The debate about whether “on-demand” economy workers should be classified as independent contractors (1099) or employees (W2) rages on, but one startup CEO found that, for Silicon Valley venture capitalists, there was a clear preference for 1099s.
On-demand startups like ride-hailing Uber, or delivery service Instacart, generally rely on “1099” workers who aren’t technically employees of the company. And there’s a simple reason why: having employees on your payroll can get expensive. Last year, Munchery told Business Insider that hiring its drivers as employees instead of contractors adds an estimated 20%-30% to cost per hour. That’s a ton.
But having your workers on 1099s restricts the type of training and support a startup can give, and this can decrease efficiency. The cost-benefit analysis of 1099 versus W2 even caused valet startup Luxe to switch from W2 to 1099, and then back to W2. It can sometimes be tough for a startup to decide which is best for it and its workers.
But Josh Bruno, the CEO of senior care startup Hometeam, said for him it was always clear that Hometeam’s 1,000+ caregivers needed to be on W2s. They just needed too much training. But unfortunately for Bruno, when he was trying to raise funding, that wasn’t what Silicon Valley VCs wanted to hear.
“I was kicked out of every office on Sand Hill Road,” Bruno laughs, referencing the iconic street that houses many famous Silicon Valley VCs. Bruno says he even had a verbal agreement with a “flashy name” VC, who then wouldn’t go through with the investment unless he put his workers on 1099s.
Why? One reason, Bruno says, is because big names like Uber and Lyft were doing it. Bruno’s main competitor Honour, which was named as one of Business Insider’s hottest San Francisco startups to watch in 2016, also originally used 1099s. They have since switched to W2s.
But it wasn’t simply because everyone was doing it, Bruno says. The deeper reason rested in what a 1099 represented.
Bruno says that to VCs he spoke with, a 1099 meant a job that was both easy and repeatable. The worker is a part that can be swapped in, which is good because it means that the business will be easier to scale, Bruno explains. And it will be easier to get the kind of growth the VCs were looking for.
Not all VCs think this way, even among those Bruno was pitching. Hometeam has so far raised $43.5 million from Kaiser Ventures, Oak HC, Lux Capital, IA Ventures, and Recruit Strategic Partners. Competitor Honour has raised a total of $62 million, and recently raised $42 million long after switching its workers to W2s.
But Bruno’s experience does raise useful points about how “gig economy” workers are conceptualized by both startups and venture capitalists. The more workers swing toward the W2 side, the less they seem like a cog in a machine, but the less they feel like part of a startup that can use technology to scale itself, up and up.