Regular readers of this blog know that collaborative consumption and the share economy are investment sectors our venture fund, Physic Ventures, is particularly bullish on. These sectors sit at the intersection of resource efficiency and the enabling technologies of social graphs, cloud data storage, and mobile computing. Collaborative consumption startups are disrupting numerous industries, such as transportation, housing, and entertainment.
In the last year, we’ve seen an explosion of entrepreneurial and investment interest in these sectors. Two excellent books written by Lisa Gansky and Rachel Botsman and Roo Rogers have catapulted Collaborative Consumption and the Share Economy from novel concepts to everyday buzz words. Lisa’s book and accompanying website have cataloged over 5000 startups in the Mesh ecosystem. Last week also marked the one year anniversary of the Collaborative Fund, setup by Craig Shapiro specifically to invest in this sector – Happy Birthday guys!
While I’m delighted to see collaborative consumption receiving the increased attention that it deserves, I’m increasingly concerned by the saturation of some collaborative consumption sectors with me-too startups that have no differentiation, no barriers to entry, and in many cases no viable business model.
Consider one industry where collaborative consumption got started early – transportation. This sector got off to a healthy start. There were two early, for-profit entrants in the B2C car sharing sector; Zipcar and Flexcar. In 2007 they merged creating one company that went on to build sufficient scale for a successful IPO in 2011. Then the P2P car sharing model began to receive attention and in the space of two years we’ve seen the launch of Relay Rides, Getaround, Spride, Wheelz, Whipcar and numerous others being cooked up in incubators around the world. All of these P2P car sharing companies have essentially the same business model, minimal IP, and they’re competing for the same customers in the same geographies.
In addition to car sharing, there’s also a promising market for ride sharing. Physic is a fan and user of Zimride, which has been steadily growing in this sector since 2008. Last week, a recent graduate from Y-Combinator, RideJoy, was funded to compete for exactly the same market as Zimride. When asked in TechCrunch how RideJoy is differentiated from ZimRide, RideJoy said “Our focus is really on crafting a great user experience, fostering a warm community and delivering amazing support.” The last time I checked, Zimride had a pretty great user experience, community and customer support, so it remains to be seen how RideJoy is planning to differentiating itself.
We’ve seen this story play out before in many other consumer internet sectors. Before E-Bay emerged as the leading online auction company, there were numerous startups offering the same online auction service, with limited switching costs, and no established brand loyalty. Eventually network effects kicked in and everyone wanted to list on the site where all the customers were.
Here’s a prediction: As more P2P car sharing and ride sharing companies compete for the same customer, there will first be downward pressure on margins as new entrants try to compete on price. This will drive the less well funded companies out of business. Then someone will create the “Kayak of ride sharing”, which will put additional downward pressure on margins by forcing competitors to explicitly compete on price, perhaps to the detriment of quality. This will drive consolidation in the marketplace and eventually one or two leading companies will emerge. This rapid process of creative destruction can be healthy for the eventual winners and may lead to better services for consumers through increased competition. However, it makes it extremely hard for institutional investors to identify potential winners and commit the level of investment required to create a truly great company.
I encourage entrepreneurs interested in the potential of collaborative consumption to think about how to build a business with a differentiated model and barriers to entry. This doesn’t have to be IP. It could be exclusive partnerships in the ecosystem, a trusted consumer brand with long term loyalty benefits, a business model with inherent network effects from increased scale, or a sticky component to the product offering. Within the Physic Ventures portfolio we have several examples of how to achieve this. Recyclebank established itself as the leading recycling rewards company by signing long term, defensible partnerships with municipalities. Gazelle became the leading reCommerce company by offering “crazy-awesome” customer experience that built long term loyalty, along with long term partnerships with retailers. EnergyHub is democratizing residential energy efficiency through cloud based services that run on its proprietary hardware.
Finally, entrepreneurs could also think about building a collaborative consumption business in sector that is less crowded than transportation, accommodation, or travel experiences. For example, the founders of Cloo are unlikely to see any competition in their sector any time soon!