The sharing economy has the wind in its sails, that’s for sure. The impact of the “collaborative consumption” phenomenon now ripples far beyond the world of techies, entrepreneurs, and venture capitalists. However, before you eagerly launch the next “AirBnB for drills, for tents, or for shoe racks” (and don’t you even whisper the word ‘useless’ around here), consider the following: it might be wiser to play it cool. After all, sharing economy start ups are first and foremost businesses just like any other. The runaway successes of companies like Bon Coin, AirBnB, or BlaBlaCar - which together have generated tens or even hundreds of millions of euros in revenue - hide the much harsher reality facing the majority of sharing economy company founders. Even in the midst of an eighteen month media hype, one thing is clear: more and more sharing economy ventures are failing. I speak from experience: at the end of 2011, I embarked on the adventure of starting my own platform, Cup of Teach, an online marketplace for peer-to-peer lessons. In March of 2014, I gave up that fight. There are a number of reasons why we failed, but looking back after a year, several of them appear to be quite specific to the sharing economy. Let’s take a moment to review these, shall we?

Would you seriously ever demand four euros from your neighbor for helping him install his curtain rods?

Even if the idea sounded great on paper, I never once believed there could actually be a market (read: a profitable business model) for communal washing machines, nor do I believe there would be one for camping in someone’s yard. As for the peer-to-peer lending of drills, jigsaws, or lawnmowers… Would you seriously ever demand four euros from your neighbor for helping him install his curtain rods?

Basically, AirBnB is like the iPhone: there’s an app for everything. But should there be? Perhaps not

Frequently, sharing economy startups define themselves as follows: “We’re the AirBnB (or the Uber) of education! The AirBnB of pools! The AirBnB of arts and crafts! AirBnB for animals!”. Basically, AirBnB is like the iPhone: there’s an app for everything. But should there be? Perhaps not. Let’s take a look at the facts.

1 - Simply put, Henry Ford, Steve Jobs, and Mark Zuckerberg are in different league from shared kitchen appliances

Henry Ford said, “if I had asked people what they wanted, they would have said faster horses.” The dazzling triumphs of visionaries and their game-changing innovations, many of which seemed to come out of nowhere, make it easy to forget that the ultimate success of an idea lies in its ability to address a real and unmet need. As such, the iPhone, Facebook, Twitter - all of these classic success stories - are the exceptions even among exceptions, rather than the rule. These companies created a supply where no one even anticipated a demand, and to achieve something like that, you need more than just a great idea. You need perfect implementation, capital, sacrifice, and luck; in short, it’s hard! So regarding the sharing of plungers…  

2 - “I promise, it’ll just take some time to educate the market…”

I said this so often and with such conviction while working on Cup of Teach that it nearly killed me when I heard the same phrase uttered by another entrepreneur a few days ago. If you have to “educate the market,” that means the market does not exist, or at least not yet. It’s easy to convince yourself you’re one step ahead of the crowd, and that you might nab the first-mover advantage. Or, perhaps, that you’re meeting a need not yet realized by the user population. But that possibility even exists - and it’s far from certain - “educating the market” entails some heavy-duty spending on marketing and communication. Even if they say they’re ready to eat pasta for the next eight years, rarely do entrepreneurs actually think in terms of strategy, financing, user recruitment costs, repeat business, or returns on investment. I might as well tell you now that Google Adwords is expensive - especially when it doesn’t bring in as much money as it costs.

Walking around with blinders on but thinking himself a visionary, the naive entrepreneur fantasizes about his genius idea.

People will love it, and immediately tell all of their friends! Together they will form a beautiful commune where everyone shares things instead of owning them (as Rifkin predicted), but also where everyone will use MY start up to access and pay for that wonderful lifestyle!

3 - “Share, but what for?”

In what I like to call the “humanist marketing” of collaborative platforms, buzzwords grow like fungus: “meeting,” “sharing,” “passion,” “responsible consumption,” “community,” “social,” “collaborative,” etc. Some have more weight than others. As a consumer, when buying a good or service, there are three criteria that matter in choosing where to make that transaction: price, convenience, and safety (in a broad sense). ‘Creating social relationships’ is not a main selling point, nor is respect for the environment. Those are just perks. It’s not that they don’t matter, but they’re just not enough by themselves. Would you regularly buy fair trade coffee if it tasted bad? Or if it costs three times as much? In other words, the successes of AirBnB and BlaBlaCar lie above all else in a clear value proposition in response to an identified need. BlaBlaCar makes you money as a driver, and is less expensive than a train ticket or flight per passenger. AirBnB is a source of revenue for the host, as well as a quality alternative to a hotel for the traveler. What else? While we’re in constant need of accommodation and transportation, we rarely need to stick a screw in the wall.

That’s why there’s a market potential for AirBnB and BlaBlaCar, and definitely not for drill rentals. The “community aspect” of both proposed services is real, but secondary.

4 : “Our business model is totally simple…”

“We take a 15% commission on all transactions. We know it’ll take some time to reach a critical mass, so in the meantime we’ll also operate in a B2B model.” Usually favored by sharing economy companies, the viability of a transactional business model - in which the platform levies a commision on each exchange - is based on two key factors: volume or big transaction values. Having both is a plus! Advertising, subscription fees, freemium (i.e. “it’s free for now but we will see”), or B2B are alternatives to this model, but sooner or later all must confront the same problems of volume, usage, and labor costs per man hour. When I created my first company, I thought about the following question: “do want to make an impact, or make millions?” Frankly, I wanted both. I quickly realized that the demands of the business and the social goals of a typical sharing economy entrepreneur are pretty inherently opposed; the created value of a company can never benefit all stakeholders equally. Schematically, you see the following divide:

• Business Aims: idea product development → recruitment / creation of the community → monetization and fundraising
• Social Aims: identifying a need → creating a community → engineering your solution in response to need → iteration → value sharing

5 - “…what funding?

Angel investors and venture capitalists are willing to make risky investments with the hope of achieving long term profitability. They’re neither sponsors nor philanthropists. Frankly, the social impact of the sharing economy or collaborative consumption is not their problem. Try to explain to an investor that you want to create relationships between people, and he’ll ask you how much they’d pay. These people think exclusively in capital letters: ROI, BFR, EBITDA, and IPO. You don’t raise capital without an excellent market approach, a real problem to address, a clear business strategy (this also includes a long term vision), and an excel spreadsheet that projects your investor becoming a millionaire by September 2018. That’s just how it goes.

6 : Is all hope lost??

What I’m trying to get across with all this is that even a great idea does not necessarily translate to a financially viable business. This is an important consideration, especially since the majority of collaborative services are profoundly based on civic awareness, and thus, deserve to exist.

But when profitability seems unlikely in the eyes of an investor, perhaps that’s when local authorities or municipalities should step in and take a different approach.

Partnerships, incubation, experimentation, and social impact measurement: I think it’s time to work with curious, innovative cities or municipalities on these issues. Some cities are already at the forefront of this, led by Seoul, South Korea (take a look at this article in Shareable). Barcelona, Paris, and Berlin are also home to some interesting initiatives, and still others may benefit from checking out the first Sharitories Toolkit. And if you’re wondering where one might find the public funds to finance these new investments, I’ve got a few ideas there too. Stop building unnecessary roundabouts to the tune of three million euros… But that’s another story.   This article was originally writen in french, translated with love by Emily Hong