The Sharing Economy: Investors See Opportunity, Risks

Venture capitalist Ann Mira-Ko invested in her first collaborative consumption companies before the name “collaborative consumption” even existed. She bet between $500,000 and $2 million in seed funding on taskrabbit.com and Zimride.com in 2009, giving her an early seat at the sharing economy table.

Her main insights so far? Doing collaborative consumption right “is not as easy as it looks,” says Mira-Ko, co-founding partner at the San Francisco-based Floodgate Fund. But for investors who pick the right entrepreneurs and look for a broad market to serve, “I believe the businesses can be standalone. The market opportunity is huge,” Mira-Ko says.

Many major investors agree. Sequoia Capital, Greylock Partners and Andreessen Horowitz led a funding round for AirBnB in 2011 that raised $112 million. Accel Partners followed in October 2012 to lead $40 million worth of C-round funding to HoouseTrip.com, an AirBnB competitor. Google Ventures and Lightspeed invested $10 million in the ridesharing site SideCar in October, and Union Square Ventures led an investment round worth $24 million for Lending Club, a P2P lending site.

But 2012 was also a sobering year. The sharing economy got a big initial boost from a TED talk by Rachel Botsman, an investor in collaborative consumption companies who compared the movement to “the next Industrial Revolution.” Such wide-eyed claims now seem premature. Major sharing companies including Netflix, ZipCar and HomeAway.com, all saw 25-percent drops in their stock valuations in 2012, scaring some investors away.

“A few years ago the economy was faltering and people were hyping this collaborative consumption idea as a way to replace our ownership society with access to goods through our neighbors and the internet,” says Isaac Pino, a research analyst with Motley Fool. “Basically I would look at this and say there were a lot of overblown expectations.”

What’s challenging, however, is finding companies that a) provide value to both consumers and investors, b) reach a large enough market to succeed, and c) have figured out ways to improve trust between users while minimizing transaction friction.

“Friction is real in our system, and we have to address it,” Ron J. Williams, CEO of SnapGoods.com, said during a panel discussion on collaborative consumption at Columbia University called Swap Don’t Shop.

AirBnB, perhaps the largest and most successful sharing economy website, made headlines in October when Peter Thiel reportedly considered a $150-million investment in the company, giving it an estimated market value of $2.5 billion. It was a big turnaround for a company that nearly imploded a year before when several AirBnB users returned to find their homes littered with meth pipes and destroyed by axe-wielding renters.

Sheila Karaszewski, community manager for Airbnb in New York, confirmed that avoiding such nightmares in the future is key to the company’s success, telling an audience last week during a panel discussion on collaborative consumption organized by Let’s Collaborate!, that reducing the risks of having a bad experience on AirBnB through community education was crucial.

But how to actually do that? Like many companies, ZimRides and Carpooling.com aggressively link their networks to users’ Facebook pages, allowing riders and drivers to check one another out before meeting. That simple innovation has done a lot to normalize the interaction and integrate it from the margins of early adopters into the everyday lives of regular people, said Odile Beniflah, senior product manager of the European company Carpooling.com. Beniflah is managing the company’s introduction to the American market, and shared this insight during the Swap Don’t Shop panel.

Both sites also let riders and drivers rate each other, further improving interactions.

“You don’t ride with strangers anymore,” Beniflah said. “You can see their Facebook profile, what kind of car they have, how they drive, what kind of music they like, so you almost know the person before you meet.”

This is a major part of collaborative consumption’s maturation process, says Fleura Bardhi, associate professor of marketing at Northeastern University, who has published one of the first academic studies of consumer behavior inside sharing economy networks. Investors may appreciate the fact that sharing economy companies tend to be capital-efficient bets that also happen to be environmentally friendly.

But regular users care little about those concerns. They will participate only if the sharing economy solution is cheaper and more efficient than their current behavior.

“A few years ago, companies like Zipcar were talking about being green an environmental,” Bardhi says. “But as it has moved into the mainstream, people are understanding this is about logistics, not sustainability. So the tactics have to change.”

One way to simultaneously build trust and integrate these new companies into the lives of people outside tech-savvy areas like San Francisco and New York is to daylight data currently buried in consumers’ social media interactions. Facebook and Twitter create 300 pieces of content about each user every day on average, Williams says.

The problem is, they actually care about just a tiny fraction of that data, and that fraction is often difficult to find. So SnapGoods created a tool to search the photos, shares, likes, tweets and geolocational data of users on Twitter, Facebook and LinkedIn, and to share that data with individual users, political campaigns and nonprofit groups who are looking to make their requests for help, goods and services immediate and personal.

The idea: Use peoples’ existing networks better.

“You’ve got 1,000 people in your network, but you only interact with a third of them, so you’ve got 970 people who don’t even realize you could be transacting with,” Williams says.

Once this value is created, how do investors find a profitable exit? The carsharing site ZipCar made big news at the start of 2013 when it sold to Avis for $500 million. But such a big, classic payday may not be right for every collaborative company, Mira-Ko says. Some will decide it’s better to go the direction of Facebook, remaining independent because they find they’ve only begun to tap the available business models, revenue streams and consumer groups.

“I believe many of businesses can be standalone,” Mira-Ko says. “The market opportunity is huge.”

If you’re looking to place bets on collaborative companies, here are some insights from insiders to keep in mind:

- Even though it’s a new industry, collaborative consumption works like any other tech startup: The quality of the founders is key. “You’re going to see a bell curve distribution in terms of companies that can capture the opportunity,” Mira-Ko says. “You have to find people you believe in.”

- As collaborative consumption grows, avoid companies whose marketing is still focused on the environment. “Now it’s time to say this is a mainstream service, and to focus more on functionality than on emotion,” Bardhi says.

- Building trust is key – and difficult. Only back companies who recognize the challenge and have a plan to solve it. (Hint: The solution doesn’t have to be high-tech.) “ZimRides encourages people to sit in the front seat, and to give the driver a fist bump when they get into the car,” says Mira-Ko. “Small things like that build up brand perception and trust.”

- Look for multiple revenue streams. Most websites have multiple ways to monetize services. Make sure the company you invest in has plans to exploit all of them.  For example, ClosetDash is a second-hand e-commerce site with a twist where women can send their gently used pieces to “swap” for pieces in its inventory.  The company also throws “swapping parties” at its NYC-based store.

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