Startup Case Study : Homejoy’s Rise and Fall

Founded in 2010 by siblings Adora Cheung and Aaron Cheung, Homejoy enjoyed tremendous initial success as a startup company in on-demand cleaning services. Since its acceptance by prestigious incubator Y-Combinator, Homejoy had raised nearly $40 million in multiple rounds from prominent investors like Andreesen Horowitz, First Round Capital, Max Levchin (Paypal co-founder) and Google Ventures. Homejoy had thousands of cleaners provide services in over 35 cities throughout United States, Canada, United Kingdom, Germany and France. The company’s blazing growth made them one of the hottest startups at the time. However, in a rather abrupt turn of events, Homejoy announced their permanent closure on July 31st, 2015. The question is how did Homejoy go from a startup darling to a startup bust? 

 

Factors That Led to Homejoy’s Downfall 

 

The home services market was (and still is) huge. It was estimated to be a $400-$800 billion market without a clear market leader during Homejoy’s rise.  On-demand services was a current trend pushed by the popularity of platforms such as Uber and GrubHub.  With a big home services market and interests in on-demand services, the environment seemed to be ideal for Homejoy to succeed. So why did Homejoy fail? Here are the likely factors that led to Homejoy’s demise: 

 

1. Worker Misclassification Lawsuits:  Homejoy faced four worker misclassification lawsuits.  Homejoy classified the professional cleaners as contractors but the cleaners argued that they should be considered as employees of Homejoy and receive appropriate benefits. It was cost prohibitive for Homejoy to re-classify the cleaners as employees. In addition, Homejoy could not raise enough money to fight the lawsuits charged against them (unlike Uber who has the funding to fight similar lawsuits). The worker classification for gig platforms is still an ongoing debate. In California, the California Assembly Bill 5, or AB 5, is a state statute aimed to prevent employee misclassification.  Companies, such as Uber, Lyft and DoorDash, have pushed to reverse AB 5 so that their workers can remain classified as independent contractors rather than employees of the company. 

 

2. Low Quality Cleaners:  Homejoy could not provide training to the cleaners due to the cleaners’ classification as contractors. Therefore, despite attempts to screen cleaners through interviews and trial tests, many customers had complained about the quality of the cleaners. It had been reported that some cleaners that passed Homejoy’s screening process never cleaned before.  Furthermore, Homejoy’s roughly 25% commission further trimmed the already low margins for the cleaners. The low margins coupled by the lack of employee benefits discouraged high quality cleaners and attracted a lot of low quality, inexperienced cleaners.   

 

3. Low Customer Retention:  Homejoy was pressed to show investors its high growth to get additional funding. They focused on growth strategies such as offering promotions on Groupon.  These growth strategies not only cut into Homejoy’s margin but they also hurt customer retention rates. Customers that buy cleaning services on deal sites such as Groupon tend to be one-time customers only. According to Forbes, only 15-20% of Homejoy’s customers booked again within a month, compared to over 35% for customers of rival Handy. 

 

4. Company’s High Burn Rate:  Homejoy’s focus was to show substantial growth to investors in hopes of obtaining future funding. At one point, the company expanded its presence to 30 cities in just 6 months. The company incurred substantial marketing and operating costs to penetrate these markets. Homejoy hired rather quickly as well, growing to over 100 employees before they permanently shut down its operations. 

 

5. Company’s Low Profit Margin:  Homejoy likely had a low (or no) profit margin.  They failed to reach a deal to be acquired by Berlin-based rival Helpling and San Francisco-based rival Handy and ultimately ran out of cash.  One aspect that had hurt Homejoy’s profit margin is the “platform bypassing” problem where the homeowner and cleaner can directly deal with one other and not utilize Homejoy for recurring jobs. By bypassing the platform, the cleaner can save the 25% commission fee that would of contributed to Homejoy’s revenue. Although Homejoy could suspend the cleaner’s account, it was highly unlikely that Homejoy would find out about the cleaner trying to bypass the platform. Also, the cleaner likely did not mind the risk of having his/her account suspended because the loss would not be that significant (cleaner has low margins). 

 

Homejoy had stated in the press that the lawsuits doomed the company. However, Homejoy’s problems were more deeply rooted than the lawsuits that it had to face. Its fundamental flaws on top of the lawsuits ultimately plagued the company and prevented its success.