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24 June 2015

Sharing economy stars 

The so-called “sharing economy,” founded upon the informal exchange of goods and services among individuals, is booming. Amidst skyrocketing valuations, two of the sector’s brightest stars have now set their sights on global domination.

Airbnb – which offers 1.5 million short-term units in over 190 countries worldwide, hosting more than 400,000 guests per night – recently completed a fundraising round that has increased its valuation to nearly $25 billion.

At a time when the startup home-sharing service, founded in San Francisco in 2008, faces increasing regulatory pressure in the US and Europe, it’s no coincidence that key Airbnb investors now include Sequoia China and China Broadband Capital, which contributed to a $1.5 billion investment this summer.

According to the company, the number of Chinese guests at Airbnb properties worldwide increased by 700% last year. Freshly capitalized, Airbnb will now invest in expanding its presence in China – and in marketing its offering to Chinese tourists travelling abroad.

Meanwhile, Uber, which currently makes 1 million trips a day in China, recently reached an even more staggering $50 billion valuation. The ride-hailing service took just five years to achieve that milestone, two years faster than did Facebook, which went IPO shortly afterwards.

Uber, which has long described India as a “global priority market,” said earlier this month that it will invest $1 billion there over the next nine months to rapidly expand its footprint in a country where fewer than 20% of households own a car.

Despite their global ambitions, neither digital platform is currently profitable: Airbnb is expected to post a $150 million loss in 2015, while Uber likewise reportedly remains deeply in the red.

That’s not worrying investors – who are more focused on sustained revenue growth, something both companies continue to achieve.

Indeed, the long-term outlook for the broader sharing economy remains extremely bright, according to PwC. The professional services firm estimates that the five largest sharing sectors (which include peer-to-peer accommodation and car sharing) have the potential to increase global revenues from around $15 billion today to $335 billion by 2025.

To realize that potential, and justify current valuations, such sharing economy companies will have to address mounting regulatory concerns.

In New York, for example, the Attorney General last year issued a damning report on Airbnb, claiming that 72% of Airbnb units in the city violate the law, and that millions are due in unpaid hospitality taxes.

Uber faces even greater challenges, including full or partial bans on its unlicensed services in dozens of cities around the world.

As these companies mature – and likely eventually assume regulatory burdens similar to those faced by their mainstream rivals – the rate of revenue growth will surely slow.

For now, however, the sharing economy is just getting started.