Collaborative Economy Market Contraction Signals Maturity

Above Image: a butterfly emerges after contracting in a cocoon.

You’ve probably read the article from Salon, with its sarcastic title and detailing of several failed on-demand, Collaborative Economy startups. A few people asked for my thoughts

First, our data shows that the Collaborative Economy movement is here to stay,. We see people increasingly adopting sharing behaviors , startups like Uber are profitable in the United States, and the UK government is  offering a tax credit for people who participate in it. It’s not going away but we do need to cull the herd.

Second, signs point to the fermented froth fizzing out as we enter Phase 4 of tech market maturation: Contraction…

The Collaborative Economy Market is Changing:

Too many damn startups are doing the same damn thing. Lisa Gansky’s massive directory of startups in this space tallies at a whopping 9,703 startups. In our latest Honeycomb 3.0, we reviewed 450 startups, but only about 250 made the cut. We found many startups doing the exact same thing as others, often in the same regional area! Take San Francisco’s recent valet app market, for example: there’s Zirx, Luxe, and Carbon all fighting for me to download their app so they can park my car in the city’s insane downtown area.

VC welfare strings are starting to tighten. The Salon article refers to investment funding as “VC welfare,” which gave me a chuckle.it’s true; this market has been funded plenty, as shown in our massive spreadsheet on funding. It indicates that, in previous years, there’s been a total of $28 billion in VC funding poured into this market. Why is this? VCs wanted to see market traction (even if the startups weren’t in the black), and they were hoping to fund the next “unicorn,” which there are dozens in this market. On my analysis post on VentureBeat, we found that much of the funding centralized last year on the billion dollar unicorns although I’m expecting the rest of 2016 to soften on VC funding.

Startups are disappearing or consolidating. There have been quite a few companies that have fallen off the Collaborative Economy honeycomb, including Homejoy, Sidecar, TheStorefront, Zirtual, Spoonrocket, and others listed in the Salon article. With that said, there were acquisitions as the market merged, including: Blablacar acquired Carpooling.org, Expedia acquired HomeAway, Outerwall acquired Gazelle, and defunct Sidecar sold its assets to GM.

What it Means to Enter the Contraction Phase

This is normal, alike every tech cycle. I’ve been in Silicon Valley for nearly 20 years and have experienced three tech cycles: dotcom, social media/web 2.0, and now the Collaborative Economy. In each phase, we see the same patterns of market initiation, massive funding of clones, a shakeout, the consolidation, integration, and then maturation. The Gartner Hype cycle’s universal framework indicates we’re now near the “Trough of Disillusionment,” and preparing for the “Slope of Enlightenment” which suggests market maturity with fewer players.

Market consolidation means the leaders will get even more acceleration. The Honeycomb graphic, is our attempt at representing global startups in each sector, sorted by industry hexes. We had to prune out existing startups as some hexes like Transportation, Space, and Money were so crowded with clones, they wouldn’t all fit. Furthermore, as startups hit the deadpool, the remaining startups would gain even more acceleration as they can clinch more of the market making it even more difficult for new entrants. If a startup is in the lead –they’re likely to stay in the lead.

The market is scrutinizing profitability of startups, as we enter this next phase. While investments are still occurring, the rate of heavy investments in 2015 seems to be slowing. In earlier market phases, startups were rewarded with large valuations for market adoption but not measured on profitability or to get “in the black”. Now, the Collaborative Economy startups will need to make their balance sheets work in order to get closer to their gigantic valuations.

So what does the future hold?

Expect a Honeycomb with just about the same amount of hexes, but we’ll see less logos in each hex as the market weens off performance strugglers. Perhaps we’ll make the logos larger of the dominant players as these startups continue to integrate. They’re already integrating within city landscapes, brokering with governments and partnering with large corporations for business deals. Soon, we’ll be entering the next phase: Normalization.

(Image used with creative commons license from Morgan Schmorgan)