How, why and when to invest in the sharing economy

Publication date: 01 February 2019
Article type: Blogs and Articles

How, why and when to invest in the sharing economy.

While the sharing economy brings advantages to all businesses through efficiencies, Igor Shoifot looks at the options available in terms of investing in this business model.

Social Media influenceDo you think that the sharing economy is appealing for businesses? 

The sharing economy is definitely appealing for businesses.

Businesses can build efficiencies where there are precious few or none and create powerful business models. Organisations such as Taxify offer additional income to anybody who can drive a car. So when a person wants to make more money, he or she doesn’t need to apply for a new job, dedicate time to a schedule or even commit.

The second reason is great distribution channels. For example, users of Airbnb who have a property to rent would probably go out of their way to try to advertise, network and post on social media. This is fantastic for Airbnb because it doesn’t need to spend money on areas such as advertising property.

Is it worth investing in the sharing economy or is this a passing trend?

I would recommend anybody doing anything new to first ‘learn the ropes’.

Unfortunately, a huge number of people who are investing do not understand what the’re doing. They are following fads, articles and rumours. This is dangerous because you can lose money and become unhappy and worried.

On the other hand, if you know what you’re doing, definitely consider investing in the sharing economy because it’s one of the strongest economic models, at least until we have the kind of artificial intelligence (AI) that would replace human jobs.

‘The sharing economy is one of the strongest economic models… but I think it is a temporary economy’

Will major businesses take over the sharing economy – and if so, how? 

The whole frontier between traditional businesses and new, technology-driven businesses is interesting.

On the one hand, the ‘bricks and mortars’ have money, great distribution, brand recognition, power and smart people working for them. On the other, the ‘new’ companies are very daring.

I would imagine hotels such as the Hilton will look at how its competitors such as Airbnb are doing things. For example, Airbnb doesn’t worry about occupancy, doesn’t have fixed costs and outsources certain areas. So the likes of hotels such as the Hilton and others would want the same.

Geoffrey Moore, author of Crossing the Chasm, asked: ‘Why do successful, innovative, well-established companies fail?’ He argued that these business fail not because they have weak technologies, are ignorant, or cannot recognise new possibilities, but because these businesses are beholden to old business models.

There are companies such as Mercedes that are seriously looking into the sharing economy. The company does talk about how it wants new business models, how, instead of simply selling cars, it wants to create environments where people will be sharing the cars, where you would essentially have a timeshare on a new Mercedes rather than owning it fully. This might make sense, but they have been talking about this for years.

We are in an environment where a business either innovates or becomes obsolete. If you look at the most brilliant companies, they go out of their way to innovate, sometimes even against their own business interests – for example, Facebook.

In the short term, traditional businesses and businesses in the sharing economy are going to co-exist, but after a while there will be some acquisitions; for example, Daimler buying Uber, or Toyota buying Lyft.

Many major businesses are talking about the sharing economy, they are all thinking about it and I think they are all want to invest in it. However, if history is showing us anything, and if books such as Innovator’s Dilemma can be used as a guide, major businesses wouldn’t be able to take over the sharing economy.

In what innovative ways can a business invest in the sharing economy?

I think businesses will invest in the same way they invest in any other company.

There is a term, ‘smart money’ [money invested by those considered to be experienced, well-informed and in-the-know]. I would say that, in the sharing economy, smart money doesn’t just bring money. Smart investors could bring connections to other investors, help with hiring key employees, help with an understanding of business models, and share their experiences of being entrepreneurs.

I also think professional investors should look into a lot of different businesses. Nobody knows specific segments as well as investors because they look into hundreds of businesses in a sector. So whether you’re investing in the sharing economy or not, you need to help of investors.

Has the sharing economy changed the way businesses invest and, if so, how? 

The sharing economy and new technologies such as AI are helping people to realise that times are changing.

Large corporations constantly see reminders of the world changing and the need to innovate. In other words, they need to invest in either internal innovations or acquire nimble, small and entrepreneurial companies and integrate them.

The sharing economy also changes our personal business models. Someone driving to work who needs extra money can just install an app such as Uber to make some extra money.

‘There will be some acquisitions; for example, Daimler buying Uber, or Toyota buying Lyft’

In what ways can a business be successful in the sharing economy?

Almost any business that has extra capacity can be successful. For example, a company can build a skyscraper of 30 floors and only fill 22. Then companies such as Wework [which provides shared workspaces] can come in and use the vacant floors. The business can then make money and doesn’t need to invest.

In addition, a business can benefit its employees that are only engaging a portion of their time and ‘hire them out’ to another business. This could be a good example of an employee time-sharing economy.

What are the risks of investing in the sharing economy?

There are huge risks. One is being too early, investing when the adoption curve is not there. For example, car parking is a huge problem in San Francisco so a company came up with the idea of renting out driveways or parking spaces. The problem was that the customers’ minds were not there yet. This idea was two or three years’ too early. It’s hard to know when the adoption curve is there. When Uber started, people were sceptical. Now there are many companies that do what Uber does.

Another risk is that there could be really powerful competitors that could ‘crush’ your business.

What advice would you give to someone looking to invest in a business in the sharing economy?

There are three things I would say: be aware of the adoption curve, see if there is a possibility that your competitors that could ‘crush’ your business, and look for alternatives. Smart investors do not let themselves fall in love with a company. They first study different opportunities and then make a decision whether to invest. And time shows if the decision is smart.

When speaking to businesses, you learn that some of them have stronger teams, some are more realistic in their goals, some are more specific about scaling, and some are better at converting customers. Typically, a good investor then finds one business that they know is really great.

Do you think the sharing economy models on which businesses are based sustainable?

They are, but only to a certain point in the future where new economies emerge. I think the sharing economy is a temporary economy. There was a time where steam machines were amazing and that passed.

My guess would be 20 years’ from now, we would look back on today and say those were the times. I think AI will be the end of the sharing economy, when you wouldn’t need human services that AI could provide.

‘Be aware of the adoption curve, see if there is a possibility that your competitors that could ‘crush’ your business, and look for alternatives’

Igor Shoifot is a Partner at venture capital company TMT Investments