Platform businesses have long been at the forefront of the tech sphere. More recently, sharing economy businesses have been racing to join Uber and Airbnb in the multi-billion dollar club. And for a good while, Homejoy seemed to be one of the more promising companies in this race.

Founded in July 2012, Homejoy completed a $38 million round of financing in December 2013. They were the frontrunners of the on-demand home services industry and had raised at least three times more capital than their closest competitor. But it wasn’t meant to be.

Fast forward to July 2015, and the company abruptly shut down its services. The next day, Google hired all of its product and engineering resources. (Funny to note, Google Ventures was a repeat investor in the failed startup.) And, like that, the company was gone.

At Applico, the Platform Innovation Company, we analyze platforms on a daily basis, and we see promising startups fail all the time. What’s bizarre about Homejoy, though, is the abruptness of its failure given the promise of its industry and the strong team it assembled. You would think that the company wouldn’t shut its doors and be worth nothing-that, at least, someone would acquire them at a huge discount and for investors to save face.

Unfortunately, in Homejoy’s case, that wasn’t how the story unfolded. In talking with a former senior employee at Homejoy, we’ve identified three main reasons for the company’s demise and lessons entrepreneurs can learn from these mistakes.

Take a long-term approach towards operations.

With all of Homejoy’s fresh capital, user acquisition was paramount to show growth to investors, employees, and media. Many paid channels were used, and huge discounts were offered to incentivize customers to sign up. However, repeat usage, the lifeblood of any platform company, wasn’t where it needed to be, according to people familiar with the company. Many users who were drawn to the platform because of its first-time discounts had little reason to return to hiked prices. The team’s ability to execute and make improvements to their product and service wasn’t able to keep up with the pace of the industry. In our opinion, operations were to blame, not platform leakage.

Homejoy’s growth strategy focused on short-term goals (user acquisition, expansion) and ignored long-term issues (user retention, diminishing funds), so what benefits came were nothing but short-lived.

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In addition, just a year after the December fundraise, Homejoy’s COO departed for a competitor that received a $27 million strategic investment from Lowe’s.

Understand your business’ legal environment.

To add insult to injury, in March 2015, a class action lawsuit was filed against Homejoy for “misclassifying” its workers as independent contractors rather than employees, a common suit in the on-demand startup economy these days.

These types of class action lawsuits are expensive and incredibly distracting, especially for startups that need all the time, money and resources they can find to grow and improve operations. With all the preexisting issues that Homejoy had, the lawsuit was the company’s nail in the coffin.

It’s ideal to consider these types of issues before they turn into complex lawsuits so that you can adjust before it’s too late.

Never stop raising money if you run a platform company.

Homejoy was running low on cash; however, the former employee we spoke to says that the company’s cash assets were not openly communicated to the employees. It’s difficult to tell your employees the current financial state of your company if a) transparency isn’t ingrained into your company culture and b) the financial situation isn’t looking too good. So, the true magnitude of Homejoy’s situation wasn’t prevalent within the organization. This type of information, when in the hands of passionate and smart employees, like many of those at Homejoy, can empower people to go the extra mile, but the company’s executives prevented that from happening.

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In May 2015, Homejoy’s CFO left the company after having been there for less than a year. No capital raise was done in 2014, while competitors were continuing to complete financings each year to fuel their growth.

The overall strategy and timing in the market for Homejoy were spot on. However, poor operational execution exacerbated by a class-action lawsuit ran them dry of cash. Another fundraise in 2014 might’ve provided them enough cushion to refine their operations, or, at the very least, leverage to negotiate an acquisition, but it had been nearly two years since the company’s last fundraise. The company was caught between a rock and a hard place, with too little to spend and too much to prove.

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Published on: Aug 13, 2015