By Kia Kokalitcheva
December 18, 2016

For the better part of the year, I’ve been documenting the slipping investor interest in so-called on-demand startups that deliver hot meals, jeans, and bouquets of flowers for people who merely tap an app.

On Tuesday, Reuters published data about investment into this category, and it matches what we’ve been seeing anecdotally: Most of the $2.5 billion invested in on-demand startups in 2016 was done in the first half of the year. In the second half of the year, investments trailed off significantly. So far in the fourth quarter, investors had dribbled only $50 million into the category.

At the same time, we’ve seen several on-demand companies adjust their business models this year.

As entrepreneurs and investors are learning, hiring contractors, building slick mobile apps, and giving discounts to customers doesn’t magically turn into a thriving—and profitable—business.

Worse: The belief that companies will automatically become more cost efficient after growing large enough is largely a myth. For example, while ride-hailing services like Uber and Lyft can charge based on distance—an acceptable way to price in the minds of most consumers— it is trickier for delivering products. Companies are experimenting with basing their fees on the total cost of the food or clothing purchased—or imposing a minimum order size. But by and large, customers are price sensitive. Few will pay a $20 delivery fee for an $8 burrito.

As we head into 2017, expect a lot more consolidation. With increasingly fewer venture capital dollars available to subsidize these services, businesses actually generating profits will be able to better survive.

Kia Kokalitcheva


This is the Startup Sunday edition of Data Sheet, Fortune’s daily tech newsletter, edited by reporter Kia Kokalitcheva. You may reach me via Twitter, email, or an entirely new platform that your startup developed. Feedback welcome.


You May Like