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.
Everyone's Talking About
Amino. The startup behind more than 250,000 ultra-niche communities for fans of anything from Pokemon to K-pop, raised $19.2 million in new funding from GV, Venrock, Union Square Ventures, Time Warner Investments, Goodwater Capital, and Box Group. Its standalone mobile apps grew from 90 to 250 in a few months this year, and have been downloaded more than 13 million times, according to the company. (Fortune)
Unicorn Watch
Uber unveils a new way for drivers and passengers to find each other. The company built a new device, equipped with LED lights, that will help passengers identify their ride. (Fortune)
Honda reveals an investment in Grab. The automaker invested in Southeast Asia's biggest ride-hailing company as part of its last funding round, and has inked a deal to work to expand Grab's motorbike service. (Fortune)
Uber debuts its self-driving cars in San Francisco and immediately faces backlash. The ride-hailing company brought its self-driving cars to San Francisco but was immediately ordered to cease operations by the California DMV (and later the California Attorney General). (Fortune) (Reuters) (TechCrunch)
Airbnb is raising more funding. The home-sharing company authorized the sale of an additional $153 million in equity. (Bloomberg)
The Week in Startups
Evernote Said It Will Read Customer Notes to Improve Machine Learning (Fortune)
New York Is Planning to Juice Its VR Industry With a Splashy New Lab (Fortune)
Loom.ai Wants to Turn You Into a 3D Avatar (Fortune)
Hertz Is Teaming Up With Shift, an Online Used Car Marketplace (Fortune)
MGM Just Invested in Virtual Reality Game Developer Survios (Reuters)
Flipagram Is in Serious Acquisition Talks with Chinese News Aggregator Toutiao (Recode)
One of Y Combinator’s Hottest Startups Is a Korean Beauty Brand That Just Raised Another $60 Million (Recode)
GitHub Is Building a Coder’s Paradise. It’s Not Coming Cheap (Bloomberg)
Pinterest Has Lowered Its Hiring Goals for Women in Engineering Roles (TechCrunch)
Eaze CEO Steps down (TechCrunch)
Words of Wisdom
"The risk for the technology industry is that we are now the incumbents: we have a stake in keeping things exactly as they are, and we build products for ourselves — we’re our own best customers. That, though, cedes the future to the powerless — those with nothing to lose under the current system will by sheer necessity build the new."—author and analyst Ben Thompson, on the current relevance of Clayton Christensen's The Innovator's Dilemma to the tech industry. (Stratechery)
