Here's why alternative lodging valuations are skyrocketing
There’s a lot of talk in the hotel industry about massive growth from homeshare players like AirBnB but relatively little talk about the immense growth of franchise brands.
For years now, major brands like Marriott have growth hacked their way to scale by going asset light. By relieving themselves of physical assets and focusing on a franchise business model, Marriott projects 1,700 new hotel openings between now and 2021.
This growth may seem surprising given all the buzz around travelers wanting unique and local experiences but there’s also been a ton of growth amongst incredible boutique hotel concepts. Think about brands like Two Roads (Thompson, JDV), Bunkhouse, Nomad, Freehand, Standard Hotels, Public Hotels, Bunkhouse, 25H Bikini - the list goes on and on.
All of the “independent brands” mentioned above (several have been acquired by chains) have found ways to create incredible (and unique) travel experiences for guests but there is one thing holding them back - scalability. Even the best (and most capitalized) management teams have barriers to scale like identifying unique real estate, negotiating large scale transactions, securing financing and building out properties.
AirBnB took a different approach to rapid scaling by leveraging the power of an unregulated marketplace model. As a result of this strategy, just 9 years after its founding, AirBnB already had more rooms online than the top 5 brands combined.
AirBnB passed the top 5 chains by # of listings (CB Insights)
You’d be hard pressed to find a friend who hasn’t had a crappy experience on AirBnB but they’ve probably also had some great ones. Where the franchises found a good balance between scalability and quality control, AirBnB and the homeshare economy sought rapid scale in unregulated markets.
More recently a new category of hotel management company has popped up. Some call these players hometels (home+hotel) and they’re more generally referred to as alternative lodging. Brands in the alternative lodging sector include Stay Alfred, Sonder, The Guild Hotels and to some extent groups such as Selina and OYO. The alternative lodging sector brings similar scalability to homeshare companies with similar quality control to brands. Sonder, for example, was founded by college students in 2012 and just 5 years later hit $100M in revenue with it’s rapid venture capital fueled growth.
The alternative lodging sector brings the consistency of a hotel without the overhead and therefore often charges cheaper rates relative to comparable properties. While attending the Triptease Direct Booking Summit in Dallas last year I slept at Sonder competitor Stay Alfred and the experience was remarkable.
Stay Alfred had leased a floor of apartments next to the Statler Hotel (Hilton Curio Collection) and converted the apartment units into hotel rooms. These rooms were larger than the rooms at the Statler next door and one third the price. Upon arrival I headed to a Key Cafe kiosk in the lobby of the building to get my key - the process was completely seamless and I never interacted with a single person. The room came outfitted with DirectTV and high speed WiFi as well as HDMI cables to plug in my devices.
The alternative lodging experience is undeniably something that the hotel industry needs to keep careful tabs on as it scales quickly and will be highly disruptive to certain segments of the market - perhaps even more so than AirBnB.
Companies like Stay Alfred and Sonder have used distribution channels like Booking.com to kickstart their growth and have augmented digital advertising efforts by offering unbeatable (sometimes even unprofitable) prices to bring customers in the door via 3rd party distribution channels. Once customers like me are in the door and have a great experience - we then tend to look for those properties for similar use cases in the future. As an example, I recently went straight to Stay Alfred’s website to book my hotel for an upcoming conference.
It’s not all fun and games though in the alternative lodging sector as the excitement has pushed valuations into what many believe is bubble territory. Alternative lodging player Selina which is often referred to as a “co-living hospitality brand” (aka glorified luxe hostel with good WiFi and coffee) recently raised $100M at an $850M valuation for it’s portfolio of 22,000 hostel beds.
To put the Selina valuation in perspective, John Pritzker’s Geolo Capital sold Two Roads Hospitality to Hyatt for $430M last year. At the time Two Roads managed 17,000 hotel rooms with a significant development pipeline and iconic brands such as Thompson and Joie De Vivre. Two Roads was producing approximately $40M of EBITDA at the time of the sale while Selina is likely to see losses for many years to come.
The alternative accommodation market is undeniably frothy with prices driven up by venture capitalists who have AirBnB fomo and are paying technology multiples for real estate companies. Today’s TechCrunch article fires a warning shot to investors:
"...one focus will be to improve the booking process and algorithmic recommendations that people use both to figure out where to travel next, as well as what they want to do when they get there." ~TechCrunch comments on Selina’s use of $100M
The question to ask is whether these are real estate companies fronting as tech companies or whether they’re the real deal. Do we actually need algorithms to tell us where to travel next? If so, is that technology actually valuable?
One of the major proponents of the alternative lodging sector has been Thayer Ventures, a travel tech focused venture capital firm with deep ties to the hotel industry. Thayer’s focus on travel and hospitality gives the firm a unique perspective so we sat down with Venture Partner Katherine Grass to discuss hotel tech, the rise of alternative lodging and more. Katherine previously founded Amadeus Ventures and has met with literally thousands of startups in the space over the years - she’s seen it all and has unparalleled insight into the alternative accomodation trend.
How did you get into travel tech venture investing?
I started my venture career at Amadeus IT Group where I founded Amadeus Ventures and went on to build out an entire ecosystem of programs working with external players and created their global Innovation & Venturing unit. Ventures had always been my first passion - aiding startups to be successful. Therefore, when the opportunity arose to join Thayer Ventures, Thayer being the leading travel-technology fund globally, I naturally jumped at the idea!
Thayer Ventures is unique because we are not only one of the few travel-technology focused funds globally, but all partners come with a very deep expertise and network in this space. Therefore, we are not only able to make solid investment decisions based on our industry expertise, but we are able to truly help our portfolio companies, whether that be with industry contacts, strategic direction or business development.
What hotel and hospitality tech companies have you invested in?
Being travel-technology focused, we have many hospitality tech investments in our portfolio. Mews Systems, Optii Solutions, HYP3R, Sonder, BookingPal, Duetto, Groupize and Social Tables are examples of hospitality tech investments. Social Tables recently being sold to Cvent. While Dishcraft Robotics and xx are additional investments that apply to the hotel sector.
How do you usually come across hotel tech investment opportunities?
Because we are one of the leading funds in travel technology, we have a combination of companies reaching out to us, referrals from other generalist funds looking for a travel-tech expert as well as directly discovering startups at major events.
Most of our investments tend to be Series A and we will absolutely lead rounds where it makes sense.
What’s one piece of advice you have for hotel tech entrepreneurs when raising capital?
Hard to pick one piece of advice! My advice would be to ensure you are addressing a real business problem in the industry. You would be surprised by how many startups develop ideas for concepts that aren’t seen as real pain point opportunities by the hotels. Additionally, ensure your opportunity has a big enough addressable market. This means there is enough profit to be made by your idea if you’re successful. Small opportunity means small profits, and you won’t get investors attention with this.
How do you think the hotel technology space will change over the next 5 years?
We will definitely see the hospitality tech stack open up and be more interactive. This means open APIs and the ability for various pieces to interact with each other and not necessarily all be from the same vendor. On alternative lodging, we still have massive growth in this sector and we will see this continue over the next 5 years.
People often say that the hotel industry is slow to adopt technology. Do you agree?
I don’t agree. We have seen hotels becoming increasingly open to quick experimentation and pilots, and as solutions become more cloud-based and API-led, it will only increase. Some legacy systems made this testing more difficult in the past due to the integration effort required for experimentation, but we are definitely seeing this change.
What is the most interesting or surprising thing that you’ve learned from investing in hotel tech?
An interesting trend we are seeing in the hospitality tech space has been the continued growth and strength of what we call alternative accommodations.
For all of the startups that might want to pitch in your office, what can you tell them about your investment criteria, etc. to help them decide if they are a good fit for your portfolio?
We are looking for stellar teams. Most all of our investments are Series A, meaning the startup already has some initial traction and customers with strong growth potential. Are investments are global but must be in the space of travel-technology. For us this means hospitality tech stack, alternative lodging, tours & activities, corporates & meetings, smart cities and mobility & transportation.