How to avoid the $100m burn

How to avoid the $100m burn

In the last few days there have been a number of concerned posts on the rising burn rate of technology start-ups flush with venture-led cash. Bill Gurley, general partner at Benchmark worries that companies are taking on excessive risk with such high burn rates, and Fred Wilson agrees this is even more of an issue than rocketing valuations.

High burn rates are particularly true for local service companies. Historically shunned by venture investors because of the costs of launching and getting to scale, the Uber, AirBnB and Homejoy models now have billions to fund their growth. The change is so strong that ‘we do your dry cleaning, but in the cloud’ is now an investment model people fight over.

But the reason for historical concerns remain. Replicating a service perfectly in multiple locations is complex, and doesn’t have many obvious economies of scale, unlike traditional software businesses. In short, people, unlike software, don’t scale well so people-led services struggle too, and those who have succeeded have required sums of capital beyond most investors risk level.

A few, however, are finding ways to scale without needing $100m+ cheques, and this is one of the key reasons for our recent investment in 3DHubs, the world’s largest 3D printing platform. Despite it being early, they have managed to grow a global service, while maintaining software-like economics, a key trait we love about the company. But maintaing this is hard, and below are some of the models we’ve seen within our portfolio and beyond that can make rolling out such services a little simpler:

1. Find the local champions; It’s expensive to put people on the ground, so why not use the people already there? One of the main drivers of 3DHub’s growth is their mayor model, where he most influential people in the local community are given tools to champion the service locally, and quickly become as important as ( or in many cases actually ) full time employees. While this model has been trialled before (see AirBnB ) it seems to work best when you have a service which people are particularly passionate about, such as additive manufacturing ( 3D printing to the rest of us )

2. Build the minimum viable team; This approach is obvious, but the execution devilish. Iterating on the minimum viable team needed to establish a basic level of service by trialling in non-core cities first can make a huge difference to burn rate in the long run. One ( of many ) reasons that services launched in San Francisco may be more successful is that the small and enthusiastic populace make the perfect test bed for trialling local service models. In Europe, Amsterdam and Copenhagen are similarly good places to trial a service before spreading out with a more developed model to larger economies.

3. Seduce your supply; Building a marketplace has always been tricky, but this is especially true with people-led services. Unlike other products, such as clothing which can be sold on multiple marketplaces at the same time, people can only provide one service at a time, excluding the rest of the market. Growing loyalty on the supply side is crucial to combat your service becoming locked out by others using your suppliers. One approach is to provide tools which are valuable enough that suppliers return to the service even at periods of low demand. Many local services are still managed in spreadsheets, so workflow tools are especially powerful here.

4. Brands can scale; If people are your product, and people don’t scale, then you need to find another part of your business that can. Brand is the most obvious, and the technology industry is currently undergoing a transformation from loathers to lovers of traditional advertising routes ( as adwords prices go up, and app store discovery remains a pain). Y-Plan, the local event discovery app, are experts at this, and every tube stop in London is now plastered in adverts for tech companies as locally targeted advertising becomes an essential acquisition route for locally provided services.

5. Partner, partner, partner; Most local service marketplaces don’t really start as marketplaces, but initially get liquidity from a few big partnerships. So finding launch partners for new geographies who can instantly turn on the supply or demand side can provide an immediate catalyst without having to spend millions in advance. These relationships are hard to get right, and it’s a delicate balance between a partner and a problem client, but everyone has them, whether it’s renters on AirBnB with multi-property portfolios, or Bookatable’s partnership with Michelin restaurants.

The important learning in the last few years for investors is that while extremely difficult ( and expensive ) to scale local services, if you find the right model, it’s a winner takes all industry, and those winners are huge. However relying on buckets of cheap money to fuel this growth isn’t a viable long term strategy, and finding more sustainable economics is going to be essential going forward.

These are just a few examples of ways to make building a service based business financially viable, and show that not everything needs to be productised. We’d love to hear of more models that have worked as well.