An Expert’s View of Investing in the Sharing Economy

You’ve likely heard a thing or two about “the sharing economy.”

The phrase describes how society is becoming more efficient at using underutilized assets. Web-based apps are making capital assets available online and easily rentable with nothing more than a smartphone. Uber has used this approach to build a $60 billion empire that’s rewriting the rules of transportation. Airbnb is doing the same for lodging and hospitality.

But the sharing economy will have much larger implications than just renting out idle cars and spare rooms. Larger, publicly-traded companies will need to adapt their business models in order to keep up with technology and the “instant gratification” purchasing habits of many consumers.

We previously noted several companies that are embracing changes in their industry. Marriott is another of these forward-thinking companies, using social media to learn more about its guests and offer them special perks to increase customer loyalty.

To better understand what’s truly driving the sharing economy, we sought out the advice of an expert. Structure Capital understands the larger opportunity and is aggressively investing its own money in the space. Calling its team “the architects of the zero-waste economy,” Structure is increasing the usage of assets in real estate, personalized health, robotics, and even e-bikes.

In the following video, Structure founder Mike Walsh speaks with Motley Fool advisor Simon Erickson about the impact the digital economy is having on traditional competitive advantages, as well as how companies with established consumer brands are reacting to the changes. Mike is a Silicon Valley veteran who was one of the earliest investors in both and Uber. He also reveals what he’s looked for in his early-stage investments and where he sees the next wave of opportunities.

A full transcript follows the video.

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Simon Erickson: Hi, everyone. Motley Fool Explorer lead advisor Simon Erickson joined by Mike Walsh this afternoon. Mike is the founder of Structure Capital, out in San Francisco, California. Mike, thanks so much for joining us.

Mike Walsh: Thanks, Simon — it’s good talking with you.

Erickson: Now Mike, we’ve got a lot to talk about here today. I’d like to brush on the subject of the sharing economy and also touch on how you were one of the early investors in Uber.

But I’d like to start with the concept of competitive advantages, and how this as a concept has influenced so many investing decisions. These brands, advantages, network effects, and switching costs all protect a company’s profit stream. But we’re in a very different world today than we were ten years ago, which is much more influenced by digital. We’ve got social media, we’ve got cloud computing, and a few other things at work right now. You’re right in the hotbed of a lot of this in San Francisco, so my first question is: How is the digital economy changing how companies view competitive advantages?

Walsh: Sure. Digital creates efficiencies of speed, often for on-demand companies or companies that could be on demand (such as Amazon, or now Whole Foods, during the acquisition by Amazon). I think that the expectation of today’s consumers — especially millennial consumers — is that they can get what they want when they want, and they can get it very fast. So part of that digital efficiency is the mobile phone, of course, and how quickly people can acquire products.

I think the other part of it that you touched on are the network effects through social media. This is all providing competitive advantage for companies, whether it’s selling through Instagram or spreading the word through Twitter. I think the problem though, or the challenge that companies do have to look at, is that they’ve got to be careful to do things correctly. That means you’ve got to build slowly, in some cases, so that you’re doing it right. There are some pretty good examples of people doing things a little bit too fast. Using digital or social media can also spread problems pretty quickly. So I think that’s one challenge that people have to look at when they are considering digital strategies.

Erickson: So companies need to think first, because those network effects are more pronounced due to social media and that universal distribution out there.

Walsh: Exactly. And as you pointed out, we were an early investor in Uber. But Uber certainly experienced some of that through their rapid growth. Obviously, Twitter was a great tool to spread the word for them and to acquire customers early on, but it also became a tool for people to spread bad news about them. So they needed to cheer up their company and the culture to get things back on track to do things the right way because of some of the damage that was created early on as it grew super rapidly.

Erickson: Mike — continuing on Uber there, I know that at Structure you all refer to yourselves as the “architects of the zero-waste economy” where you’re really looking to get rid of these underutilized assets and increase the utilization of assets that are out there. Uber, of course, being one of those for the automotive industry. You were an investor in Uber in the very early stages of the company. What was it about this company that drew you in, in the first place?

Walsh: Well Simon, I was running a company when I looked at Uber. It was a community software products company called Leverage Software. My head of marketing brought Uber to my attention when she heard that her friend was considering becoming the CEO of Uber. So I took a few minutes to talk with him. There were three things going on in my world at that time. One of things was, I was traveling all over the place with Leverage, and I was just simply tired of waiting in taxi lines. So I asked my sales rep if she would try to give our software products away so that people could do a ride share application with the product. She rightly declined to do that, because we needed to focus on driving revenue, but that stuck in my head.

The second thing is, it was impossible to get a taxi in San Francisco around that time in 2009. Our office was near the ferry building in San Francisco, and I would always hop in a black car at the hotel across the street — give the guy twenty bucks to get a ride home up to my house. So those two things were happening [in my life], and Uber just made a lot of sense to me. The third thing, when I met Ryan and suggested that he take the job and that I would make an if he did take the job, was that you never know how these things are going to go — worst-case scenario it was a $4 or $5 million valuation at the time. We could sell the thing for 15 million bucks to a buyer of transportation or Yellow Taxi or something like that. I had no idea it was going to turn into what it was, or I would have mortgaged my house and made a larger investment.

Erickson: Now, I know that Structure is in more than 140 companies, Mike. But it has always been this consumer model, right? This zero-waste consumer model. Uber definitely gets the headlines of the sharing economy, but can you tell us about some of the other opportunities that might not be as publicized that are out there?

Walsh: Sure. We’re in, as you said, 140-plus companies. We really break it down into two different categories: excess capacity (usually physical goods) and underutilized assets (which breaks into freelance marketplaces, but it can also expand to data, for example, that’s not effectively utilized). So we are in a couple of B2B companies, but most are consumer companies. And those break down into food, or real estate, or dog walking.

Let me give you just a couple examples of our real estate companies. We’re in one called Canopy, which is a higher-end WeWork, if you will. It’s sort of a premium model WeWork, where people can co-work, very similar to the WeWork model. Another is Sonder, which is like Airbnb meets the hotel space. So Airbnb is what immediately comes up — I think it’s a $30 billion market valuation at the moment? But the problem with Airbnb, in my view, is the consumer. And I actually have a property on Airbnb, a beach house. But the problem is: I’m a Superhost, and I still make mistakes with regards to cleaning and things like that, like if the cleaners don’t show up. So what Sonder does is they take apartment buildings, they redesign the buildings, they furnish the property, and they provide the hospitality services such that the consumer gets the benefit of the consistency of the hotel. But they get to stay in really cool neighborhoods like an Airbnb, so it’s a mashup of the two.

There’s two more examples I’ll give. One is in food — it’s called Copia. It’s actually recovering food from events, corporations, restaurants, that is gonna be thrown away. They capture it and they deliver it to people in need, shelters, things like that. It’s a for-profit — they actually take a piece of the tax credit that the provider would receive, by saving that food. And then finally, one that we’re really quite proud of is called Shift. They actually provide an algorithm in the marketplace to more effectively match military vets with jobs. So when you think about underutilized assets, it’s shameful that people serve our country and then they come out and can’t find a proper job. Shift is tackling that problem.

So when we think about investing in companies, obviously we’re thinking about returns for our investors, making money. But we also think pretty highly about values in addition to the valuation, so we tend to focus on founders with strong values, who are putting people back to work.

Erickson: Well, I’m a big fan, and I’m definitely rooting for a lot of those companies you’re investing in, Mike. Especially because I’m a traveler too, and I would love a more efficient trip out of any airport! One other thing I wanted to ask you about — a lot of those opportunities you talked about are disrupting some pretty established businesses. You focused a lot on real estate and the Airbnb opportunity. Marriott is a $50 billion company right now, very well established with a recognized brand with the consumers it sells to. What is the reaction you’re seeing from the incumbents in these large industries that you’re going after?

Walsh: Well, it’s interesting that you pick Marriott. They’re quite progressive in this area — a couple of our companies are actually working with Marriott. Copia, the food sharing company that I mentioned, is piloting with Marriott at this moment, because Marriott has an initiative to reduce food waste by 50% by 2025. I think some brands are doing the right things. They’re also using one of our other company’s technologies called Hyper, which is building loyalty with customers. So if, for example, somebody is posting an Instagram photo publicly at a Marriott location, Hyper knows and Marriott knows that that person is celebrating an anniversary, for example, and they can respond to that. They can deliver a bottle of champagne or give them a free night’s lodging or however they decide to respond. So I think they’re quite progressive.

Just this morning I was reading an article about Lord and Taylor. I think this happened back in December or January, but I just heard about it today. WeWork, which is a seven year old company, last valued at $20 billion, took over the Lord and Taylor building as their headquarters. Lord and Taylor was established in the 1800s, and it’s amazing that they had to downsize so much, and this newish company took over their headquarters. So I think that if companies aren’t looking at these new ways of conducting business, they’re going to fail anyways.

Erickson: So it’s safe to say that a lot of these larger companies have initiatives to be more efficient or to not be disrupted by people doing it better.

Walsh: Yeah that’s right. We looked a company called Chariot, which is sort of like a better bus system — it does point-to-point rides, mostly for business people in cities. It’s a great concept, but we, frankly, just didn’t end up investing, because we didn’t have the time to look at it effectively. And they were acquired by Ford about six months later. I thought that was kind of a brilliant move, because it’s not gonna touch the bottom line or the top line, but it gives them some insight to help people who are thinking about new transportation within cities — whether it’s jump bike or scooters.

One of our companies is called Kango. It’s like Uber for kids. They actually just partnered with Chrysler, where Chrysler is leasing minivans, which, again, I thought was really smart. It gives them some insights, but it also gets their brand in front of some very loyal drivers, often moms, on the Kango platform. And it’s these small steps that say a lot about a company’s direction and how they’re thinking and how they’re innovating.

Erickson: Well that, to me as an investor, sounds like we should keep our eyes out for some acquisitions from those larger companies out there. Mike, you’ve got the pulse on what’s going on in the sharing economy. Our audience for the The Motley Fool is mostly individual investors looking at public companies. What are a couple things you think we should be watching as the sharing economy continues to develop and mature?

Walsh: I think from a public company standpoint, keeping an eye on these companies that are partnering with smaller, innovative companies involved in the on-demand and sharing economy is the smart thing to do. I don’t think it’s necessarily going to impact the smaller companies from a start-up standpoint. It’s not really going to affect the bottom line of these companies that much, but I think it’s a great indicator of a company innovating. That’s probably one piece of advice I could offer. Some of these companies do grow rapidly. Uber is now eight years old, but it’s a $62 billion market cap at the last transaction, so keep a close eye on these early-stage companies, and watch how they’re partnering with the public companies.

Erickson: Mike Walsh is the founder of Structure Capital. Their website, if you want to learn more, is Mike, thanks so much for joining The Motley Fool this afternoon.

Walsh: Thanks, Simon. I appreciate your time!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Simon Erickson owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and The Motley Fool recommends Ford and Marriott International. The Motley Fool has a disclosure policy.

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