The share economy, social networks, and a defensible business model

The Silicon Valley Business Journal sat down recently with Lightspeed Venture Partner Justin Caldbeck. Lightspeed has invested in ride sharing company Sidecar and is interested in the wider share economy. Caldwell made some telling comments about the attractiveness of share economy business models, which say a lot about the potential of this growing sector as well as issues related to all models relying on social networks.

After discussing familiar issues at the core of share economy businesses like Airbnb and Task Rabbit, such as trust and value generation on the supply and demand side of the transaction, he noted something that is less discussed. Caldwell says:

These businesses also typically have very, very high gross margins and strong stability relative to other consumer businesses, like e-commerce.

He goes on later in the interview:

As for copycats in the same vertical, one of the attractive elements of the sharing or collaborative model is that it lends itself to scale and defensibility. I think that once you get to scale, it’s very, very challenging for new entrants to be competitive.

Caldwell is getting at the fact that while ecommerce is highly competitive and in many ways a race to the bottom, devastating margins in an Amazon dominated world, the share economy is often the opposite. Once Airbnb owns the market on vacation sharing there become huge barriers to entry and disincentives for competitors to get in the market because on the supply side hosts want their homes in the biggest network and renters want the greatest number of available places to stay. This leads everyone to come back to Airbnb time and again.

Few people at share economy businesses or any social network will really discuss that one of the most attractive aspects of succeeding is that you wind up with an effective monopoly. Value is only generated for a business dependent on social networking once the business reaches critical mass, but once it crosses that threshold, it becomes extremely difficult for anyone else to compete.

What’s your alternative to Facebook? Look at how difficult it’s been for Path to amass 10 million users. Even Google can’t draw much attention to Google Plus with the weight of a $300 billion company behind it.  And one of the reasons Airbnb is on a sprint in terms of fundraising and expansion is that it knows there’s a limited amount of time to knockout upstarts 9flats and Wimdu. But once it does, it’ll be game over. In fact, Amazon’s amazing success in ecommerce is almost more impressive when one considers that ecommerce is the opposite: an open playing field where margins are constantly under pressure from the next website.

The irony for me of Silicon Valley generally and the share economy in particular, is that all of these startups begin as disrupters but end as monopolies. In the Financial Times list of top 500 U.S. companies, which is organized by market cap, 6 of the top 20 are IT companies. Imagine that being true in the 90s when the focus was still on unseating the establishment. Now IT is the establishment. So the appeal of the share economy is most definitely its margins and its potential to throw money at a startup and have it wrap up a market in a few years.

The reality is that share economy is slow going right now with the one notable breakout being Airbnb. Caldwell remains bullish that in the next 4 to 5 years there will be many more breakout companies. And all we can say is that if there are, relatively low scaling costs and market defensibility will be two of the major payoffs.

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Adam Lesser

Analyst Gigaom Research

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