For a few months in early 2016, Handy CEO Oisin (oh-SHEEN) Hanrahan lived in fear of Tuesday mornings. It was then, in the on-demand home-cleaning startup's weekly leadership team meetings at its New York City headquarters, that Hanrahan had to look at slide after PowerPoint slide showing how badly the strategy he'd championed was backfiring, while doing his best to ignore the I-told-you-so looks of his co-founder.
At the time, Handy was in the midst of a major change in the way it brought on new cleaners, or "pros," as it calls them, a change that Hanrahan had advocated. He eventually wanted to roll out an online onboarding process in all 28 of its markets.
His co-founder, Umang Dua, had resisted the plan since it was first proposed back in late 2014. His chief concern was that qualified candidates wouldn't complete the application process unless a human helped. But the two agreed to do a limited test run and see what happened. They rolled out the new system in Miami and Washington, D.C., in January 2015.
The two founders were still debating whether to implement it in all of Handy's markets when, in November 2015, the company closed its $50 million Series C venture capital funding. The new capital brought some relief--in the form of additional financial cushion--but also caused a new kind of stress. The tone of the meetings with potential investors during Handy's search for funding had unnerved both Dua and Hanrahan. "A lot of the conversations we had were less around our business and more around whether there would be future funding for businesses in this category," Hanrahan recalls.
Several VCs told Hanrahan and Dua they worried they'd be plowing money into Handy only to have their counterparts at other firms balk at underwriting its next stage of growth, leaving them holding the bag.
The co-founders weren't exactly surprised by the skepticism. "Things were not particularly good at that point," Hanrahan recalls. "We were seeing other companies around us struggling to raise capital. There was talk of down rounds. There was talk of unicorns falling," he says, referring to the Silicon Valley nickname for startups with billion-dollar valuations. Faced with a rapidly chilling climate for funding, Hanrahan and Dua agreed they needed to proceed on the assumption that this round would be the last available to them and to think about how it could carry them through to profitability.
The obvious answer was to implement the online onboarding strategy across the entire company, which Hanrahan predicted would save Handy millions of dollars a year. Dua agreed to the plan, and the company began the rollout to all its markets last January.
The only problem was that Dua was right. Successful onboarding plummeted more than 40 percent. Handy had to cancel thousands of bookings as demand outstripped the supply of available pros. Customer complaints skyrocketed. It was a grim replay of an episode from a year earlier when the company had moved all of its customers onto recurring-service plans without providing easy ways to opt out--while simultaneously shutting down its telephone complaint line.
For Hanrahan and Dua, this debacle was just one more stumble on the long, unfamiliar, and painful path from growth to profitability.
Sacrificing growth for profitability, seeking ways to save a few million bucks, worrying about the future mood of investors--these are things that well-capitalized startups in Silicon Valley and throughout the tech industry didn't need to do much of during the past decade. As VC funding for private companies broke records in 2014 and 2015, startups competed to spend like sailors on shore leave.
For companies like Handy, which has raised more than $110 million in venture capital, the ability to spend hard and fast was seen as a way to gain a competitive advantage over everyone else trying to capture the same market. And no matter how hard the company spent, there was always someone willing to throw more money at it. Growth and market penetration became the primary valuation barometer, and no expense was spared to keep it rising.
When torching money seems fiscally prudent, it's bubble time. Right on schedule, a correction arrived. Venture capital funding, which had been setting new records with each passing quarter, tumbled 11 percent at the start of 2016, according to the National Venture Capital Association. The total number of investments plunged 29 percent, according to an analysis by PitchBook. For the first time in years, the number of "down rounds" by companies raising money at lower-than-previous valuations eclipsed the number of new unicorns.
Unlike the bursting of previous bubbles, this has not been a wholesale economic apocalypse. Rather, the deflation of this bubble brought sanity, and a desire for profit, back to startup land. What looked like evidence of desperation 18 months ago--cost cuts, layoffs--now reads as welcomed discipline.
"Two years ago, the only question [investors] were asking was, Is this a big idea?" says Donn Davis, managing partner of Revolution Growth and co-founder of Revolution. "Now they're asking two questions: Is this a big idea? And do you have a reasonable plan to grow to profitability without too much cash?"
At an onstage appearance in June, Drew Houston, CEO of the $10 billion cloud-storage startup Dropbox, declared that Silicon Valley had entered a "post-unicorn" era in which the rules were different. "Cash is oxygen, and if you keep having to go to investors to fill up your scuba tank, then you can run out," he said.
This sentiment has come as a rude awakening to cash-drunk, growth-focused startups, which must now figure out two things: the levers they need to pull to shift from growth to profit, and whether they have the skills and stomach to pull them. Back in early 2016, Handy was faced with the possibility that it might not have either.
Hanrahan and Dua met as classmates at Harvard Business School and had the idea for Handy (originally called Handybook) while sharing an apartment in Cambridge, Massachusetts. There was a third roommate who didn't join their team but provided an invaluable contribution in the form of inspiration. "I'm a tidy person," Hanrahan says. "Umang is like middle of the road, and then the third guy was nasty." Like so many would-be entrepreneurs at the time, Hanrahan and Dua were already wondering how they could use the new ubiquity of smartphones to upend some settled market. On-demand cleaning seemed like a large and unclaimed opportunity--albeit one full of challenges they couldn't foresee.
Their timing was good. In 2012, when they launched, the financial crisis was a receding memory, the "Uber but for fill-in-the-blank" phenomenon was still in its infancy, and VCs had a keen appetite for on-demand plays. Joel Cutler, an investor at General Catalyst Partners, had two pieces of feedback when Hanrahan and Dua asked him to join Handy's $2 million seed round: They should ask for more money, and they should drop out of business school to focus on the startup full time. The next couple of years was a land grab against rivals like Homejoy, Mopp, and Exec, and that often meant outspending them. Handy eventually acquired Mopp and Exec.
Then, in July 2015, Homejoy went out of business. Rebecca Greene, who oversees Handy's marketplace operations, remembers Homejoy's shutdown triggering a surge of relief with a tinge of existential worry. "It makes you a little nervous when you consider your biggest competitor is suddenly no longer there," she says."It makes you a little nervous when you consider your biggest competitor is suddenly no longer there."
To Hanrahan, it was a bad news-good news situation. Just a year earlier, Homejoy probably could have raised another round ... and now it couldn't. "The capital markets had changed in general, but they had definitely changed for the on-demand or flexible economy," he says. The good news, however, was "we were now in a category where there wasn't a number two that was fighting us for every single customer with very aggressive unit economics. We had the space to focus on sustainability instead of pure growth."
Handy didn't just have space. It had a financial imperative. Throughout its brief history, the company has been dogged by complaints and low ratings. The reviews section of its page in the Apple App Store is full of horror stories--tales of last-minute cancellations, no-shows, clueless cleaners, damaged floors, you name it. Some quality issues were simple rookie mistakes, like the time Handy ran a big promotional offer without realizing it was Easter weekend, and almost no cleaners were available, forcing the company to cancel bookings and issue credits en masse. Others were growing pains, the enviable problems of a company struggling to keep up with snowballing demand. "The growth may come overnight, but your ability to deal with it--it's not a switch," says Dua.
But other issues were structural, the same sorts of stumbling blocks that tripped up Homejoy. Home-cleaning is what's known as a "high-cost-of-failure" business: A booking costs a lot more and takes a lot longer than, say, a car ride, and customers are considerably less willing to laugh off one that goes wrong. "It's just a hard category," Hanrahan says. "This is most of the complexity of Uber with an added layer of what actually happens in the home."
These problems were less important than the company's explosive growth while the money still flowed. But now, with the company burning through more than $1.5 million per month, it had to turn those irate customers into consistent profit centers, and the only way to do that was to improve the product.
The company had been trying to address these problems from the start. In its first two years, as demand soared, the company hired dozens of hourly workers to handle the flood of incoming complaints and problems. Eventually, it had a team of more than 100 customer service associates in its cramped New York City office, manning phone banks in shifts. Even with all the new bodies, wait times often ran as long as an hour. It also implemented chatbots to serve as a customer's first contact. Unlike human employees, bots never take bathroom breaks or want overtime pay for holidays. (They can, however, be unpredictable and profligate in their own way: Once, after a customer entered her phone number incorrectly, a Handy chatbot ran up a $50,000 bill exchanging preprogrammed text messages with what turned out to be another company's automated chat app.)
But by mid-2015, the need for a cheaper solution was painfully obvious. By outsourcing the customer experience department to call centers in Florida and Missouri, the co-founders knew they could reduce that part of the payroll by more than 50 percent, saving millions of dollars a year. But they also worried they'd be giving up a valuable measure of control. They argued over the pros and cons for hours, in the end agreeing that call centers were the way to go. That meant laying off dozens of customer experience associates they'd so recently brought on. Both co-founders say it was a wrenching moment. "It just sucks," Hanrahan says.
But that was nothing compared with the self-inflicted pain Hanrahan suffered through in early 2016 as he waited for his self-service onboarding initiative to stop bleeding and start being profitable. Instead, things got worse.
He and Dua had intended to roll out the self-serve model slowly, market by market, but then word began making its way around Handy that virtual onboarding was the long-term scenario. Members of the operations team who handled onboarding in markets where self-serve wasn't yet up and running demanded to know whether their jobs were safe; at least half a dozen didn't wait to find out and took other offers. Rolling out the change gradually had seemed like caution; instead it was creating chaos. "Anything more than a couple of weeks when people's jobs are at stake is a long time for them to have uncertainty," Hanrahan acknowledges.
As the months passed, Hanrahan stayed resolute, but only because he didn't see an option. The Dublin-born entrepreneur is fond of a saying from home: The best way to climb a wall is to throw your shoes over it. Handy, he says, had thrown its shoes over the wall, committing itself to the business model, and there was no going back.
As Handy's engineers worked out the kinks in the new self-serve platform, the onboarding completion rate stopped dropping like a stone. By the end of the first quarter, it matched the pre-rollout rate, and by the end of the second quarter, it outpaced the old rate by 10 percent. It looked like Hanrahan had made the right call after all. It helped that Handy's biggest competitor wasn't around to capitalize on its wobble.
Most recently, Handy has increased the layers of chatbots that customers have to go through before they can get to a human customer service representative. Between the success of the onboarding initiative and the shift to more chatbots, the company laid off another 42 employees in March, just four months after it closed its $50 million Series C.
Replacing people with software systems is the kind of decision that's difficult emotionally but a no-brainer as a matter of business rationale, Hanrahan says. The company simply needed to get to the size at which spending money to build those systems made economic sense. "It's important, as you go through these scaling moments, that you figure out the places where you can do something in an automated way and where the human touch is more valuable," he says. "Our goal is to focus humans where they can have the most value and focus bots or machines where they can have the most value."
An extremely important lesson Handy has learned during its pivot to profit came from a decision that was made long before the funding environment became challenging. At the advice of its investors, the company decided in 2014 not to expand to any new markets beyond the 28 it was already in. Pressing pause on expansion to new cities, and focusing instead on growing within existing markets, carried significant risks, especially during a period in which the "growth uber alles" ethos still reigned. If Handy wasn't already in a market, some other cleaning startup could seize it. "It's an all-out land grab and will continue to be in perpetuity," acknowledges Bob Davis, a general partner at Highland Capital Partners. "There's a tradeoff."
The risk ended up being worth it. The more customer density Handy has in a market, the better its business model works--customer acquisition is cheaper, the greater density of both cleaners and customers makes it easier for both to get appointments they want, and referrals jump as a result. Happier customers means fewer contacts with customer service staff. Happy staff means higher retention and less need for recruitment and onboarding assistance. If Handy hadn't stopped its market expansion, it would not be reaping these benefits today.
"From the outside, you look at this and think probably the way to improve unit economics is reduce pay to pros, increase prices to customers, maybe discount less," Hanrahan says. "On the inside, you realize so much more of it has to do with optimization and getting your pros more jobs."
Handy's economics are looking healthier with each passing quarter. More than 50 percent of its growth is organic or through referral channels, yielding a 33 percent drop in the average cost of acquiring a customer, from $30 to $20, in the past six months. Discounted bookings (typically sold through deal sites like Groupon) are down from 12 to 7 percent of the total. All of Handy's cities are now gross margin positive, versus 72 percent in October 2015, and the company as a whole saw its gross margins jump from 7 to 20 percent. Most critically, Handy's burn rate has been falling steadily. At $1.5 million a month last summer, it has come down by more than 15 percent since, and, sometime in the second half of 2017, the company expects to flip over into profitability. And that's budgeting in for the launch of new cities and at least one new service vertical.
None of this necessarily means that Handy is done with the money-burning part of its story. Startups often do a profitability toe-touch, just to prove it's within their reach, and then dive back into investment mode. "Will we raise more capital 12 months out? Maybe, maybe not," says Dua. "But if you do it, you want to do it from a position of strength. You want your fate in your own hands." Compared with some of the upside-down thinking of the bubble years, that sounds like a philosophy that makes sense whatever the season.