Trying to top a market is extraordinarily difficult, and always easier to do in retrospect. But that doesn’t mean that everyone should own every asset in perpetuity. Sometimes the smart thing to do is sell, and one way to know when is by watching those who know more than you.
Back in 2007, just as the real estate market was getting frothy, Sam Zell, one of the greatest property investors of all time, sold his iconic company to Steve Schwarzman’s Blackstone in the largest LBOs in history. A few months later, Schwarzman, an iconic investor himself, took Blackstone public, effectively selling his most prized asset. One year later everything crashed.
This year is shaping up to be the year the shared economy goes public, with IPOs expected from Uber, Lyft, Postmates & AirBnB. One conclusion is that the industry has finally reached maturity. But another one is that the smartest people in Silicon Valley — the founders and early investors in these companies — are all looking to sell the same asset class. Let us consider why.
There are countless arguments as to why these are great companies and everyone should invest in them. But there is also an argument that they are doomed to fail, because the business model of the centrally owned platform, where individuals take all the risk but the platform captures a substantial portion of the upside, is not sustainable.
Silicon Valley adores the risk-taking entrepreneur, and has almost a religious belief in that mythical character’s right to amass wealth should they succeed. How ironic then that most of the unicorns of the past decade were built on the opposite principle. Every Uber driver or AirBnB renter is in-effect running a startup. They have to come up with a plan, invest capital and put in sweat equity. But not only do these entrepreneurs not get to keep all the profits, they get none of the equity.
Even the most cold-hearted capitalist should take issue with Uber taking 25% of every cab fare — not because it violates their moral compass, but rather their business one. One of the fundamental tenets of a good market is an alignment between risk and reward, lest it devolve into rent-seeking. Every time a new driver joins a rideshare service, they take 100% of the risk, having to buy the car, insure it, get a license, etc. If they get into a serious accident on day one, the platform doesn’t lose a penny. So why does it get a substantial cut if they succeed?
This argument doesn’t apply when a platform first launches, because then the creators are also taking substantial risk, arguably even more than the freelancers providing the service. But once a shared-economy platform matures, the dynamics flip, leading to the present world of angry providers and interventionist politicians — not to mention hungry investors.
The solution is to realign the incentive structure — giving the doers more equity and a say in governance. Maintaining a platform, even after maturity, takes work, and there is some risk. So the founders should still get a cut of the profits, but they should share more of the upside. The recent announcement by Uber and Lyft to give shares to some drivers proves that even they are realizing the current structure is not sustainable. But that’s just a temporary fix, and doesn’t address the drivers of tomorrow. A better solution is to disintermediate the platforms altogether.
Of all the businesses in the crosshairs of blockchain disruption, shared-economy platforms might be the most susceptible. A decentralized platform flattens the shareholder, decision-maker and driver into one. The driver who takes the most risk and does the most work earns the most tokens, giving them greater participation in governance and future growth.
Compare that to today’s model — which includes platforms like YouTube and Facebook — where the opposite is true. The content creators that do all the work get little, and shareholders don’t have as much say as founders. Is it any wonder that these companies are seemingly spiraling out of control and governments all over the world are cracking down? Bad things happen when risk and reward are misaligned.
A lot of this might sound implausible, especially to skeptics of blockchain or decentralization. But it wasn’t that long ago when the success of today’s centralized platforms also seemed implausible. Uber destroyed the century-old model of taxis anyway. New technologies always enable new business models, and while the internet enabled one, blockchain enables another. If decentralization wasn’t a threat, why are all the incumbents looking to sell?