When it comes to describing her investments, Rachel Barge of Greenstart is modest. “We’re a smaller firm focused on cleanweb,” says Barge, a partner in San Francisco-based venture firm Greenstart.
But Barge, named #6 on Forbes magazine’s list of top 30 under 30 rising stars in the energy sector, is finding much more success in collaborative consumption than her self-description suggests. A month after Greenstart invested in Yerdle, the stuff-sharing startup announced a weeklong promotion with Today Show and MSNBC. Nearly simultaneously, Greenstart invested $150,000 in crowdfunding site Carrotmob. An early investment in electric scooter-sharing company Scoot Networks was followed by a half-million-dollar funding round and early plans to expand beyond San Francisco this year.
“We’ve been interested in collaborative consumption from the beginning,” Barge says, “and we’re seeing a huge increase in other people getting interested in the space.”
That’s yet another understatement. Interest in collaborative consumption companies has soared among venture capitalists looking for capital-light startups that use established technologies to help consumers share everything from cars to lawnmowers to Ikea furniture builders.
Now the industry is showing signs of maturity, including a $500-million, all-cash exit by ZipCar; a ruling by a New York judge that spending a night in a room reserved through AirBnB is illegal; and a new bike-sharing program sponsored by Citigroup unveiled this week in New York City to great fanfare.
Meanwhile, signs of immaturity remain. That’s evident with Yerdle, whose cofounders admitted at a recent Cleantech Forum event that they have only a tenuous plan for making money. The industry “is still in inning number one,” says Greg Gottesman, managing director of Madrona Venture Group and founder of the pet sitting site Rover.com.
Some problems faced by collaborative consumption companies are illusory, and will be solved in time. Others are real, and will require real innovation to solve. Distinguishing between the two will help venture capitalists make money.
Problems That Will Soon Go Away
Anytime an industry’s largest player is declared illegal in the nation’s largest city, that’s a problem. Airbnb also faces troubles in San Francisco, where the treasurer announced that the site isn’t exempt from the city’s 15-percent hotel booking tax, and in Amsterdam and Quebec, where officials are cracking down on illegal rentals. Regulatory problems also ensnared popular ride sharing sites including Lyft, SideCar and Uber, that received fines from the California Public Utilities Commission for operating without evidence of sufficient insurance coverage.
While such actions may give pause to investors looking for short-term results, such regulatory issues should eventually be resolved.
“Well sure you’re worried about it, but you don’t let that dissuade you from continuing to move forward,” Gottesman says. “For Airbnb and some of these car sharing companies, they have enough traction and wherewithal that they can withstand challenges like this.”
Barge compares fights over sharing sights to early legal battles in the telecommunications field. “It’s a hairy, bumpy process,” she says, “but collaborative consumption will become mainstream and cities and states will find ways to make it legally workable.”
Another problem is growing transaction friction. For new sites to take off, they need as few barriers to customer acquisition as possible, which often means scant controls for user authentication. As their online communities grow from a cadre of committed users into millions of strangers, that openness leaves them exposed to abuse, as Airbnb found when a user came home to find his home ripped apart by an axe.
The website is trying to address the problem with its new Verified ID program, which requires extra authentication steps. While that may slow early adoption, soon such measures will appear seamless to consumers because “I think that’s where the web is heading because there so much fraud and ID theft on the Web,” says Barge.
Problems That Are Here to Stay
Collaborative consumption is in an awkward, adolescent state, investors say. So many companies are competing for consumers’ attention that the field is already crowded.
“So how do new sites in a crowded field of consumer options get the word out?” Gottesman says.
Those crowds are largely limited mostly to tech-savvy people in cities like New York and San Francisco, however. “Ninety-nine percent of the population has never heard” of popular sites like Lyft, says Gottesman.
Another issue concerns business models. Some collaborative consumption entrepreneurs admit they don’t have one. This is an area where different venture capitalists are willing to accept different levels of risk.
“We don’t expect you to have it completely figured out, which could mean you have no revenue,” Barge says of entrepreneurs.
For Gottesman, that’s not enough.
“If they haven’t been able to generate any revenue, its not a red flag, but it’s a yellow flag,” he says. “Many sites fail because they’re not able to capture a fair share of the value they’re making.”
Finally, how big is the market opportunity, really? Anyone who walks into Greenstart’s office claiming to be the next Facebook will quickly find himself back on the sidewalk, Barge says.
“Consumers are already drawn to several large platforms, and won’t easily integrate another,” she says.
One solution: Start incredibly small. Barge mentions a startup focused on delivering sustainable beef. Once the site establishes itself, perhaps it can take on other meats.
“It’s a race to execute on your first initial market and then expanding from there,” Barge says.
But start with too small a niche, and venture capitalists may find customer acquisition costs are too high to make a profit.
“Sure, we could do a Super Bowl ad,” Gottesman says, “but the cost of acquiring those customers would cost more than those customers are worth.”
Profits Coming Your Way
Collaborative consumption investors are hesitant to make any predictions about who could become the next Airbnb. Gottesman certainly didn’t expect Rover.com to become a $7-million company when he pitched it as a lark in 2011 at Startup Weekend.
“What’s a best bet?” he says. “Honestly I’ve been thinking about it a lot. If I had one, I’d be in stealth mode.”
One area of growth will be ancillary services that provide smoother billing and identity authentication, Barge and Gottesman agree. But such companies should also look to broader horizons.
“If they’re just focused on collaborative consumption, they’re probably missing the bigger picture,” Barge says, since big retailers also “want people to have a personal connection to their product.”
Gottesman thinks Rover.com and DogVacay may have merely scratched the surface of the pet care market.
“There could be a billon-dollar business in that category,” he says.
Beyond specific niches, however, both Gottesman and Barge agree that investors should look for companies with these attributes:
1) Great design. “We have to provide the most seamless, delightful consumer experience possible,” says Barge.
2) Recognize that they’re not competing with giant, entrenched industries, not other collaborative consumption companies. “If you look at what makes a successful collaborative consumption market, it’s something like Airbnb, which takes something traditional like a hotel stay and does it better and cheaper,” Gottesman says.
3) Many different business models could work, including taking a portion of a rental fee, or charging higher fees for higher levels of access and service. One model that should make investors run for the hills, Gottesman says, is traditional advertising, because “you need an overwhelming amount of traffic to make money.”
The best bet? Look for a company with several cards up its sleeve. “We’re working with some businesses that have three or four different revenue models,” says Barge, “and they have to test which works best for their customers to show repeatable, scalable options.”
“Collaborative consumption businesses have to be not only sharing and nice but they have to provide better, faster, cheaper service than traditional channels,” Barge says.