The rise of Uber and other ride-sharing apps has bridged the gap between instant information and instant service, forever changing consumers’ expectations for completing a transaction. This trend has led to a new generation of startups claiming to be “like Uber, but for X” in almost every vertical imaginable. IT support, babysitting, flower delivery … if you can think of the service, it likely already has multiple players in the on-demand ecosystem.
But just because these companies offer services that are nice to have, doesn’t mean they are cut out to scale and ultimately survive. Between the need to diversify in today’s maturing marketplace environment and the correction occurring in venture markets, 2016 will be an inflection point for “Uber for X” companies, with many being swallowed up by bigger players or just flat-out going out of business. For the exact same reasons, however, Uber itself will continue to see growth.
Slowing growth drives diversification
The network effect that spurs hypergrowth in many business models has proven to eventually slow, forcing companies to innovate beyond their core businesses and seep into other market opportunities. We’ve seen this before with companies like Amazon and its AWS business, which has driven high margins as growth has started to slow down in its traditional e-commerce marketplace business.
Uber may have been categorized as a taxi service originally, but at its heart it’s a technology company that focuses on efficiently moving things from point A to point B, whether that be people or goods.
We’re already seeing diversification from top on-demand companies, and it will only accelerate in the next year. From UberEats and domestic shipping to ugly-sweater delivery, Uber is coming after a host of legacy businesses that involve getting an item, person or service from one location to the next. Uber may have been categorized as a taxi service originally, but at its heart it’s a technology company that focuses on efficiently moving things from point A to point B, whether that be people or goods.
As more and more vertical markets become saturated, some large players will look to acquire smaller and niche on-demand businesses to diversify offerings and aid expansion. On-demand companies that offer a wide range of services often have a tough time offering best-of-class services in every possible category or expanding into new offerings. But with the acquisition of strong vertical players, these horizontal businesses can quickly expand by folding new offerings into their existing categories. 2016 will certainly be a year full of established on-demand players courting smaller acquisition targets in order to diversify and expand their businesses.
The feeling is mutual
As determined as big players are to acquire vertical companies, many of those niche startups are just as excited about the possibility. This has everything to do with the larger forces at play in the on-demand and broader venture communities.
The “platform middle-man” structure of many on-demand businesses means that customer acquisition — and, to a larger degree, service-provider acquisition — are fundamental components to driving growth. As we saw with Homejoy last year, rapid service-provider acquisition and retention can be a difficult and expensive proposition. But without strong marketplace supply, demand will dwindle.
Reading the writing on the wall, some niche “Uber for X” players are already looking for the right acquirer.
While high burn rates have been acceptable over the last few years of incredible venture financing, that period is coming to an end, and a correction is under way. Valuations are dropping due to write-downs, and venture capitalists are beginning to decrease the pace and size of their investments, especially in businesses that feature high burn rates. The combination of cash flows drying up and cooling venture markets means that on-demand companies without significant traction and a cash flow problem will be left with two options: Fail or get acquired.
Reading the writing on the wall, some niche “Uber for X” players are already looking for the right acquirer. Anecdotally, I’ve seen this kind of movement firsthand on the creative services side of the on-demand economy. We’ve had multiple niche creative-service companies approach us and ask about the potential of Fiverr acquiring them, hoping to leverage their vertical expertise to become part of our horizontal marketplace.
Diversification drivers and funding crunches are interconnected and point to the same conclusion: The on-demand economy will see a correction in 2016 and “Uber for X” companies will sit at the center of it. Established on-demand companies like Uber will look to transform into more horizontal marketplaces in order to increase growth and enjoy potential cross-category pollination, while the majority of niche-focused or earlier-stage players will opt for acquisition or fail in the quest for independence.
Micha Kaufman is the co-founder and CEO of Fiverr, the marketplace for creative and digital services. Reach him @michakaufman.
This article originally appeared on Recode.net.
