As a venture firm, we see entrepreneurs routinely pitch companies as “Uber for X,” where X can be any number of mobile-enabled services. We agree that Uber is just the tip of the iceberg and apps that orchestrate physical services (“mobile-enabled on-demand services”) are disrupting dozens of industries, including groceries (Instacart), car sharing (RelayRides), dry cleaning (Washio) and parking (Zirx).
However, the back-end infrastructure of mobile-enabled on-demand services is often complex and challenging to scale. In fact the more delightful the user experience of these services, the more complexity in their back-end infrastructure.
While much attention has been focused on generating customer demand via great product experiences, enduring companies in the mobile-enabled on-demand services space will drive value and profitability by optimizing their back-end logistics. We believe that leaders in this space will distinguish themselves by how well they execute on two key back-end characteristics: Disintermediation and democratization.
Mobile-enabled on-demand services fundamentally create value by removing middlemen from the equation. In the case of Uber, the disintermediated entities are taxi services and limo companies. By connecting directly with the drivers, Uber is able to capture value that previously accrued to the taxi and limo management companies. Dry-cleaning/laundry apps such as Washio and Rinse do the same by cutting out “front end” dry-clean shops (the so-called “drop shops”) that don’t own the dry-cleaning equipment, bringing your laundry directly to and from your home to the machines, thus capturing the value that previously accrued to the “drop shops.”
One can imagine that other services, such as food- or grocery delivery, would, over time, follow the same path and expand their gross margins by excluding the middlemen (in this case, restaurants and grocery stores). Already, Sprig and Munchery have their own chefs to provide the meals that they deliver, instead of working with restaurants. Eat Club offers a mix of popular dishes created by restaurants and in-house chefs.
Can we imagine Instacart, when it scales to millions of users, sourcing their groceries directly from suppliers that are vendors to its current partners, Safeway and Whole Foods? You bet. Similarly, services such as RelayRides are offering rental-car services without the parking lots and service counters, and on-demand valet companies such as Zirx are changing the parking experience without owning capital-intensive garages.
An exciting observation here is that while these companies create value for themselves, they also create a more delightful experience for the end users, at prices that are at or near parity with the more cumbersome traditional experiences. As these businesses displace their traditional brethren, we will start to think of these mobile-enabled on-demand services as “new age” taxi companies, food-delivery companies, grocery companies, dry-cleaning companies, parking companies and the like. It will be a given that these newer services are instant and accessible via a device that we always have on us, be it a phone, a smartwatch or, dare I say, Google Glass. In fact, we will wonder why we did business any other way.
The second important advantage that the new-age mobile-enabled companies have is their back-end infrastructure.
These companies typically structure their back ends to convert the significant fixed-capital costs of traditional companies to variable costs. They do this by democratizing supply. Instead of owning a fleet of cars (as Avis and Hertz do), or owning their own cars and hiring full time drivers (as traditional limo companies do), RelayRides and Lyft open up the supply to almost anyone willing to rent their car or drive people around. Similarly, the mobile-enabled parking companies do not own their own garages. They simply lease space on a variable-cost basis that matches the peaks and valleys of consumer demand.
The obvious benefit of this democratization of supply is that these companies need less capital to get off the ground. But a more important benefit to the business (and its end consumers) is that it can scale its supply quickly. Most successful on-demand services spend as much time perfecting the management of their back-end supply as they do their front-end user experience. They need to do this because the back-end supply management has a huge impact on the front-end user experience.
Companies such as Lyft, Eat Club and RelayRides have heavily optimized supplier experiences, including complex scheduling, routing algorithms, and sophisticated notification and communications features. Since the supply side is “on-demand” and not “owned,” these companies have to give special attention to the army of suppliers, and often nurture them as a community to assure continued availability of a high quality of service. The smart on-demand service companies understand that while this democratization of supply has many benefits, it also creates an obligation for them to select and train these “independent suppliers” well, assess and prune the suppliers, provide proper insurance coverage and stay competitive on wages.
All of this points to the fact that while the user experience of these on-demand services is simple and facile, the back-end complexities are many, and excellence in operations can make or break a mobile-enabled on-demand service very quickly.
If you are starting a mobile on-demand service, you should make sure that it is a differentiated service, so it gets adopted by end users. However, if you want to ensure long-term success, there are two further steps you must take. First, make sure you are disintermediating the middleman in that space, so you can capture their revenue; and second, ensure that you are democratizing supply, so you can scale the business in a capital-efficient, profitable way.
Ajay Chopra is a general partner at Trinity Ventures. He has active investments in several digital media and m-commerce companies, including Dynamic Signal, Fitstar and TubeMogul. Prior to joining Trinity Ventures, he co-founded, grew and took public Pinnacle Systems, a seminal media technology company that pioneered consumer generated media creation. Reach him @AjayChopra.
This article originally appeared on Recode.net.