How do you decide the starting point?

Meanwhile, users’ anathema to ownership has reached the ears of manufacturers. Globally, the world’s largest furniture maker, Ikea, is piloting furniture rentals in all 30 markets it is present in. Carmakers like Mahindra and Hyundai, stung by sales which are at an 18-year low, now want to rent to consumers.

In May, Hyundai partnered with leasing company ALD Automotive to rent its cars to buyers directly. Even hourly car rental company Zoomcar has a subscription service called ZAP. It allows one to drive any car one wants for periods ranging from 6-36 months with zero downpayments, zero insurance costs, and zero maintenance.

Underscoring this trend is a Morgan Stanley projection that estimates that India will be home to 410 million millennials by 2020. Welcome to the rental economy tipping point.

Starting pains

A startup’s hotness is linked to how quickly it hits user milestones. Swiggy took 18 months to reach a million users. Payments company PhonePe only took about a year to hit the 100 million users milestone.

Compared to these, Furlenco and RentoMojo are closer to snails than potential unicorns. Take the 85,000 homes furnished by seven-year-old Furlenco, a subscription company that allows users to rent furniture and appliances. One of the first companies in this space to be funded, Furlenco has raised a total of $43.7 million. RentoMojo started in 2012, also follows a similar model—renting out at least 100 different products in the consumer durables and furniture category. While it has raised less money than Furlenco—about $28.09 million—it has reached some 90,000 users.

In a nutshell—the usual startup user metrics simply do not apply to these businesses. “Companies [like Swiggy, Uber] have grown on the back of discounting to change behavior and have been pounded with capital,” says Ajith Karimpana, the founder and CEO of Furlenco. Both discounting and heavy funding have not been done in the rentals space, he explains.

Initial Investment Required

Ironically, though, rental startups are capital-intensive businesses. The initial investment is needed to acquire assets to rent, while the recovery of that investment is staggered over months and years. This also differentiates these companies from shared economy stalwarts or even e-commerce platforms, where the companies tend to be asset-light.

“Products which have high upfront costs, have a useful period exceeding 2-3 years, and which retain the residual value of more than 10% in three years or so are ideal for leasing,” said Vishes Kothari. He is a consultant at Vinod Kothari Consultants, which advises companies on leasing.

Typically, these have been products that aren’t particularly personal. But now, companies are stretching their offerings to include even highly personal products such as mattresses and mobile phones. With easy financing on e-commerce sites for such products making ownership easy, rental companies believe their true fight is with equated monthly installments (EMI). So, a product like an air conditioner, which you could buy with an EMI of Rs 3,050 ($44), a month is Rs 1,809 ($26.3) on rent.

For companies like RentoMojo, 65% of their sales are from furniture and appliances. Sofas and beds are most popular amongst furniture, while refrigerators and washing machines dominate appliance rentals, said a senior employee at RentoMojo.

Due to the maintenance costs for appliances, furniture is where the real money lies. In fact, if companies manufacture their own furniture, as in the case of Furlenco, margins on furniture rentals can go up to 35% higher than for appliances, said the senior employee quoted above.

The rent and return cycle

The likes of RentoMojo and Furlenco typically rent their products for a minimum of three months. It is only by the end of year one that they recover their investment in the asset. In year two, they can square off against all other costs like interest costs, logistics, and maintenance. Consequently, profitability is directly proportional to the number of times they redeploy assets. And this is where things get difficult.

Today, only 30% of RentoMojo’s new orders are fulfilled with redeployed assets, said a RentoMojo employee. With redeployment, users are fine with old products as long as they don’t look and feel old. But managing this with year-old products isn’t easy. Especially with electronics.