How to Avoid Bursting with a Second Internet Bubble

internet bubble

The peer-to-peer business model, virtual employees and the so-called gig economy have been major topics in the news over the last few years. And the media have been overwhelmingly reporting on how these areas are growing like mad.

Not so fast, Bunky.

In recent days, dark clouds gathered and poured a little rain on the gig economy sunshine:

  • Zirtual, a virtual assistance service, closed its doors and then reopened – pared down – after an 11th hour sale.
  • Homejoy, a peer-to-peer house cleaning startup, went belly up.
  • Zen99, an accounting service for members of the gig economy, died with no reincarnation plans announced.

There are some lessons here, maybe the first of which – no matter what Big Bird says – is to avoid the letter Z at the beginning of your startup’s name. But since that may be purely coincidental, there’s a lot more to learn from these troubled companies.

1. Government policy matters. Homejoy co-founder Adora Cheung suggested that law suits over whether or not the cleaners using its site were, in fact, Homejoy employees, as well as a California Labor Commission ruling on Uber over a similar issue, scared off investors.

We recently covered the Department of Labor’s apparent crackdown on these kinds of working situations. I should also mention that Hillary Clinton seems to hold a position that could disrupt much of the “gig economy.” Investors hate uncertainty and political currents are creating a lot of uncertainty around the peer-to-peer business model.

2. Burn rates matter. It’s a sad fact that humans tend to make the same mistakes over and over. Remember the first Internet Bubble? It can happen again and I think some of the companies I referenced at the beginning failed to judiciously control their burn rates.

Explaining the situation at Zirtual, founder and CEO Maren Kate, explains how the company’s burn rate got away from them. When they moved from using independent contractors to regular employees, labor costs jumped some 20 to 30 percent. Further, the company had nearly 500 employees and offices in San Francisco and Los Vegas. While those are great cities with talented people, neither one comes cheap for business ventures.

3. Attention to detail matters. All three of the businesses I started this article with were built around good ideas, but without extremely attentive care and feeding, a good idea can turn into Frankenstein’s monster almost overnight. If you’re the founder, there’s a good chance you don’t have the operations background required to pinch every penny. It can be a very smart idea to bring in someone with the necessary practical experience.

Big companies have the Fixit Guy I’ve discussed before, but that person is never part of a startup’s founding team. Sometimes a venture capital company will have those kinds of managers available to send in and save the day. But the truly wise founder pays sufficient attention to the details that the Fixit Guy – or bankruptcy attorneys – don’t need to be called in.

4. The handwriting on the wall matters. Founders have so much of their own psyche tied up in their projects that they are either blind to or choose to ignore the handwriting on the wall. You need to always have good information and be willing to act on the data. Further, you can’t be so wedded to your vision that you fail to recognize when the vision of others is superior.

Let’s hope that we aren’t seeing the beginnings of a second Internet Bubble, but if we are, let’s be certain that your startup doesn’t get caught in it.