Why Is There So Much “Red” Around Vacation Rental Unicorns?

Author: James Olin
Category: Industry News
November 11, 2019

​This guest post is by Inner Circle leader James Olin, CEO of C2G Advisors LLC​, who has been ​involved in M&A activities in vacation rental industry since 1992. ​He ​is the only person to be CEO of both the nation’s largest privately owned vacation rental company (Abbott Resorts), and largest public vacation rental company (ResortQuest). ​Which is to say, his opinions on the industry hold great weight.

​Sonder, StayAlfred, Vacasa, Lyric, Domio, and a host of other national “start-ups” have gotten huge headlines over the past couple of years for their incredible unit growth. The media has made them their darlings, and all of them have done an excellent job raising funds and touting their fantastic technology and processes.

In many cases, their operations clearly back up their claims, but are these the companies we as “Mom & Pops” (aka traditional vacation rental companies) should compare ourselves to? 

Who ​am I?

For those that don’t know me, I am the former CEO of 3 vacation rental companies: Abbott Resorts (NW Florida), ResortQuest (North America) and Sterling Resorts (NW Florida). I have been in the industry for well over 30 years, and started before there was internet, email, and all the other contraptions we all use today. My son/partner and I do the majority of the Buy-side acquisition consulting for the industry as well as a host of other advisory roles. 

​Start-ups vs. Mom​ and Pops

To set the “stage”, let’s discuss the difference between the Start-ups (Unicorns) and the rest of us.

A Start-up for this ​article is defined as a company looking for a national or international footprint within some part of the short term rental industry. This could be…

  • ​Traditional vacation rental management companies such as Vacasa, TurnkeyVR et al.
  • Lease Arbitrage (aka Serviced Apartments) like companies such as Sonder, StayAlfred et al.
  • ​Hybrid ​models like AvantStay, Stay D. Alexander et al. 

The growth for all of these companies focus on revenue and inventory growth, and not profitability. They raise funds through investment vehicles (private equity, hedge funds, etc.) and look for an exit strategy such as going public (aka IPO) or getting bought by a larger company.

Mom and Pops are defined as ‘US.’ Small, medium or large vacation rental companies that are locally owned and have grown slowly by adding inventory, services, and other operations that provide value to the company. The focus is on profitability, and only using debt or investment when absolutely necessary.

Let’s look at the similarities and differences between these two distinct entity types:

​Similarities Between Start-ups vs. Mom and Pops

  1. ​All of ​the “start-ups” tend to focus on leisure travel, even though it may be more in urban settings than resort ones. I actually call these “urban resort markets”. Nashville, New Orleans, Austin, Portland, and a host of other urban areas also are great attractions for leisure travelers. So all of us are marketing to travelers focused on leisure activities, whether it be groups, families, or individuals. The urban ones, at times, also focus on the business traveler as we do on occasion.​​Note: ​ The urban resort markets are the new feeding ground due to their access to inventory (mostly apartments than can be converted to short term rentals), their placement as a new destination for tourists looking for something “different”, and in many cases because they are not susceptible to economic or weather fluctuations (hurricanes, lack of snow, etc).
  2. ​Start-ups and Mom and Pops both​ have many of the same ​challenges – labor, housekeeping, emerging technologies, OTA’s, Regulations, etc etc.
  3. We are all trying to drive REVENUE.

There are many more, but I believe you get the gist…

​Differences Between Start-ups vs. Mom and Pops

  1. None of the “start-ups” are attempting to be profitable at this juncture. Their investors want them to grow revenue, and only revenue, even if they are “bleeding money like a stuck pig”. The current environment is a race to inventory acquisition, not a race to profitability. This is not only limited to our industry, as co-working, ride-sharing, food delivery, hotels, and scooters are all in the same “rat race”. 

I don’t think I need to venture into any other differences, since this one difference is not only huge, but fuels all aspects of operations, planning, growth, and success.

​After reading the similarities and differences, you can see that success for ​Start-ups is not a long term profitable company, but an exit strategy that produces the highest financial returns to the investors. This is not a knock on the strategy, but for our industry, it creates a completely different set of paradigms than what we are used to or should be living by. 

​Really ​think ​about ​​it…

If you decided to grow your company by acquiring another vacation rental company, you would look at ways to lower expenses by combining departments like marketing, accounting, HR, etc. The Wall Street term for this is creating “synergies”.

If you are simply looking at growing revenues, then you may keep all of these employees on board, and focus them on buying more companies or charging them with finding new ways to create additional revenues. Your paradigm shifts from making a profit to growing revenue. 

Keep in mind these Start-ups are under tremendous pressure from their investors to grow quickly. We, as Mom and Pops, don’t have this pressure as much.We can grow strategically while still enjoying autonomy, control, freedom, and true ownership. In a way, we are true business owners in the most strictest of definitions.

So, ​what ​happens ​next? 

Now, these great start-ups do not have a never-ending supply of cash, so sometime in the future they will need to prove they can make money. However, when you have the We Works of the world burning through literally billions of dollars of cash and not coming close to turning a profit, but still being touted as a “Unicorn” for their billion dollar valuation, you have to scratch your head. 

Vacasa is now a Unicorn: a “new” term that makes their value over $1 billion. Does this mean they are hugely profitable? Absolutely not. It means they have grown revenues to a point where the investment community values them at $1 billion.

In an industry that traditionally values companies at a multiple of EBITDA (aka cash flow), these billion dollar companies would be valued at close to $0, if not $0. 

Hand​-drawn by Spanish aritst Mateó

I am somewhat concerned about the Unicorn phenomena, mainly because it puts the cart before the horse. Controlling expenses are very hard to do “after the fact”. People by nature get used to a certain paradigm, and it is hard to shift, but Wall Street will NOT allow these companies to not become profitable over time.

If one of these Start-ups goes bankrupt or has major issues as we have seen with We Work, our entire industry suffers:

  • You as a very viable Mom and Pop business may have more trouble getting financing
  • You may get more questions and concerns from your existing or new owners
  • ​This could make it harder for good business to grow in the space. 

Call it domino effect or ripple effect — it is very real. 

Now, what should you as a Non-Unicorn do?

Absolutely look for ways to grow revenue, but profit still is the king. If you lose units to Vacasa or other national Start-ups due to their over-generous offerings, lick your wounds and focus on new opportunities and new homeowners. 

Do NOT try to “race” them, because you will never be able to outspend them. Work hard, work smart, and capitalize on you being a locally owned, professional management company. ​Remember, you have an edge:

​Flight of the Non-Unicorns by Spanish artist Mateó

  1. You can pivot a lot quicker than the big boys. You ever watch a cruise ship turning around in a port? Not very quick activity.
  2. You can specialize service better too. Large national companies are more “married” to systems, processes, and structures that don’t allow them to be flexible with their owners or guests. We always can be if we want to be. You don’t have to say, “That’s just how we do it.”
  3. You can have a “family” atmosphere internally and externally. People like to feel as though they are part of something. It’s hard to feel part of Home Depot, but easy to feel part of the local hardware store where you know the owners.

Here’s a “To Do” list:

  • Create a standard set of responses for when owners call you about being solicited by one of the Start-ups. Focus on your benefits of flexibility, availability, and specialization.
  • Don’t try to be a competitor to the Start-ups. You be you, and provide great service and revenues to your owners. Don’t get into a race to the bottom.
  • Lock your key staff down. Don’t lose your most important asset. Profit share, bonus programs, flex work schedule, etc etc. Whatever it takes
  • Read, study, analyze, and ask questions – new technologies, new concepts, new methods, etc. Use VRMB, use each other, go to industry events. Never stop learning.

To this day, my wife and I would rather eat at a locally owned, niche restaurant when we want to celebrate. We don’t go to a national chain simply because we want to experience things that others can’t on a regular basis. We want quality and a uniqueness that makes the evening special. You do and be the same thing. For those “old timers” like me, we made a very good living before anyone realized unicorns actually exist. You definitely still can!

About the author 

James Olin

James Olin is the CEO of C2G Advisors LLC​ and has been ​involved in M&A activities in vacation rental industry since 1992. ​He ​is the only person to be CEO of both the nation’s largest privately owned vacation rental company (Abbott Resorts), and largest public vacation rental company (ResortQuest). ​

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