Thursday, April 24, 2014
A Blueprint for Building Billion-Dollar Businesses
What is the “sharing economy?” For me, it’s simply connecting latent supply and demand and adding value in the processes. For example, Uber has built an amazing service connecting riders with drivers (both professional and personal), and in the process has built a multi-billion-dollar business. Meanwhile,Airbnb has built a shared economy amongst vacation renters and housing suppliers, andAngelList /Crowdfunder have built a shared economy of investors and private companies looking for funding. So how can we all tap into this massive trend? Here’s a blueprint for building your own billion-dollar business via the sharing economy (experience and capital sold separately).
Step 1: Identify Services (and Products) We All Regularly Use
To leverage the shared economy you need to have “fluidity.” This simply means that if you’re going to monetize brokering supply and demand, there has to be enough demand to tap into. People take rides and taxis every day, there is a trillion dollar market for vacation rentals and hotel rooms, and they’re millions of people looking for loans for their businesses; this is, in part, why Uber, Airbnb and LendingClub are so successful. They went after markets with huge demand.
Step 2: Determine If/Where There is Latent Supply
In many cases, the sharing economy creates a new source of supply to meet a current demand. For example, DogVacay helps dog owners find dog sitters. Traditionally, you would put your pet in a kennel, but their model leverages everyday pet-lovers who are willing to open up their home, and in the process can earn $1000+ a month. In this case there was latent supply (pet-friendly homeowners), who were galvanized and matched with the demand for the services they could provide (reliable pet sitting).
Step 3: Technology Should Meaningfully Improve the Process
It’s not enough just to match the supply and demand, you have to add value. For example, Uber adds the value of being able to hail a ride through your phone, track its location and pay without cash or credit cards. This convenience increases people’s incentive to use the service. In other cases, like Amazon Mechanical Turk, the technology platform provides access to services that we might otherwise not be able to access. Mechanical Turk connects us to people from across the world who will do any number of micro-tasks for micro-payments: data entry, content curation, bug testing, etc. In this case the technology platform helps us complete tasks we otherwise couldn’t.
Step 4: The Key to Attracting the Supply and Demand
These businesses all face the chicken-and-egg dilemma of how to simultaneously scale supply and demand. Meaning, how do you get customers for services that don’t exist, and how do you encourage people to offer these services before the customers exist? One of the ways to solve this is to have a mechanism to scale one side of the equation quickly. For example, Chegg provides a platform for students to buy and sell their textbooks. In their case, it’s easy to build the supply because there is a group of debt-laden college students looking for any way to make some extra cash (and get rid of old textbooks). When executed best, the supply creates new and excess demand. People are now more likely to get their clothes dry-cleaned with services like Wash.io because of the ease of the experience and transparency in pricing.
Step 5: The Unit Economics and Margins Must Work
Sharing economy businesses can have massive margins, but not all do. Many of these businesses struggle because the costs of customer acquisition, technology and operating expenses eat into the revenue generated from making the match. TaskRabbit evolved from focusing on immediate tasks like errands and pick-ups to services like home cleaning and improvement, presumably because the margins of each connection allow for greater profitability than small errands do. Airbnb is dealing with average purchases of hundreds of dollars apiece, so there’s flexibility to charge enough in fees to make the connection.
Step 6: Scale to Millions of Customers
Like any consumer billion-dollar business, lots of people will need to use your service. How do you know if your idea is prepared to scale? Go back to step one: sizing demand. If you can find a use case with the potential to keep increasing both supply and demand (without a significant incremental cost), and the potential for that supply and demand is limitless, then you’ve cracked the formula for building your own billion-dollar business.