The sharing economy and profiting from what others own

The start-up darling this week clearly has to be Airbnb with their recently announced valuation of US$10 billion. This puts them ahead of international hotel chains Hyatt (worth $8.4 billion) and Wyndham Hotel Group ($9.3 billion).

Airbnb’s founders are a growing group of entrepreneurs profiting from the concept of the sharing economy.

Simply put, they are businesses that use technology to disrupt an existing business model by leveraging or using what others have to create a profitable business in a similar fashion.

Airbnb has grown into a full-blown hospitality brand without owning any properties and most importantly, any large overhead cost that is associated with running a hotel or rental services. Their employees list include engineers, developers, designers, marketing and community leads as opposed to most hotel chains which includes chambermaids, servers, concierge, front desk staff and etc. Uber, other famous alumni of the sharing economy, runs one of the world’s largest transportation services without owning any car fleet of their own.

To build a business around the sharing economy is a dream for many entrepreneurs. It means doing more with less. In Airbnb’s scenario, it has grown to 600,000 listings in 190 countries on the backs of other people’s properties. How could any traditional hotel or real estate owners compete with that?

As an investor, Airbnb is very attractive. They have low overhead but can operate on a global scale without much investment. It escapes many rules and regulations applicable to traditional businesses. It does not have to pay hefty real estate taxes because of its business model and governments have yet to react fast enough to the concept of the sharing economy.

But creating a business out of what others own is not an easy task. You have less control over quality and customer service management. Airbnb have limited control of how the apartment will look when you arrive and if all the amenities as stated in the terms will be provided. The process may present many hiccups for the renter and rentee causing unhappy customers on both ends. Worst of all, bad PR press about trashed apartments or unwittingly renting out your apartment for a mass orgy party!

With this new round of funding, many speculate that Airbnb will use the funds to beef up the end to end process of their network, thus allowing for it to compete with some of the top hospitality brands.

This new round of valuation for Airbnb may indicate that it is being accepted as a mainstream business able to compete on par with the top hospitality brand or it may be the sharing economy fever that is spreading around the VCs in Silicon Valley. Only time will tell.

This article first appeared on Linkedin on Mar 22, 2014.