Can service startups pay contract workers well? This investor says yes

On-demand and delivery services have radically changed how some of us do things like getting from point A to point B, eating food, mailing packages, cleaning house, and more.

But what about your on-demand driver or the friendly face picking up your packages? They often depend on your patronage to pay their bills, get health care, keep a roof over their head, and more. So can the economics of these services make that happen?

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According to Hunter Walk, former Googler and cofounder of seed fund Homebrew, the answer is yes.

Economics versus ethics

“The two companies that we funded, [Shyp and Managed By Q] … have from the get-go been focused on career paths, benefits,” Walk said in an interview with VentureBeat.

In late November, Walk wrote a personal blog entitled, “One founder told me he wanted to overpay his employees. So we invested,” detailing Homebrew’s decision to invest in office cleaning startup Managed By Q because it wanted to give its contract workers benefits, high wages, and the same treatment white-collar workers get.

“[Managed By Q’s founders] believe that having a stable, trusted, motivated workforce is going to be more valuable to them,” Walk said. Investing in its employees means less turnover and training, and better staff loyalty in the long run.

But putting extra money into labor could slash companies’ margins — or, worse, force them to pass on the extra cost to customers, which would turn affordable services for the masses into luxury ones for the rich, spoiled, and lazy. And using venture capital to subsidize these extra costs can only end badly.

However, Walk doesn’t see his investments as falling into that trap.

“You look at the numbers, and the numbers still work,” he said. Shyp, for example, makes its money from shipping large volumes, not from the small fees it charges for pickup; in fact, it waives them for multiple parcels.

Walk and his Homebrew partner Satya Patel are wary of startups specifically using contract workers to keep costs low.

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“I don’t think that trying to get by by evading payroll taxes is going to be a sustainable model,” Walk said.

Can respect pay?

Walk also believes that companies can leverage technology to elicit customers to care about their workers — for example, by letting them choose a worker or inform users they’ll be served by the same person as last time and giving them the opportunity to tip accordingly.

Also, at its most basic level, consumers have the choice to only patronize services they believe are treating their labor force well.

And yet, as a former contract worker in the tech industry, I’m still skeptical of the economics. Sure, Shyp and Managed By Q (and others) might have great models that depend on things other than keeping labor costs low, but that’s not everybody. Lyft and Uber still aren’t offering benefits to drivers, despite it being a full-time job for many of them — which is true for many workers in the new economy.

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There is a reason why many of the companies in the service sector (fast food restaurants, retail, etc.) have stuck to employing hourly, contract workers for decades: economics.

The solution will likely lie in creative business models, like Shyp’s. In the big-business world, while Walmart is making buckets of money and not paying its employees nearly as well as it could, competitor Costco has worked out ways to do both.

But maybe we need to rethink our values as a society — should employees be responsible for health insurance, for example, or is that something we should all chip in for?

Either way, startups: Please prove me wrong.

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(Following our conversation, Walk wrote another blog post on the topic, which you can find here.)