Will MENA’s on-demand startups become sustainable businesses?

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On-demand startups, the so-called ‘Uber for X’ of startups, are those that provide immediate service by dispatching someone to your very doorstep. The person in question could be a childcarer, a masseuse, a personal driver, or simply someone to pick up your laundry.

The on-demand model utilizes existing infrastructure while leveraging technology. Companies can rely on this model to service their customers who have no time to execute some of their basic errands. It also offers paid job opportunities to many to many people.

Careem, MENA’s only unicorn, Fetchr, a unicorn-to-be, ChefXchange, connecting foodies with chefs, and many more on-demand startups are already reshaping the labor and services market in the region. The trend looks set to continue; just last month, Egyptian delivery platform Bosta received a major investment from Numu Capital.

The on-demand economy of the US is estimated to reach $57 billion in 2017, with around 22 million customers. Today, around 300 on-demand startups operate in the US alone. Though there are no exact figures about the industry in the MENA, such startups are flooding the market, providing identical or similar offerings.

The rise of the millennial consumer

In the long run, the biggest beneficiaries of this rise are consumers, since they have countless services at their fingertips, whether from the likes of Designer 24, where you can rent clothing, or Elves, which books, buys, and delivers virtually whatever you want, functioning as a personal assistant of sorts.

(Image via Pexels).

Industries across the globe are witnessing changes in consumer behavior, much of this due to millennials. In the MENA alone, they are estimated at 150 million. Their consumption habits differ from those of prior generations like Baby Boomers and Generation X. Millennials around the world rarely buy things, they rather rent them: cars, houses, cable TV. Hence, they are sometimes referred to as the generation of renters.

The mindset of many millennials is captured in an expression coined by consumer psychologist Kit Yarrow: “I want what I want when I want it.” Millennials tend to seek instant gratification, and are willing to spend more on same-day delivery than any other age group.

MENA millennials have the highest brand loyalty compared to their counterparts in Asia and the West, and mobile penetration among them is almost 100 percent, factors which make them an attractive and profitable target for startups marketing on-demand services.

Which sectors are the most lucrative?

The most lucrative on-demand sectors in Europe will generate 570 billion Euros (US$ 672 billion) by 2025. The sectors in question include peer-to-peer housing and transportation, collaborative finance, as well as household and professional services.

Some sectors are lucrative because, in order to secure their services, customers are willing to shell out more money than they normally would. When it comes to food, whether groceries or takeout, consumers are willing to pay around 11 percent more for each added layer of convenience.

In the MENA, 147 million people, or 60 percent of the population, now have internet access, a 15 percent increase y-o-y. According to We Are Social and Hootsuite, MENA consumers increasingly look to smartphones and social media when tackling their everyday needs. The same study shows that 39 percent of Saudis made online purchases and 33 percent used smartphones to do so, with the numbers for the UAE at 62 percent and 47 percent, respectively. MENA startups of the on-demand variety are watching all this closely.

Grabbing MENA VCs’ attention

Global VC funding is falling for on-demand startups. The fourth quarter of 2016 saw only $1.7 billion worth of investment in 55 global on-demand startups, down from $3.7 billion and 78 deals in the third quarter of 2015.

Graph via CB Insights

On the other hand, regional VC investments in regional and international on-demand startups are increasing. Kuwait’s Arzan Capital invested in companies Careem, Boxit (led by Wamda Capital), and OnFleet. Saudi Arabia also showed interest in on-demand opportunities, dipping into its Public Investment Fund last year to invest $3.5 billion in Uber.

Do not rely on VC money

Going over the western on-demand startups, many haven’t yet reached a sustainable business model that not only covers their expenses, but allows them to generate profits. Numerous concepts are kept afloat artificially, thanks to VCs. As their clients’ base is not generating enough revenues to cover their expenses, these startups are not only resorting to VCs for growth money, but to help them cover their expenses too.  

The late Silicon Valley-based cleaning startup Homejoy, which connects customers with home service providers such as cleaners, mainly failed mainly because of a bad retention rate. Customers rarely booked its services after the expiry of its promotional $19 offer (the regular cost was $85/2.5 hours). Homejoy ended up burning through $40 million of VC money, received via five rounds of investments throughout its journey, and died in 2015.

The keys to survival are offering a service that is requested frequently and utilizing automation (which is less costly) as much as possible, thereby ‘locking in’ customers.  In order to succeed in doing this, MENA’s on-demand startups should aim to innovate, but also try to disrupt standard commercial patterns. While observing how and why on-demand startups in other regions succeed, they should create their own business models, rather than simply copying those of others.

According to Clayton Christensen, one of the world's top management thinkers/ professors at Harvard Business School and expert in disruptive innovation, for an innovation to be disruptive it must either target price-sensitive customers with cheaper products/services whose performance is no better than fair, or target non-consumers not being served by existing products.

So, will MENA’s on-demand startups adopt the same path some western startups have taken and keep going back for VC money – and shut down when it dries up? Or will they manage to innovate and survive?

Feature image via Pexels.

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