The boom in on-demand apps, waiting for consolidation

Katie Benner's phone storage capacity is getting maxed out with the number of on-demand apps available. Photo / Getty

I had a lot of things to mail last week, so I tried to download an app called Shyp, which would let me summon a courier to pick up and mail my packages. But I couldn't get Shyp because I've maxed out my phone's storage capacity with lots of other apps that let me call for food, car rides and cleaning services. I'll probably delete Netflix to make some room, since watching West Wing reruns is less important to me than avoiding a trip to the post office.

My phone - which I once used for photos, music, email and maps - is now crammed full of apps for on-demand services. It's just one sign of the crazy boom in companies that want to turn our phones into remote controls for the real world.

Money is pouring into these startups. Funding grew by 514 per cent to $4.1 billion in 2014, and that number will probably double this year, according to a recent research report from CB Insights. A total of $9.4 billion has been spent on 263 deals since 2010, when the trend began. In 2010, there were fewer than 20 venture investors in the space. There were 198 investors by the end of April 2015.

The clamour to get into on-demand companies has been driven by the runaway success of Uber, which could soon be valued at $50 billion. At the industry's On Demand Conference last week, it was impossible to avoid the phrase "Uber for." Steve Schlafman, a venture investor at RRE and a panelist at the event, said that someone had even tried to pitch him an "Uber for private investigators."

Uber accounts for about $5.5 billion of the $9.4 billion that investors have deployed into on-demand services, and CB Insights says that seed funding in the space is on the rise as venture firms try to find the next big thing.

If you live in San Francisco, those numbers probably sound about right. Most people I know here - usually other yuppies like me - use an on-demand service everyday. Uber for a ride home. Sprig when there's no time to grab lunch. TaskRabbit when Ikea furniture must be assembled. New apps promising a more convenient, pampered world spring up all of the time. Why do your own laundry, park your own car, grocery shop or go to a liquor store when you can push a button to take care of those chores?

But California, and the Bay Area in particular, is basically a test kitchen for all sorts of ideas, and it's easy to forget that few of the buzzy startups out here survive. The whole idea of venture investing is that lots of failures will be outweighed by a few home runs. TechCrunch, the bible for startup companies and trends, is littered with the carcasses of failed companies.

It's hard to read that frothy CB Insights report and not think that all this growth will end like the previous boom in social networks, which was driven by the huge success of Facebook. There will be a handful of other big winners, a lot of consolidation and a lot of failures. Shervin Pishevar, who was an early investor in Uber, told the On Demand Conference attendees that a fear of missing out is driving the on-demand investment boom, raising the possibility that the boom is well underway and the bust is not far off.

Patricia Nakache of Trinity Ventures says her firm believes in the on-demand economy in part because the millennial generation wants products and services that fit into a lifestyle of smartphones and instant gratification. Trinity is invested in Eat Club (on-demand meals) and Zirx (on-demand parking).

But even Nakache thinks that there will be consolidation. Part of the reason the investment dollars are flooding the zone, she argues, is that many of the winning companies will be those that got the biggest the fastest. "There are low barriers to entry for lots of companies in the space, like on-demand alcohol delivery," she says. "Never underestimate the power of branding, but for these companies, generally speaking, the way to achieve any barrier is to go for market domination." Companies have to burn through a lot of money to reach that sort of scale.

So as the money flows and new startups are formed seemingly every month, here are some ways that the on-demand space will probably shake out.

• Startups will deliver service people, not just stuff.

Uber, Lyft and Postmates have shown that people are comfortable having strangers shuttle them and their stuff from door to door. The next step is to get people into our homes. TaskRabbit has been doing this for awhile, but a new crop of startups including Handy, Managed by Q, Soothe and Alfred are sending plumbers, cleaning people, masseuses and personal assistants into our homes and offices.

This new type of service throws some thornier issues into the mix, especially around labour. Outsource to minimise cost (the industry norm) or hire full-time employees to assure quality (as Alfred and Q do)? These are two wildly different business models, and it's unclear which will win out. Semil Shah, an investor in Q, says that when someone crosses the threshold into a home or office, it creates a greater need for trust and consistent service - the sort of standards that are probably easier to maintain when everyone is an employee and feels a strong loyalty to the customer and the product.

• Regional players will consolidate.

Do we really need Washio in Los Angeles and Rinse in San Francisco? It might make sense for startups that are attacking the same problem in different cities - in this case, laundry on demand - to get together. Companies that have the strongest operations and best cost structures will be in a position to roll up other players.

• Only a few on-demand services will thrive outside big cities.

Uber, and to some extent Lyft, have been hugely successful because people use taxis just about everywhere, even in the suburbs and rural areas. But household economics are not the same everywhere. Outside of a handful of densely packed metro areas, chores are less of a schlep. People own washing machines.

A family in suburban Iowa might use a grocery shopping service, but they probably won't need someone to find parking for their cars at night.

The on-demand marketplace will sort all this out, as markets do. The apps that meet a consumer demand will survive. I'll do my part by clearing a few gigabytes on my phone so I'm ready for the next big thing.

- Bloomberg