There’s nothing wrong with the on-demand economy — it’s just survival of the fittest

It’s fair to say that it has been a tough couple of weeks for Curtis Lee. 

The founder of Luxe, the on-demand parking and auto services startup, Lee has watched as the media has quickly turned from a devoted supporter to a fierce critic of his company. Once a fan favorite among reporters, Luxe is now being portrayed as an unsustainable business that can’t make the on-demand model work. As the funding market turns cold across the startup world at large, on-demand companies are suffering the most public beating after a period of pure praise and admiration.

Unwilling to disclose numbers that could potentially debunk the naysayers, Lee has sat back and watched the criticism roll in — until today. Luxe announced a $50 million Series B round led by Hertz. Lee started fundraising at the end of last year and after some initial offers, felt that Hertz was the best strategic partner. Like all on-demand businesses, Luxe’s unit economics get stronger with scale and there is no doubt that Hertz’s national presence is a key asset for the startup as it grows.

The negative press against Luxe started right as the startup was trying to do the final due diligence on the deal. Lee claims that the media avalanche didn’t affect investors — they knew what Luxe’s business looked like on the inside — but partners and employees were impacted negatively by the news. After announcing a strong funding round in such a down market, Lee says this is his way of signaling to everyone the strength of the business he is building. Growing 30% month-over-month, Luxe is profitable in some cities and very close in others.

“It is fun to finally say that we are doing pretty well,” he said. “Right now we are seeing this Darwinian evolution of companies down to those who can actually make [on-demand] work. Only after a handful of years do you see who the real winners are.”

If Luxe will indeed emerge as the winner in the newly forming world of on-demand parking is still very much up for debate. The startup’s small funding win falls against a much larger backdrop of startups trying to raise capital falling on hard times. Last quarter had the fewest number of venture deals in four years and most of the capital is going to late-stage businesses. In an interview, I talked with Lee about why he is so confident in Luxe’s positioning.

Edited excerpts:

Caroline Fairchild: It has been reported that you are moving away from the on-demand model. Is that true?

Curtis Lee: That is our business. If that isn’t working, then we don’t have a business. The writer who wrote that took a bunch of failed companies in the on-demand space and because our competitors have failed [competitor Zirx recently shut down its consumer business] they wedged us in there. They tried to use a product feature that we have had for close to a year now as an example of us trying to get out of the on-demand space. We are not trying to get out of the on-demand space. The reason Herz wanted to invest in us is because of that reason. If that business was failing, how could they support us? It doesn’t make any sense.

CF: The other criticism is that on-demand services are largely luxury products. What leads you to believe that Luxe has mass market appeal?

CL: If you think about on-demand businesses, they are largely relying on this notion of people arbitrage. They take people’s time, the workers, and they mark that up for the services they provide. Inherently a lot of on-demand services are premium products, but ours differs from that because what we supply is cheaper than what a customer can get elsewhere. We do the people arbitrage component, but also the land arbitrage component that allows us to provide prices that are in line or cheaper than what you can get at a parking lot… The most parked car in our lineup are Toyota Prius and Honda Civic. Our customers are people who need parking for their average cars.

CF: How do you feel about the negative attention on-demand is now getting?

CL: It is the hype cycle. We have seen this across almost every industry. Back in the 1990s, e-commerce was awesome and then all these companies got into it, and they said that the companies would not make a profit. That is what happening in this cycle. A year and a half ago, on-demand was all the craze and there were some companies that were started that were pretty bad ideas. Now what you are seeing are a bunch of companies that have gone out of business and those that can scale, get bigger and more profitable are going to succeed.

CF: How do you react when a major competitor stumbles or fails?

CL: It depends on how they are stumbling. If there is a broader systemic issue with the industry like regulatory issue, that would give me pause. For our industry I saw a bunch of companies that took different strategies than us. We have the right strategy, and they didn’t. It is a good business to be in and others are doing it incorrectly. Today just adds more fuel to that.

CF: Why Hertz?

CL: Our business gets better with scale. With increased utilization, our numbers get much better. When you think about their base of customers, you are looking at hundreds of thousands of customers that use them on a daily basis. Having that scale and putting us in front of those customers is huge. We can get bigger much faster.

CF: Did the funding conversation change when the market started to turn south?

CL: When we first went out there was a lot of excitement and as the market started to tank, it becomes harder. Investors start not to know their own situation, and they take longer to make decisions. The entire process becomes harder and there is downward pressure on the on-demand space in the whole. Then your competitors start to bad-mouth you in the market and that doesn’t do us any favors. But people dug into our numbers, and the conversation changed. Three years ago, we could have raised very quickly. People were giving us money without us doing anything. That environment is officially over. You have to prove that you can speak to the numbers.

CF: So do you feel like you are immune to the market trends?

CL: Nobody is immune to it. Even big companies who can raise could have gotten much more favorable terms and valuation the beginning of last year than this. The market has corrected. We are glad that we raised money during the hardest time since the dot com crash and we have north of $50 million in the bank. It helps us ride the wave out and prove out the business even more. When we raise next time, we hope to be 100% profitable and completely self-sustaining. It is up to us. We could be stupid and spend money like crazy, but you won’t find it in me… Now it is back to business as usual and there is more pressure on us than ever. We are not taking it lightly.