The Next Hot Business Model
McDonald's, Uber, and the future of franchises
McDonald’s doesn’t sell food. At least not to anyone that eats it. McDonald’s sells raw ingredients, software, and a brand to small business owners via franchising deals. By building a highly sophisticated supply chain, ginning up demand through marketing, and establishing exacting standards for what a McDonald’s meal and location should be, McDonald’s sells inventory, demand, and operating capacity to its franchisees, who in turn sell food and heart disease to you and me.
This is great for the Golden Arches. They don’t need to own or even run all their locations. They don’t need to hire and manage all those employees. McDonald’s just needs to optimize its “McDonalds Platform,” so to speak. It’s not fundamentally dissimilar to Uber’s relationship to drivers, to whom Uber sells demand, software in the form mapping/routing tools, and “ingredients” like auto-loans and income factoring.
Now the maturity of software as a service (renting cloud-based software rather than buying software to install locally) and the relative green fields in capital intensive areas that are traditionally difficult for startups to launch in will make/is making franchising or “business in a box” a very attractive prospect for venture investment and entrepreneurs. I’m seeing this across a ton of concepts and industries and I think it’ll be the next “DTC” in terms of business model hype.
These opportunities go far beyond sharing/gig economy platforms. There’s opportunities in high skill white collar work on one side (medicine, law, tax, financial advising, etc) and then SMBs (home services, retail, nursing care, etc) on the other. I’m seeing this everywhere from cannabis dispensaries to dental care.
A founder might say “instead of opening a One Medical style clinic, I’ll build practice management software, a brand, and lead generation and sell that to people looking to go into private practice.”
Certainly part of the appeal is “enabling entrepreneurship” by letting you “be your own boss” but I think the real motivation is somewhat to the contrary. Doctors often don’t want to be entrepreneurs or deal with vendor management. They want to practice medicine. The same is true in lots of SMBs, I think. Consolidating those functions via a franchise makes sense for the franchisees and allows startups to innovate services (not just delivery mechanisms) more capital efficiently in traditionally cost-prohibitive markets.
The most promising opportunities that I’ve seen/can imagine are defined by a few common characteristics:
A long tail of SMBs making up the bulk of the market
Geographically-constrained businesses that cannot reasonably be virtualized or otherwise directly consolidated
Little to no brand affinity or modern brands at all
There has to be some level of organizational, logistical, compliance or supply-chain complexity that a) yields meaningful benefits to scale and consolidation and b) provides for defensibility
Let’s unpack that all a bit, using lawyers as an example.
There are 164,000 law firms in the US and nearly 80% of them have 4 or fewer total employees (including non-lawyers). (Source)
A startup cannot legally practice law as only attorneys can hold equity in a law firm
Have you seen small law firms’ ads? Come on.
These lawyers are responsible not just for practicing law but also for finding clients, managing billing/receivables, scheduling meetings, doing CPE courses, etc. Lawyers only spend about 29% of their time on billable hours. (Source)
So what if you could pair practice management software with a marketplace/lead generation platform, workflow tools, and CPE offerings to allow lawyers to operate locally under your brand? Theoretically, franchising allows franchisees to increase revenues in relatively fixed-margin businesses while allowing the franchisor to enjoy the SaaS margins and growth trajectories attractive to startup operators and investors. Franchisors can scale beyond geographic constraints/footprints and get more leverage from investing in technology, while more widely sharing the fruits of that investments with their customers, the franchisees.
And, crucially, this is not merely the same as selling an industry-specific SaaS offering because a franchisor creates a brand halo for its franchisees. You buy from Kylie Cosmetics not from Shopify, whereas you stay in an Airbnb not at Steve’s house.
For many companies, I believe franchising will be a path to expansion rather than a business on day one, at least for now. This could be especially true for the new class of physically based healthcare startups in the short term but it will radiate out from there into more “tech-enabled” categories quickly. Starting native/full stack provides you a sandbox to “eat your own dog food” and build your tech/brand before you try to go sell it to anyone else. Arguably that’s what Atrium is doing in law.
The competitive incumbents for a lot of these companies will likely be transactional marketplaces, which, though capital light, cannot adequately control quality. In many categories, marketplaces may be products franchise companies offer their franchisees, rather than standalone companies in their own right.
Yes, I know McDonald’s operates about 15% of its own storefronts. No that doesn’t undermine my general point.