Why the Gig Economy Is Sputtering

The New York Times' Farhad Manjoo recently wrote an oddly lamenting piece about how "the Uber model, it turns out, doesn't translate." Manjoo plaintively describes how so many of the "Uber -of-X" companies that have sprung up as part of the so-called sharing economy have become just another way to deliver more expensively-priced conveniences to those with enough money to pay. Ironically many of these Ayn Randian-inspired startups have been kept alive by subsidies of the venture capital kind which, for various reasons, are starting to dry up.

Without that kind of "VC welfare," these companies are having to raise their prices, and are finding it increasingly difficult to retain enough customers at the higher price point. Consequently, some of these startups are faltering; others are outright failing.

Witness the recent collapse of SpoonRocket, an on-demand pre-made meal delivery service. Like Uber wanting to replace your car, SpoonRocket wanted to get you out of your kitchen by trying to be cheaper and faster than cooking. Its chefs mass-produced its limited menu of meals, and cars equipped with warming cases delivered the goods, aiming for "sub-10 minute delivery of sub-$10 meals."

But it didn't work out as planned. And once the VC welfare started backing away, SpoonRocket could not maintain its low price point. The same has been happening with other on-demand services such the valet-parking app Luxe, which has degraded to the point where Manjoo laments that "prices are rising , service is declining, business models are shifting, and in some cases, companies are closing down."

Yet the telltale signs of the many problems with this heavily subsidized startup business model have been prevalent for quite some time, for those who wanted to see. In July 2014, media darling TaskRabbit, which had been hailed as a revolutionary new way of work for the way it allowed vulnerable workers to auction themselves to the lowest bidders for short-term gigs, underwent a major "pivot." That's Silicon Valley-speak for acknowledging that its business model wasn't working, it was losing too much money, and so it had to shake things up.

TaskRabbit revamped how its platform worked, particularly how jobs are priced. CEO Leah Busque defended the changes as necessary to help TaskRabbit keep up with "explosive demand growth," but published reports said the company was responding to a decline in the number of completed tasks. Too many of the Rabbits, it turns out, were not happy bunnies -- they were underpaid and did a poor job, despite company rhetoric to the contrary, and an increasing number of them simply failed to show up for their tasks . As a result, customers also were failing to return.

A contagion of pivots began happening among other sharing economy startups. Companies like Cherry (carwashes), Prim (laundry), SnapGoods (gear rental), Rewinery (wine), HomeJoy (home cleaning) all went bust, some of them quietly and others with more headlines. Historical experience shows that three out of four startups fail, and more than nine out of ten never earn a return. My favorite example is SnapGoods, which is still cited today by many journalists who are pumping up the sharing economy (and haven't done their homework) as a fitting example of a cool, hip company that allows people to rent out their spare equipment, like that drill you never use, or your backpack or spare bicycle -- even though SnapGoods went out of business in August 2012. It just disappeared, poof, without a trace, yet goes on living in the imagination of sharing economy boosters.

I conducted a Twitter interview with its former CEO, Ron J. Williams, as well as with whatever wizard currently lurks behind the faux curtain of the SnapGoods Twitter account, and the only comment they would make is that "we pivoted and communicated to our 50,000 users that we had bigger fish to fry." Getting even more vague, they insisted "we decided to build tech to strengthen social relationships and facilitate trust" -- classic sharing-economy speak for producing vaporware instead of substance from a company that had vanished with barely a trace.

Zaarly in its prime was another sharing-economy darling of the venture capital set, with notable investors including Steve Jobs, hotshot venture capital firm Kleiner Perkins and former eBay CEO Meg Whitman on its board. It positioned itself in the marketplace as a competitor to TaskRabbit and similar services, with its brash founder and CEO, Bo Fishback, explaining his company's mission to a conference audience: "If you've ever said, 'I'd pay X amount for Y,' then Zaarly is for you." Fishback once spectacularly illustrated his brand by bringing on stage a cow being towed by a man in a baseball cap and carrying a jug of milk--"If I'm willing to pay $100 for someone to bring me a glass of fresh milk from an Omaha dairy cow right now, there might very well be a guy who would be super happy to do that," he said. That kind of bravado is what gave these companies their electric juice, as media outlets like the Economist lionized them a s the "on-demand" economy.

Like so many of the sharing-economy evangelicals, Fishback brandished a libertarian Ayn Randianism which saw Zaarly as creating "the ultimate opt-in employment market, where there is no excuse for people who say, 'I don't know how to get a job, I don't know how to get started.'" But alas, those were the heady, early years, when Zaarly was flush with VC cash. Flash forward to today and Fishback is more humble, as is his company, having gone through several "pivots." The "request anything" model is gone, as are Fishback's lofty sermons to American workers. Instead, Zaarly has become more narrowly focused on four comparatively mundane markets: house cleaning, handyman services, lawn care and maid service.

And then there's Exec. Like Zaarly and TaskRabbit, Exec also started with great fanfare as a broader errand-running business, this one focused on hiring a personal assistant for busy, high-powered Masters of the Universe. Like other sharing startups, initially it had grand ambitions about the on-demand economy and fomenting a revolution over how we work: connecting those with more money than time with those 1099 indies who desperately needed the money. But eventually this company too was forced by its market failures to narrow its focus, in this case to housekeeping exclusively. Finally the company flamed out and was sold to another housekeeping startup, Handybook. Exec's former CEO, Justin Kan, wrote a self-reflective farewell blog post about what he thought went wrong with his company . His observations are illuminating.

His company had charged customers $25 per hour (which later rose to $30) to hire one of their personal assistants, and the worker received 80 percent, or about $20 per hour. That seemed like a high wage to Kan, but much to his surprise he discovered that, when his errand runners made their own personal calculation, factoring in the unsteadiness of the work, the frequency of downtime, hustling from gig to gig, the on-call nature of the work as well as their own expenses, it wasn't such a great deal. Wrote Kan, "It turns out that $20 per hour does not provide enough economic incentive to dictate when our errand runners had to be available, leading to large supply gaps at times of spiky demand . . . it was impossible to ensure that we had consistent availability.

Kan says the company also acquired a "false sense that the quality of service for our customers was better than it was" because the quality of the "average recruitable errand runner"--at the low pay and on-call demands that Exec wanted--did not result in hiring the self-motivated personality types like those that start Silicon Valley companies. (Surprise, surprise.) That in turn led to too many negative experiences for too many customers, especially since, like with TaskRabbit, a too-high percentage of its on-demand workers simply failed to show up to their gigs. (Surprise, surprise.) It turns out, he discovered, that "most competent people are not looking for part-time work." (Surprise, surprise.)

Indeed, the reality that the sharing economy visionaries can't seem to grasp is that not everyone is cut out to be a gig-preneur, or to "build out their own businesses," as Leah Busque likes to say. Being an entrepreneur takes a uniquely wired brand of individual with a distinctive skill set, including being "psychotically optimistic," as one business consultant put it. Simply being jobless is not a sufficient qualification. In addition, apparently nobody in Silicon Valley ever shared with Kan or Busque the old business secret that "you get what you pay for." That's a lesson that Uber's Travis Kalanick seems determined to learn the hard way as well.

Kan, like Leah Busque, Bo Fishman and so many of the wide-eyed visionaries of Silicon Valley, had completely underestimated the human factor. To so many of these hyperactive venture entrepreneurs, workers are just another ore to be fed into their machine. They forget that the quality of the ore is crucial to their success, and that quality was dependent on how well the workers were treated and rewarded. The low pay and uncertain nature of the work keeps the employees wondering if there isn't a better deal somewhere else.

Moreover, a degree of tunnel vision has prevented startup entrepreneurs from seeing that their business model often is not scalable or sustainable at the billionaire unicorn leve without ongoing VC welfare subsidies. Silicon Valley has an expression, "That works on Sand Hill Road" --referring to the upper-crust boulevard in Menlo Park, California, where much of the world's venture capital makes its home. Some things that seem like great ideas--like paying low wages to personal assistants to shuffle around at your every whim, or lowballing wages for someone to hustle around parking cars for yuppies--only make sense inside the VC bubble that has lost all contact with the realities of everyday Americans.

A pattern has emerged about the "white dwarf" fate of many of these once-luminous sharing startups: after launching with much fanfare and tens of millions of VC capital behind them, vowing to enact a revolution in how people work and how society organizes peer-to-peer economic transactions, in the end many of these companies morphed into the equivalent of old-fashioned temp agencies (and others have simply imploded into black hole nothingness). Market forces have resulted in a convergence of companies on a few services which had been the most used on their platforms. In a real sense, even the startup king itself, Uber, is merely a temp agency, where workers do only one task: drive cars. Rebecca Smith, deputy director of the National Employment Law Project, compares the businesses of the gig economy to old-fashioned labor brokers. Companies like Instacart, Postmates and Uber, she says, talk as if they are different from old-style employers simply because they operate online. "But in fact," she says, "they are operating just like farm labor contractors, garment jobbers and day labor centers of old."

Tech enthusiasts like the Times' Farhad Manjoo seem to be slowly waking up to the smell of the coffee. "The uneven service and increased prices," writes Manjoo, "raise larger questions about on-demand apps" which he says "now often feel like just another luxury for people who have more money than time." After being such a booster, Manjoo now seems to be turning a full 180, saying that "we are witnessing the end of the on-demand dream."

Yet that strikes me as too black-and-white, as overly gloomy as Manjoo once was excessively optimistic. The sharing economy apps have proven to be extremely fluid at connecting someone who needs work with someone willing to pay for that work. Some workers have praised the flexibility of the platforms, which allow labor market outsiders - young people, immigrants, minorities and seniors especially -- who have difficulty finding work to access additional options. It's better than sitting at home as a couch potato with no income. And by narrowing the scope of their services, these companies stand a better chance of contracting with quality people, and developing real relationships with them.

I suspect that, properly pivoted in the right direction, these app-based services will continue to play a role in the economy. Eventually many traditional economy companies may adapt an app-based labor market in ways that we can't yet anticipate.

But that means we need to figure out a way to launch a universal, portable safety net for all US workers (hint: we can do it at the local and state levels, we don't need to wait for a dysfunctional Congress). At the end of the day, the sharing economy startups have been hamstrung by the quality of the workers they hire. If they want good workers, they need to offer decent jobs. Otherwise, this sharing economy is not about sharing at all, and not very revolutionary.

The current startup model destroys the social connection between businesses and those they employ, and these companies have failed to thrive because they provide crummy jobs that most people only want to do as a very last resort. These platforms show their workforce no allegiance or loyalty, and they engender none in return.

Steven Hill is a senior fellow with the New America Foundation and a Holtzbrinck fellow at the American Academy in Berlin. His most recent book is "Raw Deal: How the Uber Economy and Runaway Capitalism Are Screwing American Workers." www.Steven-Hill.com, @StevenHill1776