Sharing Economy

The Uber business model loses some of its sheen

Uber CEO: We're getting good
Uber CEO on China: Still in investment mode
Lyft co-founder: Why more people are choosing us

Six years ago, Uber launched a test run to help hail cars in a few cities. Freelance drivers, who needed work in a deep recession, and customers, lured by cheaper rides and cashless transactions, together bankrolled Uber into a tech unicorn — a private company with a valuation of at least $1 billion.

But the era of cheap money is easing as valuation expectations adjust. Some start-ups have discreetly cut staff. IPOs remain weak. And it turns out the Uber business model — this broad idea that any sector might be disrupted by an army of freelancers, overlaid across a mobile platform — doesn't necessarily translate.

Uber and other start-ups in the on-demand economy have been dogged by questions about freelance-worker background checks. There are accusations that start-ups are basically skirting regulations and related licensing fees that apply to traditional businesses, including taxis, limousines and hotels.

But beyond Uber, more new companies are reimagining the on-demand business model. New ventures are coupling flexible schedules with more traditional workplace benefits including health insurance and a chance to buy a company stake — a privilege usually reserved for founding members and deep-pocketed investors, not rank-and-file employees.

More start-ups are also converting 1099 independent contractors to W-2 employees. And other companies are offering base wages above the federal minimum of $7.25 an hour. Some employees also get health insurance.

"Uber was the first game in town," said Rebecca Smith, deputy director of the National Employment Law Project, or NELP.

But San Francisco-based juggernaut Uber stands by its strategy and says the company is growing, co-founder and chief executive Travis Kalanick told CNBC on Monday. "We've just been watching literally hundreds of cities go profitable. We've just tightened up the operations," he said.

Uber has a presence in some 400 cities worldwide, from San Francisco to Shanghai. "We're getting good at running profitable cities," he said.

Kalanick added he does not expect his company to go public anytime soon. "I'm going to make sure it happens as late as possible." He added Uber has raised around $10 billion during the last 18 months.

Uber no longer the only game in town

But Silicon Valley and conversations among venture capitalists have shifted. A freelance-based model is no longer a condition of funding. There are more pointed conversations about growth targets and talent retention as a good business move, and a condition of valuation markups.

"Companies felt that in order to get funding and succeed, they had to follow that model," said Smith of NELP, a worker advocacy group. "Now we are seeing successful companies that either start out with workers as employees or shift to the employee model."

The Uber business template, it seems, is losing some of its luster.

Inside Managed by Q

Dan Teran (at left) is CEO of Managed by Q, an on-demand office cleaning and maintenance company. He walks with Labor Secretary Thomas Perez.
Photo: Chris Warga

Among the new crop of on-demand companies is office cleaning start-up Managed by Q, based in New York City with service available there and in San Francisco, Los Angeles and Chicago.

Managed by Q last week announced its office cleaners and handymen will be able to purchase up to a 5 percent stake in the company. The first ownership grants are planned for July 1 of this year.

And the ownership option is on top of other benefits not usually associated with start-ups.

In the on-demand economy (sometimes referred to as the gig economy), freelancers use smartphones and other technology platforms to connect to available work and income streams such as driving passengers to destinations or renting out a room or house. Amid an uneven recovery since the Great Recession, many Americans workers — everyone from college students to those chronically under- and unemployed and those in their 50s and older — have turned to such small-task jobs to create a patchwork of employment.

At Managed by Q, all 500 workers are classified as full-time employees. All the workers have health insurance that's covered 100 percent by the company.

The start-up, founded in April 2014, was launched with full-time workers. But wait. Full-time workers? Health insurance? Didn't potential investors balk at such a pricey business model?

"Well, let's just say it's a great way to self select the right partners," said Dan Teran, co-founder and chief executive of Managed by Q. With its success, funding conversations have naturally gotten easier.

"Uber has been incredibly successful and pioneered a model that works very well for them," Teran said. "But no one size fits all and it never has been. We've seen enough companies struggle, or go under, that it really isn't like Uber is the only model that's applicable for everyone," he said.

Other start-ups that have converted their independent contractors to employees include:

  • Shyp, a package delivery company.
  • HomeHero, a home caregiver business.
  • Honor, a home care start-up.
  • Sprig, meal preparation and delivery.
  • Eden, tech support and office management.

Other start-ups paying above the federal minimum wage include:

  • Bridj, a mass transportation company, mandates a $15 minimum wage.

"These companies are proving that you can both make money and treat workers fairly," said Smith of NELP. "They are showing that you can offer employees a flexible schedule just as you can 1099ers."

The on-demand business model is no longer seen as a choice between innovation or workplace benefits. As U.S. unemployment has dropped and the overall economy has improved, business strategies that address the chronic, costly challenge of finding, training and retaining talent are valued.

"Whether it's a software engineer or handymen, these are real skills and there's a market for them," said Teran of Managed by Q. And hiring employees is good for business. "Beyond the argument that it's the right thing to do, it's the clearest path to a sustainable business," he said.

Silicon Valley's cash party is coming to an end

Bigger picture, new on-demand business models may prove to be a crucial bridge for Americans, struggling to fend off stagnant wage growth.

In an economic address in July 2015 in New York City, Democratic presidential candidate Hillary Clinton called out the sharing economy as a potential factor in dampened wage growth. More than 53 million Americans are freelancers, composing 34 percent of the U.S. workforce, according to a 2014 survey by research firm Edelman Berland, commissioned by the Freelancers Union.

Workplace and wage advocates argue some of these start-ups are evading payroll taxes, workers compensation and unemployment insurance payments, and minimum wage and overtime laws. Eventually lawyers got involved and class-action suits were filed.

Read MoreUber drivers' suit given class-action status

As more start-ups shift to employee status, the change may be as much about making a bet on how the courts ultimately will rule on related labor cases affecting on-demand workers.

"They are reading the tea leaves and betting that the courts and their own success as businesses will require that they treat workers as employees," said Smith of NELP.

"This on-demand or so called gig economy is creating exciting opportunities and unleashing innovation, but it's also raising hard questions about workplace protections and what a good job will look like in the future," Clinton said last July.

Income volatility rising

So what will a good job in the future look like? Presumably one with predictability.

More American workers, in fact, say they feel like they're dancing for their next meal.

For example, income volatility is rising among Americans, according to a February 2016 report on the topic from JPMorgan. "Moreover, the decline in real wages since 2009 for all income groups except the top 5th percentile means that life is harder to afford in general, but even more so when earnings dip below average," the report said.

Uber, Airbnb and other online platforms offer workers a chance to bundle together discreet tasks. But as any freelancer will tell you, paycheck amounts and frequency can vary widely. Such uncertainty can contribute to paycheck volatility and the inability to save for a rainy day and make long-term financial plans.

With the help of Homewise, Saul Carta and his mother Maria “Lucy” Carta moved into their first home in Santa Fe, N.M.
Some Americans can't afford to buy homes in their hometown

A separate study has found nearly a third of adult Americans have no rainy day fund. The results of the telephone survey of 1,000 U.S. adults were released Monday by NeighborWorks America. The group supports more than 240 nonprofits that work in affordable housing and community development. Homeownership remains a key path to wealth accumulation for many Americans.

Roughly 63 percent of adults surveyed with incomes below $40,000 have emergency savings, and just 39 percent of people with annual incomes of less than $20,000 had a rainy day fund.

"The gig economy requires that you really manage the good times," said Douglas Robinson, a spokesman for NeighborWorks America. "And that's where having a budget for those slower times comes in."