SAN FRANCISCO (Reuters) - Only a couple of years ago, billions of venture capital dollars were flowing into so-called on-demand businesses that hoped to mimic Uber Technologies Inc and provide a service at the touch of a smartphone app.
But the demise last week of valet parking company Luxe, which followed the collapse of three of its competitors, shows the brutal economics of on-demand services and raises questions about the viability of the concept.
Luxe raised $75 million and reached a valuation of about $160 million as investors competed to back on-demand startups in everything from restaurant take-out to health care and home repair.
“From a fundraising standpoint, ‘Uber for X’ was the attractive thing,” said Sean Behr, the chief executive of Zirx, another now-defunct valet parking company.
Yet the founders of all four parking startups told Reuters that the math never added up. Dispatching a valet at a moment’s notice to park a car in the middle of a city is expensive and labor intensive, the executives said, with growth only leading to bigger losses.
Parking garages often refused to give the companies any meaningful discounts, with spots at times topping $500 per month, while customers were not willing to pay more than if they had to park their cars themselves. Because parking space in cities is scarce, the more spots a company wanted to rent, the more expensive they got.
“As the demand went up the cost went up,” said Ajay Chopra, an investor at Trinity Ventures, which backed Zirx. “As Zirx grew more and more, we were losing more and more money.”
Margins were razor thin —$2 to $5 per parking job, founders said — and that was before paying for the scratches and dents valets put on cars. Insurance costs soared.
“We realized we couldn’t make money,” said Hamza Ouazzani Chahdi, who co-founded parking startup Vatler. “So we decided to stop it, and that was the best thing that happened to us.” The company has become SpotAngels, which helps people avoid parking tickets
After raising $38 million from venture capitalists, Behr last year reached a similar conclusion and changed Zirx to a fleet management service for rental car and car-sharing companies, called Stratim.
“The unit economics just wouldn’t move in the way that I thought they should,” Behr said.
Luxe closed its parking app in the spring and was trying to change to a software platform that offered an array of vehicle services. Co-founder and Chief Executive Curtis Lee said Luxe needed a big cash infusion if it was going to try and survive, but knew he would be rejected by investors.
“The thought of going down the path of raising another round, it wouldn’t have turned out well,” he said.
The collapse of valet parking apps raises doubts about the entire on-demand industry, which has raised about $58 billion from investors since 2014, according to data firm CB Insights. Indeed, the very company that pioneered the on-demand economy, Uber, has not yet proved it has a viable business model.
“The space has been a good place to lose money,” said Anand Sanwal, co-founder and chief executive of CB Insights.
Other casualties include home-cleaning startup Homejoy, laundry service Washio, food delivery companies Sprig and SpoonRocket and errand service Exec.
The on-demand business “became a red-headed stepchild that no one wanted to touch,” Lee said.
The fate of Luxe shows how quickly fortunes can change in Silicon Valley. Just two years after raising $50 million to fund a national expansion, the company last week sold its assets to automaker Volvo [VOLVO.UL], which also hired the company’s remaining staff.
The price was not disclosed, but a person close to Luxe said the investors did not get their money back.
Reporting by Heather Somerville; Editing by Jonathan Weber and Leslie Adler