August 7, 2013 7:02 pm

Start-ups: Shareholder societies

Online businesses promoting a ‘sharing economy’ face a regulatory backlash
Sharing economy

For Allison and Dave Shuttleworth, Airbnb has been a financial saviour. When Mr Shuttleworth lost his job at a hospital last year, the income from renting out the spare room in their house in San Francisco through the online rental site replaced his salary.

The year before, the side job covered three rounds of in vitro fertilisation, at $15,000 each. They are now considering saving up for another round. For Ms Shuttleworth, who works as an emergency room nurse in her day job, the extra cash has not been easy money.

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She or her husband gives every guest a 45-minute introduction to the house and the city, maps out bus routes, lays out plush dressing gowns and chocolates and cooks a hot breakfast every morning.

“Airbnb is pretty much a full-time job right now, in addition to my full- time job,” she says. “Dave and I are housekeeping, security, concierge, cook, tour guide. We are a five-star establishment.”

People have long rented out their spare rooms but a new generation of technology start-ups, driven by easy-to-use software, has made sharing more attractive than ever.

People are finding customers to rent not only rooms but office space and seats on car journeys. They are even turning idle assets such as drills and lawnmowers into revenue generators. They are selling their own time, too, hiring themselves out to walk dogs, pick up dry cleaning or assemble Ikea furniture.

In recent years, about 200 new companies have sprouted in this new “sharing economy”, backed by an influx of $2bn in venture capital funding, according to a report from the Altimeter Group. The investments came amid an economic downturn that pushed consumers to seek novel ways to save money. There was also a cultural shift among young people interested in doing business with their friends and neighbours rather than buying from faceless corporations.

“I like calling them digital hippies,” says Loïc Le Meur, an entrepreneur and co-founder of the LeWeb conference in Paris and London. “It’s not cool to own. It’s cooler to borrow a car.”

The rental sites make money through a service charge on either the hosts or their guests. But, more broadly, it is unclear to what extent this new business model will really upend traditional industries such as hotels, automotive and taxi services.

The sharing economy is under threat. Traditional industries have launched regulatory battles with their new competitors, arguing that peer-to-peer home rentals and ride-sharing contravene national and regional laws on housing and transportation. Tax collectors are also going after start-ups for a piece of their financial success. Clashes in court rooms and city halls from New York to Hamburg are testing where the boundaries lie between the new companies and trading regulations designed to guarantee quality and safety.

The true market demand for these services is also in question. Ms Shuttleworth says the guests who stay at her home are international travellers looking for an authentic, less touristy experience. They want to know what it is like to live in San Francisco, take the bus and visit coffee shops – and they want to pay less than a traditional hotel room. On average apartments on Airbnb are 21 per cent cheaper than hotels in most major US cities, according to a Priceonomics study. The guests are also willing to sift through a sea of individual homes and work with homeowners to find the right fit, as proven by Airbnb’s swift rise in popularity.

However, the copycat companies that have applied the same reasoning to garden equipment and bicycles have yet to prove how willing people are to invest the same kind of time and energy in co-ordinating with the neighbour down the street over one hour’s use of the electric drill. Do they really need to compromise the reliability and customer service that they can count on by simply buying one at Home Depot?

To be successful, such companies must prove trustworthy and straightforward to use, says Philippe Botteri, a partner at venture firm Accel Partners, which has backed companies such as Housetrip, an Airbnb competitor, and BlaBlaCar, a long-distance ride-sharing operation.

“On a five-hour drive, losing 10 minutes to make some money is worth it,” he says. “For someone who has a drill [to rent out], it’s a lot of email exchanges and meeting at the right time and hoping they will bring it back for just three or four dollars. The friction is too much.”

SideCar CEO Sunil Paul©Getty

SideCar CEO Sunil Paul

In the past year, cars with bright pink furry moustaches on their front bumper have become a familiar sight on the roads of San Francisco as ride-sharing start-ups Lyft and SideCar stand in for taxis and a poor public transit network. After passing a background check, anyone with a car can use these companies’ smartphone apps to locate passengers, receiving “donations” for ferrying them to their destination, again guided by the app.

“There is a drought of human connection in life,” says Logan Green, 29, Lyft’s co-founder and chief executive. “Everyone is working harder and technology has allowed us to be more isolated from each other. There is a huge push for something that is authentic and personal. These short trips across town are providing an incredible connection for that.”

Sunil Paul, SideCar’s chief executive, says the shift does more than just replace taxis. “In 10 years we think that car ownership will be half of what it is today because of these innovations,” he says. “It’s a shift from having to own one to having access to one.”

. . .

Car companies are keeping an eye on the trend, both from a consumer and an environmental perspective. They know that urban areas are approaching saturation point for cars, and by 2050 many cities will no longer be able to fit any more vehicles into city limits. BMW, Volkswagen and Peugeot are a few of the larger corporations looking to adapt, borrowing a page from the new upstarts by establishing their own car-sharing and resale programmes. “Instead of trying to sell one car to one person, BMW wants to sell the same car nine times,” says Jeremiah Owyang, an analyst with Altimeter Group. “They see this as an upside.”

Other large companies are fighting back. Taxi companies have banded together against ride-sharing companies by alerting regulators to ways in which they might be breaking the law. SideCar suspended its service in New York City after one of its drivers was fined for operating an unlicensed vehicle, while RelayRides, which allows people to rent their cars to others, shut down in New York State when regulators said the insurance the company provided was “illegal and inadequate”. State regulators in California, on the other hand, are backtracking on their “cease and desist” order and just proposed legalising ride-sharing, provided drivers obtain a special licence and abide by safety rules similar to those that apply to mainstream taxi services.

Hotel industry advocates have also been lobbying officials in cities throughout Europe and the US to take a closer look at the likes of Airbnb, HomeAway and Vacation Rentals By Owner, accusing peer-to-peer home rental companies of breaking laws.

“We have done research and gotten packages together showing evidence to the city council asking for enforcement,” said Mavis Early, executive director of the Greater New Orleans Hotel and Lodging Association.

A New York judge found one Airbnb host in violation of a city law that forbids the rental of apartments for less than 30 days. The company is fighting this and similar laws, clocking recent victories in Hamburg and Amsterdam, where it convinced politicians to relax the rules for homeowners to rent their own homes to make ends meet.

“The new law [in Hamburg] replaces an old housing bill that was created in 1982 – long before anyone thought of the internet, the sharing economy, or Airbnb – so change was long overdue,” said David Hantman, Airbnb’s head of global public policy.

The company is producing a series of economic impact reports to show how these rentals are having a positive impact on businesses outside the usual tourist routes. San Francisco officials are so convinced that the Airbnb concept will be successful that it is rewriting city laws to allow it – while also pushing to charge hosts the same 14 per cent hotel tax the Hiltons and Marriotts pay.

New marketplaces for short tasks or small jobs, of which TaskRabbit is the best known, face no such regulatory difficulties. Leah Busque, TaskRabbit’s founder and chief executive, says that governments see her service as a way to reduce unemployment.

“More and more people are realising they can be their own bosses,” she says at START, a conference for entrepreneurs in San Francisco. Some 10 per cent of the 12,000 people signed up to be “TaskRabbits” regard it as a full-time job, making thousands of dollars a month.

TaskRabbit’s vision is compelling: an easy way for cash-rich, time-poor people to find neighbours with different skills, such as making furniture or simply having spare time to build flat-pack furniture kits. “Sometimes in the past, pursuing your dream of becoming a chef or a screenwriter in itself isn’t able to sustain you and your lifestyle,” says Ann Miura-Ko of Floodgate, an investor in TaskRabbit and Lyft, explaining the benefits of supplementary incomes. As well as providing “micro-entrepreneurship platforms”, TaskRabbit is “returning to that notion of the high school kid who mows my lawn rather than using a professional gardener,” she says.

. . .

Instead of trying to sell one car to one person, BMW wants to sell the same car nine times

But such services are facing disruption. TaskRabbit last month cut a reported 20 per cent of its 65 employees as part of a reorganisation to focus on providing services for small businesses that cannot afford permanent staff for certain low-level roles. The business became, in effect, more of a staffing agency than a pioneer of the sharing economy.

Investors and observers say TaskRabbit’s costs in acquiring customers – whether through offering discounts, coupons or advertising – often outweigh the amount that a person then spends. Many do not come back for another task once their furniture has been assembled. This raises broader questions about whether the economics of the sharing economy stack up for the businesses managing those marketplaces, causing fewer entrepreneurs to enter the market. “There was a phase where every pitch was about collaborative consumption. You just don’t see it any more,” says Howard Hartenbaum, a venture investor with August Capital that backed RelayRides.

“It sounds good but in the end is it a good business or isn’t it? You can have great services with people sharing stuff but if someone isn’t making money, it isn’t a business.”

. . .

Counter-culture: Digital hippies with a taste for luxury

The concept of the sharing economy has struck a nerve with a segment of the population that has found refuge in movements such as Occupy Wall Street and Burning Man, the no-commerce art festival held in the Nevada desert every August, writes April Dembosky.

Today’s counter-culturalists are turning to the web to organise themselves and to divert their spending power away from big corporations and the traditional economy. Instead, they rely on each other.

“It’s really citizens solving the problem between themselves, and going against the government and public power,” says Loïc Le Meur, the LeWeb co-founder who chose the sharing economy as the theme of his latest conference in London. He invited Larry Harvey, the founder of Burning Man, to speak there and described the participants in both movements as “digital hippies”.

But don’t call them anti-capitalists. Today’s digital hippies are quite distinct from their 1960s counterparts.

“You can succeed and make money,” Mr Le Meur says, “but greed is bad.”

Early adopters of sharing economy services, many of whom hail from the Silicon Valley elite, still want to be driven around in a black limousine, sail a yacht or sleep in a Gulfstream private jet at $10,000 a night – five-star pilots and flight attendant included.

They want access to luxury but they do not want the burden of owning and managing the limousine, the yacht, the aircraft or the holiday home.

And there is a list of start-ups that caters to this kind of high-end sharing.

Truly revolutionising the economy in the open market is still a fantasy, says Jeremiah Owyang, an analyst with the Altimeter Group.

While consumers may be saving money and regular folks may be pulling in a chunk of cash on their car or spare room, it is still select venture capitalists and early company employees who will profit from the success of this sector.

“Oligarchy is reinforced as owners rent to the economically deprived,” says Mr Owyang.

“VCs and investors who already stem from the 1 per cent seal their place in power positions by being owners of the movement.”

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