Over the past few years, we have seen the launch and rise of several new companies like Uber, Groupon, and AirBnB. These companies may have started in local markets with a mostly Millennial customer base, but they have now evolved into global enterprises used across generations, creating a viable alternative to traditional methods of transportation, lodging, computing, food delivery and even legal services. These companies are all part of a group known as the “Sharing Economy.”
There has been quite a bit of buzz in the investment world about these companies, which often boast sky-high valuations. Many of these companies have the backing of important venture capital firms or titans of Silicon Valley. Clients have been asking us whether it makes sense to consider some of these companies as potential investments. It is our belief that while companies in the Sharing Economy have made things much more efficient by using technology, It remains uncertain that they will build a business of lasting value, or have a clear path to shareholder value creation. There are just not enough profits to share in the "Sharing Economy". Most of the benefits are for consumers –which is why we believe clients should be consumers and not investors in these companies.
What is the Sharing Economy?
The Sharing Economy encompasses a new wave of companies that use the Internet to attack inefficiencies in the supply of goods and services. These companies create attractive offerings for customers by making them highly convenient and cost efficient. Perhaps the most well-known is Uber, the on-demand personal car service that is typically cheaper than a taxi. Uber is now available in 58 countries, 300 cities worldwide and services more than 8 million users.
The Sharing Economy has taken off in the last few years, thanks to the use of mobile technology and popularity of smartphones (85% of 18-29 year olds and 79% of 30-49 year olds in America own smart phones). Mobile technology allows consumers and producers to be instantly connected at any time and any place, removing barriers to supply and demand and creating more efficient markets.
The Sharing Economy has opened up the marketplace for providers of goods and services, allowing many local businesses or individuals-who did not have the correct infrastructure-to compete. Now consumers have more to choose from –and these providers must differentiate themselves by offering more competitive pricing and more added value.
What are the Implications for Investors?
Uber, a company founded only 6 years ago (and only operating outside of San Francisco since 2011) is currently valued at $50 billion, similar to the market cap of Kraft Foods or Target. Avis, a global rental company, is worth 10x less than Uber’s current valuation –Uber’s valuation is more on par to global car manufacturer Ford. AirBnB, the home sharing company (which owns no properties), estimates its current valuation is $20 billion, similar to that of Marriott International, the leading global hotel brand, and double the size of the global brand Hyatt.
Are these valuations justified? Revenues and other key financial data of these companies are kept under close wraps as they are private companies, so it is hard for outsiders to understand exactly the base of these valuations. However, we encourage our investors to look at these companies with caution. It is still unclear whether these companies are going to build lasting value for shareholders. Creating markets that are more efficient does not necessarily translate into creating output –or value.
Some analysts fear that companies will make profits in the short term –picking the “low hanging” fruit or profits that initially result from the market reaching a more natural equilibrium. Companies may use these profits as a base of unrealistic projections of future earning and valuations, which could be unsound as they may be based upon unsustainable initial success which maybe difficult to replicate in the longer term.
In conclusion, the Sharing Economy will likely continue to use technology in fascinating ways to make markets more efficient and bring more interesting options to consumers. We think it is much better for clients to thus use these companies as a customer, rather than an investor.
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Ms. Dutt is focused on supporting the BigSur Patners weekly Investment Committee. She presents the Investment Committee with broad market and investment research, using BigSur’s institutional and independent research sources. She further supports the Investment Committee by participating in the third party manager selection process and on-going due diligence of preferred investment vehicles. Ms.