Is Airbnb’s latest setback bad for the sharing economy? by JP Mangalindan @FortuneMagazine April 21, 2014, 9:26 PM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons FORTUNE — Airbnb’s competitive pricing is proving to be a double-edged sword. Less than a month after a New York customer returned home to find an orgy underway in the apartment he had rented out on the apartment-sharing website, the New York Post reported that prostitutes are renting Airbnb apartments in the city and using them as pop-up brothels. Airbnb rentals are “more discreet and much cheaper than The Waldorf,” quipped one anonymous sex worker quoted in the Post. The lewd revelations don’t seem to worry Airbnb’s backers. That last news report surfaced just days before Airbnb reportedly closed a $475 million round of funding that values the company at about $10 billion, making it one of the highest-valued U.S. tech startups. The vote of confidence is a boost in the arm for Airbnb, which has faced other growing pains. On Tuesday, for example, the online home-rental marketplace is set to appear in court against New York Attorney General Eric Schneiderman regarding site users who allegedly rent out apartments illegally. Online marketplaces such as Airbnb are part of a growing category of “sharing economy” companies enabling just about anyone to share anything from a car to a lawnmower. As the industry has grown in recent years, other sharing economy companies have faced similar issues: Uber, for example, a popular ride-sharing service, has faced legal battles in major cities where it threatens to disrupt existing transportation services, such as taxis. MORE: How green is Apple? In the case of one Airbnb apartment used for prostitution, the startup took immediate action to ensure the apartment owner had a safe place to stay, reimbursed her for property damage, and kicked the Airbnb guest off the service for good. “Like other leaders in global hospitality, we are constantly evaluating security measures and working on even more tools to give our users even more ways to build trust,” a spokesperson told Fortune. The bigger question then perhaps becomes whether Airbnb’s latest issue is a temporary setback or another indicator that the overall sharing economy is in trouble. “These situations damage the reputation of the overall market, but are a reality in both the collaborative economy, as well as the traditional economy,” said Jeremiah Owyang, founder and “chief catalyst” for Crowd Companies, a council for large corporations seeking roles in the sharing economy. Owyang expects these instances to increase as these services become more mainstream. “It’s a bit of a PR fail — a crisis management situation — and it needs to be approached as such,” explained Dean Crutchfield, a branding specialist and founder of DCA Growth Advisors, a New York-based business growth and marketing advisory firm. At the very least, some property owners may scrutinize who is renting their property further. At worst? “They’re destroying franchise value,” added Crutchfield. Both Owyang and Crutchfield call for more stringent screening: stronger reputation systems where the customers and buyers are rated with more extensive history to minimize abuse. MORE: Corporate therapy for Silicon Valley The sharing economy could be compared with the automobile’s early days, a time when vehicles were less advanced and more dangerous. “If you go back, there were all kinds of legitimate reasons why we shouldn’t have adopted the personal automobile — people dying, there were no windshields, few gas stations — but in the end, the automobile was a better way for us to get us and our things from point A to point B,” according to James McQuivey, a Forrester Research analyst. Just as the auto industry endured because it ultimately improved owners’ quality of life, McQuivey says the sharing economy — populated with many services that arguably also improve quality of life — will persevere. But startups like Airbnb should execute caution when shoring up their defenses. “The closer their [screening] tests get to foolproof, the more it’ll inhibit what Airbnb is trying to accomplish,” he said. “After all, it’s not like Airbnb caused the prostitution.” More effective sharing economy services should translate in the long term to people hiring or buying more, stimulating the economy, and causing the overall pie of opportunity to grow, added McQuivey.