For Sharing Economy Start-Ups, a New, Social Currency

As the sharing economy concept has emerged, fans have lauded the utilitarian nature of maximizing ownership of a good by splitting its use amongst several people.
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Last weekend I decided to rent a bike.

My options were to go to the neighborhood rental shop and pay $60 for the day, plus the cost of obtaining a helmet and lock elsewhere, or, to rent off Spinlister. Spinlister is a NYC-based start-up that lets you rent someone else's bike for the day; the bikes pop up on a search map based on their proximity to you, and generally go for between $10 and $30 per day.

My choice was clear, and I successfully rented a cruiser (and lock) for $15 from a lovely college student who lived three blocks from my Manhattan apartment. What wasn't clear to me was the college student's motivation: why did she, along with others offering bikes on Spinlister, price her bike four times below market value? Sure, she had no overhead in the form of a shop and insurance, and maybe her bike wasn't as nice as what I could have gotten at a professional outfit. But still, even for a college student, $15 is hardly a windfall for the hassle of coordinating pick-up and drop-off, making sure to be around at the times I wanted to get the bike, explaining how the damn thing worked (I had never ridden a fixed gear before!)... not to mention depriving herself of her primary mode of transportation for the whole day. And yet, to this woman the economics seemed worth it.

As the sharing economy concept has emerged, fans have lauded the utilitarian nature of maximizing ownership of a good by splitting its use amongst several people. A recent economist article claims that the lack of transaction costs is the precise reason why sharing economy start-ups thrive.

But the Spinlister example shows that, while transaction costs of a peer to peer market may be lower than in a traditional business model, they are far from insignificant. So, if the hard economics of a sharing economy start-up don't always make sense, why do people engage?

My own experience with Airbnb, through which I occasionally rent out the couch in my living room for $60 a night has taught me that the answer is two-fold: the promise of social interaction, and the ability to support a cool idea.

As to the first, I find myself screening prospective couch-renters by a simple metric: "does this person seem like someone I'd like to hang out with?" If I were a hotel, that wouldn't be kosher; hell, if I leave town for a weekend and rent out my entire apartment, for substantially more than $60, personality never enters the calculus of whether I'll accept a renter's money. But for $60 (which comes to roughly $15 per hour if you count the time it takes to clean my apartment, wash the sheets before and after the guest, coordinate pickup and drop-off... in other words, a whole lot less than I make as an attorney), you better be interesting and offer me the fringe benefit of teaching me something new, giving me a new perspective or at least entertaining me with some stories while you lounge in my living room. I would venture that for the college student, the social aspect of Spinlister is at least part of the draw as well.

The second part of why I rent on Airbnb is that I think it's a cool concept. I'm glad it exists and I want to support it. I've used Airbnb abroad in Argentina and Brazil, and am willing to operate at a bit of a loss if it means Airbnb will stick around and others like it will spring up. Again, I know part of the reason I and others rent over Spinlister, even on occasions when it's not convenient, is for the sake of supporting an interesting, entrepreneurial idea.

As Jeremiah Owyang, an industry analyst at Altimeter Group, described to me recently, technology is an enabler of the sharing economy trend, "but the economics and social aspects are the drivers. The social driver is the mindset of sustainability, and an offshoot is also meeting new people." So while most collaborative consumption literature concentrates on the hard economics of why it makes sense to rent, not own, a good you use only occasionally, it seems that soft factors - sustainability, social interaction, citizenship - are at least as important a factor for start-ups like Lyft , Vayable and Task Rabbit.

The real question then is, do these start-ups, and others like them, knowingly rely on these intangible, soft factors for their success? That question begs others. Is the willingness of participants to price themselves below the market essential to the success of a start-up, and in fact a planned part of its strategy? Is hard currency knowingly being subbed out for, or augmented by a soft social currency, measured in new friendships and facebook likes? And, inevitably, will the flood of VC money that has recently poured into sharing economy start-ups render them impersonal, rid them of their je ne sais quoi, and therefore rob them of their success?

As to whether sharing economy start-ups laud soft factors on purpose, it's telling that many advertise "cool people" as one of their selling points. For example, Task Rabbit's slogan is "Task & Errand Service by Awesome, Trustworthy People" and Spinlister's is, "Rent Bikes from Awesome People." Lyft's is "your friend with a car" and co-founder John Zimmer has expressly stated that Lyft screens for "aspirational, friendly people" to be its users. In each of these cases, the "awesomeness" of the provider doesn't seem like the primary benefit of a service that is at first blush utilitarian. What do I care about the personality of the person whose bike or car I'm renting for the day? And yet these sites aggressively tout the merits of users in their messaging.

It's also telling that some industry insiders are already bemoaning the downfall of the sharing economy because the flood of VC money and the meteoric rise of sites like Airbnb is taking away the precise social aspect that I'm describing. In a recently penned post on Pando Daily, Neal Gorenflo, co-founder of Shareable magazine, writes that "as collaborative consumption goes mainstream, it risks losing the very thing that attracted people in the first place, the unique and even transformative social experiences made possible when you interact with helpful strangers. With this potential loss goes an important part of the positive impact, and a straight-up competitive advantage worthy of any Harvard MBA's lust."

The start-up community's outrage at the recent acquisition of ZipCar by Avis (and the ZipCar CEOs abrupt exit just hours after the acquisition) points to the fact that despite the hard utilitarian bent of sharing economy start-ups, soft factors matter. Under that theory, the ZipCar/Avis deal can make sense on paper, but if the culture that made Gen Y urbanites gravitate to Zipcar is flushed, the company will fail.

Ironically, Gorenflo offers that "a rule of thumb on Wall Street is when national magazines discover a trend, the trend has peaked". Perhaps I've recognized this trend only as it has started to die. The real importance of the soft factors that I, at least, find so appealing in sharing economy start-ups will be tested by the entry of VC money and mainstream companies like Avis. As these players start crowding and depersonalizing the sharing economy space, it remains to be seen whether the model can persist.

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