There must be some correlation between how successful tech investors become and just how goddam nice they are. Being well liked gets a venture capitalist or “VC” a good “deal flow,” giving them the chance to pick and choose their investments. With his breezy manner, Jeff Jordan makes you feel like pals catching up over a bottle of Bud even while you’re sat in the immaculate offices of top venture fund Andreessen Horowitz. That is the Silicon Valley way, uncorporate, genial, and modest. And Jordan (I can hear him saying, “Call me Jeff!”) is one of the power players. He was GM of eBay, North America. He has served as President of PayPal. Jordan also floated OpenTable, now worth $2.6 billion, so knows all about business models that rely on increasing utilisation, in the case of OpenTable the “open” unbooked tables themselves. These days, Jordan sits on the boards of Airbnb alongside Alfred Lin and crowdfunding startup Tilt.
Jordan approaches sharing economy investments by looking down what he calls “the balance sheet of people’s lives.” In other words, he is most interested in people’s most valuable assets: real estate, cars, and designer fashion where idling capacity represents the largest unlockable value. For companies that target opportunities high up the balance sheets of our lives, the opportunities are staggering. Airbnb’s 2014 investment round valued the 6-year-old business at several billion dollars more than the InterContinental Hotels Group whose origins stretch back to 1777. Up next: cars. As larger-than-life venture capitalist and investor in car-sharing company Getaround, Shervin Pishevar, notes, “Most cars are only used 8 percent of the time. This is incredible waste happening each and every day across the world.” There may be a business opportunity renting out cheaper items, for example, lawnmowers, but probably not a huge one, not a venture capital-backed one.
All investors like big addressable markets. Three days after Steve Case resigned as Chairman of AOL-Time Warner having pushed through the catastrophic merger, he went for a pizza in Washington with an old AOL colleague, Donn Davis. Case wanted to discuss how they could disrupt industries in the same way that so many startups had disrupted AOL-Time Warner. The next day, Case summoned Davis to his offices. He said he had seen the potential in vacation homes. “It’s a huge industry,” Case told Davis. “It’s an expensive hassle to maintain the houses. There’s gotta be something there.” This was 2003—before anyone had used the term sharing economy. By the end of the year, Case owned 80 percent of Exclusive Resorts, a vacation rental membership platform. Membership grew 100× over the following 3 years. Case and Davis looked down the balance sheet of people’s lives and found cars. In 2005, Case took a majority stake in Flexcar and merged it — more successfully this time — with Zipcar. When Zipcar exited to Avis Budget, Case’s fund pocketed $96 million.
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There is a fundamental reason why many investors like sharing economy businesses: they are marketplaces. On the downside, marketplaces are notoriously hard to build as they require both supply and demand in the right ratio. On the plus side, when they work, they really work. Since buyers want to be where the sellers are and vice versa, marketplaces exhibit “network effects” where the value of the whole increases as it grows. JustPark acquires over 50,000 drivers a month and rising because the more parking spots we have, the more drivers join; and the more drivers join, the more property owners list their parking spots. Once a marketplace is established as the leader in its space, it tends to run away from the competition as the mass market of consumers gravitates towards it. “If it’s not winner takes all,” says David Hornik of August Capital, “it’s winner takes most.” For an investor who spots that future dominant marketplace, the rewards can be immense: they will end up with part of a potentially huge and high-margin business.
Peer-to-peer marketplaces also benefit from a cross-pollination of buyers and sellers. Just as sellers on eBay often start out making a purchase, so hosts on Airbnb often start out as guests. Airbnb’s founding team noted how Parisians visiting New York would frequently become hosts themselves once they returned to Paris. Sometimes, a user would rent out their own apartment while they were on vacation in someone else’s, allowing Airbnb to make double revenue from them. Finally, peer-to-peer marketplaces enjoy low marginal costs. A company selling tangible goods sees its cost base shrink only modestly with economies of scale: when Levi’s sells thousands more jeans a day, each pair costs it less but only up to a point. But new users can be added to an online marketplace at almost zero marginal cost. Of course, becoming an Etsy or Airbnb is easier said than done. There are now, for example, over 30 peer-to-peer car-sharing companies globally. Only a few will emerge as global leaders, perhaps just one.
Venture funding is crucial to this process because a very large amount of capital is normally required to become a dominant player. “It is cheaper than ever to start a business,” as Jeff Jordan told me. “The downside of that is that anyone else can start one too. As a result you have to get big fast and to get big fast you have to raise.” After only 3 years as a venture capitalist, Jordan’s companies have raised over a billion dollars of venture capital. This is the game: investors back the perceived market leader. Their money helps it to grow faster, allowing the company to raise more funding, which fuels more growth. As the company grows, so does the amount of money that it can raise at each funding round, putting it still further ahead of the pack. Meanwhile, other investors fear competing with a company with a large war chest. They start to think of a competitor as merely an acquisition target— not an exit that will get billion-dollar funds reaching for their checkbook.
Being located in the US can help a company to get on this virtuous cycle of growth. The quantity of available capital and high valuations in the US can allow a US-based company to raise more money than the equivalent European business. In 2008, the same year that Airbnb was founded, Stephen Rapoport and Dan Hill founded Crashpadder, a startup that was doing more or less the same as its more celebrated San Francisco counterpart. The London-headquartered company never raised venture capital and was a fraction of the size of Airbnb, which acquired it in 2012. Even had Crashpadder raised finance, it would, in all likelihood, have been an unfair fight: British knives against American guns. The gap is rapidly narrowing. But for credible founding teams, the US remains awash with cheap money by comparison with Europe.
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Fred Wilson, Union Square Ventures
Career-VC Fred Wilson is the investor most associated with marketplaces. He is also arguably the most famous venture capitalist on the planet. Through Wilson’s blog, AVC.com, and his 350,000 Twitter followers (he also put some of the first money into Twitter), he is known as the quintessential marketplace expert. I met Wilson in the offices of his firm Union Square Ventures, high above the Manhattan traffic. Low-key and cordial, Wilson let me in himself, appearing to be the first person in that morning. He had deep rings round his eyes. I liked that. Many a time, I’d gone to meetings at a venture capital firm looking frazzled and sat opposite an immaculate venture capitalist who clearly had far more time than me to get their beauty sleep and fix their wardrobe. ‘How hard do they actually work for their companies?’ I’d sometimes wonder. ‘How much do they really care?’ Sit opposite Fred Wilson and talk to him about startups and you don’t have those concerns. He ended up hijacking the interview for this book and making me pitch JustPark for my life. Despite the rings, Wilson’s eyes were alert. He knows that in tech you can miss things with a blink. Thus he explained how Union Square Ventures ended up missing out on Airbnb:
At that time, Airbnb was a marketplace for air mattresses on the floors of people’s apartments...we couldn’t wrap our heads around air mattresses on living room floors as the next hotel room and did not chase the deal. Others saw the amazing team that we saw, funded them, and the rest is history.
In a Union Square Ventures meeting room, Wilson keeps an Obama- themed cereal box on permanent display. It is one of the thousands that the Airbnb co-founders sold while bootstrapping Airbnb. Wilson put it there as a warning about “the classic mistake that all investors make.” By that, Wilson means focusing on what a company is doing at any one time rather than seeing its potential to grow into something far greater.
Wilson understands better than anyone how to turn a well-funded marketplace into a large and profitable one. “Venture is a very good source of capital for these businesses,” he told me in his measured, gravelly voice, “because if you keep your take rates low and invest in product and engineering you’ll have negative cash flow for a number of years. But eventually, you will get to a scale which allows you to make money.” Wilson recounted how Rob Kalin, the founder of Etsy, once told him, “In a perfect world, we would take no transaction fees and make all our money on advertising.”Wilson explained that Kalin was pointing out that a marketplace should aim to take its transaction fees as low as possible to generate a total take that is higher without effectively taxing the marketplace. “That provides a pricing umbrella,” said Wilson, “and makes it hard for anyone to come in underneath you and compete, and it also turns scale to advantage since value-added services [such as advertising fees] can turn into a lot of money whereas a new entrant can’t possibly make money with them.”
This article was taken from the book "The Business of Sharing".
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