Outside investment has been pouring into the short-term rental industry for the last seven years with increasing intensity, but on the heels of Airbnb’s IPO success story, the funding frenzy is now in full swing.
“This year, the investor funding level for startups is tracking at a pace of about 40 percent above the most recent investing peak in 2018, according to data tracker PitchBook,” Skift reported. “The vacation rental sector has drawn attention in light of the success of Airbnb’s initial public offering.”
The news story du jour is Vacasa’s purchase of TurnKey Vacation Rentals for an undisclosed sum. Since 2013, TurnKey raised $120 million through seven funding rounds. By comparison, Vacasa raised $634 million over the same period.
However, hundreds of millions of dollars of investment into short-term rental (STR) companies were wiped away in 2020 via business closures, including $179 million at Lyric, $62 million at Stay Alfred, and $116 million at Domio. Even before the pandemic, Tripping closed after raising $60 million, and LeisureLink shut its doors after bringing in $42 million.
Yet, the money keeps coming. Cosi announced just last week that it had raised $23.7 million, and a few months ago Casai raised $48 million.
With so many companies folding under the weight of inflated investment and so few funded companies reaching sustainable profitability, we’re left to wonder―what is it that the investment community doesn’t understand about the STR industry?
THE “INVESTMENT COMMUNITY”
“The ‘investment community’ is a broad term that encompasses venture capital (VC), private equity (PE), family offices, and other various funds and firms,” explained Jacobie Olin, president at C2G Advisors. “They all have different objectives when focusing on the short-term vacation rental industry,” he continued, and there are “high-level points that the investment community does not fully grasp”.
FRAGMENTED DOESN’T EQUAL STUPID
The vacation rental industry is often described as fragmented and mom-and-pop. These descriptors seem to lead investors to believe that the sector is unsophisticated and antiquated.
Rented CEO Andrew McConnell said: “Many times, over many decades, smart people have come in thinking everyone in the industry had it wrong, and they will fix it (with technology, etc.). Then they face the harsh realities of the incredibly manual, and fickle ground game that this industry requires. Code integrates well and efficiently; super manual on-the-ground operations, less so.”
METRICS, MANAGEMENT, AND MONEY
According to Simon Lehmann, founder and CEO, AJL Atelier, “[Investors] don’t understand the fact that we deal with privately owned assets, the challenges that this brings to our industry, and the impact it has on the unit economics.”
Unit Count Doesn’t Correlate with Success
“Unit count alone is not a measure of success,” said Robin Craigen, cofounder and CEO at Colorado-based Moving Mountains. “Guest review scores, owner satisfaction and retention, a stable, experienced and passionate employee pool backed by a strong company culture for delivering exceptional hospitality, and―wait for it―profitability, are the metrics that investors should be considering. It’s not easy to scale and achieve all of these, and without all of them, the business is not sustainable. All that glitters is not gold.”
Experienced Management is Critical
“The VR industry is extremely complex, and an industry-experienced leadership team, especially a competent CEO or Managing Member, is essential to financial success,” said Steve Milo, founder and CEO at VTrips. “Conversely, incompetent leadership in this sector, especially at the CEO level, can drive a good company into the ground. Pretty pitch decks and cute cookie cutter business models may raise money from VCs, but they have never proven to work in the property management sector. If that was the case Domio, Lyric, Stay Alfred and other urban players would still be around instead of going out of business the first time they faced adversity.”
The Language of Profitability
“The best perspective on the vacation rental community right now as an asset class is to think about a vacation home not as a commodity but as an operating company doing what all operating companies do―seeking to maximize revenue and minimize costs,” said Clark Twiddy of North Carolina’s Twiddy & Co. “As the investment community assesses vacation rentals, I think the primary barrier―if any―is one only of language. For example, if we reframe annual booking revenue into something more akin to a more conventional equity measure―earnings-per-share, for example, I think we’re bridging language. As an additional example, if we describe a sales price to a vacation home as in many ways a reflection of a price-to-earnings ratio, we’re bridging language.”
LOCALIZED OPERATIONS HINDER SCALABILITY
“Vacation rentals are deeply connected to the specific place they are located,” said Margot Schmorak, cofounder and CEO at Hostfully. “Management of each requires a local-centric approach. This goes for revenue optimization, handling policies and regulations, and maximizing auxiliary revenue from in-destination tourism spend. The one-size-fits-all ‘let’s standardize and save money’ approach will not work at scale like it can for hotels. It requires a more flexible approach so unique local factors of a rental can be part of the value proposition. Otherwise, lost revenue will continue to be left on the table.”
VACATION RENTAL MANAGEMENT ISN’T A TECH PLAY
“They think we are a ‘tech play,’ which we are not, and that we should be valued off revenues and not worry about profit, which is so wrong. Wall Street vs real businesses sometimes are complete opposites,” said Jim Olin. “We are managers, plain and simple, and the best of us throw off large amounts of cash when run correctly.”
According to Audrey Leeds Miller, cofounder and managing director at Cottage Connection of Maine, “It is the wild-wild-west in the VR industry right now. Ethical, eco-centric, consumer safety policies, and sensible regulation are going to become more prevalent. Demand is currently high because of COVID. This will slow down when travel restrictions are lifted and Americans can go to other parts of the world.”
Miller advised, “Investors should review what happened during the .com bubble, remember that the vacation rental industry is based on relationships, and plan accordingly.”
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