, as the stock market has begun to correct and valuations for startups are being cut left and right. With this changing environment, startups may find it increasingly difficult to sustain positive growth without over-reliance on funding, and may need to adapt their fundamental priorities and strategies to become profitable as soon as possible. Out of 155 venture capitalists surveyed, over 80% of them expressed caution or concern going into 2016 [Source: Upfront Survey, Jan 2016] The business models aren't sustainable. Just as Uber had attempted to replace the taxi, Spoonrocket attempted to replace the home-cooked meal by taking a unique position among food delivery competitors, offering a cheap and quick alternative with pre-made meals under $10 delivered in under ten minutes. Other companies that currently prioritize low costs as a competitive advantage, such as Amazon, possess additional core services, such as Amazon Web Services, that help fund its less profitable operation. However, we have seen that smaller startups which do not have multiple revenue streams to balance each other out have become profitless in the past, leading to an eventual shutdown very reminiscent of the on-demand startups of the dot-com bubble. By the time Spoonrocket had been able to yield positive margins, its previously unsustainable unit economics had heavily drained its funding. A combination of Spoonrocket's low customer retention rate and operating losses with each meal it sold had totaled to an unsustainable business model in the end. Growth is being over-prioritized. Perhaps the biggest challenge for on-demand startups is the balance between growth and margins. Offering the opportunity for an on-demand service requires additional operational costs that warrant a premium, usually covered as a convenience fee. However, that premium can't be set too high as to deter a large proportion of potential customers from using the service. This dilemma has led many startups to, instead, completely rely on venture capital funding as a crutch, justifying losses due to unsustainable prices with their customer acquisition strategies and need for growth in a sort of "grow first, money later" kind of deal. However, this mindset and strategy can be prohibitive, as seen in the case of Homejoy, an on-demand home-cleaning startup, where customers who took advantage of promotional offers did not re-use the service later, contributing to the startup's eventual shutdown. For Spoonrocket, the focus on customer acquisition without ensuring quality in the production of meals had been a waste, as low customer retention equated to a lethal combination of higher customer acquisition costs and wasted funding while operating at a loss. Parting Thoughts Here's the bottom line: by all means, growth is still an incredibly important step in scaling any startup. However, as the on-demand industry already only allows for razor-thin margins, these startups must begin looking into strategies that contribute toward turning positive profits as soon as possible. With venture capital funding becoming increasingly sparse, they must adapt in focusing less on growth before devising a balanced business model that permits customer acquisition and retention without significant sacrifice or unwarranted losses. This is a crucial challenge that, for some, may not be possible. However, the startups that aren't able to do so will ultimately shut down, joining Spoonrocket and so many others that have run out of fuel and fallen out of the sky. -- About the AuthorJustin Liu is currently an undergraduate student studying business administration at UC Berkeley. With experience consulting for companies including Google and Square, Justin is passionate about the intersection of business strategy and tech across a wide spectrum of different industries. To find out more, visit his LinkedIn profile here. This post is also part of the @MillennialIdeas series from the Marketing Thought Leadership course at UC Berkeley taught by Forbes 30 Under 30 and LinkedIn Top Voice, Tai Tran. #StudentVoicesimage url: https://media.licdn.com/mpr/mpr/shrinknp_800_800/AAEAAQAAAAAAAAkjAAAAJGNkMGM2OWIwLTNmNWEtNDViZS1iMGUyLTEzYTc5NmY2NWFkYw.png