Companies like Airbnb, Uber and Lyft have raised hundreds of millions of dollars in venture capital in the belief that the money they spend now will buy them lasting competitive advantages for years to come. But what if that’s exactly backwards? What if all those nine-figure war chests are really millstones that will only weigh them down as newer, nimbler entrants swim circles around them?
That was the scenario put forth by influential VC Brad Burnham at Share, a conference in San Francisco devoted to the so-called sharing economy. Burnham, a managing partner at Union Square Ventures in New York, predicted that the next wave of successful sharing economy startups will be “skinny platforms” that use innovative funding strategies to steal market share from the established players by offering users on both sides of the marketplace a better deal.
Peer-to-peer services have been able to disrupt industries like hospitality and transportation because companies in those industries, like hotel chains and limousine services, have high fixed costs they can’t escape. But in raising so much money at high valuations, Burnham said, Uber and its cohort of sharing-economy services have put themselves in a similar bind, promising that a huge amount of the value they create will go to their venture backers.
Every dollar they have to return to investors is a dollar that doesn’t go to users of the platform — users who, by the nature of the sharing economy, often feel they’re the ones who created the value in the first place and deserve to partake in it. ‘Those companies won’t be able to get out from under that structure,” Burnham said. “That is an opportunity for the next generation of sharing economy companies. The key is to raise less and raise it at a valuation that allows a return for your investors without having to have a thick platform that extracts a lot of rents for your investors.”
Brad Burnham (Photo credit: USV)
How much less should they be aiming to raise? Again, because of the nature of the sharing economy, there is essentially no floor. “A perfect share economy network should not require any capital,” Burnham said. As competition in a given space ratchets up, the platforms should get “thinner and thinner to the point where you end up at decentralized autonomous corporation” like Bitcoin.
What does that mean for this generation? Is there a way forward for Airbnb, which has raised $776 million so far, or Uber, which has taken on more than $300 million?
I put this question to Burnham (whose firm, I should mention, backs the ride-sharing app Sidecar). His answer: Maybe. The question is how much bigger they can get before hitting the limits of their markets. The transaction costs they levy on users will have to come down over time; that’s a given. Therefore, they’ll have to grow their user bases enough to compensate for the narrower margins. If they can find a way to support their present valuations while taking an ever-thinner slice of each transaction, they just may be able to satisfy their investors and stay competitive — even against new rivals whose costs of capital approach zero.