HomeHero Ceases Operations, Cites ‘Inferior’ W-2 Employment Model
By Amy Baxter | February 26, 2017
For a few years now, the home care industry has focused on a handful of “disrupters”—venture-backed startups that popped into the space with splashy funding rounds and new technology. Just a few years after coming into the market, one of those disrupters, California-based HomeHero, has announced it is closing its doors.
“While this may come as a surprise to a lot of people, today we are announcing that HomeHero has decided to cease all operations and remove itself from the industry of home care entirely,” HomeHero CEO and Founder Kyle Hill wrote in a Feb. 24 blog post announcing the company’s decision on Medium.
As one of a few companies that have captivated the home care industry by its aim to disrupt the conventional models—and raising millions of dollars to try—HomeHero’s sudden announcement throws the viability of these break-out companies under a new spotlight.
The End of the Independent Contractor
HomeHero launched in 2013 and raised a total of $23 million in funding rounds over the next two years. The startup became known for its technology that matched families and caregivers.
By the summer of 2015, the company had onboarded 1,200 caregivers—called “heroes”—and HomeHero expanded from its Santa Monica roots to California’s Orange County, San Diego and San Francisco. While the company started out hiring caregivers on an independent contract, or 1099, basis, it switched to a W-2 model about a year ago.
The changeover forced the company out of its “attractive” contractor model, where HomeHero could once charge 30% to 40% less than the industry average to its clients while also paying caregivers about 25% higher wages above industry averages, Hill wrote.
“Almost exactly one year ago, HomeHero lost its core identity when we were effectively forced to terminate our working relationships with 95% of our 1099 caregivers and required to adopt an inferior employment business model,” Hill wrote. “In the process, HomeHero also lost a majority of its competitive differentiators in price, speed and scalability that allowed us to be so disruptive in 2014 and 2015, and it had nothing to do with competition.”
Switching from a contractor model to a W-2 increased caregiver onboarding costs by ten times, according to Hill. However, the company felt it had no choice under changing regulations.
In late 2015, regulatory changes that ensured home care workers were qualified for overtime and minimum wage protections changed everything.
“The entire home care industry got rocked,” Hill wrote.
The effect of this rule and rising minimum wages in California sharply increased home care prices, and live-in home caregivers essentially ceased to exist, according to Hill. As competitors around HomeHero closed and the company faced an increasing threat of lawsuits, HomeHero changed.
“The independent contractor model was under attack and we felt intense pressure to change,” Hill wrote.
The switch added payroll taxes, overtime, paid sick leave, minimum wage regulations, benefits and health insurance, unemployment tax, workers comp insurance and potential lawsuits to HomeHero’s bottom line. The company raised prices 32% and implemented a 4-hour minimum.
With its new business model, HomeHero hired new staff, became HIPAA compliant and focused on securing partnerships with hospital systems. However, after winning a $1 million pilot study in Michigan, executives realized long-term contracts weren’t on the table.
“It became evident that most of our pilots were being constructed solely for case studies and had slim chances of turning into sustainable contracts,” Hill wrote.
Without hospital systems seeing the value to pay for home care, HomeHero would still be reliant on private pay business. The realization was “the straw that broke the camel’s back,” according to Hill. HomeHero closed its doors “with significant capital left in the bank” and has decided to shift its business to ‘“build a more sustainable health care business outside of home care.”
More details on the new business will be coming in the near future, Hill wrote.
The “Uberfication” of the larger American economy has trickled into the home care space, but its fragmented market and intense regulatory environment proved too much for one of the burgeoning companies aiming to disrupt the industry and scale its technology. In the end, HomeHero ended up with a model similar to the already-established home care businesses out there.
“We mustn’t assume big fundraising rounds are synonymous with market success, this is certainly not the case in home care,” Hill wrote.
Despite this, the attraction to the home care market is big and growing. Over the last 16 months, almost $200 million has been invested into various home care companies, according to Hill.
Before signing off, Hill reflected on a few mistakes made and lessons learned from HomeHero’s time in business:
-Underestimating the timing, effects and intensity of state and regulatory changes in home care.
-Overestimating the ability for heath systems and insurance companies to pay for non-medical home care.
-Underestimating the ability for legacy home care agencies to adopt new technology.
The overall lesson may be that the expansive home care market isn’t quite ready—or able—to accept and scale a technology company as a care solution. However, there are other players in the market to watch and possibly tell a different story.