B2B Rental Models

The rise of the “rental economy” has been a topic of extensive conversation in the press recently. A range of startups that allow consumers to rent instead of own assets have matured and consumers are increasingly choosing to rent things instead of buy – from furniture to ice cream machines. What’s been lost in the coverage is that renting and the rise of the rental economy is not unique to consumers. In fact, the ability to rent assets that were difficult to rent before is rippling through the world of business as well, and we’re just at the beginning of this trend.

Renting assets has always been a crucial part of business. Cashflow is king in business and renting has always been a critical strategy for businesses for managing cashflow and operating in a capital efficient manner. It’s a powerful strategy because it allows businesses to allocate money that would otherwise be allocated to a capital purchase to be allocated to growth, product development or customer service – all things that improve the business at its core. Owning an asset instead of renting it has no additional benefits except if the business expects to own the asset and use it for the long-term, at which point it eventually becomes more economical to buy a factory than rent it.

Businesses have typically rented just a few assets – office space, production space and long-term leases of land, mines and other such things. But a wave of new rental startups have sprung up in the last few years that digitally intermediate or create whole new rental marketplaces or services for assets that previously were not easy to rent. Emerald Cloud Labs allows laboratories to send in their samples via mail and rent time on their lab equipment to run lab processes and get the results. Meenta allows scientists to find and book time on rare, extremely expensive scientific equipment distributed in university and corporate labs nationwide. The YardClub and EquipmentShare allows construction operators and fleet managers to rent out their equipment to contractors and subcontractors nationwide. Kwipped allows businesses to rent a range of highly specialized equipment from power utility equipment to environmental testing equipment. 3DHubs allows customer to rent time on 3D printers, CNC machines and sheet metal fabricators. Kitchen United and CloudKitchens allows restaurants to rent fully equipped professional kitchens to create a delivery-only restaurant.

The rental marketplaces are primarily focused on renting out machinery and equipment. Typically business equipment is very expensive and can be prohibitively so for more specialized equipment, such as that used in labs or niche production processes. This can serve as a barrier for entry in many industries. For example, starting an airline is a prohibitively expensive task because of the cost of commercial aircraft. Business equipment also typically has a very low utilization rate. All these verticalized marketplaces have the same thesis as Uber, why buy an expensive piece of equipment if it spends 90% of more of time idle? Why not rent it from someone else as you need it? Uber’s thesis is applicable in the B2B world but massively amplified because of the cost of purchasing equipment.

These B2B rental startups come in two forms:

  1. Verticalized Marketplaces: These startups simply create or intermediate new rental markets for specialized equipment in construction, laboratories and other niches.
  2. Vertically-Integrated Services: These startups aggregate the supply-side of the marketplace in-house and use it to service the demand. Companies like EmeraldCloudLab and KitchenUnited are good examples of this. Both of them typically own the space or equipment they rent out.

The rise of the Rental Economy in the B2B world is not constrained to the US. In fact, it’s a global phenomenon because businesses globally face the same cashflow challenges no matter where they operate. It’s simply a fact of business. In India, RentSher and SabRentKaro both have specialized services allowing businesses to rent IT equipment, laptops and other office appliances. In Germany, Klarx is a construction equipment rental marketplace similar to The Yard Club. 3DHubs is based in the Netherlands.

There is huge opportunity to further extend the B2B rental economy. Equipment and machinery is ubiquitous across a developed economy. In the United States alone 1.1 million people are employed in the machinery manufacturing sector alone and US exports of machinery were worth $141 billion in 2018. Higher utilization rates on this machinery and equipment will have ripple effects throughout the economy by dramatically lowering capital expenditure for businesses that rent equipment and significantly increasing revenue and the return on investment for businesses that own equipment.

Overall, renting instead of buying is increasingly prevalent across the economy both for consumers and for businesses. For consumers, an asset-light, rental-first lifestyle prioritizes cashflow and convenience. You can live a great life without having to worry about maintenance and financing an asset. For businesses, renting assets helps to optimize cashflow but is also a wider business strategy decision. Businesses increasingly can choose to rent equipment, space and services that are important but not core functions of their business, and instead reallocate the resources they save to developing and improving their core product offering. In an age of rapidly increasing competition – thanks to the record $132.1 billion in venture capital invested last year as well as from incumbents – every dollar spent on becoming more competitive really counts.

This piece was originally published here.

 

Mikal

 

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