Cleaning services company Homejoy is shutting down on July 31 after struggling to raise a big enough round of funding. The company had already been facing growth and revenue challenges, but CEO Adora Cheung said the “deciding factor” was the four lawsuits it was fighting over whether its workers should be classified as employees or contractors. None of them were class actions yet, but they made fundraising that much harder.
“A lot of this is unfortunate timing. The [California Labor Commission’s] Uber decision* … was only a single claim, but it was blown out of proportion,” she told Re/code. The on-demand space has become a riskier bet for investors in a short amount of time.
Homejoy was able to raise funding, but not enough to grow the company as big as its founders and backers had hoped. “We declined those investments because it wasn’t enough, and we wanted to stay true to our vision,” Cheung said. She declined to comment on reports of possible acquisition between Homejoy and competitor Handy. Homejoy had recently been exploring a sale, according to the San Francisco Chronicle.
This is one of the first startup casualties as a result of the worker classification issue that has gripped the tech industry. Many companies in the gig economy, such as Uber, Postmates, Luxe and Sprig, classify their workers as contractors instead of employees. As a result they don’t have to foot payroll taxes, social security benefits, vacation time or other fees. But workers have filed lawsuits over the issue, and it’s now become a heavily debated talking point among the presidential candidates.
Cheung believes there ought to be a third classification for employees, and she defended Homejoy’s decision to make its workers contractors, citing the importance of flexibility for its cleaners.
“How do we support and do right by those people while remaining a two-way platform?” Cheung said. “I wish we were able to do more for them, but the reality is that we can’t under the current regulatory environment.”
Founded in 2012 by Cheung and her brother Aaron, Homejoy was one of the earlier entrants into the gig economy, and Cheung became a favorite speaker on the startup circuit. But it didn’t grow as fast as its competitor Handy, and customers complained after Homejoy raised prices. The lawsuits were the nail in the coffin — Homejoy didn’t have the war chest of Uber to fight long, costly legal battles.
Homejoy raised $40 million from Y Combinator, PayPal founder Max Levchin and a handful of angel investors, as well as startup investment firms First Round Capital, Redpoint Ventures and Google Ventures. It operated in 35 cities in the United States, France, the U.K., Canada and Germany and had 100 employees and roughly 1,000 cleaning professionals. The platform will stay open long enough to fulfill any existing appointments.
* Cheung is referring to the California Labor Commission’s recent determination that an Uber driver was an employee instead of a contractor. This wasn’t a binding precedent and doesn’t apply to any other drivers, but it jumpstarted ample media coverage of the worker classification issue with startups.
This article originally appeared on Recode.net.