The sharing economy: opportunity or ideology?

There is a new breed of unicorn which not only offers technological solutions but potentially lifestyle solutions as well. The only problem is that many of them are currently loss-making, writes Victor Hill.

The sharing economy is not just an incipient technological reality but a new approach to how we organise our lives and resources. It offers a step-change in both efficiency and convenience. Potentially, it could also help in the battle against climate change and growing inequality of wealth and income.

Or so many people – particularly young people – believe. New ways of delivering services through the internet accord with a new attitude amongst the young – or as I call them the millenarian millennials.

Millenarians in western history were people who, in various centuries, thought that the end of the world was nigh – whether due to plague, war or sin. The young – as you may have noticed if you were caught up in the Extinction Rebellion protests in London last month – also believe that we don’t have much time left to save the planet. In that belief they are encouraged by influential elder sages such as national treasure Sir David Attenborough.

For investors, there is a new breed of unicorn which not only offers technological solutions but potentially lifestyle solutions as well. And they have the weight of youth culture behind them. The only problem is that many of them are currently loss-making.

Follow that trend…But can investors support the sharing economy, help save the Earth and still make money?

Cultural evolution and the sharing economy

Listening to some of the millennials (and their not so youthful agitators) speaking to the media during the Extinction Rebellion that paralysed central London in late April, I was struck by something. On the one hand, most of them did not seem to understand the scientific issues surrounding global warming stroke climate change (no one mentioned carbon capture) very well and were ignorant of how much the UK in particular has reduced its carbon emissions over the last decade. On the other hand – I admit this reluctantly, given my more mature vintage – they seem to have a very important point.

The baby-boomer generation has spewed carbon dioxide into the atmosphere with alarming consequences and filled the oceans with plastic – yet it is the young who will face the environmental music as they grow older…Mind you, I wasn’t very impressed by Dame Emma Thompson, wearing dungarees, gesticulating from a pink boat that paralysed the traffic in Oxford Circus. (She had jetted in, business class, from LA for the gig thereby generating another five tonnes or so of CO2!) Nor was I impressed by their double-barrelled supposed leader whose Instagram account reveals a love of skiing holidays…The real star of the show was a tiny, pig-tailed Swedish schoolgirl called Greta.


Of course, we are all greens now. Environmentalism, or, to use the older term, conservationism, is universal, particularly in the corporate world. Who would invest in a company that admitted to being a polluter? And indeed, in the UK in recent years, listed corporates are required to disclose their total carbon emissions in their annual reports. As Legal & General (LON:LGEN) has recently attested, these metrics are rigorously analysed by institutional investors.

Now, as EM Forster said: Only connect. The new breed of facilitator unicorns which are now coming to market speak directly to the rising millenarian youth culture. These young people, whatever you might think of them, adhere to two principles. One is fairness (and I could write at length about what a floppy concept that is – but I shall discipline myself here); the other is ecology – using resources in a sustainable way. Actually, this does notamount to socialism. While the millennials are generally welfare-friendly (unlike more mature grouches like this writer) they don’t seem to believe that the means of production, distribution and exchange should be brought under state control.

One possibility is that, as they mature, they will foster a newer, gentler form of capitalism which will try to address the major issues of our time: the widening gap between rich and poor in the developed world (including China, by the way); and the degradation of our environment.

Changing the world by disruption

Imagine a world where people, instead of owning lots of stuff, hired things as and when they needed to use them. If you think this is fanciful, just listen to what Lyft (NASDAQ:LYFT) had to say in its flotation prospectus:

We believe that the world is beginning to shift away from car ownership to transportation-as-a-service (TAAS)…Lyft is at the forefront of this massive societal change…

Any newly-coined four-letter acronym should normally set the BS detector flashing and beeping – but there is a serious trend here. Car ownership amongst the young has been plummeting in the last decade in the US and the UK as compared with their parents’ generation at the same age.Many millennials, apparently, don’t even think it’s worth passing their driving test: to be sure, a self-driving taxi will be arriving shortly to whisk them to the latest protest!

And, by the same logic, why would these free spirits wish to own a holiday home when they can click on the perfect get-away with Airbnb (another unicorn coming to market soon)? Then there are the technologies which facilitate the sharing not just of physical assets like cars or houses but of experiences too. Pinterest (NYSE:PINS) is one.

What gives us pause is that Lyft recorded the biggest loss last year of any new listing coming to market ever – nearly $1 billion. That record will probably soon be eclipsed by Uber which has burned through about $11 billion of investors’ cash since its foundation in 2009. In contrast, Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG) were well in the black by the time they launched on the market.

On the other hand, all these unicorns have tried-and-tested business models which are losing money in accounting terms because they are investing madly so as to globalise their offer. These are not the untried-and-untested nerds of the 2002 tech bubble. In any case, about 80 percent of initial public offerings (IPOs) in the US last year involved loss-making firms.

And there are still more players coming into this space. Last year Indian taxi-app giant Ola announced plans to launch in the UK. Ola was valued at about $5.7 billion at the end of last year. A number of venture capital firms including Softbank (TYO:9984) have stakes in the company.

One of the key conundrums is how quickly electric self-driving vehicles will become an everyday reality. If the likes of Uber could dispense with all their drivers then they will take their cut of the taxi fare from 20-25 percent to 100 percent (less the cost of electricity). Though that would leave a very large number of unhappy human drivers looking for work – 3.9 million worldwide in Uber’s case. So maybe the new capitalism will not be gentler after all.

Ironically, Uber was launched in the dark days after the financial crisis of 2008-09 when there was a steady supply of drivers willing to work unsocial hours for low rates. When the cost of gasoline fell with the US shale boom, drivers (who pay for the running and maintenance of their own cars) increased their take-home pay. Maybe Uber’s drivers should take comfort from the fact that the arrival of self-driving vehicles has been postponed: a pedestrian was killed by one of Uber’s self-driving prototype vehicles in March last year.

Unicorns rampant

Lyft (NASDAQ:LYFT) launched on the market on 29 March in a $24 billion flotation and both Pinterest and Zoom (NASDAQ:ZM) made successful debuts on the market during the week of 15 April.

Shares in Pinterest, the photo-sharing social media phenomenon which describes itself as a visual search engine, shot up by 28 percent on its first day of trading, valuing the company at $16 billion. One successful investor was Michael Birch who founded Bebo before selling it to AOL in 2008 for $850 million. (Mr Birch later admitted that AOL overpaid.) He first invested in Pinterest eight years ago when it was worth just $52 million. His stake is said to have increased in value by 250 times. Pinterest grew its revenues in the first quarter of this year by nearly 50 percent to just under $200 million.


Zoom, which facilitates video-conferencing, was even more successful. Its shares soared by 72 percent on launch, valuing the outfit at $18 billion.

Investors these days might experience some doubt when they are invited to invest in unicorns. Terminology aside, we were accustomed to tech companies that provided services (information) like Google and Facebook and then entertainment like Netflix. But then this new genus of facilitator arrived – especially in the field of transport and delivery – which enables us to get to where we want to go or to receive the goods that we have ordered on Amazon and the rest…

There could be another six or so unicorns coming to market in New York over the summer – led, of course, by Uber which is likely to be valued north of $100 billion – maybe even more if the US market continues its bull run. Other unicorns due to launch later this year include Palantir, Airbnb, food delivery app Postmates and messaging service Slack. Uber’s listing, expected in early May, will be the largest since Alibaba in 2014.

Uber above all

An early investor in Uber said about Travis Kalanick, its founder and first CEO, soon after the taxi app was first launched in 2009: “It’s hard to be a disrupter and not be an a***hole”. Mr Kalanick did not disappoint.

Uber has grown into a must-have tech brand which offers a hassle-free taxi service in decent cars (with generally pleasant drivers) right across the planet – and no dirty cash changes hands at the end of the ride. All people have to do to start using it is to download the app onto their smartphones and to register their credit card details.

But Uber has been plagued by corporate governance issues. Mr Kalanick was accused of sexual harassment at the company’s San Francisco HQ in 2017. (Not a great image for an outfit that invites single women to get into strangers’ cars at night.) Then Bloomberg posted a video of Mr Kalanick abusing one of his own drivers. Mr Kalanick was forced to step down as CEO in 2017 after Benchmark Capital (run by Bill Gurley) reportedly demanded his resignation. But he remains a board member and a major shareholder – he stands to reap about $10 billion in the coming flotation. Mr Kalanick was replaced as CEO by Dara Khosrowshahi.

The term the Uber economy has become a by-word in the USA and beyond for the casual exploitation of freelance labour. Then there is the more piquant criticism that Uber is fundamentally an aggressive agitator which competes on price alone – with little concern for customer satisfaction. The #DeleteUber campaign on Twitter in 2017 lost Uber hundreds of thousands of users.

Add to that the brouhaha surrounding Uber’s exploitation of a loophole in the UK VAT regime by means of which it shifted responsibility for VAT payments to its 40,000 British drivers. Uber did this by using an EU rule concerning business-to-business sales across borders within Europe, billing its UK drivers from its Dutch subsidiary. The UK accounts for about one third of Uber’s total sales in Europe. In contrast, competitors Gett (which summons traditional licensed black cabs in the UK) and Mytaxi pay VAT on booking fees because they bill their drivers from within the UK.

In practice most Uber drivers do not pay VAT because their total earnings are below the current UK VAT sales threshold of £85,000. Uber drivers in the UK make on average £560 a week from fares – so about £28,000 a year and Uber takes a cut of 20-25 percent on those fares. Its UK revenues alone are thought to be well over £200 million a year.

In September 2017, after a series of incidents, Uber lost its license to operate in London. Transport for London (TfL) argued that Uber was not a “fit and proper” operator, saying that Uber failed to carry out sufficient background checks on its drivers. 600,000 people signed a petition demanding to reverse the ban. Uber was permitted to continue to operate pending an appeal.

Uber has also diversified. Uber Freight sought to do for the trucking industry what the company had done for the taxi sector. Over 70 percent of goods in the USA are transported by truck but productivity in the trucking sector has lagged behind other transportation sectors. Using Uber’s smartphone app truck drivers can now sign up to deliver freight days or weeks in advance.


Uber even purchased Otto, a company that was developing driverless trucks. The company is now defunct as Uber closed it down to focus on the development of self-driving vehicles within its subsidiary Advanced Technologies Group. It is active in the field of food delivery with UberEats. It also owns spin-off businesses active in cycle and scooter hire.

Mr Kalanick followed his idol, Amazon’s Jeff Bezos, by putting growth ahead of profitability. Uber has benefited from its size, pursuing a market dominance strategy. But it has not had everything its own way. The company was forced to retreat from China, Russia and Singapore by local incumbents. But in Dubai it has bought out local competitor Careem in order to consolidate its market leadership.

Uber is still burning through investors’ cash with little prospect of going into the black in the near-term. The firm published its listing prospectus on 11 April. We now know that Uber lost nearly $3 billion last year on revenues of $11.3 billion (that’s after the deduction of the drivers’ share of the fares). Indeed, it has made cumulative losses of nearly $8 billion since it was founded in 2009.

Yet, according to CNBC markets[i] Uber could be worth up to $120 billion – making it more valuable than Nvidia (NASDAQ:NVDA) and PayPal (NASDAQ:PYPL). More conservative analysts value the company at $90 to $100 billion, pointing out that the rate of growth in revenues is slowing.

Lyft launches first

Lyft has beaten its more famous rival to the stock market. On 29 March the company’s shares were launched on the NASDAQ (under the moniker LYFT) at a price of $72 a share, valuing the company at $24 billion – despite losses of $911 million last year. The shares reached $82 shortly thereafter. At the time of writing (the week after Easter), however, the share price was trading at about $60.

The company was founded in 2012 in San Francisco and was rolled out in hundreds of US cities. Lyft first came to prominence in the UK during TfL’s ban on Uber in Britain’s capital city. Although it operates a very similar business model to that of Uber it has cultivated a more socially conscious brand than its more controversial competitor.

Nevertheless, there is a feeling that, as the Daily Telegraph’s James Titcomb put it, Lyft is Pepsi to Uber’s Coke – a perennial runner-up. Most of the profits in any given sector tend to be gobbled up by the market leader. The US taxi hailing market is nearly 60 percent dominated by Uber and 39 percent by Lyft. Uber is thus much bigger and is diversifying more widely. There will be a permanent price war in this near-duopoly. Lyft is therefore an also-ran in a tech universe that favours monopolies. Already, the initial valuation of Lyft’s shares looks optimistic.

Investors should also be aware that Lyft’s founders, Logan Green and John Zimmer, are still major shareholders and hold disproportionate voting rights. The word is that, after the initial spike, the short-sellers moved in. Invest here cautiously.

DiDi drives China

The Chinese car-hailing giant DiDi Chuxing halted its expansion in August last year after a 20-year old woman passenger was raped and murdered in the eastern city of Wenzhou. DiDi is credited with chasing Uber out of China in a war of attrition which cost both firms billions. Finally, in 2016, Uber sold its Chinese operations to DiDi in exchange for an 18 percent stake. DiDi launched in Australia in early 2018 and then in Mexico

In July last year DiDi secured a $500 million investment from the owners of the US travel website Booking.com, Booking Holdings (NASDAQ:BKNG). This money is likely to be used to fund DiDi’s expansion into western markets. DiDi’s users can now book holidays through Booking.com and other websites such as Agoda and Kayak which are owned by Booking Holdings. China is rapidly becoming the world’s largest market for travel services, sending more tourists abroad than any other country.


DiDi owns a stake in the Estonian taxi-hailing network Taxify (whose app is called Hopp) as well as in numerous other apps around the world. Last year DiDi also raised $4 billion in a funding round in Japan in which the Japanese tech conglomerate Softbank (TYO:9984) participated. DiDi has raised a total of about $20 billion since it was launched in 2012.

The company even secured a $1 billion investment from Apple (NASDAQ:AAPL) partly to fund its own research and development centre in Silicon Valley called DiDi Labs. There it has been testing self-driving cars (taxis?).

Turo advances

Turo makes it possible for people to hire cars in almost any location on a peer-to-peer basis – meaning that I can rent your car for a day (or longer) from you when you don’t need to use it. Cars available are practical roadsters; but enthusiasts can take classic or luxury cars for a spin just for the hell of it.

This concept is much better established in the USA than in the UK but it is now available here too. Turo launched in the UK last September and now has 4,000 cars on the app and 92,000 registered users. 5,000 new users are signing up each month.

In the US, Turo and its smaller rival Getaround are engaged in what they regard as a David versus Goliath battle with the established car hire companies – dominated by the big three: Avis (NASDAQ:CAR), Hertz (NYSE:HTZ) andEnterprise (private). These giants are lobbying to ensure that Turo and the nascent car-sharing sector should be tightly regulated in terms of tax, safety and insurance.

Turo has not made any financial information available so far. The word is though that Turo’s cut of the hire fee is large. Unlike Uber’s drivers, Turo’s providers don’t make a living out of making their cars available – just some useful extra cash. In contrast, in the traditional car rental market, margins are tight which explains why Zipcar, a fleet-based car-sharing app, was bought out by Avis in 2013. Significantly, Daimler (ETR:DAI) has invested in Turo, leading a $92 million funding round in 2013.

What about safety? That is an important issue; but good hosts (i.e. car providers) who provide well-maintained clean cars get good reviews – and vice versa. While mature business people might be squeamish about climbing into other people’s cars, millennials are more comfortable with the idea of sharing other people’s property – for a fee, of course.

Airbnb

In March this year Airbnb made a stock swap valuing the home-sharing and holiday rentals business at $35 billion. Interestingly, that’s only a couple of billion more than the value attributed to the business two years ago. The company priced its shares at about $120 per share when it purchased the last-minute hotel room provider Hotel Tonight for more than $450 million[ii]. That deal paid out Hotel Tonight shareholders in both stock and cash. At that price, Airbnb would be privately valued at more than booking rivals like Expedia (NASDAQ:EXPE) at about $18.5 billion and hotel chains like Hilton (NYSE:HLT) at about $25 billion, but less than Marriott (NASDAQ:MAR) at $45.5 billion or Booking Holdings (NASDAQ:BKNG) at $85 billion. Airbnb’s last funding round took place in 2017. It is still not certain that Airbnb will launch on the market in 2019.

The UK herd

The UK has more than 60 unicorns with, prospectively, a market value each of over $1 billion, according to Tech Nation, the government’s start-up incubator. Of those, 36 are located in London – more than in any other European city. In fact, Oxford and Cambridge between them have more than either Paris or Berlin. Silicon Fen (Cambridgeshire) is reckoned by some as Europe’s biggest technology cluster. Much of these unicorns are being funded from the £24 billion that Softbank paid to buy ARM Holdings in 2016.

UK unicorns include the digital bank Monzo, the payments company TransferWise and the take-away food deliverer Deliveroo. But for all these household names there are a plethora of less well-known digital businesses.

Sharing skills

Toptask has signed up about 400 students from the top universities including University College London and the London School of Economics who want to do paid gigs – i.e. short-term jobs covering activities from research, design, child-minding, dog-walking, decorating to translations. The business was founded by Gregory Newman and his wife Lee Steinfeld after they had difficulty finding a suitable tutor for their children. Toptask interviews all students to ensure that they really have the skills that they claim to have. Once a prospective employer posts a job they are provided with a list of students in that area who are willing and able to undertake that task. The students receive a guaranteed minimum of £10 an hour for any work done.

Action

Follow the trend – yes; but don’t underestimate the risks. Many sharing economy facilitators have fallen by the wayside. And beware inflated valuations.

Karhoo, the HQ of which was in London while the company was domiciled in the USA, collapsed in December 2017 at the cost of 200 jobs. Karhoo started out in May 2016 in London and reportedly raised $150 million to fund expansion in nine UK cities as well as New York, Paris and Singapore. Likewise, Autolib was lunched in Paris in December 2011 and built up a fleet of more than 4,000 cars. Its unique selling point was that all of those vehicles were electric. After acrimonious litigation around the use of its name and brand and a series of car fires the company went out of business on 31 July 2018. Autolib was the moving force behind Bluecity which facilitates electric car sharing in London.


The real question is: when will these app-master facilitator unicorns ever make money? I don’t think even they know. But they are huge, popular and here to stay. And they are investing like crazy in order to become truly global players.

Unicorn listings suggest that the real winners are the early backers – the venture capital firms and wealthy private investors (such as Michael Birch who invested in Pinterest) – rather than the institutional and retail investors who queue up to buy the shares. Personally, I would foreswear the IPOs and track the share prices thereafter. Investors will have to take a long-term view. But, ultimately, the dominant facilitators of the sharing economy are going to win out in the age of millennial smartphone capitalism.

It would be interesting to know what young Greta thinks.

[i]See: https://www.cnbc.com/2019/03/15/ubers-eye-popping-valuation-worth-more-than-nvidia-and-paypal.html

[ii]See: https://www.recode.net/2019/3/19/18272274/airbnb-valuation-common-stock-hoteltonight