Two of the leading companies in the short term rentals and co-living markets saw their founders depart in recent management shake-ups. 

In mid-February, Vacasa’s CEO and co-founder Eric Breon relinquished the chief executive role and was replaced by board member, and former CEO of OpenTable, Matt Roberts as interim CEO. In late February, co-living company Ollie announced that founders Chris Bledsoe, CEO, and Andrew Bledsoe, COO,  left the company in January. Board member Gregg Christiansen has stepped in as president. There has been no word on their CEO and COO search.

Both of these companies were venture-backed with Vacasa raising a total of $526.5 million, a huge sum. Their recent round of $319 million in October 2019 puts the company’s valuation at over $1 billion, making it the sector’s first ‘unicorn.’ Ollie raised a $15 million Series A in early 2018 and was looking to raise $50 million through another funding round in late 2018, according to Bisnow. This additional funding, however, has yet to materialize.

Founders have been known to step aside for more experienced executives as their companies grow and change. With Vacasa and Ollie, the departures may not be entirely amicable. The founders’ exits were abrupt with no imminent successors to helm the business – generally, that is not a good sign. The companies have been mum about these departures. There could be a number of reasons why these founders left, such as philosophical or strategic differences between founders and their investors, the investors have lost confidence in the founders, personal or family reasons, or the business is in trouble.

These abrupt founder exits are troubling and point to possible cracks in the current short term rental and co-living business model that has adopted the traditional VC playbook of raising a lot of money, putting that money into growth, and then raising more money. However, gaining market share has proven to be expensive and investors have become impatient with losses. 

These fast-charging real estate ‘disruptors’ are traveling in an eerily similar trajectory as the venture-funded direct-to-consumer (DTC) brands — media and Silicon Valley darlings such as Outdoor Voices, Brandless, Peloton — that are now selling at steep discounts or have closed shop. Last week we wrote that UK property management company Hostmaker could be headed for bankruptcy if they don’t get additional funding.

A recent BOF article on the DTC reckoning is sobering and serves as a cautionary tale for branded STR and co-living companies as we consider what may have led to the management fallout at Vacasa and Ollie.

Untenable Growth Expectations

Some in the business community have attributed the DTC woes to the untenable growth expectations that come from venture capital. BOF noted that investors can tolerate losses but eventually they will need meaningful returns on their capital.

As a generation of digital-native consumer product companies such as Warby Parker and Bonobos enter their second decade, the VC-funded, direct-to-consumer business model they pioneered is facing a reckoning.

Over the last decade, thousands of companies selling everything from shoes to T-shirts to toothpaste have followed the Silicon Valley playbook of aggressively raising capital and pursuing growth at all costs. Their investors tolerated years of losses because the goal was scale: secure a big enough share of the market…drive down unit costs, and profits would follow.

For a while, it worked like a charm…

Many of these companies are now at the point where investors expect an exit: either an initial public offering or an acquisition by a larger retailer. Neither path looks particularly promising at the moment.

Unfortunately, some of these venture capital-backed DTC startups failed to scale as quickly as anticipated. 

Capital Addiction

There was plenty of capital looking for investments and raising money was never easier than throughout the past few years. The danger with an abundance of capital is that business fundamentals may get overlooked. As explained to BOF, Alex Song, founder of Innovation Department, a digital brand creation platform, calls this the addiction to capital.

Direct-to-consumer brands raised round after round of capital at higher and higher valuations. Much of that cash was funnelled toward marketing as it became harder to acquire new customers and Facebook and Google hiked advertising prices.

Song called this the “vortex of venture capital,” where the more money a company raises, the more money it needs to raise. 

If revenue growth slows and a company has yet to turn a profit, it’s tell-tale sign that “you’ve built a business that’s addicted to capital,” Song said. “And a strategic acquirer does not want a business that’s addicted to cash.” “All this unicorn status, it’s just inflated. It’s paper money and it’s not real.”

Another danger of capital addiction is that it causes companies to focus on expediency (boost to sales/top line) rather than longevity (profit growth). “Raising much cash also warps the natural trajectory of a company” because cash enables companies to focus on quick customer acquisition to boost sales rather than nurturing organic growth that yields a more sustainable business.

Marginally Better Product, Not a Tech Company or Category Disrupter 

Many companies like to think they are category tech disruptors which help them command higher valuations, but in reality, some are only offering marginally improved products.

“Most of these companies haven’t really innovated, they’ve just created novelty,” said Song. “It’s very much saying, ‘Hey, let’s make something more beautiful, something that speaks more clearly to a millennial demographic and feels attractive and digestible. And we’ll see what happens from there.’”

Also, DTC drew a lot of interest because it was going to replace brick and mortar retail. It didn’t. It is essentially another retail distribution channel. Sam Kaplan, a venture partner at Burch Creative Capital tells BOF, “It’s not that direct-to-consumer business as a channel is dying, it’s that direct-to-consumer is and always has been a distribution channel alongside wholesale and owned retail.”

Similarly, STR is not replacing hotels and co-living is not replacing the various multi-family housing models. They are just another option for travelers and renters.

Silicon Valley is always on the lookout for the next technology company to disrupt an industry. Companies get higher valuations if they are “tech” companies. However, many of these product companies call themselves tech companies simply because they are using technology to enhance their product.

“These companies are funded like a tech company assuming that once you have a customer they’ll stay with you,” Pat Robinson, Managing Director at CircleUp Growth Partners, an equity fund and credit provider tells BOF.

Investors to Shore Up Businesses

The DTC sector serves as a warning to real estate start-ups trying to take a page from the DTC playbook in using private capital to generate hyper-growth that masks a weak underlying business. These fast-charging real estate ‘disruptors’ are finding that their capital addicted, fast-growth business model is no longer sustainable. Gone are the days of lofty valuations for marginal product companies.

The focus now is on profits, but these companies have to consider further expanding their top-line, including adding new products. We are likely to see the STR and co-living sectors blur, offering increasingly similar products. Of note, Ollie plans to launch a STR business and has put up a coming soon message, “We’ll be bringing Ollie’s hotel-style living to shorter stays with Ollie Colodging,” on their website. As the sectors evolve, gaps in the business model are exposed and these management changes are a signal of market maturity. To shore up businesses that are on shaky grounds, investors will take the reins to protect their investment return.

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Categories: Stays