The inexorable rise of the sharing economy in 2018

The sharing economy shows no signs of slowing down. Roland Tam, co-founder of space sharing marketplace ‘Spacer’, shares his predictions for the sharing economy in 2018.

A recent paper commissioned by the NSW Department of Finance, Services and Innovation reported that the collaborative economy – or share economy – grew by $1b or 68% from 2014/15 to 2015/16 in NSW alone.

Impressive enough, these numbers are dwarfed by the figures thrown around globally, with Bank of America Merrill Lynch now valuing the worldwide sharing economy at $250b and forecasting it to eventually be worth $2 trillion. 10 years since AirBnB was conceived on an air mattress in a lounge room, it’s fair to say, the sharing economy has reached critical mass.

Locally, the sector keeps going from strength to strength, with the number of participants, and verticals continuing to mushroom. Governments are scrambling to keep pace with technological change and define its role in the changing future of work, movement, services and income.

As we do at this time of year, we look back at the events that have made news over the past 12 months and look into our crystal ball with our predictions for the sharing economy in 2018.

Trend 1: More public and private capital will flow into the sector as investors value these companies better, however this will not necessarily come from traditional sources such as venture capitalists.

One of the interesting trends in 2017 was not that the burgeoning sector was able to attract large capital inflows, but the sources of that capital. Across the board, we have seen market participants raise higher licks of capital from strategics keen to be a part of, rather than a casualty of changing online consumer behaviours.

In October, Airtasker announced that it had raised $33m to expand into the UK, underpinned by a major investment from Seven West Group. Around the same time, it’s US counterpart Taskrabbit announced it had been acquired by retail giant IKEA, a strategic move on IKEA’s behalf publicly stated to improve it’s digital capabilities to compete with the likes of Amazon.

Across other verticals, we have witnessed the likes of Camplify (Apollo Motor Homes), Cars Next Door (Caltex), Collaborate (Aon, RACQ), Hipages (Newscorp), Spacely (REA) and Madpaws (Qantas) all take strategic partners onto their register.

In a competitive market for capital, founders are potentially happy to accept lower entry valuations for the right partner, understanding the strategic value that corporates bring. For the platforms, a partner with brand, customers and national reach ramps up exposure exponentially, which without big marketing budgets would otherwise be unreachable in a reasonable timeframe.

So, what’s in it for the corporate partner? Other than ensuring they have a ‘seat at the table’, equity participation can give access to the customer and market data and demand insights less agile organisations may lack.

Often there is a clear win-win commercial opportunity that comes out of the partnership; and in some instances equity may take the form of PIK – payment in kind – rather than 100% cash. Depending on the deal, it may also provide a first right or call option to acquire the business at a later point should the opportunity present.

We predict that 2018 will see increased investment from corporates in the sector, with a couple of outright acquisitions facilitating exits for founding partners.

Trend 2: Consolidation will continue, as regional markets struggle to support multiple competitors in competitive verticals.

In any vertical today, it’s likely that there are multiple ‘Airbnbs for [insert here]’ in that segment. Whilst the barriers to entry to build a platform are low, the barriers to entry to build a platform of scale and geographic reach supported by excellent customer service are high. The Australian market is not large enough, nor is there enough early stage capital to support the number of marketplace platforms operating today.

As we are already witnessing in the large but crowded food delivery space, heavy competition will continue to eat away at operating margins until consolidation and Darwinism will create a natural monopoly or duopoly. Share economy markets lend themselves to a ‘winner takes all’ mentality, in which winning the brand game to be consumer’s ‘top of mind’ is everything.

In relatively small markets such as Australia, we are seeing natural consolidation of a dominant brand beginning to occur. For example, Spacer, a relatively new entrant I helped to co-found, has already completed 4 acquisitions since 2016 and, in concert with its Parkhound subsidiary, is already a major player in the storage and vehicle parking sectors, linking people with belongings to store or vehicles to park with others with the space to accommodate them.

Zoom2U, a participant in the highly competitive last mile courier space, has similarly completed multiple small acquisitions to generate scale and geographic presence in a short period of time. In the world of kill or be killed, access to capital and deal capability is a success factor for these businesses.

It is our belief that in a few years’ time, each sharing vertical will be dominated by a couple of brands, similar to the way online real estate is divided between realestate.com.au and domain.com.au.

We predict that 2018 will see heightened M&A activity in the sector, as smaller operators seek exits and larger brands seek to scale quickly and efficiently to dominate their segments.

Trend 3: Regulators are scrambling to know what to do and are being caught between supporting innovation and the interests of powerful lobbies

“After three public hearings, 212 submissions and a parliamentary report the NSW government has announced it is not yet ready to make a decision about how to regulate short-term holiday letting through online booking services like Airbnb and Stayz.”

This quote, from the government news website, perfectly sums up government indecision on its role in the sharing economy and the politically charged landscape of mediating between what is generally a commercially popular and publicly beneficial service, with the competing lobbies of strata managers and homestay operators who currently operate within a regulatory licensing regime.

Without wanting to get into a specific debate around the homestay market, its does appear likely that the outcome of the NSW government’s ‘crackdown’ on short term accommodation will result in an economic leakage, being a cost impost on hosts – which will ultimately be passed onto renters – that use the platforms.

Similar to the ‘Uber’ tax paid to make good the local taxi industry this cost may comprise of a ‘nuisance tax’ for Airbnb hosts to be licenced, higher strata costs or limitations on rental days, all of which add friction to the model. We are seeing similar debate occur around trades, servicing and contracting models and its impact on historically established labour laws.

As market participants, we continue to get mixed messages out of our leaders, and differing rulings out of each state, all of which bring confusion and uncertainty. Financial markets hate uncertainty, and the lack of clarity does create friction to funds flowing into the sector. This also appears to contradict the overarching rhetoric of the Federal government’s innovation and entrepreneurship agenda.

Our view is that local authorities will continue to be indecisive in 2018 around how to address change, and as a result we will see legal issues dealt with in the courts, rather than by the lawmakers. Ultimately this will force governments to form a position and create greater certainty for the industry moving forward.

The share economy is a juggernaut that shows no signs of slowing down as acceptance of technology increases and trust and verification of users becomes more sophisticated. In an instantaneous on-demand world, sharing platforms fulfil a critical function, and this will only become more and more important throughout 2018 and beyond.