Are “neighborhoods of trust” the solution for startups in the sharing economy?
rom issues with safety to problems with scaling, startups in the sharing economy have a hard time staying afloat. We take a look at the problems posed by this business model using the story of Berlin-based startup, Jaspr Trades.
The sharing economy has, in recent years, been enjoying a lot of attention. But as with many of these buzzwords, the term appears to elude definition.
Mostly identified as an economic model based on the peer-to-peer sharing of goods and services, the sharing economy can involve loaning gardening tools to someone in your local neighborhood, to hailing a cab through a company like Uber.
Statistics from 2018 show that while the sharing economy was valued at $14 billion in 2015, it will be worth $335 billion by 2025 – an indicator that consumers are becoming more attuned to the idea of participating in these kinds of transactions over the internet.
But among the perks of the sharing economy are issues with raising capital and creating liquidity on both local and global scales.
While it’s true that eight percent of startups fail within their first three years of business due to common problems concerning funding and inadequate market research, there are challenges unique to the sharing economy that make it difficult for companies to stay afloat.
Using the story of Berlin-based startup Jaspr Trades, we take a look at the current problems posed by the sharing economy..
The story of Jaspr Trades
Jaspr Trades was a digital peer-to-peer trading platform that combined old-school bartering with modern technology. People could trade their talents and unneeded valuables, cash-free, with the people in their local environment.
“I came up with the core technology for Jaspr Trades as my Master's thesis. I'd always dreamed about doing it,” cofounder Noel Wigdor told Startup Guide. After meeting his cofounders Vitalii Zurian and Steve Duncan at Babbel, an online language platform, they began building the prototype on evenings and weekends. They then quit their jobs and the company was founded in September 2016.
Conceptually (and, to an extent, in practice), Jaspr Trades worked well. Noel recalls how the platform brought the best out of its users. People could trade anything, from photography services to massages, espresso machines and Bluetooth speaker sets.
“People would trade tons of homemade food, and it was like it became a currency. I once went an entire week eating only through Jaspr from different cuisines everyday.”
But where the platform excelled in bringing the “right kind of people together,” it lacked the ability to raise enough money, according to Noel.
“With Jaspr, the business model works with scale, so you need to get a huge number of people using it before you’re going to start being profitable,” Noel says, adding that insofar as they had to “eat and clothe” themselves, they knew that it was unlikely they were going to be able to raise enough capital to keep the company afloat.
Jaspr Trades eventually disbanded. The problem with the company was not, however, that it didn’t work but that it was “extremely difficult, if not impossible, to raise money for it,” Noel says.
Creating a sustainable business model
According to Joerg Rheinboldt, Managing Director at APX Axel Springer Porsche (APX), a company’s ability to access funding, and consequently scale their idea, comes down to their long-term business plan. Investors are often looking for a model that already has a clear strategy for expansion, but it seems that many companies are unable to produce this at the start of their journey.
People would trade tons of homemade food and it was like it became a currency. I once went an entire week eating only through Jaspr from different cuisines everyday.
“At APX, we always look at the micro and the macro dimension of the business model, and it's usually very tricky to come up with a sustainable business model in the sharing economy,” Joerg says. “It has not so much to do with investors being able to invest, it's more the founders being able to create a business model that works, on a small and large scale.”
In the case of Jaspr Trades, the amount of capital needed to make their idea profitable far outweighed their capacity to raise it, according to the founders themselves.
Noel found that much of their difficulty sprung from being unable to attract the interest of investors in Germany: “I found that German investors like to invest in what I called ‘laundromats.’ It’s all about low risk and a very clear path to revenue and profit,” he says.
But according to Joerg, investors aren’t necessarily dissuaded from investing in a company that has a higher level of risk. In fact, investors welcome a “good balance of risk and opportunity,” he says. What matters is having some idea of how your company can grow.
“Understanding growth patterns is key for startups in the sharing economy, and I think that you need to find growth to be successful,” Joerg says.
Sanctions and safety issues
As the sharing economy has grown from a movement at the fringes of society to a more dominant economic force, issues of safety and regulation have been brought to the forefront.
“Making transactions safe and getting unit economics to make sense” are, according to Joerg, the largest obstacles to overcome as a startup in the sharing economy.
In recent media, sharing economy giants such as Airbnb and Uber have been held under scrutiny for not complying with regulations, with many countries imposing sanctions on their activity. Uber, for example, was stripped of its license in September 2017 by Transport for London in response to claims that the ride-hailing company wasn’t doing enough to regulate its drivers or comply with transportation law.
Authorities in Berlin have similarly tried to crack down on Airbnb usage – initiating hefty fines for users who rent out entire properties rather than single rooms – in order to maintain affordable housing prices for the city’s permanent residents.
I found that German investors like to invest in what I called ‘laundromats.' It’s all about low risk and a very clear path to revenue and profit.
As sharing in this way is still a relatively new concept to society, many companies still operate within legal gray areas. Existing laws are still catching up on how these businesses work.
Creating neighborhoods of trust on a wide scale
Aside from problems with legislation and legality is the primal issue of trust. For sharing platforms to work, individuals have to have faith that those on either side of the transaction will keep their word.
Recent statistics from the US suggest that there has been a growth in the borrowing or renting of items from local people. A survey from 2018 conducted by Statista indicates that 83 percent of respondents are familiar with at least one sharing economy service.
Neighborhood sharing platforms such as Peerby, which was featured in the New York Times as an “extension of the successful Airbnb, Uber and Lyft model, but for household items,” have been successful because they have been able to cultivate networks of trust between people in the same vicinity.
But while people in the US are opening their toolboxes, houses and garages to trade and lend items to their peers in the local community, the “appetite” for these kinds of platforms in Europe is still much lower, according to Noel.
According to Joerg, replicating neighborhood trust networks on a wide scale could be the solution for companies struggling to scale.
“Creating these neighborhoods of trust has to be in the middle of society, I think, and not at the fringes,” Joerg says. “Once people are online, and they learn that they can make these transactions in a safe, low-risk way, then the sharing economy will grow.”
Creating products for everyday people
While geography and timing may still be an issue for sharing economy startups, companies are also affected by problems that are universal to business owners, namely, producing products that customers actually want.
“I think many startups are tackling [the sharing economy] from the wrong angle. Everyone I've met so far wants to create a sharing economy for a very young audience, and the things they are supposed to share, they don't need,” Joerg says.
It’s no secret that Berlin is one of the ‘hipster’ capitals of the world, and companies that cater to this demographic arguably do quite well. But according to Joerg, the sharing economy is not only for the young and idiosyncratic. Companies should focus on products for everyday people, and “not just hipsters in Neukölln,” he says.
Creating these neighborhoods of trust has to be in the middle of society and not at the fringes.
In terms of what investors want from startups, Joerg harks back to the imperative point at hand: having a deep understanding of how your company can grow on a large scale.
“As investors, we look for a good understanding of growth patterns, how growth and liquidity actually work, and an interesting approach to becoming mass market,” he says. “And mass market sometimes means ‘not so cool.’”
Opening up the sharing economy to a universal audience could well be the medicine for startups that are struggling to scale. Individuals with everyday concerns constitute the largest sector of the market and in terms of probability, targeting this group ensures you are reaching more people.
“It’s not the hipster target group, it’s normal people with their normal issues and their normal problems that companies should be looking at,” Joerg says.
The future of the sharing economy
A question not many people seem able to answer is, “What’s next for the sharing economy?”
While Jaspr Trades struggled to scale – either as a victim of bad timing or a market that isn’t quite primed for sharing – its cofounder seemed to arrive at the same conclusion as Joerg. Companies in any industry just need a worthwhile product.
There are so many industries that “could benefit from an entrepreneurial standpoint – a spirit of trying to solve a problem,” Noel says, adding that while the philosophy of “all you need is an idea and a spirit” to start a company is encouraging, it should really start with “all you need is a profitable business idea.”
But as cashless transactions over the internet are becoming more readily available, and more widely accepted, in industries outside the sharing economy, consumers are slowly changing their attitudes towards the way they interact with one another. There is, according to Joerg and Noel, a future for sharing yet.
Main photo: Noel Wigdor, Vitalii Zurian and Steve Duncan, cofounders from Jaspr Trades, featured in Startup Guide Berlin.