Sunday Long Read: Clean Sweep

Just another reminder not everything works with the sharing economy, as home cleaning startup Homejoy found out the hard way. Sometimes being first on the scene in order to get to the customer before anyone else falls on its face when the customer finds out what the real cost of the service is.

When Homejoy folded, a slew of media articles pointed to worker classification lawsuits that plagued the company in its final months.

Like Uber, TaskRabbit and other well-known on-demand economy companies, Homejoy treated its cleaners as independent contractors, and not employees, despite how many hours they worked. Some litigators did not agree with this assessment, arguing that Homejoy and its ilk were depriving workers of reimbursements and overtime wages. At the time the company shut down, it was facing four employment suits challenging its workers’ status, and a judge had just handed class action status to a raft of suits brought against Uber by its drivers. The contract-for-hire system — key to the cost structure and profits of the on-demand model as currently conceived — was suddenly teetering.

But was that the reason for Homejoy’s collapse? At the time, Cheung told the technology blog Recode that the lawsuits were the “deciding factor” in Homejoy’s failure to raise additional funding. Others paint a different picture. In interviews with more than a half-dozen former employees who spoke with Backchannel for this story, a more complicated story emerges. The lawsuits were not the primary nor the proximate reason for the company’s demise, these people assert.

In fact, Homejoy was grappling with far more immediate problems that might have deterred potential investors equally or more: mounting losses, poor customer retention, a costly international expansion, run-of-the-mill execution problems, technical glitches and the steady leak of its best workers to direct employment arrangements with its own (now former) clients.

One of its biggest problems was the crippling cost of customer acquisition. By mid-2014, thousands of people were scooping up deeply discounted first time Homejoy cleanings for $19.99 on daily deal sites like Groupon. The company offered these aggressively even though its own internal data showed most of these people never used the service again, according to three ex-employees.

Former West Coast operations manager Anton Zietsman said that Homejoy was all-too aware of the challenges for startups and small businesses to attract repeat customers from Groupon. But he said they were forced to rely on it heavily because of intense competition with their chief rival, Handy, which employed a similar strategy.

A third-party analysis of the company’s financials viewed by Backchannel showed that only about a quarter of its customers continued to use the service after the first month, and less than 10 percent used it after six months. (The source of this report requested anonymity because the data is proprietary and not authorized for public release.)

“The key problem is that we weren’t making enough money on our customers,” recalled Daniel Hung, the second full-time engineer to join the company. “We were spending a lot of money to acquire them, but not really retaining them.”