The sharing economy: Why investors should be caring about sharing
The swift rise to prominence of companies such as Airbnb and Uber emphasises the importance of identifying sectors and companies potentially at risk of similar disruptions.
Sharing businesses have emerged as the hot topic in the current wave of technology excitement. Start-ups compete to be “the Airbnb” of every industry imaginable and for the capital that label can attract.
Identifying sectors vulnerable to similar disruptions and understanding incumbents’ exposures and strategic responses is increasingly vital given the scale and speed with which change can unfold.
The disruptive impact of sharing businesses is already clear
Heavy investment has provided new entrants with war chests for assaults on established industries. Coupled with short lead times, the commercial impacts can be substantial. Sharing businesses receive more venture capital funding than any other category, overtaking social media platforms in recent years. This creates a powerful disruptive force gathering in the sidelines of many sectors.
Few opportunities to invest in the theme through public equity markets
Able to scale with limited capital, most sharing businesses operate outside public equity markets and provide little visibility into their finances or operations. Our main focus is therefore on the ability of incumbent companies to defend their competitive positions, and potentially ride the growth opportunities this presents if they are able to adapt quickly enough.
But more sectors may be at risk
We expect that sharing models will appear in a much wider range of markets than has been seen to date. By examining large categories of spending on consumer durable goods with low utilisation rates and for which physical sharing is straightforward, we have identified markets we think are likely to face disruption, including travel equipment and sports goods, luxury jewellery and accessories, apparel and footwear.
The experience of lodging or transport (through Airbnb or Uber) demonstrates the speed with which change can unfold; and the inability of incumbents to adapt after that trend has become established.
Airbnb uses the scale of an online marketplace to allow homeowners to generate a positive return on property, albeit often lower than hotel groups would demand for the same investment, and eliminates redundant administrative and service overheads its users don’t require.
Uber similarly leverages an online market place, combined with advances in navigation technologies, to bring together self-employed drivers and passengers.
Had incumbents recognised those business model opportunities, they might have more easily stemmed their growth by adapting their own strategies.
Every industry will face different challenges
The priority for incumbent companies is to identify ways new entrants could undermine traditional business models and to invest in exploiting those openings themselves.
In that sense, the sharing economy is similar to any other disruptive threat, made easier by the rising penetration and comfort with online exchanges.
For example, peer-to-peer insurer Lemonade is apparently looking at ways to leverage behavioural analytics and distributed ledgers (holding records with customers rather than centrally).
Others – like Heyguevara, Bought by Many, Friendssurance – are building policy-pools that create small “captive insurers” for groups of people or friends, who are likely to try to keep claims low so that their payments are lower in subsequent years.
Many established insurers are developing proactive responses; for instance, looking at ways to tailor risk analysis by making use of ubiquitous smartphone ownership to monitor driving behaviour and even patterns of leaving their homes empty.
The effects on incumbent companies will vary
In principle, deep-pocketed incumbents with established brands and customer relationships should be in the driving seat. In practice, they can be held back by a strategic focus on established competitors and a resistance to change that might cannibalise their business.
Buying emerging competitors once they reach scale can work, but is typically costly and difficult to execute without a commitment to invest in the new business and integrate it with existing business lines.
We are monitoring trends and evaluating responses
Monitoring markets where conditions are ripe but those effects have yet to be felt helps alert us to upcoming disruptive threats.
Equally importantly, our analysis and discussions with companies can help shed light on the changes they expect and the responses they are preparing, helping us to evaluate the likely winners and losers.
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