Piggy back business on airbnb and uber. Aivars Lode avantce
‘Piggybackers’ Hitch Themselves to Airbnb, Uber
Derivative startups, pegged to others’ success, are springing up faster than ever
Charlie Wells joins MoneyBeat to discuss startups built around marketplace startups. Photo: Getty
By Charlie Wells
Feb. 18, 2015 7:30 p.m. ET
Plenty of people dream of starting businesses that transform a marketplace, and shake up the world. But more entrepreneurs are building so-called derivative startups, or businesses pegged to others’ success.
At least half a dozen new businesses have surfaced in the past three years pegged to the short-term rental marketplace Airbnb of San Francisco, for instance. There is Guesty of Tel Aviv; Keycafe of Vancouver; Proprly of New York; and Guesthop and Pillow of San Francisco, to name a few. All see an opportunity to earn revenue by helping manage the over one million properties listed on six-year-old Airbnb’s website.
Similarly, the rise of San Francisco-based ride-sharing services Uber and Lyft has spawned San Francisco-based Breeze and HyreCar, both founded in 2014. Each offers to lease vehicles to would-be Uber and Lyft drivers in multiple cities around the country.
Broadly speaking, these derivative businesses seek to build out a surrounding “ecosystem” much like smaller software companies built products and services on top of Microsoft Windows in the 1990s, according to Steve Blank, a veteran technology entrepreneur and lecturer at the University of California at Berkeley, New York University and Stanford.
“This is a gold rush,” said Tony Tjan, chief executive of Cue Ball, a Boston venture-capital firm. “You can either mine for gold like Uber or Airbnb, or you can sell the pots, the pans, and the Levi jeans.”
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“People might consider these companies as piggybackers, but I don’t see us that way,” added Amiad Soto, co-founder of Guesty, the Israeli startup that helps Airbnb’s users manage properties. “We are helping Airbnb grow, helping them stay consistent.”
Sean Conway, right, is CEO and co-founder of Pillow, which helps people manage short-term rental properties, taking a 15% cut of the rental fee. Photo: Laura Morton for The Wall Street Journal
To be sure, new companies built around existing companies have existed for nearly as long as there have been companies. But the speed at which today’s derivative startups are springing up on top of others is faster than ever before. “It used to be that you needed to become an established enterprise company before anybody would build on your platform,” said Ethan Kurzweil, a partner at Bessemer Venture Partners in Menlo Park, Calif.
Social media is shrinking that time frame, as is the proliferation of new businesses cropping up around the sharing-economy marketplaces such as Uber and Airbnb.
Given that startups are inherently risky, the breed of derivative startups is even more so. “The prima facie argument is that you are simply doubling risk,” said G. Felda Hardymon, a professor at Harvard Business School. “Even though you may create a successful product, the underlying companies themselves may not be successful.”
“The further away you get from the core consumer service, the more dangerous it gets,” added SherpaVentures’ Scott Stanford, an early Uber investor.
Entrepreneurs such as Sean Conway of San Francisco sometimes find they walk a fine line by capitalizing on the success of other existing firms.
Last year, the 30-year-old Mr. Conway founded with partners a 20-employee firm that caters to users of Airbnb, as well as its competitors VRBO and HomeAway, by helping people to set appropriate rental prices for their properties, providing 24-7 support during a stay, and cleaning. Mr. Conway’s startup collects a 15% cut of the rental fee.
He keeps very close ties with Airbnb. He personally visits its headquarters—just a few blocks from his own offices—several times a month, for instance.
But after six months of conversations with staffers at his own firm, he began to realize that the startup, known as AirEnvy, had a significant problem: its name.
“The ‘Air’ made it sound too connected to Airbnb,” he said, adding that “it’s important for us to be a stand-alone brand.” So, last month, he changed his business’s name to Pillow.
Indeed, one issue for entrepreneurs building derivative startups to consider is: “Are you going to bet on one platform, or are you going to bet on the whole market?” said Hunter Walk, a partner at San Francisco venture firm Homebrew, an investor in Pillow.
Derivative startups will likely hold a strong allure for some investors, especially those who feel they may have missed the boat by failing to invest in, say, Uber, which is just five years old and valued at more than $40 billion.
Fabrice Grinda is among those who felt he made a mistake by not investing in Uber’s last fundraising round, when, as he put it, “it was so clear that Uber was going to become a massive company.”
Yet, Breeze, a year-old San Francisco firm, offered him another route to bet on Uber’s growth: it leases cars at $195 a week to aspiring Uber and Lyft drivers.
So Mr. Grinda invested $100,000 in Breeze last year, in exchange for an equity stake. He has since helped it to raise more than $1 million in additional funding from so-called angel investors. Serial entrepreneur Mark Cuban also invests in the company. Breeze now has 30 employees and operates in San Francisco, Los Angeles and Seattle, according to its founder, Jeffrey Pang, who declined to specify the firm’s revenue or say whether it is breaking even.
One of the biggest risks for derivative startups is that their host companies could quickly expand their own offerings, becoming rivals overnight. In late 2013, Uber itself started joining with third-party lenders who could provide financing options for drivers—and that, too, could theoretically undercut Breeze’s business model. Uber is adding 50,000 new drivers a month.
Last spring, Uber began deactivating vehicles leased through Breeze because of what an Uber spokeswoman described as “regulatory ambiguity.” In particular, Uber executives were uncomfortable with the fact that Breeze’s rentals were registered to Breeze, rather than to the Uber drivers using them, she said.
The Uber executives worried that Breeze’s model might prevent Uber from being able to comply with ridesharing regulations in California, where Breeze operates.
So Breeze changed its business model: Its cars would be registered to the Uber drivers themselves. And last June, Uber stopped blocking Breeze vehicles.
The Uber spokeswoman declined to comment on whether it would expand into vehicle leasing or similar new lines of business. But Mr. Grinda, the Breeze investor, says he believes Uber will likely be too busy dealing with its own regulatory issues, and with direct competitors, to pose a significant threat to Breeze.
