The great cycle of re-invention spawned by the Internet and mobile technologies continues apace. This time it’s the entrepreneurial businesses laying the foundation for the sharing economy — whether that be beds, room, clothes, tuition, bicycles or cars. A few succeed to become great new businesses; most fail.
From the WSJ:
A few high-profile “sharing-economy” startups are gaining quick traction with users, including those that let consumers rent apartments and homes like Airbnb Inc., or get car rides, such as Uber Technologies Inc.
Both Airbnb and Uber are valued in the billions of dollars, a sign that investors believe the segment is hot—and a big reason why more entrepreneurs are embracing the business model.
At MassChallenge, a Boston-based program to help early-stage entrepreneurs, about 9% of participants in 2013 were starting companies to connect consumers or businesses with products and services that would otherwise go unused. That compares with about 5% in 2010, for instance.
“We’re bullish on the sharing economy, and we’ll definitely make more investments in it,” said Sam Altman, president of Y Combinator, a startup accelerator in Mountain View, Calif., and one of Airbnb’s first investors.
Yet at least a few dozen sharing-economy startups have failed since 2012, including BlackJet, a Florida-based service that touted itself as the “Uber for jet travel,” and Tutorspree, a New York service dubbed the “Airbnb for tutors.” Most ran out of money, following struggles that ranged from difficulties building a critical mass of supply and demand, to higher-than-expected operating costs.
“We ended up being unable to consistently produce a level of demand on par with what we needed to scale rapidly,” said Aaron Harris, co-founder of Tutorspree, which launched in January 2011 and shuttered in August 2013.
“If you have to reacquire the customer every six months, they’ll forget you,” said Howard Morgan, co-founder of First Round Capital, which was an 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, he added that he recently used Uber’s ride-sharing service three times in one day.
Consider carpooling startup Ridejoy, for example. During its first year in 2011, its user base was growing by about 30% a month, with more than 25,000 riders and drivers signed up, and an estimated 10,000 rides completed, said Kalvin Wang, one of its three founders. But by the spring of 2013, Ridejoy, which had raised $1.3 million from early-stage investors like Freestyle Capital, was facing ferocious competition from free alternatives, such as carpooling forums on college websites.
Also, some riders could—and did—begin to sidestep the middleman. Many skipped paying its 10% transaction fee by handing their drivers cash instead of paying by credit card on Ridejoy’s website or mobile app. Others just didn’t get it, and even 25,000 users wasn’t sufficient to sustain the business. “You never really have enough inventory,” said Mr. Wang.
After it folded in the summer of 2013, Ridejoy returned about half of its funding to investors, according to Mr. Wang. Alexis Ohanian, an entrepreneur in Brooklyn, N.Y., who was an investor in Ridejoy, said it “could just be the timing or execution that was off.” He cited the success so far of Lyft Inc., the two-year-old San Francisco company that is valued at more than $700 million and offers a short-distance ride-sharing service. “It turned out the short rides are what the market really wanted,” Mr. Ohanian said.
One drawback is that because much of the revenue a sharing business generates goes directly back to the suppliers—of bedrooms, parking spots, vehicles or other “shared” assets—the underlying business may be continuously strapped for cash.
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