2015: More than 400 hyperlocal startups. Over 100 startups funded. Approximately $800 Mn in total funding.
2016: Hyperlocal bubble burst. More than 100 startups shut down. Over 30 acquired. Industry experts say the on-demand model in the home service sector is dying.
Fast forward two years to 2018: Confidence in the segment seems to be back among startups and investors. Things started looking up in 2017.
Speaking about this sector in the Inc42 Annual Funding Report, 2017, Krishnan Ganesh of entrepreneurship platform GrowthStory said, “These business models require capital to reach a steady state and breakeven. The first challenge is to break even on unit order basis. Then breakeven at the operational level, including fixed costs. Finally, breakeven at the company level. For a B2C business with a low ticket size, even a 20% gross margin is too small in absolute terms to reach breakeven, given delivery costs, cost of returns, payment charges etc. So, unless VC sentiment comes back to support these, it will be tough to pull off.”
However, online home services marketplaces UrbanClap and Housejoy seem to have pulled off the business model to emerge as survivors with their efficient management and well-balanced expenses. In fact, the two startups have come up as the two top players in the segment with revenues of INR ~11 Cr ($1.6 Mn) and INR ~32 Cr ($4.72 Mn), respectively, for FY16-17.
Bhaskar Majumdar of Unicorn India Ventures echoed Ganesh’s thoughts: “I believe this sector has now matured. Incumbents need to focus on standardising their operations and providing a rich delivery experience so customers are habituated to repeatedly order without the need for offers/discounts.”
Riding on the good sentiment of the investors for the sector in 2017, and the entry of Internet giant Google with its on-demand service app Areo, Indian digital classified unicorn Quikr entered the space as well. It started QuikrServices and acquired Zimmber and raised a round of funding to strengthen QuikrServices, its on-demand service provider.
According to a report published by KPMG and Google, the online services market in India comprised only 2% of the digital classifieds market worth, INR 2,900 Cr ($428 Mn) as of FY14-15. However, it is set to grow at a compound annual growth rate (CAGR) of 22% over the next three years to be worth about INR 7,900 Cr ($1.2 Bn) by FY19-20. Meanwhile, online services have beat the anticipated growth rate at a CAGR of about 50% and are set to reach INR 440 crore ($65 Mn) by FY19-20.
While the market has good potential, so far, only a few startups have been able to make a mark. But, before we delve into the nuances of the market, let’s look at the numbers of the two players topping the hyperlocal services chart in India — UrbanClap and Housejoy — to see how they adapted their business models to survive the bubble burst.
The Bunce: How Much Housejoy and UrbanClap Made
The revenue trend for Housejoy and UrbanClap in the last couple of years has been quite impressive. In FY16-17, UrbanClap reported revenues of INR ~11 Cr ($1.6 Mn) with 12X growth compared to FY15-16. Meanwhile, Housejoy reported the higher revenue between the two — INR ~32 Cr ($4.72 Mn) — that year, its income rising by 66% compared to the previous financial year.
While the RoC filings of the startups for FY17-18 are not out yet, in a recent communication with the Inc42 editorial team on May 3, 2018, UrbanClap claimed to have clocked in revenues of INR ~45 Cr ($6.64 Mn), 4X that in FY15-16.
The Outlay: Spiralling Expenses For Housejoy
Expenses have been one of the biggest challenges for startups operating in this segment due to the high customer acquisition cost. In fact, according to Inc42 findings, high expenses was one of the major factors causing on-demand service startups to shut shop in 2016 and 2017.
In FY16-17, UrbanClap reported net expenses of INR ~83 Cr ($12.25 Mn), 34% higher than FY15-16. For the same financial year, Housejoy reported expenses of INR ~101 Cr ($15 Mn), 20% higher than the previous financial year.
UrbanClap claimed to have reduced its expenses for FY17-18 to INR ~50 Cr ($7.38 Mn) from INR ~83 Cr ($12.25 Mn) in FY16-17. Assuming the claim to be true, and given its revenues of INR ~45 Cr ($6.64 Mn) in FY16-17, UrbanClap seems to have taken a turn towards becoming profitable in the next two-three years. We were not able to verify these metrics independently.
This should be a cause of concern for Housejoy, whose FY16-17 expenses were quite high — INR ~101 Cr ($15 Mn).
UrbanClap and Housejoy: Line Items From RoC Filings
Going through the notes of the RoC filings, the following line items of expenses and revenues catches the eye.
- Housejoy spent INR ~3.23 Cr ($0.47 Mn) in discounts and cashbacks while UrbanClap spent INR ~1.32Cr ($0.19 Mn) on promotional discounts in FY16-17. Although the numbers are lower than that of the previous financial year, this suggests that discounts are still the most important tool in driving traditional Indian customers to use online services.
- In August 2016, Housejoy migrated to a hybrid model, wherein service providers comprise both Housejoy’s in-house services and aggregated members. The cost of service and material expenses of Housejoy in providing home services amounted to 30% of its total expenses in FY16-17. UrbanClap, on the other hand, has a strictly aggregated marketplace business model, thus did not incur any such costs.
- UrbanClap’s employee benefit expenses were quite high in FY16-17, amounting to INR ~37 Cr ($5.46 Mn) or 44% of its total expenses. Housejoy spent 36% of its total expenses on employee benefits for the same year.
- UrbanClap was observed to have high marketing and advertising spends. The startup spent INR ~32 Cr ($4.72 Mn) (38% of its total expenses) in FY16-17 alone on marketing. Housejoy spent just INR ~22 Cr ($3.25 Mn) (22% of its total expenses) on marketing and advertising in the same financial year, although its revenues and expenses are substantially higher than UrbanClap.
The Road Ahead For Online Service Marketplaces
The hyperlocal market in India has been through a lot of crests and troughs in the last three years. In 2015, it was the sector that saw the highest number of deals. However, by 2017, most of the startups had either shut shop or has been acquired.
Startups like LocalOye, TaskBob could not keep their head above water despite receiving more than million dollar fundings. Facebook, which forayed in the on-demand service space in India, suffered failure. This was largely due to the fact that almost all of these companies tried to adopt the US on-demand business model without adapting it to the Indian demography.
So, how, in such a scenario, did UrbanClap and Housejoy untie the Gordian Knot? Simple: they amended their business models for the Indian market. Housejoy started providing insurance and free re-work; it also recently launched its B2B business called ‘Housejoy For Business’. UrbanClap, meanwhile, went big in creating an aggregated marketplace with a wide range of services with ticket sizes ranging from INR 500 ($7.38) to INR 1 lakh ($1.47K). It has also announced its plan to go international and has already launched operations in Dubai.
Abhiraj Bhal, the co-founder of UrbanClap, has already expressed his wish to take the company to an IPO. With its $21 Mn funding in 2017, UrbanClap has a long runway ahead. On the other hand, the Amazon-funded Housejoy has definitely capitalised the market with its mixed business model and higher revenues. However, the last funding round for Housejoy was in 2015; given its high expenses, the startup is running on a short runway.
Incidentally, in 2015, Amazon launched its own home services business in the US. It is also running a pilot of its beauty services in Bengaluru. While in India, in 2017 founder Arjun Kumar and Sunil Goel quit Housejoy making Saran Chatterjee, the CEO, single decision-making body. Looks like Amazon is prepping Housejoy to be its gateway into India’s on-demand service sector which is finally picking up.
[This is a part of the What The Financials (WTF) series launched by Inc42 Datalabs. We would be exploring the financial health of Startups and discuss its key metrics of growth, to read more articles click here.]