It’s the Sharing Economy, Stupid

The rise of companies like Uber and TaskRabbit has revolutionized the way we consume goods and services. How is the sharing economy shaping the future of business?
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Clockwise from top left: TaskRabbit, Gramercy House (featuring residents Jack Amory with Kat Vorotova ’14), District CoWork, Closet Collective, CoHatchery (featuring founder Wendy Xiao Schadeck ’16 with son Tyler).

Photography by Peter Ross (CoHatchery, District Cowork, Gramercy House)

The day before her Business School graduation, Seema Gohil ’13 realized she had nothing to wear to the ceremony. In a panic, she texted her friend Claire Allison “to send me pictures of everything she had in her closet” that Gohil might borrow. Allison’s response: “ ‘I love you, but I am not doing that for you,’” recalls Gohil. “She told me, ‘You’re welcome to come over [and] pick out anything you want. But taking pictures and sending them is a lot of work.’ ”

That night, the two wondered whether that incident had uncovered a business opportunity: maybe they could match up women who had designer pieces sitting unworn in their closets with others who coveted but couldn’t afford them. Thus was born Closet Collective. Borrowers can browse people’s virtual closets to rent that perfect Diane von Furstenberg wrap dress or colorful Chloe sheath for a flat fee of $45 a month — a fraction of the retail price.

Until about a decade ago, the notion of renting your designer dress to a stranger on the Internet might have seemed, at best, a dubious proposition. Now it raises nary an eyebrow. Neither does opening your home via Airbnb to a guest you’ve never met in person or operating your business cheek-by-jowl with half a dozen unrelated enterprises in a co-working space. Closet Collective is simply joining the growing ranks of businesses that are part of the so-called sharing economy, an ever-expanding sector that, according to a December 2015 McKinsey Quarterly report, “looks set to scale new heights over the next decade.”

Seema Gohil ’13, founder of Closet Collective, which enables users to borrow and lend designer pieces from fellow fashion lovers’ closets.

Peter Ross

According to a 2015 PriceWaterhouseCoopers (PwC) study, the sharing economy generates annual global revenues of about $15 billion; by 2025, it is poised to generate revenues of  $335 billion. While sharing-economy businesses pose myriad opportunities for consumers and business owners, they also bring with them enormous challenges and raise questions about everything from customer safety to tax collection to worker compensation. They are issues that are only now beginning to be considered as it becomes apparent that sharing, in some way, shape, or form, will be an increasingly integral part of the economy.

What Exactly Is the Sharing Economy?

The jury is still out on what exactly constitutes a sharing-economy business, and the best way to define the term may be by example: among the best known are Airbnb and Uber. But there are countless others that fulfill highly specific needs, such as Spinlister, a sharing business for high-end sporting equipment, and DogVacay, which matches people wanting a furry friend for a finite duration with dog owners needing short-term pet care.

“The word sharing is a bit misleading,” says David Rogers, a Columbia Business School Executive Education faculty member and author of The Digital Transformation Playbook, who believes the word’s connotations are too warm and fuzzy. “Sharing would imply that the good is held collectively, like a public park, or that customers are sharing their goods and serv­ices freely, like bringing food to a potluck dinner, but, in fact, most of these new-economy businesses involve commercial transactions. You’re almost always talking about a rental, resell, or freelance exchange.”

A better descriptor might be, according to Rogers, a platform economy, “where the firm doesn’t actually create the value itself. Instead, it brings together different kinds of customers — like homeowners and travelers — who exchange value with each other.” In his book, he notes that “Airbnb books 40 million guest nights per year” but “doesn’t own a single rental property.” Closet Collective has 150 virtual closets filled with $1.5 million worth of clothing by 500 designers — almost none of which Gohil and her partner spent capital to purchase or store. Platform businesses, Rogers says, “can allow a startup to grow very fast, without spending capital to buy assets. They also allow the customer’s individual assets — like a home or a car or a designer dress or a few hours of spare time — to be used much more efficiently within a market.”

“‘Sharing’ would imply that the good is held collectively, like a public park, or that customers are sharing their goods and services freely, like bringing food to a potluck dinner, but, in fact, most of these new-economy 
businesses involve commercial transactions.” —David Rogers

Changing Attitudes

The notion of what can be shared continues to expand as consumers become increasingly comfortable sleeping in strangers’ homes, riding in someone else’s car, and even wearing clothes that don’t belong to them.

“Comfort levels change. In the 1990s, everyone was afraid to use their credit card online because of hackers,” says Daniel Hoffer ’07, a founder of Couchsurfing, an early online platform for facilitating homestays for travelers. “Our theory with Couchsurfing was that this idea — which initially seemed crazy — of staying in a stranger’s home would eventually become mainstream.”

A Jimmy Choo bag available from Closet Collective

Hoffer, now a partner at Tandem Capital, a seed fund for tech startups, continues to believe in the benefit of sharing. “I traveled to Sicily in 2004. My Couchsurfing host took me into the hills for a meal with his grandfather, and it was unlike any Italian food that I had eaten at a restaurant,” recalls Hoffer. “It was unique and memorable and a highlight of the trip. There is intrinsic value in the experience. Ultimately, value always drives behavior and purchasing patterns.”

And patterns may be veering away from purchasing. The PwC study finds that of the 44 percent of US consumers familiar with the sharing economy, more than 40 percent agree that owning items feels like a burden. The report also draws on happiness studies that “show that experiences increase contentment far more than purchases do.”

A Matter of Trust

It is perhaps a desire to spend life having such experiences that has made TaskRabbit an enduring sharing-economy business. Founded in 2008, TaskRabbit allows people to monetize their skills and extra time by doing home services such as cleaning or furniture assembly. The company now has 50,000 taskers in 19 markets. “People today wake up every day with more on their lists than they can possibly accomplish,” explains Rob Willey ’12, TaskRabbit’s vice president of marketing. “What they want to do is outsource their chores.”

Customers can be matched with a tasker instantly for an on-demand experience, or schedule in advance, selecting taskers by reading their ratings and reviews. This peer-rating system is one of the hallmarks of the sharing economy, and while most people agree that it is an imperfect system, it is currently the only option, explains Kinshuk Jerath, Class of 1967 Associate Professor of Business in the Marketing Division. “Because of this lack of centralization and full guarantee from the company … the only mechanism we have is ratings,” he says. “Over time the good ones will bubble up and the bad ones will go down. So someone like me, who is risk averse, is likely to let others take the risk first.”

An Uber car

Minimizing risk by refining ratings systems will be the sharing economy’s next frontier, says Hoffer. “I think what’s next for the sharing economy is a more portable trust layer,” which might mean, for instance, that a driver could transfer his Uber ratings to another ride-sharing service, or that a good Airbnb guest could share her positive ratings with Closet Collective. “You’d have a social FICO score that indicates how others perceive you on certain dimensions,” he says. “Variables can be balled up to become a single score, and then individual attributes could also be highlighted, with some similarities to LinkedIn. Many startups have tried to do this, but no one has gotten it right yet.”

Legal and Regulatory Gray Areas

In many ways, peer-to-peer platform businesses operate in a murky legal and regulatory zone because they don’t fit most recognizable models, leaving businesses and governments grappling with many challenges. Safety may be the most prominent issue, and lawmakers are working to increase oversight of ride-sharing and other companies amid reports of assaults and other crimes.

The sharing economy has also created economic impacts being felt not only by traditional sectors, such as the hospitality industry, but also by workers, the housing market, and cash-strapped cities and states. “We’re in a time of disequilibrium,” says Evan Rawley, the Roderick H. Cushman Associate Professor of Business in the Management Division. “We are moving from the old regime to the new, and some of what the big [sharing-economy] companies are doing is taking advantage of these regulatory quirks.”

For instance, until relatively recently, Airbnb guests in most areas did not pay a hotel tax; this is quickly changing as local governments grow wise to how much this has cost them. A 2015 study prepared for the Hotel Association of New York City found that in 2014–15, Airbnb rentals led to a reduction of $226.5 million in federal, state, and local taxes that would have been collected by hotels.

In some cities, Airbnb has also led to the constriction of an already-tight housing market, as buyers snap up apartment buildings with the sole purpose of renting the units on Airbnb. According to a 2016 Penn State University study for the American Hotel and Lodging Association, 30 percent of Airbnb’s revenue comes not from people making extra cash by renting out their homes while they’re away, but from people who act as hosts for at least 360 days a year.

“You now have professional Airbnb hosts buying up buildings and operating them as hotels,” says Raymond Martz ’02, CFO of Pebblebrook Hotel Trust, a hotel real estate investment trust (REIT). “[I might sound] like a ‘sour grapes’ hotel owner, but there are reasons that’s illegal,” says Martz, adding that hotels have to follow strict fire and life safety rules and comply with the Americans with Disabilities Act, which landlords who are buying apartments and renting them on Airbnb do not.

Workers in the Sharing Economy

The sharing economy is sometimes referred to as the “gig economy.” Proponents tout its flexibility and the chances it offers workers to supplement their incomes. Critics argue that it is, in fact, creating overall greater economic insecurity.

Articles have chronicled unsuccessful attempts to make a living entirely in the sharing economy. Some companies have reportedly used TaskRabbit to skirt minimum-wage requirements, and taking on work per project often means workers are earning just a few dollars an hour. Since the workers are contract employees, they don’t receive health and disability insurance or other protections that come with full-time employment and are on their own if they are injured on the job. “The economic upside is that we are creating jobs and tapping into economic efficiencies that were not possible before, but the challenge is that it shifts the social welfare burden further onto the state and onto the individual, rather than onto the employer,” says Rogers.

The sharing economy is sometimes referred to as the “gig economy.” Proponents tout its flexibility and the chances it offers workers to supplement their incomes. Critics argue that it is, in fact, creating overall greater economic insecurity.

The Changing Workplace

Yet, the gig economy is only one facet of the larger story about the changing workplace. The percentage of self-employed workers is climbing, and that, along with technology that makes it possible to run a business with little more than a laptop and a cell phone, has given rise to co-working spaces, which provide freelancers or small-business owners shared office space. Members pay a monthly fee and typically have access to a common working area, Wi-Fi, quiet rooms for making calls, and conference rooms for meetings. There are often extra perks, such as bottomless cups of micro-batch coffee and refrigerators stocked with snacks.

For James Wyman ’16, running his business from the Columbia Startup Lab, based in SoHo at WeWork, one of the country’s largest co-working companies, has been invaluable. The lease-free, ready-to-go space has allowed him to focus efforts — and money — exclusively on creating his home health platform, Pillo. “We don’t have to spend the capital we have buying printers and tables and desks,” he says. “One of the great things about co-working spaces, and the sharing economy in general, is that you can be asset light.”

For some, having somewhere to go is crucial for remaining on task. “It’s easy to think you’re being productive at home, but when you’re around other people and you can soundboard ideas from time to time, that actually keeps you alert and moving to another goal,” explains Neelam Brar ’14, founder of District CoWork, a co-working space in Manhattan’s NoMad neighborhood geared toward entrepreneurs.

Members at District CoWork

Peter Ross

Being productive when you’re self-employed can be especially hard with young children, an issue Wendy Xiao Schadeck ’16 and Susann Friedrich ’16 are working to solve with their startup, CoHatchery, which joins shared childcare with co-working.

The idea for CoHatchery came to Xiao Schadeck when she was interning for a venture capital fund. Workers were allowed to bring in their dogs, and Xiao Schadeck, who was balancing business school, an internship, and motherhood, wondered, “If you can bring your dog to work, why shouldn’t you be able to spend time with your child throughout the day?”

She met Friedrich, who, having worked in consulting, agreed. “I would see a lot of women leave once they entered that family phase of life. I’ve always felt very passionate about the idea of not having to choose between a family and having a career,” says Friedrich.

CoHatchery location in Brooklyn, NY

Peter Ross

The two teamed up, surveying potential users. They took courses with Management Division professors Brendan Burns and Dave Lerner — both experts in entrepreneurship — then did an independent study with adjunct professor Joseph Azrack ’72, who advised them on the project’s real estate aspect.

They launched with a space in Park Slope, offering a daily three-hour childcare shift with day-care providers who run games and projects, while parents happily tap away on their laptops nearby.

For Brar, co-working is about more than simply renting out desk space. “We really actively play the role of community management. It’s not just a matter of ‘Here’s your desk. Here’s your office. Good luck.’ There’s a real engagement intention on our behalf. When you work here, you kind of have little angels working in the background trying to put things together for you,” she says. District, like many other co-working spaces, hosts regular events, including pitch nights and networking dinners.

Neelam Brar ’14, founder of District CoWork (Peter Ross)

Some, like Brar, consider co-working spaces part of the sharing economy. “The fundamental point of a shared economy is that the same product can be used by multiple people to lower the cost for everybody,” she says. Rogers disagrees, comparing co-working companies to gyms or hotels, which lower costs by offering the same asset to multiple customers, rather than to platform businesses such as Uber. Still, he says such spaces help facilitate other aspects of the sharing economy. “The co-working service is perfectly suited to freelance workers piecing together a work week out of various projects secured through platforms like TaskRabbit,” he says, adding, “Co-working companies stand out because they offer a great customer experience — that mix of services, work environment, and networking.”

Networking, says Xiao Schadeck, is especially crucial for parents. “Parenting has a huge sharing component — around sharing information, babysitting groups, nanny sharing. I believe in the philosophy of  ‘It takes a village,’” she says.

From Co-Working to Co-Living

Perhaps it’s not only young children who need villages; the seismic shift in the way people work and live has given rise to ready-made roommate communities that also accommodate the desire to be “asset light.” Over the past couple of years, urban hubs like New York have seen the emergence of co-living spaces — fully furnished and stocked homes, for which a manager takes care of everything from setting up Wi-Fi to buying toilet paper. Rent typically includes all utilities, and the leases are often more flexible than for traditional apartments. Though open to anyone, the homes are mostly geared toward twentysomethings. In many cases, they employ community managers who organize events such as dinners or yoga classes.

“As an entrepreneur, 150 percent of my brain is dedicated to my business, and not so much to shopping for stuff. It feels very freeing to have the minimum necessities.” —Kat Vorotova ’14

The co-living trend has sparked some scorn from people who say it’s a way for young people to avoid learning to live on their own. But Kat Vorotova ’14, who founded the international- food subscription service Try the World and until recently lived in Gramercy House, a co-living space, says that for her, such a situation was ideal. “As an entrepreneur, 150 percent of my brain is dedicated to my business, and not so much to shopping for stuff,” she says. “It feels very freeing to have the minimum necessities.”

In many ways, freedom is the promise of the sharing economy — from possessions, from routine, even from mundane chores. And this freedom is heady. No matter how you define the sharing economy, the excitement around it shows no sign of letting up. But as it becomes more commonplace, it might not even be something that’s worth discussing (or writing about). “If you think about the next generation, they are growing up in an economy where sharing isn’t something that they are talking about as new and innovative, it’s just something that’s part of everyday life,” says Closet Collective’s Gohil. But then again, maybe sharing never was new. “Hundreds of years ago, people grew up sharing things,” adds Gohil. “You lived next door to everybody you knew. The sharing economy is just the concept of villages all over again.”

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