Venture Scenes | Take 7

PropTech Investment Thesis

PropTech Investment Thesis: Airbnb Management

In December 2020, Airbnb went public. The fact that the company maintained its route to the public markets in a pandemic is a miracle in its own right. And while Airbnb is but one platform in the overall Short-Term Rental (STR) landscape, it has arguably had the greatest transformative effect on the STR real estate market. But as the company has scaled, so has the need for tools to help property managers run their operations. As The Generalist notes:

At scale, professional hosts often turn to tools beyond the Airbnb platform. Beyond Pricing and Wheelhouse optimize nightly rates, while Guesty manages bookings across platforms including Airbnb, Booking.com, and Vrbo. This represents a notable development in Airbnb’s market — as competition has increased, professional hosts now promote listings on several marketplaces. For reference, Sylvia received approximately 65% of their bookings through Airbnb, 30% through Booking.com, and the rest through VRBO and other listing sites.

Source: The Generalist

Startups have inserted themselves into the workflow of Airbnb hosts, and for good reason. This is a lucrative and growing market opportunity. The Airbnb host market is also fragmented and littered with pain points, as discussed below.

Problems

Opaque and Cumbersome STR Investment Process. Investing in the STR asset class requires extraordinary time, diligence, and capital. As it stands today, there is no incumbent STR real estate investment platform that can automate this process (as Opendoor or Fundrise have done for traditional RE investing). While scaled solutions exist for a number of alternative asset classes, STR has not seen the same level of sophistication in its short life cycle. Therefore, retail and institutional investors are left to their own devices, which can lead to over 100+ hours of labor before a property is commercially viable.

Fragmented Market with Host of Operational Issues. 90% of Airbnb hosts are individuals (vs. Property Management Companies) indicating broad whitespace for management services. But the professional Airbnb property management market is also highly fragmented. 70%+ of STR property managers manage fewer than 20 properties on behalf of their clients. Most STR PMs nationwide are mom-and-pop operations with little sophistication, which begets quality issues. Overall, 30% of Airbnb owners view technology as their greatest struggle. Within technology, centralization, automation, pricing, and reporting represent some of the top challenges.

Property Maintenance & Guest Communications. Reviews are critical to Airbnb hosts and their properties. They dictate the visibility of any given Airbnb property, and property maintenance and guest communications play a crucial role in the review process. But maintaining an Airbnb is often referred to as a second job for STR property owners. 18% of Airbnb hosts view turnover and cleaning as their number one challenge. The problem compounds once STR investors or managers add more assets to their portfolios.

Supply Shortage. Airbnb currently has over 5.6mn listings from 4mn hosts, but there is an industry-wide supply shortage for hosts and properties. The traditional rental property management firms are reportedly struggling to keep up with the demand for their services. In some markets, AirBnB owners must convince retinal PMs to work with them. Airbnb CEO Brian Chesky recently told CNBC that the platform would need “millions of more hosts” in the coming years to meet demand. This represents a challenge for the existing mom-and-pop rental property management companies, but a lucrative opportunity for STR owners and tech-enabled business models in the rental PM space.

Trips Feature has Failed to Resonate with Hosts. Airbnb launched its Experiences offering in 2016 to significant buzz. The company actually describes the feature as “the most significant development in its eight-year history.” According to the Generalist, “Trips provided access to special guidebooks, and bookable Experiences, like learning to make a violin in Paris.” But the feature has never truly caught on. In fact, it was not mentioned once in Airbnb’s S-1.

STR Market opportunity

Airbnb believes its near-term Serviceable Addressable Market stands at $1.5tn (includes $1.2tn in Short term stays and $239bn in experiences & attractions). Interestingly, the company’s bookings of $38bn in 2019 only represent ~3% of its purported SAM (BofA). BofA expects Airbnb’s bookings to hit $56bn in 2023, growing 48% from 2019. The company has estimated a long-term market opportunity is $3.4tn.

BofA

Startup to Watch

Andes STR. A proptech solution that assists users with finding short-term rental properties, facilitates the purchase, and manages them as rentals. The properties are listed on sites like Airbnb and Booking.com. Andes STR handles communicating with guests and maintaining and cleaning rentals in between bookings. The company was the Polsky New Venture Challenge winner, a month-long competition that pitted the company against a strong competitive field of Chicago Booth startups. The company won $680k in SAFE funding from the Polsky Center at Booth.

The product offering can be broken down into two core buckets:

• Investment Advisory & Analytics. Andes consults with retail and institutional investors at the earliest stages of the STR investment process. The company meets with prospective buyers to gain an understanding of their investment objectives and goals. Then, the company deploys its proprietary algorithm to a given market in order to automate the property selection process. The company then utilizes its local brokerage partners in a given geography to narrow its list of prospective properties. Finally, Andes utilizes its algorithm to fine-tune its selection of properties, providing clients with detailed financial projections for every given property. Once the customer has finalized their selection, Andes negotiations the purchase on behalf of the customer.
• STR Maintenance & Management. Andes provides full-service management for AirBnB properties. The company has partnered with cleaning companies in all of its markets (Toronto, Etobicoke, Orlando, Miami, and Santiago) and coordinates cleaning in between stays. Andes also has partnered with prominent furniture companies in its serviceable markets. The company has formulated an operational plan that handles guest inquiries that typically contribute to higher guest ratings. Andes works with AirBnB owners to develop dynamic pricing strategies based on local market conditions. Lastly, the company provides marketing services that optimize listing visibility on rental platforms and provides clients with periodic reporting on property performance vs. benchmarks.

I believe the young company offers a number of distinct and compelling advantages:

• The value proposition is solid and revolves around offering both AirBnB cost-saving and revenue-generating services. STR rental management companies typically generate 8x better unit economics versus rent-by-owner. Andes believes it can generate 88% higher revenues for its clients versus long-term rental alternatives.
• Their Ideal Customer Profile is high net worth professionals who have at least $2mn of assets, with minimum liquidity of $150–200k (ideal customer has over $1mn in liquidity) Essentially, Andes is targeting accredited investors looking to diversify their holdings with exposure to the STR space. As previously noted, this is an investment class that accredited investors have had few services to augment their investing activities.
• Has the ability to develop a MOAT with respect to its algorithms. As the company continues to assist clients with their purchases of STRs, the strength of the company’s proprietary algorithm should theoretically increase.
• AirBnB management solutions showed evidence of displaying high switching costs/stickiness during the pandemic. Hosts and managers largely continued to pay for their management services throughout COVID, including the cleaning, marketing, and dynamic pricing tools. Finally, the operational prowess and experience of the team present a strong case for defensibility.
• The founding team is of “rockstar” caliber. CEO & Co-Founder Sebastian Rivas has strong founder-market fit as he spent ~4 years in the real estate and infrastructure space as an investment banker and private equity analyst before starting Andes STR. He is clearly capable of impressing some of the most prominent VC’s in the country, as evidenced by the NVC win
• Large enough TAM to IPO, should Andes acquire scale. A very conservative bottoms-up TAM reveals a $7bn opportunity buttressed by the $700bn travel market and experience economy in North America. TAM is expected to grow 48% to 2023 to $12bn. The vacation rental market is growing at a 8.5% CAGR. The startup is also strategic to Airbnb, which purchased a European comparable company in 2018 and bought Proprly in 2016

That said, the company is not without its challenges to scale. There are 1,000s of regional competitors (many are mom-and-pops) offering some form of Airbnb property management services.

Overall, I am extremely excited to watch Andes continue to execute on its vision. I think the company has some serious tailwinds behind it, and it has the potential to become the next unicorn in the growing STR space.

Additional Startups

• Buoy. Proptech startup offering revenue management services for STR owners and managers. Buoy has created a proprietary algorithm that is fully dynamic and entirely market-based. It uses an index of millions of vacation rentals and hotels from around the world to set an optimum rate for its hosts. The company believes that it is the only interface to combine rate-setting, market intelligence, and reporting into a single timeline. The founding team also believes that the traditional “base rate” pricing algorithm (subjective number that is set by any given Airbnb owner or manager) has a negative impact on the bottom line for most Airbnb properties. Early diligence reveals a true differentiation between its competitors (Beyond, Price Labs, Wheelhouse, Rented.com) who universally utilize a Base Rate algorithm. Buoy is currently enrolled in the Techstars Chicago accelerator. The company’s proprietary algorithm and revenue-generating value proposition can be previewed here and here.
• Indie. Startup looking to connect Travel Creators to hotels, airlines, online travel agencies, and STR hosts). The company will look to partner with STR hosts through future integrations with Airbnb. Once integrated, hosts will be able to partner with Indie to offer “Trips” to potential guests that include time spent with Travel Creators who have built audiences on Patreon, Substack, or Clubhouse.

Conclusion

Airbnb is one of the most transformational platform businesses of the 21st century. What it has done for the Short-Term Rental market is remarkable. It is the rare startup that, due to network effects, has been able to dramatically increase the size of its TAM. But there are still pain points that startup founders can address, and I am excited to continue to search for early-stage software startups looking to build solutions aimed at the STR market.