Myth: Online Labor Marketplaces Only Lower Worker Wages

“By creating competition for task/project-based employment, online labor marketplaces lower average wages for workers. These platforms do increase demand so people can make same/more in total, but only if they work more hours (ie hourly wage down, utilization up).”

Since Homebrew invests in marketplaces, I tend to encounter the above sentiment fairly frequently despite the fact that, in many cases, it’s just plain wrong. Yes it’s true that incumbents utilize regulatory frameworks to create artificial scarcity, which inflates prices, shrinks demand and hurts consumers (eg cosmetologists in Utah being forced to spend $16k and two years of school in order to braid hair). And it’s also true that reducing opacity in connecting supply and demand (as well as geographic boundaries) can lead to price discovery, so if you were getting away with overcharging, marketplaces are a shining light on your dark corner.

But here’s the thing – if you have a differentiated skill, marketplaces will actually substantially increase your effective hourly wage. I’ll share two examples, one from Homebrew and one from personal experience.

We’re investors in UpCounsel, a legal services marketplace which connects high quality independent attorneys with companies who need legal work (10-300 employee enterprises is their sweet spot). UpCounsel’s founder/CEO is a former attorney with the bold vision that the largest law firm of the future will be a virtual one. That is, not part of a large partnership but instead turning towards a platform like UpCounsel for back office and demand generation. It’s a bold statement about the future of labor in the legal vertical and, obviously, we like it.

As UpCounsel drives more and more demand (platform is at a healthy seven-figure run rate), they’re able to extract some interesting observations about the hourly rates of lawyers on the platform. One phenomena is that lawyers with specialized skills may have been undercharging previously (imagine that, a lawyer who bills too little!). It’s because word of mouth and the other discovery paths for independent lawyers today may not have exposed their full demand curve to them. Imagine there’s a lawyer who understands a very specialized type of immigration law. Networking with local businesses in her hometown produces X hours of demand a month, but getting on a platform like UpCounsel could generate 5x. Boom, wage leverage.

Recently I also saw this in a babysitting marketplace – my willingness to pay more per hour for a sitter with many high reviews. Turns out increased peace of mind is worth a few bucks. Sure in the old days I could find a sitter and call their references but this was a friction. Now with sites like urbansitter or sittercity I can see reviews and even how I might be connected to someone who used the sitter previously. Urbansitter’s CEO once told me that many sitters routinely underprice themselves and she’s excited to see them make material increases in their hourly wage. So here we see that streamlining trust and quality discovery benefits those who are skilled at their profession.

Now I’m sure there are examples where marketplaces lead to greater commoditization of labor but the idea that “marketplaces = labor fights for survival” is just not universally true. It, like many aspects of the future of labor, is more nuanced than that.

I Don’t Want to Meet Your Company at Demo Day

As a new seed fund you might imagine Homebrew hustles to incubator demo days, taking notes and then chasing down founders to make an in-person connection. Nope. If you see me at a demo day, it’s likely to show support for the incubator itself, not to discover the Next Big Thing. Why? Because if I’m meeting a founding team for the first time on demo day I messed up. Given Homebrew’s commitment to go “all in” for our founders (leading financing rounds, operational guidance) and our fund’s thematic focus (the Bottom Up Economy), if I’m doing my job we’ll have found one another earlier, even if fundraising activity hasn’t begun.

It’s not because I want a sneak peek, or to try and pressure you into taking money before you have the chance to make a market. Rather I’m hoping we can see how each other work, maybe even work together by hopping off a whiteboard to talk through a design issue, product strategy or distribution hack you’ve been struggling to solve. I’m more interested in the way you think, communicate and lead, than your Keynote pitch skills. A termsheet should be just another milestone within a long relationship. When you talk with Homebrew, we don’t act one way before we wire you money and different afterwards.

Some founders (or incubator founders) will read this and raise an eyebrow, assuming there’s a hidden agenda on our part, or that there’s signaling risk in talking with investors in a staggered fashion. Maybe insisting that the unveiling of a company and subsequent funding auction yields the highest valuation. I realize that in aggregate some of these statements may be true (well, not the hidden agenda part). Thankfully we don’t want to invest in the aggregate company. And we have no problem being part of competitive/collaborative fundraising efforts. You want to kick off your raise on demo day and close quickly to create urgency? No problem, we’re excited to support that but the probability of our participation increases dramatically if we’ve had the chance to see you develop as a company and know that you too have had the opportunity to get to know us.

Making 10 or fewer investments each year gives us the ability to look for opportunities where there’s great culture fit between Homebrew and founders. Deal terms matter but people matter even more. We want to work furiously to help mission-driven founders build the companies they imagine. Ones that last a long time.

Aside from our model and ambitions, I’d suggest that if you’re in an incubator, early on identify a handful of funds that you want to get to know better. Funds that are likely to lead or otherwise participate in your seed round. Express that interest and spend some time together before you hit the stage with your ‘up and to the right’ graph. At the end of the day do this not because it’s what investors may want but because it will help inform your decisions.

So see you at demo day, but it’ll be sitting in the first few rows giving you a thumbs up for the progress you’ve made, not leaning over to the person next to us asking “what was that company’s name again?”

The Seed+ vs Pre-A Round Financing

Our venture fund Homebrew is focused on seed stage because that’s where we can be of most value to entrepreneurs by going “all in” for them early: leading a round, bringing on other great investors, putting together a board and helping them build the product/company/culture they imagine. Since we launched in May, there have also been a surprising number of what I’d call “special opportunities” – namely, companies which have raised a seed within the last two years looking to replenish their coffers without doing a full next round.

You write your principles in pen and your business plan in pencil, so we’re definitely taking a look at these, although we haven’t invested in any yet (all our commitments to date have been in true seed rounds). As we review them there are clearly two different scenarios, one of which is way more attractive than the other:

One I’d call the Seed+ — that means the team hasn’t yet hit the milestones they hoped to accomplish with the capital from their seed financing and need funding to continue. The reasons for the miss are varied – market developed more slowly, distribution took longer, team struggled to hire or hit their stride. Seed+ rounds seem to be priced at the same terms of seed (obviously dilutive), or slightly improved terms recognizing progress team has made. When evaluating Seed+ we ask the following:

  • Current investors: are they still supportive? are any putting more money in?
  • Team: how is morale? are founders still confident, or has the slog started to take its toll? Have they lost any key team members?
  • Deal: are founders properly assessing the value created to date, or lack there of?
  • Why?: Why are they running out of money? If it was an external event they couldn’t control, are they now executing as expected? If it was internal to the company has the issue been resolved?

Sometimes founders/current investors will tell us it’s worth bridging because it’s a small technical team and they can probably soft land if this doesn’t work out. That’s not of interest to us – in fact, probably a negative signal. As venture investors we’re not looking to say “let’s put a little more money in on this seed+ and likely outcome is they sell to Yahoo and we get our money back.” We need teams that still have the conviction they’ll build a company of merit and value.

If it’s not a Seed+ plus then it’s what I’d call a Pre-A. These startups have enough momentum to likely raise an A round at reasonable terms but are betting if they hit just a few more milestones, they’ll be in a position of even greater leverage. These are sexy as hell because not only is it a company heading in the right direction but a team that believes in itself enough to make a thoughtful, somewhat non-traditional decision. Many times Pre-A rounds will be taken fully by current investors but founders may want to bring in a new party as another pair of helping hands. Even better if, like Homebrew, they’re a seed institution that is likely to follow on in the A round. Pre-As are usually structured as a convertible, with a cap and/or discount to the A round.

Hopefully this helps entrepreneurs who are approaching their next funding decision. If you have any questions or want to discuss Homebrew investing, you can email me hunter at homebrew dot co.