Iterations: Lessons We Can Draw From Cherry

Editor’s Note: Semil Shah is a contributor to TechCrunch. You can follow him on Twitter at @semil.

Every week, it seems, a new marketplace or services business is born. Some of the hottest companies of 2012 — after photo-sharing apps, of course — were online and mobile marketplaces and services-based companies, pioneered by the likes of Uber, for instance, and all the way to a newer company (with a common investor) to help you find someone to watch your four-legged friends while you’re away from home.

Cherry, the service to book a car wash for your four-wheeled friends, fit in this category. In December 2012, Cherry announced it would shut down its service after raising venture funding. I used Cherry a few times throughout the year and it worked great for me. I know Cherry was, at one point, booking a lot of car washes in and around the Bay Area, and I always assumed that, eventually, the purpose of raising venture capital was to expand their labor force and upsell other car-related services to become a more diversified business. This makes sense particularly in urban areas, where the real estate and infrastructure needs of a physical car wash operation aren’t practical. So, why not bring the wash to the car instead? (I’m not sure what Cherry’s future plans are as they raised a good chunk of money, but I hope they find a new angle and keep going.)

When TechCrunch’s Anthony Ha reported on Cherry’s shutdown news last month, I was surprised at the negativity in the comments section, a place typically reserved for a congratulatory chorus. Forget about the fact they’re coordinating car washes for a minute, and Cherry is not all that different than many of the other emergent services companies to pop up in this golden, overstuffed age of startups. That said, they provided more of a service rather than a marketplace, and that is a big distinction.

The demise of Cherry’s car washing operation is a failure that the Bay Area ecosystem can draw many valuable lessons from, which is important to the ecosystem right now given the sheer number of startups trying to harness the web and mobile to provide services or build new marketplaces. Companies such as Postmates, Exec, Lyft, Sidecar, TaskRabbit, Zaarly, Instacart, SWIG!, and so many more all fit into this broad category.

The lessons from Cherry listed below are written from a “venture-scale lens” because the company did raise institutional funding and others will as well, but of course, venture capital is certainly not a prerequisite to starting a new service business or marketplace and not all new endeavors need to be at venture-scale to be valuable. With that disclaimer and context, here are the three key “venture-scale” lessons we can draw from Cherry:

  • Transaction Volume: Cherry customers probably didn’t need a car wash every day. Maybe every week, at best. Therefore, to maximize revenue in the Bay Area, where they started, Cherry would have had to either begin to upsell other car-related services to be delivered at the time of a car wash and/or to maximize the number of bookings made through its service. Now, on the other hand, a marketplace for town cars like Uber is something users could do daily, or even multiple times a day, assuming they have the budget. Uber’s transaction volume is high on two dimensions: repetitive use and high-ticket sales. Companies in these categories looking at venture-scale opportunities will most-likely need to show robust figures in at least one of these two dimensions.
  • Profits Margins: Revenue may be en vogue again, but all revenue isn’t created equal. The real metric of interest is the profit margin. Venture-scale businesses need to have tremendous leverage in their revenue models. Consider the crown jewel: Google. Each Google search is a mini-auction for advertisers to bid against that search, lining Google’s pockets with $100M+ revenue….per day! By contrast, many of today’s new services have models which require the organization of excess labor supply, training that labor, and supplying it with materials and/or information in order to carry out the mission. Each step between point-of-sale and point-of-completion puts more and more pressure on the model and most likely compresses any margin. Through this lens, we may see why Cherry couldn’t justify their financial model. In venture-scale businesses, investors will want to model out the likelihood that any business could apply leverage on the revenue to extract margins, which creates the real economic value they seek.
  • Scaling In The Real World: Suppose Cherry worked so well in the Bay Area that they began a plan to expand to other cities. My sense is that in the SF Bay Area right now, and for the past year or so, many folks around here have a tendency to assume “scaling offline” is complex but as controllable as “scaling online.” While scaling an infrastructure and system online is certainly difficult, I would say right now it’s much harder, more expensive, and more time-consuming to scale these types of business offline and into new locations. Each company in these categories would need to build their own playbook in their test market (usually the Bay Area) and then execute against that plan to expand their reach while maintaining quality. And, even if these conditions are met, a VC may be reluctant to invest given the minefield of operational risks any team will surely endure. Pulling of a business like this takes serious time and effort. There may be a Starbucks in every town in America, but keep in the mind the company was founded in 1971.

It’s easy to mock Cherry as a small idea, but I give them credit — and hey, they could still do something new and interesting. They went out, delivered a service, and while there were some hiccups, their shutdown creates a learning opportunity for the ecosystem which is especially timely given the companies I’ve mentioned above, and the venture capital (and time) needed to make these things spread offline with real margins. In the past few months, I’ve grown concerned that these offline, non-technical, and operational elements aren’t taken into humble consideration or waved off as being “easy” to execute on. Too many people think to themselves, “Hey, we’ll do what Uber did, no problem.”

Well, what Uber did and is doing is really, really hard, and they still have a long way to go. It’s also important to recognize that Uber is mostly a marketplace and doesn’t handle labor as much as some of the other companies. Managing and training labor is time-consuming and expensive, and can negatively impact all three dimensions listed above. When Uber was raising their early venture and growth rounds, some investors still passed on the deal because while they liked the transaction volume and offline scaling proof points, some questioned the robustness of margins. To each his/her own. That said, if Uber had such a tough time and fought through it, I’d imagine everyone else in this broad category will go through as much pain or more in order to get a peek to the promised land in the horizon. Yes, it’s a fight worth fighting for, but as we see with a company like Cherry, which probably had enough cash to keep going for a bit longer, there should be no illusions in how hard it will be to get there.

Photo Credit: knottboy / Flickr Creative Commons