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.
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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.
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.
Companies like Uber and Lyft face another gray area after the death of a young girl earlier this year.
FORTUNE -- When is an Uber driver an Uber driver, and what happens when there's an accident?
Million-dollar questions like these -- and more -- are being asked in the aftermath of Sofia Liu's death. On New Year's Eve, the 6-year-old was struck and killed by Syed Muzzafar in his gray Honda Pilot MOREJP Mangalindan, Writer - Feb 6, 2014 5:00 AM ET
In courtroom battles against the room-rental service, elected officials find themselves facing a surprising opponent: the people.
FORTUNE -- The week before Thanksgiving, roughly 200 Airbnb hosts and community organizers sat shoulder-to-shoulder at The Alley, a Midtown Manhattan co-working space popular with techies. The event was convened by Peers, an organization developed to support the growth of the sharing economy.
An Airbnb host named Mishelle Farer got up to speak. Farer explained MOREJessi Hempel, writer - Dec 9, 2013 4:05 PM ET
New products enable the startup's 350,000 hosts to do without the desktop.
FORTUNE -- Airbnb wants its hosts to get out of the house.
At a press event Tuesday at the company's San Francisco headquarters, co-founders Brian Chesky, Joe Gebbia, and Nate Blechzarczyk introduced redesigned Apple (AAPL) iOS and Google (GOOG) Android apps with an emphasis on improving the mobile experience for the company's 350,000 hosts.
"Hosts said they don't have all the tools that MOREJP Mangalindan, Writer - Nov 12, 2013 3:11 PM ET
Buyers can use other FON routers anywhere, free of charge.
By Michal Lev-Ram, writer
FORTUNE -- The "sharing economy" seems to be working for cars and vacation rentals, so why not Wi-Fi?
FON, a Madrid-based company, is trying to cash in on the growing collaborative consumption trend by offering a new, $59 router that turns home Wi-Fi networks into community hotspots. Users open up their network to other FON members, and MOREMichal Lev-Ram, writer - Oct 23, 2013 11:24 AM ET
Why RelayRides is buying Wheelz.
By Kurt Wagner, reporter
FORTUNE -- Peer-to-peer car-sharing service RelayRides announced on Tuesday the acquisition of competitor Wheelz, a San Francisco-based startup also connecting users with nearby rental cars. The deal's financial terms were not disclosed, but Wheelz's financial backers have agreed to carry over their investments to RelayRides. Wheelz has raised $15.7 million in funding to date, and investors include Zipcar, Social+Capital Partnership, and Fontinalis MOREMay 14, 2013 6:45 AM ET
Startup hopes new verified ID badges will attract more users.
FORTUNE -- Starting April 30, Airbnb will go to even greater lengths to insure you are who you say you are, online and in the real world. The apartment-sharing site will begin rolling out a verified identification program that matches digital identity -- via social networking sites -- with real-world proof -- a photo ID. Once members have been verified, Airbnb MOREJessi Hempel, writer - Apr 30, 2013 12:00 PM ET
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