The Sharing Economy – Changing the World

Have you ever sat around trying to think of an idea that would make you rich? It always seems so simple after someone else comes up with it. Then we all scratch our heads and ask ourselves, “Why didn’t I think of that?” One such idea in the sharing economy was developing an app that connects people who need rides with people who want to give rides. That clearly did not seem like an idea that would turn into a $50 billion company over the course of five years, but that’s exactly what happened.

If you don’t know what I am talking about, you probably think “uber” is still an adjective meaning excessive or extreme. Uber (the ride sharing company) is only extreme in the amount of money it has raised from investors, the speed at which it has expanded, its ambition, and how few employees it has.

How Uber works:

Uber is simple to use and about half the price of a taxi. The drivers are not employees. They are independent contractors who do not have scheduled hours. When drivers want to work, they open the app on their phones and click “go online,” which tells the company they are available to accept rides. People who need rides open the app on their phones. The app knows exactly where they are and instantly provides an estimate of how long it will take to get picked up (at my current location, the estimate is two minutes). The closest driver who is “online” gets the ride and his phone starts beeping. The driver clicks to accept the ride and then driver and passenger can communicate via text message or cell phone in case they have trouble finding each other. The passenger pays for the ride through the app using a debit or credit card (cash is not accepted, and tips are not expected). The company keeps a 20% commission and forwards 80% of the fare to the driver.

Drivers are required to keep clean, well-maintained cars and be courteous and professional. The passenger and driver are both prompted to leave an evaluation at the ride’s conclusion. Drivers with low ratings will be kicked out of the system or receive fewer assignments. As a result, drivers may offer a bottle of water or have an extra cell phone charger for passengers to use to improve their ratings. Passengers also get ratings. So if they are jerks, drivers may pass on them the next time they need a ride.

The company now operates in 58 countries and over 300 cities. The number of drivers has been doubling every 6 months so that there were over 160,000 Uber drivers at the end of last year.

Poster child for the sharing economy:

What makes Uber interesting is it is the poster child for the sharing economy. The sharing economy is the use of technology to empower people to sell, share, and/or reuse excess capacity in goods and services. Another example includes AirBNB, which enables homeowners to rent out their home when they are out of town.

In theory, the efficiencies created by the sharing economy business models improve our standard of living. However, there are always winners and losers. The taxi cabs (and their owners and unions), for example, are not big fans of Uber. Venture capitalists, on the other hand, can’t throw money at the company fast enough. The company has raised $2.8 billion so far and it is in the process of raising more money at a valuation of around $50 billion. To give you an idea of how much money that is, $50 billion is a higher valuation than 80% of the companies in the S&P 500. Many of those companies have been around for 50 years, have tens of thousands of employees, buildings, equipment, patents, etc. So what makes Uber so attractive to investors? It is a high margin, low-risk business, with few employees. As famous technology investor, Marc Andreessen put it, “Uber is software that eats taxis.” Hmm…why didn’t I think of that?