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Investors pump a record $10 billion into on demand…. with more than 80% going to four companies

By Sarah Lacy , written on August 23, 2017

From The Disruption Desk

Well, this is going to end in tears.

CB Insights released a report this week showing that the “on demand” economy isn’t quite as beleaguered as…. Well, every single sign would suggest.

On demand was overhyped for sure. But the way it was over-invested in took two forms.

There were the Ubers and Airbnbs of the world, where one company raised such a gargantuan amount of money from major investors early enough that they had a relatively small number of well funded, legitimate competitors. Uber effectively has one in the US, and Airbnb has none. Compare that to hundreds of, say. YouTube competitors that sprouted up as if from nowhere. (A phenomenon we wrote about in detail here.)

Or there are the categories like meal kits and food delivery-- where no clear player got a dominant lead and funding position early on and so it became the most overfunded category by deals, if not by concentration of dollars.

The leader of the first camp is Uber. The leader of the second is Blue Apron. Yeah…. Money going in wasn’t a problem for these guys, but money coming out seems another matter….

Presumably $70 billion Uber has virtually no senior leadership, a major lawsuit with a larger competitor over trade secrets and a major lawsuit with its most significant early stage investors. BlueApron-- the so-called standout of the “solving dinner” category which has had such a disastrous young life as a public company that it announced cost cutting measures today. These are supposed to be high growth companies in their prime.

Well, CB Insights reports that after several waning quarters investments in on demand were again surging-- hitting an all time high in fact.

In a reversal from the slowing investment trend witnessed over the last several quarters, on-demand companies saw a resurgence in both deals and dollar funding last quarter. Specifically, after only 67 and 69 deals in Q4’16 and Q1’17, respectively, on-demand companies rocketed up to 87 deals in Q2’17.

Of course, if you dig into the numbers nothing about it signals a resurgence in optimism about the space as much as it signals investors hoping to take advantage of an impending shake-out.

They numbers were dramatically skewed by a handful of mega deals. And by mega I mean-- gargantuan. Didi Chuxing raised $5.5 billion in one round, while Go-JEK, Ele.me, and Lyft also raised mega-rounds worth more than $500 million each. It bears noting that none of these deals are lead by Sand Hill Road style players or would be considered traditional “venture capital” in earlier eras. And in terms of the number of deals completed, it was only the 7th busiest quarter on record for on demand.

But back to those four mega-deals. Didi and Lyft, for one, are Uber’s two biggest competitors in a commodity business and Uber has never looked weaker. Of course this is the moment you back-up the truck if you are a backer of either company, given these are commodity businesses with no network effects and cash alone can move market share.

Additionally, three of the four are in Asia. Some have argued that Asia is even more overheated than the US when it comes to on demand…. Maybe. But many parts of Asia also have a greater need for services like delivery or transportation because of factors like low car ownership and insufficient existing infrastructure. They may well be bigger opportunities. Either way, it’s a different market dynamic than what we are seeing with Uber and Blue Apron here. Bigger risk, sure, but also possibly bigger reward. Didi long ago out paced Uber in completed rides, by a hefty multiple.

To me, those four mega deals which together make up more than 80% of this record quarter in funding don’t singal much new excitement about a growing category as much as they single doubling down on investing bets, and trying to jockey for a stronger position in a shifting landscape.

As CB Insights noted, a full 20% of the funding is post-Series E...

At some point, we’re gonna run out of rounds… or at least letters to distinguish the rounds. Since the dot com bust companies have taken longer and longer on average to exit and it’s now 20% longer than it was in 2008, according to Pitchbook. The ratio of VC investments to exits in the US is now at a record high, also according to Pitchbook.

At some point, these companies will have to try to go public. And so far, the only decacorn to do that hasn’t fared so well.