SoftBank’s $300M dog-walking bet

SoftBank put $300 million into dog-walking services provider Wag! today. It barks like the go-go 90s investing SoftBank when people frequently asked, “Is Masayoshi Son nuts?” The Wag deal isn’t as ludicrous as it looks, though the valuation drove venture giants Kleiner Perkins and NEA away in recent weeks, according to TechCrunch.

Why might this make sense? First, Americans spent an estimated $69.3 billion on pets and pet supplies in 2017. The Bureau of Labor Statistics estimates that households spend $528 on pets annually, or about one percent of income. SoftBank’s Vision Fund invests for international growth, which is far off in Wag’s case. The company will be made or broken in the U.S. market.

An on-demand service must have an audience that can afford additional services, as well as need for those services. One of the reasons to own a dog is to walk it, to play with it. So, most dog owners are not candidates for Wag! They play with their dogs instead of paying others to do it. At an average price of $20 for 30 minutes, Wag’s service is priced for urban professionals and not the typical dog owner.

The second factor in Wag’s success is the ability to win and keep a repeat customer. The company has struggled with quality issues. Dogs are more like family than a car; they are not handed over casually to a walker.

The entire professional workforce in the U.S. included approximately 61.6 million people in 2017, according to AFL-CIO’s Department for Professional Employees. The number of Young professionals, 17.2 million in 2017, is growing by 350,000 workers annually. There is substantial growth among people likely to mix dog ownership, work, and an urban location. Several million people can afford to send their dogs on 3o minute walks three times a week, at the cost of $4,680 a year.

A $4,600/year price point is difficult and expensive online consumer branding challenge. We expect to see more services like Wag bundled and delivered by local intermediaries, as a benefit offered by companies seeking to attract and keep talent, or by concierge brands that span service categories. For example, Wag offers conveniences such as lockboxes to allow the walker into the home, but how many lockboxes are necessary for the customer? Some form of service interface consolidation is required.

Wag is currently recruiting walkers in 56 U.S. cities. Using 56 service locales as the basis for estimating how long it will take Wag to recoup the investment in topline revenue, it would require every city to see 733.8 walks per day delivered for a year. The actual distribution will vary. However, the 7.5 million walks delivered in a year gives us a basis for understanding how much Wag must grow just to earn back SoftBank’s investment. 

For purposes of this back-of-the-envelope calculation, if a walker averages two one-hour walks and four half-hour walks — a highly efficient pace — for a total of $120 in revenue, each city needs only  122 walkers to realize ~$300 million in revenue in a year. That is the ideal scenario, and it looks tractable.

The problem is Wag’s share of that revenue. The company pays walkers $16 for a half hour, retaining only $4 net for each half-hour walk.

In fact, Wag needs ~600 walkers in each of 56 cities delivering ~3,600 walks per day to reach $300 million in annual net revenue. Out of that share of revenue, the company must build software, recruit and screen walkers, provide transaction services, perform marketing functions, and pay its full-time employees.

That is a long walk to profitability. Wag! had raised $61.5 million before SoftBank’s investment. With a well-funded competitor, Rover.com, which has raised $155 million to date, Wag is a big bet by SoftBank that Wag can figure out and optimize the dog-walking market faster than Rover.

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