The limits of the sharing economy

A small dark cloud appeared over America’s “sharing economy,” one of the few bright spots in a general environment of entrepreneurial gloom. New businesses created more than 100% of all jobs created between 1992 and 2005, as I noted in an Oct. 23 essay (“Small-ball conservatism or national greatness“). Between 2008 and 2015, by my calculation, startups made zero net contribution to employment, a disturbing turnabout.

American entrepreneurship isn’t dead, to be sure, but it is running light on employment and capital. The lion’s share of venture capital goes to apps that require a handful of programmers and virtually no capital investment. Among these the most celebrated are Uber and its imitators. We learn today from Bloomberg News that two top investment banks declined to sell Uber shares to high-net-worth clients because the ride-sharing service is also light on financial data.

The question is not whether Uber can make money but whether the company’s valuation is fair. At a stated value of $66 billion, Uber claims to be worth as much as Time Warner or Texas Instruments. Some commentators find this excessive. But the point remains that Uber drivers earn only $13 to $14 an hour in some major US markets. They accept low pay because Uber (and similar services) allow them to work whenever they feel like it. With a labor force participation rate of less than 63%, there are plenty of people with time on their hands and cars to drive.

In markets like New York, where the cost of a yellow cab medallion peaked at $1 million in 2011, Uber can undercut taxi fares because its drivers do not need to carry the medallion cost (which has fallen by roughly half since 2011). Uber, to be sure, still burns money in order to attract riders. I just paid $89 for a month’s unlimited rides in its carpool service. At the early hour I head to work, I often have a car to myself. But the business model makes sense in principle; the only question is what the business is worth.

Extending the Uber model to other services, such as home cleaning and repair, is far less convincing. One venture-capital favorite is Handy.com, which has raised more than $100 million, Techcrunch.com reported last year.

There has been consolidation, collapse and other troubles among some on-demand home services startups, but others seem to be cleaning up in their wake. Handy — a platform for on-demand housekeeping and other services like furniture delivery and assembly via an app that connects tradespeople with customers — is announcing today that it has raised $50 million in new funding to continue growing its business. Handy is not commenting on the valuation, but it is reportedly in the $500 million range.

The trouble is that home services are far less fungible than driving. In New York City, two hours of cleaning costs $54, almost double the going rate for house workers. Convenience is Handy.com’s only advantage: one can book odd times on a smartphone app rather than search for a reliable house worker.

I did a bit of my own market research by booking a couple of home cleanings on the Handy.com app. The first two times all worked reasonably well; the service was expensive but adequate, and available in the evening when most house workers are not available. On the third occasion, the Handy.com “professional,” an absent-minded young man from New Jersey, failed to show. I had booked it for a Sunday morning, unlike the previous evening engagements, and he texted me around noon to explain that he had neglected to look at the hour. He promised to turn up by 1 pm and then canceled. Handy.com responded to my emails first with excuses, and then with apologies: the service uses independent contractors and could not find an alternative until the evening.

Unlike Uber, which charges less than regulated taxis, Handy.com and its competitors charge substantially more than the alternative forms of service. Because they take no responsibility for “independent contractors” they can’t find a labor pool that justifies their convenience premium. Managing the marginal labor pool—unskilled workers who earn minimum wage or slightly more—is a perpetual problem in the fast-food and hospitality industries. It can’t be done well on a smartphone app, and the home-service providers are not positioned to to this.

Even the most viable sectors of the “sharing economy” seem overvalued. And the model cannot easily be extended from driving to higher-value-added services.