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A better on-demand model: On-the-go office manager

Diana Pryor, special to CNBC.com

Looking for a million-dollar start-up idea? Don't follow the horde of start-ups hawking delivery services directly to the consumer. Become an on-the-go office manager — to a corporation, museum or even a restaurant. That's the concept that has allowed Eden, a San Francisco-based start-up, to generate a million dollars in revenue run-rate in just four months' time.

Eden co-founders Kyle Wilkinson, CTO, left, and Joe Du Bey, CEO.
Source: Eden

The company was initially a tech-support business that helped consumers with technical issues — similar to Geek Squad — but soon realized that it was too focused on the wrong opportunity: It could make more money by focusing on the business-to-business (B2B) market rather than consumers, who tend to be more price-sensitive.

After launching in San Francisco in June 2015, the company discovered that its tech services were actually being used by businesses more than it expected — in fact, Eden didn't expect to attract that market at all — but quickly realized that business-to-business clients were generating a significant amount of revenue.

"Our revenue has grown 15 percent each week for four months," said CEO and co-founder Joe Du Bey.

By November 2015, the revenue split between the consumer and business client base was 50/50, even though Eden wasn't focused on business clients. That's when the company decided to make the switch to being exclusively a business-to-business company.

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"It's tempting as a founder to have a consumer business idea, but once we noticed the best part of our business was in B2B, we had to pivot," Du Bey said. "Serving businesses tends to have higher frequency and higher profit."

Eden's path to profitability, on a unit economics basis, reflects an emerging trend in venture capital start-up investing as the on-demand services market becomes crowded with too many rivals.

Recent data from venture capital research firm PitchBook shows an increase in investments made by VCs to start-ups focused on the B2B sector between 2013 and 2015. On the other hand, investments in business-to-consumer (B2C) start-ups, where PitchBook senior analyst Garrett Black described the competition as "super intense," has leveled off after a torrid pace of investment in recent years. Overall venture-capital deal flow in the U.S. on-demand space reached $2.5 billion last year.

Du Bey said Eden investors were willing to follow the data and the company had been transparent about the possibility of a shift when it started to notice success with business clients.

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Black said the initial risk in making a pivot is slimmer profit margins. "Being able to grow revenue slims profit margins a little but is worth it because then you can capitalize on growth more and your unit economics are coming in from a more stable stream of revenue."

While the business pivot was the catalyst for Eden's success, Du Bey said it was also the hardest decision he ever had to make as CEO. But the company quickly realized that if it were to offer its services to both consumers and businesses, it would be spreading itself too thin. He said that the company's consumer profit margins were low while operating as B2C but that its profitability actually improved upon pivoting.

"Historically, the challenge for on-demand businesses is that they grew by giving away a dollar for every 80 cents of revenue — if you grow because you're giving away money that is not real growth," Du Bey said. He added that it's critical for start-up founders to pay attention to growth, demand and unit economics.

(Source: PItchBook)

Black said venture capitalists are wary about investing money in B2C companies because many of them have previously lacked a focus on unit economics and now companies are scrambling to manage costs. He said many start-ups slashed their margins and tried to amass enough customers to keep the business model going.

The Eden founder and CEO said it makes money on every transaction, "a lot more on every dollar it spends." However, the company is not profitable on a net-income basis, because it's still in early start-up seed stage, having raised two rounds of venture capital for a total funding of $3.3 million.

Historically, the challenge for on-demand businesses is that they grew by giving away a dollar for every 80 cents of revenue — if you grow because you're giving away money that is not real growth.
Joe Du Bey
co-founder and CEO of Eden

Eden's success in the B2B market has also led to an expansion of services: It now offers office cleaning and handyman services in addition to its core tech services. All 13 of Eden's HQ employees, plus its 70-plus "Tech Wizards" in the field, are W-2 employed, which allows for what Du Bey calls "a consistency of experience" that is expected in the business-to-business marketplace.

Because Eden employees have benefits, they do a quality job for their clients and they stay on to work for Eden rather than moving around, like many contractual workers employed by other start-ups. This leads to happier customers who want the same people working in tandem with their office needs, Du Bey said. Eden is then referred to other companies in the area, which leads to more growth for the company.

The model is in stark contrast to many on-demand companies, most notably Uber, which is fighting regulations and lawsuits across the world in its effort to keep all of its drivers classified as independent contractors.

While Black said the business-to-business pivot by start-ups isn't a major trend yet — though he thinks there is a chance it will become one — other start-ups are moving to a hybrid model that doesn't abandon the consumer market but tries to add a business-market segment to its legacy market.

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Foursquare, the location-pinning app, started as a pure consumer company but realized it would be beneficial to develop business partnerships because it recorded data that one-third of Fortune 500 companies, now Foursquare clients, wanted access to.

Foursquare founder and executive chairman Dennis Crowley recently told CNBC that businesses, like Twitter, need to analyze how big they can get as consumer companies. "They have to figure out how to grow exponentially with many more users, or sit and ask, 'What are the assets that we have, and what are better ways that we can start to monetize those assets?'"

It would have been difficult for Foursquare, which now refers to itself as a "location intelligence company" to pivot entirely away from the consumer, like Eden, because consumer traffic drives Foursquare partnerships. It is analyzing foot traffic data for clients, among other things.

"Our company isn't as much of a weighted scale with competing and divided resources; It's more of a virtuous cycle with elements that support one another," said Foursquare's CEO Jeff Glueck in an interview. "When we raised $45 million in January, we had just closed the books on 2015 with our biggest revenue month, our biggest revenue quarter and our biggest revenue year ever, validating our hybrid approach."

By Diana Pryor, special to CNBC.com

(Disclosure: Comcast Ventures, the venture capital arm of Comcast, is among Eden's investors. CNBC's parent company NBCUniversal is a subsidiary of Comcast.)