Clutter and the Emergence of Tech-Enabled Real Estate Platforms

Today, Clutter announced a $20M Series B financing from Sequoia Capital. This financing comes just 6 months after their $9M Series A also led by Sequoia. And it comes just 11 months after our seed investment in Clutter’s $2M angel financing. Announcement here: Clutter on-demand storage services packs up $20 million from Sequoia

Clutter is a rocketship; disrupting the sleepy $30 billion per year self storage industry in the US. The company is also representative of a rapidly growing new category of disruptive platforms that are leveraging innovative technology themes (sharing economy, on-demand technology, tech-enabled logistics, mobile) to build an entirely new paradigm in real estate.

Traditional self storage isn’t fun.

What does Clutter do? Simple. Clutter is a self storage company that picks up your stuff, photographs it, barcodes it, and then transports it to a remote, secure industrial self storage facility for long-term storage. When you need your items back, you can simply request them on the Clutter mobile or web app and they are delivered to you. Painless, easy and efficient. If you’ve ever been to a Public Storage facility, lugged your sofa up a flight of stairs to shove it into a shed-like unit with a heavy lift up gate, you can probably appreciate how superior Clutter’s customer experience is. Basically, Clutter is self storage that doesn’t suck.

But the beauty of Clutter isn’t just a superior consumer experience to its alternatives, its also cheaper. Clutter can store the same amount of “stuff” from your home at a fraction of the price because its stored in a lower cost location (often outside the city center) and Clutter can pack your items more densely into that space. As Clutter fills up these industrial warehouses with consumer’s “stuff” its costs get cheaper and cheaper. And unlike a physical self storage location, Clutter can never “fill up”; there’s a virtually limitless amount of underutilized industrial store space available at very low rental rates.

So what kind of business is Clutter? Is it a real estate company? It is a logistics company? Is it a technology company?

answer is actually quite confusing because its really hard to pin down. Clutter is a self storage real estate company in so far as it sells the use of physical space: it stores physical objects in physical space and charges the customer for it. On the other hand, it doesn’t own a single real estate asset; so how can it possibly be a real estate company? In effect, Clutter is a real estate company that DOESN’T OWN A SINGLE ASSSET.

Clutter is not alone in this emergent category of companies building the next generation of real estate businesses without any hard assets. Airbnb, WeWork, Common, Luxe, Zirx, Storefront, LiquidSpace, Breather, and many more fall into this category. All of these businesses monetize physical space which is the hallmark of any real estate business model. Airbnb is monetizing the spare bedroom you stay in, WeWork is selling you co-working office space, Zirx is finding you a cheaper parking space for your car, Storefront is leasing you short-term retail space, and Clutter is storing your stuff. All of these companies make their money by selling you the use of physical space. That’s real estate folks.

So with no physical real estate assets, how do these companies actually monetize space? With some combination of a few innovative approaches:

  • Rental Arbitrage: lease space and then re-lease it to you at a higher rate or with denser utilization. When done at scale this generates a positive margin between the rent they charge their tenants and their fixed cost (the rent they pay their landlord). WeWork is the paradigm here: it signs leases with landlords and then re-lease that space at higher rates with higher occupancy (more tenants, many shared desks/offices) to make a positive spread. In some cases WeWork actually has the leverage to utilize a franchise model due to its brand recognition allowing them to offload both buildout cost & re-lease risk by simply structuring a revenue-split with the landlord while having no fixed costs.
  • Geographic Arbitrage: utilize logistics technology to sell space that is far cheaper because its in a less desirable location. Clutter is the paradigm here: Public Storage locations in downtown San Francisco are really expensive. Why? Because there are very attractive alternative uses for this space. Public Storage has to compete with all the alternative and better uses for that location (apartments, retail, office space, etc.). These alternative uses are embedded in the higher rates you pay for these locations. By comparison, Clutter stores your stuff outside the city in industrial storage facilities in remote locations on giant racks where Tetris-like algorithms densely pack items to maximize space efficiency. The result: lower cost.
  • Enfranchising Unused Space: leverage sharing economy concepts by enfranchising and then monetizing space that would otherwise go unused. That empty bedroom you never use? With Airbnb it’s a hotel room and supplementary income stream . There’s an enormous amount of underutilized space in the world from empty bedrooms to empty parking spots to spare desks in offices. Individually, they are hard to market but with a marketplace, all of this space is now monetizable for owners. Airbnb just takes a cut off the top.

In truth, all the companies we referenced borrow from all three approaches, some more so than others. But the overarching theme is consistent: reimagining how physical space is utilized and monetized.

These businesses are becoming enormous. WeWork ($18 billion) has approximately the same value as Boston Properties ($19 billion), the largest public owner of office buildings in the US. Airbnb ($30 billion) is valued significantly higher than every other hotel company including Marriott, Hilton, Starwood, etc. But neither WeWork nor Airbnb owns a single asset. Granted these are private market valuations not public valuations and may be very aggressive but the point still stands: you don’t need to own assets to build huge real estate companies anymore.

There is some downside here: none of these businesses have real estate upside. Meaning, when the value of a real estate asset increases, a traditional real estate company captures that upside. Since Airbnb, WeWork, and Clutter don’t own their assets they don’t capture that potential upside. The flipside of that is that these companies don’t take real estate risk. When real estate values go down it doesn’t impact these tech-enabled real estate concepts, in fact it may benefit them as their rents may get cheaper (WeWork is exposed to long term leases in a real estate down cycle but a proliferation of their franchise model could insulate them to a certain extent)

We believe this trend towards tech-enabled real estate platforms will play out in many subsectors of the real estate industry. And it already is. To name a few:

  • Office: WeWork, Breather, LiquidSpace, and literally hundreds of co-working concepts
  • Residential: Common, WeLive, and many more co-living concepts
  • Retail: Storefront, AppearHere, and a wide array of pop-up, short-term, and kiosk retail concepts
  • Hospitality: Airbnb, HomeAway, Pillow, etc.
  • Parking: Zirx, Luxe
  • Storage: Clutter, MakeSpace, Boxbee
  • Gym: ClassPass, which is basically the largest gym in every market where it operates

These next-generation, technology-enabled, asset-light real estate businesses will continue to emerge. They are hyper-scalable, partly because they are so capital efficient as you don’t need to purchase/finance hard real estate assets.

Technology is reimagining everything. And real estate is clearly not immune from that. These asset-light tech-enabled real estate companies are encroaching on the largest industry in the US, the real estate industry which represents $40 trillion of asset value and contributes $2 trillion to US GDP.

Needless to say….lots of opportunity.