There’s been an explosion in collaborative consumption startups. The failure rate is high, these are some key pitfalls.Google Trends: “sharing economy” (red) and “Uber for” (blue)
This Google Trends chart shows the volume of searches for “sharing economy” (red) and “Uber for” (blue): there’s been a meteoric rise since 2011. There are now numerous examples of high-profile startups valued at over $1B, including most prolifically Airbnb and Uber, which facilitate the collaborative consumption of accommodation and transportation, respectively. Excited entrepreneurs have rushed to apply a similar model to hundreds of other verticals. Many of those entrepreneurs have experienced a rude awakening.
Some of the key pitfalls highlighted recently by the Wall Street Journal fall into two main buckets: (a) the difficulty in building a critical mass of supply and demand (it’s hard to scale both sides of the marketplace) and (b) higher-than-expected operating costs (customer service, insurance, lobbying, customer acquisition, etc):
The pitfalls: scaling both sides of the marketplace, and managing costs1) It’s hard to consistently produce a level of demand on par with what is needed to scale rapidly. Especially with geographic dispersion, it’s hard to have enough inventory. Uber spent millions giving users $10 coupons after not finding rides in their vicinity.
“If you have to reacquire the customer every six months, they'll forget you," (Howard Morgan, investor in BlackJet). "A private jet ride isn't something you do every day. If you're very wealthy, you have your own plane." By comparison, customers use Uber's ride-sharing service multiple times in one day.
Tough competition from free alternatives. Example: Ridejoy - competition from carpooling forums on college websites. Also, some riders could—and did—begin to sidestep the middleman.
Challenging cash flow dynamics, because a high percentage of revenue goes directly back to the suppliers (apartment owners, vehicle owners, etc).
Questionable rights to public goods. For example, parking spot sharing startup MonkeyParking has come under fire for monetizing street parking spots.
Fraud and abuse. Companies like Airbnb and HiGear have had to deal with a very small percentage of their users abusing the service (trashing apartments, stealing cars, and damaging property). This also leads to a very high cost of customer service.
Regulatory issues: with much of this territory uncharted, it’s unclear how collaborative consumptions companies will fare in the long-run against regulation. Uber and Airbnb have been banned or restricted in certain regions and countries. Airbnb has a team of five employees focused on government-education full-time.
Examples of failed sharing economy startupsThese are a few examples of companies that failed for the reasons above. You’ll notice that they raised between $0 to $3M. Sharing economy startups can fail relatively cheaply because they’ll learn quickly if the business model doesn’t scale.
148 other sharing economy startupsWe searched for “sharing economy” and “collaborative consumption” in the sector search on DataFox, yielding 148 companies in total.
Here’s what we learned:Many verticals and niches have been attempted before. Texxi is a ride-sharing solution that founded in 2005, way before Uber. Crashpadder started the same time as Airbnb but has struggled to build a sustainable business.
TPG and Sequoia have deployed the most capital in the space, mainly due to their Uber and Airbnb investments. SV Angel and Andreessen Horowitz have invested in the most companies (eight and five, respectively).
So from this long list of companies, who else might fail? Visit the interactive watchlist to see which companies haven’t raised money in a long time, which have been losing PR momentum, and which are failing to hire talent.
Check out the Watchlist here (sign up for a free 30 day trial to access the interactive list and graphs):
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