Sharing economy firms like Uber and Airbnb are burning cash at a phenomenal rate — but it's ok
An audience member at the Sharing & On Demand Economy Conference recently questioned a panel of entrepreneurs on whether people will possess anything of their own in years to come, be it their own home, their own car, their own wedding dress, or even their own power drill.
Owning things is expensive and finding places to store unnecessary luxuries in a world that's becoming increasingly densely populated could be seen as cumbersome, according to Alex Stephany, the former CEO of drive rental platform JustPark.
Entrepreneurs operating in the sharing economy, which is underpinned by the internet and the rise of smartphones, are describing their businesses as revolutionary, with Uber's Travis Kalanick saying his taxi-hailing app is changing the way people travel across the world.
"We want transportation to be as reliable as running water everywhere for everyone," Kalanick said at Salesforce's annual conference in September.
But there's one potential problem that few people are talking about: many of these businesses, including Uber and Airbnb, aren't yet turning a profit.
Fred Destin, a general partner at Accel Partners, which has invested in Facebook, Dropbox and Spotify, doesn't believe being profitable is as important in a company's early years as you might think. "People obsess about profitability," he told Business Insider. "You can decide when you want to make a business profitable by simply growing more slowly.
"If you look at Uber, Airbnb, Blablacar, Deliveroo, all these companies do the same thing. They acquire customers up front. You have to make the investment upfront in marketing to get these people onto your platform. You don't immediately make money. You make money when they use, and reuse, and reuse the product.
"The payback time, so the amount of time it takes to make money on a newly acquired customer, can be 12 months, 24 months, etc. So almost the faster you grow the more you burn money at the beginning, but you're building an asset underneath it which is a base of stable, loyal users. That's very good."
The Belgian investor — who sits on the board of restaurant food delivery service Deliveroo, which has raised $200 million (£133 million) — went on to remind Business Insider that Amazon was unprofitable for many years. "Now, with the level of brand they have, a lot of people, including me, probably do 60-80% of their ecommerce on Amazon," he said. "They've proven they're an immensely valuable company."
Uber and Airbnb, the most valuable sharing economy companies in the world by valuation, are spending vast sums on aggressive marketing and global expansion in a bid to gain as many new users as they can.
Uber is now a bigger company than Ford, General Motors, and most of the S&P 500 companies, according to an article on Nasdaq's website. It has raised over $10 billion (£6.6 billion) and is valued at over $50 billion (£33 billion). It's also losing millions of dollars every day, according to leaked documents that were obtained by US news site Gawker and published in August.
Airbnb, has raised $2.4 billion (£1.6 billion) for its home rental platform and is now valued at over $25 billion (£16.5 billion). But it's forecasting an operating loss of $150 million (£99.5 million) for 2015, according to The Wall Street Journal.
Destin said he'd be surprised if Airbnb, for example, wasn't profitable "within three years, five max". He added that the startup is still in "hyperexpansion mode" and it's "probably the world's largest hotel company" despite having only been built in the last few years.
"If they decided to stop growing tomorrow, with the strength of their brand and their supply, they would probably throw off vast amounts of cash," he said.
Show me the money
But profits aren't coming quickly enough for some venture-funded startups and there's only so long they can wait before they have to start pulling back.
In the UK, parking rental app JustPark raised several million pounds over the last two years from well-known investment firms like Index Ventures but last month it announced that it was cutting at least 10 roles and losing its CEO.
There are certain things companies in the sharing economy need to avoid if they don't want to end up going bankrupt.
Destin said startups can go wrong when they start giving away free credit and and slash their prices in a bid to get people signed up to their platform.
"When you use aggressive discounting techniques you can get into trouble," said Destin.
With billions of dollars behind it, Uber can afford to offer coupons to new users but bootstrapped startups need to be more careful.
Many sharing economy companies aren't yet profitable, but they are still providing work for a large number of people around the world that may otherwise be unemployed. Uber for example, is helping over 20,000 drivers in London to earn a wage, while Airbnb is providing thousands of homeowners with an extra source of income.
UK government and the sharing economy
As a result, the UK government is very keen to support the sharing economy and the businesses that sit within it.
In March, Chancellor George Osborne showed his support for the sharing economy when he scrapped an outdated subletting law that meant UK residents could only let out their homes on Airbnb and other home sharing platforms for a certain number of days a year.
He also announced plans to trial a number of sharing economy services in Leeds and Manchester, dubbing them the UK's new "sharing cities".
The Chancellor made the reforms after digital minister Ed Vaizey tasked Debbie Wosskow, the founder and CEO of LoveHomeSwap, a startup that allows homeowners to exchange their properties, with carrying out a review on the impact of the sharing economy in the UK.
"With increasing UK economic impact, the opportunity is great for companies big and small — and for individuals all across the country to turn themselves into successful 'sharing economy' micro-entrepreneurs," said Wosskow ahead of the report.
Wosskow now chairs Sharing Economy UK (SEUK) — a trade body comprised of over 20 sharing economy companies either based in the UK or operating here in one form or another.
She had this to say about sharing economy companies turning a profit
"Though sharing is not a new idea, the sharing economy is still a very young sector and some of the businesses of which it is comprised are much younger still. It's not possible to comment exactly how many businesses are profitable but it is fair to say that the potential of the sharing economy is huge and profits are already being made by the users, which is a success story in itself. SEUK businesses like Hassle.com, Airbnb and Under the Doormat, for example, are enabling users to create new sources of income through existing, and often unused assets.
"The real question is how do we support these businesses on their way to a profit. Key challenges such as insurance, taxation and regulation through more traditional systems and services are issues that the majority of sharing economy businesses have to spend a lot of their time overcoming. Rather than focusing on what should be the key items on a business agenda such as customer acquisition, financing, profitability etc. These are the key issues the sector needs to work on together to support individual businesses on their road to profitability."