January 30, 2013
Q&A with Chris Fralic, partner, First Round Capital
We talked with venture capitalist Chris Fralic while researching one of our 10 Trends for 2013, Peer Power. As the peer-to-peer marketplace expands in size and scope—moving beyond goods to a wide range of services—it will increasingly upend major industries, from hospitality and education to tourism and transportation. First Round Capital, which Fralic joined in 2006, has invested in a number of peer-to-peer companies. Fralic was an early employee at Half.com, spent six years at eBay after it acquired Half.com, and served as VP of business development at del.icio.us. He discussed how peer-to-peer companies are starting to disrupt industries and forcing traditional businesses to “step up their game.”
You’ve been involved in the peer-to-peer world from its earliest days. How has it changed over the years?
If you go back to a business I was part of, Half.com—back in ’99, we were trying to start up an easier way for people to buy and sell used books, music, movies and games to each other. eBay was the big player in peer-to-peer commerce. No one thought it would ever work. You’re buying something from a complete stranger, who you shouldn’t trust. Yet [eBay founder and chairman] Pierre Omidyar was right, that people are basically good. What they started eBay with was their feedback system, which was primarily designed so they wouldn’t have to do direct customer service and handle all the emails. That turned into the mechanism by which trust is developed.
If you think of peer power and commerce and services, its cousin is collaborative consumption. At Half.com, we were pretty early on that front. In 1999 it was such a new topic that there was no industry data on how big the used movie market was, or game market. Now you’ll find that anybody that’s in physical media sales is probably making huge percentages of their profits from used products, and consumers are very comfortable with the idea of using something somebody’s already had. And there’s a lot of other benefits that come from green-friendly approaches to saving money. What’s different now is that there are billions of people online, and they’re organizing and connecting and engaging through social media, and that changes everything. And it unleashes a lot of opportunity and a lot of companies.
What are some examples of peer-to-peer companies that are taking a new approach to an industry?
Things like TaskRabbit are really enabling a whole new class of service that connects people together. I remember the first time I heard about [Airbnb], I thought that was the craziest idea I ever heard. Who would ever let a stranger into your house or want to sleep on someone’s couch or spare bedroom? But yet they do.
Then you’re seeing it shift up into different areas, even things like our company Uber. It’s not exactly peer, but it’s definitely collaborative consumption and reorganizing something in a brand new way that is essentially matching up empty backseats and black cars with people that need to get places, and completely changing the dynamic. If you’re in New York and you take a limo to a Broadway show, that driver is just going to sit in the car for two and a half hours doing nothing. And now they can go out and do fill-in jobs. So that’s a good example. We’ve invested in—the co-founder of Uber has started BlackJet, which is the same basic idea except for private planes. So you’re filling up the seats on private planes.
Another in our portfolio that’s really interesting is FundersClub. They are allowing direct investment by qualified investors, but essentially creating mini venture funds to fund startups, so someone can put in as little as $1,000. And they can group them together, so there’s maybe 500 of them that can make the fundraising happen. In some ways, these funding clubs and networks can disrupt, if not some parts of venture capital, certainly angel investing, and make it more widely available.
Then there are also the peer-to-peer lending services.
Lending Club is the big leader in that space. I know people that are moving their 401(k)s over to a Lending Club portfolio because they’ve had such positive returns. Who would have thought? That would have sounded crazy just a few years ago, but it’s not.
You guys invested in TaskRabbit, the pioneering peer-to-peer services company. How is that investment doing?
TaskRabbit is doing very well. They’re growing, they’ve raised a fair amount of capital, and their customers are really happy with the service. It can be anything from someone picking up your laundry for you to waiting in line for your iPhone or even running errands. They’ve baked in a lot of things to give protection on both sides, to get a better sense of who you’re dealing with. They also do things like handling payments, so that the “task rabbit” [the person who performs the task] can pay for something with a credit card that Task Rabbit gives them, and then it’s all billed back to the other party. They’ve been rolling out in big markets and beyond.
It seems like many of these companies overlay the existing channels quite neatly, once you plug in.
It’s a mindset shift. We’ve got another portfolio company called Hotel Tonight, which overlays a new service on existing resources. In their case it’s empty hotel rooms. You can, in the afternoon on any day, get great choices on rooms that are available that night at great prices, which would otherwise go unsold in the hotel. Folks from an ad agency in Dallas flew into New York for an event we had. On the way in, we picked a Hotel Tonight to stay in. It became an exciting addition to their stay, not knowing exactly where they were going to stay and doing it all on the fly.
There is a discovery and a deal element, in addition to a cool factor. You can’t underestimate that quick sort of thing. Like if you’re just standing around with some people and in three clicks, book your hotel room for that night. Or you walk out of a hotel and there’s a long line for the taxi, and no taxis in sight—you pull out your iPhone, push a button, and in three minutes a black S500 rolls up. That makes an impression.
Are these types of companies augmenting existing categories, or are they forcing industries to reinvent themselves?
There’s probably lots of both. From our standpoint, you might say we’re funding a company [FundersClub] that might help unseat venture capital. That’s probably an exaggeration, but if it were true, better that we do it than someone else. A bigger trend we can see is capital being commoditized. So you have to add value in other ways, which we spend an inordinate amount of time doing.
With peer-to-peer travel, do you think these new services are broadening the industry or disrupting it? What’s the right way to look at it?
It may be making the market for travel bigger. It may be adding a whole new category that didn’t exist before. And whether it’s minor things like a hotel for the night or just a last-minute reservation, or major things like an Airbnb—creating inventory and maybe demand where it didn’t exist before—it just shows that the way we thought of and built and booked and ran hotels has to change. But whether it’s a good thing or a bad thing, it’s so hard to tell. It’s definitely a big change.
It seems that the hotel industry has to figure out what kind of extra value it can add, whether it’s a full complimentary breakfast or maybe various types of guarantees?
Yeah, maybe it’s that there are certain amenities or programs or aspects of convenience, or a lot of other things. It causes them to think through those things and the whole experience, and step up their game. If you look at hotels, you’re seeing a lot of the business focus on extended-stay kind of things that have upped their offerings in a pretty meaningful way.
Do you think the peer-to-peer approach can work in every industry?
Not necessarily. We invested in a company called Storably that was the idea of collaborative consumption for storage space and things like an empty parking spot in front of your house when you’re gone all day. They launched and had a lot of press, and it never turned into very much traction. It didn’t really fit as much as they thought, and they quickly went back to the drawing board. They came up with another, different idea. Now it’s called Curalate, and they’re doing analytics and marketing for the visual Web; they’re going gangbusters. Not everything can or should be collaboratively consumed or peer produced.
So peer-to-peer is not the answer to everything. But it does force you to rethink your notion of supply and demand.
I would agree. For example, there are a lot of people trying to aim that at the ticketing business. Half of the concert tickets go unsold every year—people need new ways to discover and buy those tickets. And the someone who figures that out will have a very nice business.