Small Business Labs

What are Digitally Native Franchises?

Forerunner Ventures is best known for funding early direct-to-consumer, online brands like Warby Parker. Bonobos and others.  

Their latest investment thesis is "digitally native franchises," which they describe as online platforms that enable people to start their own business with meaningful ownership and flexibility, but also the playbook and support of a centralized platform.

As the Forerunner chart below shows (click to enlarge), they see digitally native franchises as providing independent workers more control, freedom, and financial upside than gig workers - and greater support and less risk than traditional small business ownership provides.

Forerunner says the drivers of digitally native franchises are:

• Broad, rising interest for people to be able to work themselves (though current market conditions can make that daunting)
• An unbundling of historical service industries (healthcare, education, personal finance, home services, and more)
• New tech making structures more efficient and scalable (yes, AI)

Forerunner uses Fora Travel, which they have invested in, as an example. Forerunner describes Fora as:

"a unified platform enabling anyone with a passion for travel to monetize that expertise as a modern travel agent."

We're not sure how different a digitally native franchise like Fora is from the many existing online platforms that connect small businesses and solopreneurs to customers.

But given Forerunner's success at spotting and building new businesses, we think following their efforts in the digitally native franchise space is well worth doing. 

TechCrunch has a good article on digitally native franchises and Forerunner has a detailed white paper on the topic.

Dog Walking Company Wag Raises $300 Million

Wag calls itself the "#1 dog walking and dog sitting app for busy dog owners". 

And backing this claim up is their recent $300 million funding round. 

According to a New York Times article on the funding round, a key reason Wag can raise this much money is the value of their data. Key quote from the article:

"Data on the real-world comings and goings of internet users — and, evidently, their dogs — is a highly sought-after commodity among technology companies."

We don't need to be convinced of the value of data. We've been writing about it's growing value since 2007. 

But we have to admit we're having a hard time of seeing the value of data showing where dogs are walking. Especially dogs who are being walked by a professional dog walker and not their owner. 

But as regular readers know, we're also big followers of pet trends. And one of things we've learned from following pet trends is betting against the pet market has not been a good idea.

We've also learned there's demand for pet products and services that we felt were very, very unlikely to be successful (expensive dog parties being one of many examples).

So our bottom line is while we're skeptical about this $300 million investment, we also think it could easily work.

Somewhat related, Franchise Direct released their 2017 Pet Franchise Industry Report last December. 

It's full of interesting pet industry data including the chart below, which shows how the $70 billion pet industry revenue (2017) breaks down.

It's a huge market, so maybe Wag's $300 million raise isn't big enough.  

Employee Misclassification, Labor Laws and the Sharing Economy

Two cleaning ladies have filed a class-action lawsuit against Handy, claiming the maid-on-demand service violated a number of labor laws.

The basis of the suit against Handy is the folks filing the suit claim they should be classified as employees, while the company claims they are independent contractors.

If the courts find they have been misclassified by Handy and should have been classified as employees, Handy will face substantial fines and penalties. They will also have to comply with a raft of labor laws they currently don't have to deal with.

Employee misclassification - claiming a worker is an independent contractor instead of a traditional employee - has long been a thorny issue. 

The laws in this area are inconsistent and open to interpretation. They also vary from state to state and state laws vary from federal government laws.

This suit - and other related suits and government rulings - will have a major impact on the sharing economy.

This is because sharing economy business models only work if sharing economy providers - Task Rabbits, AirBnB hosts, Uber drivers, etc. - are independent contractors.

If sharing economy companies have to hire their service providers as employees, the added costs and administrative requirements would severely damage their profitability.  

This suit and others like it will be hotly contested in the courts. The sharing economy companies have lots of money to fight and simply can't afford to lose.

At the same time, government agencies are increasing their scrutiny of employee misclassification due to a growing number of complaints about abusive labor practices by sharing economy companies.  

Expect to see many more suits and legal actions like this one filed in the coming months. 

The Economics of Independent Consulting

The Zintro blog has an excellent infographic on the economics associated with being an independent consultant. Lots of interesting data including:

1. The startup costs for an independent business consulting businss range from $100 to $20,000 according to the infographic.  While we agree, our research indicates the majority of new independent consultants spend between $3,000 and $10,000 to get started.  

2. Not surprisingly, marketing is one of the largest independent consulting expenses.  According to the infographic, the average independent consultant spends about $7,500 per year on marketing. 

It's a bit unclear from the infographic if this is both hard and soft costs, but I think it's only hard costs (meaning cash outlays).

Our research indicates soft cost marketing expenses (meaning non-cash costs which are mostly time) tend to be quite high for most independent consultants. These include sales time, marketing presentations, time spent networking and on social media, etc. These often add up to 20%-40% (or more) of an independent consultant's time.

Anyone considering becoming an independent consultant should definitely include these soft costs in their business plan.

The infographic has lots of other interesting information.  Click here to see it. 

Franchising: An Important Sector of the U.S. Economy

Franchising is the Rodney Dangerfield of the business world - no respect.  We're guilty of this here at Small Business Labs.  We don't follow, study or report on franchising as much as it deserves.

I was reminded of this while reading CNBC's Hidden Small Businesses: The Case for Franchising Growth. The key quote is on the size of the franchising industry:

There are more than 825,000 franchise establishments across 300 business lines, which employ nearly 18 million people and accounts for one in eight U.S. private-sector jobs.

To put this number in perspective, it's more than the 12 million people the venture capital community claims works for U.S. venture backed companies (which includes firms like Fed Ex, Microsoft, Google, Starbucks, etc.).  

It's way, way more than the roughly 3.5 million Americans that work in the Auto industry, which includes auto parts manufacturers and auto dealers.  

It's also way more than oil and gas industry employs, which is 9.2 million according to the industry but only 2.2 million according to industry critics.  

Bottom line - franchising is an extremely important sector of the U.S. economy. We're going to try and treat it with more respect going forward.

Franchisee Demographics

Franchise Business Review - a market research company that focuses on the franchise industry - recently released their 2007 Franchisee Satisfaction Study. They surveyed over 14,000 franchise owners and asked about how satisfied franchise owners are with their business in general as well as details on the support they are getting from their franchise system.  Overall the results say franchise owners are basically satisfied.

I found the franchisee demographics quite interesting if not surprising - they are middle-aged white males.  Key quote:

"Franchisees for the most part are not a very diverse group – typically white, 40-something and male. That said, the “face of franchising” is changing, with more women, minorities and younger people entering the business daily."

The stats from the survey: 87% are white, 76% male and 68% between the ages of 35 and 54.  While other demographic groups are actively starting to invest in and operate franchises, the capital requirements and the franchise selection process favor this cohort.  As with all small business segments, we will see franchisee ownership become more diverse over the next decade.

I saw the reference to study on the Startupnation blog.