Welcome to Scaled and Failed! My name’s Amil Naik and I’m an aspiring VC and founder at The University of Texas at Austin. I write about startups that scaled and startups that failed to draw insights about the patterns of startup failure and how to avoid them. Everything is clearer in hindsight, so it’s worth looking back.
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TLDR
Today’s Topic: Coliving
Scaled: Common; Diversified properties and created other brands that leveraged its technology platform, served a demographic that stuck with urban housing through the pandemic, and uses an operator business model that reduces risk and positive outcomes for property owners and residents.
Failed: HubHaus; Failed fundraising led to leaner operations that made customers suffer, then pandemic bled the company dry of remaining capital.
Lessons Learned: There’s a tradeoff between profit and risk mitigation inherent in the business model, so make sure to optimize the company’s risk tolerance. Don’t be afraid to not maximize growth and potential upside if it makes the company far less likely to go under.
Today’s Topic: Coliving
With the lofty price of housing in most major cities, it makes sense to get roommates and cut costs where you can. Some people even like the sense of community and intimacy of living with other people; definitely not me, but some people. Coliving has taken off as a “millennial trend” with young professionals living together with private bedrooms, shared common spaces, nice amenities, and incentives and events to foster a sense of community. It’s a lot cheaper than living alone and comes with a lot more perks than your average apartment complex. Many compare it to a college dorm but for working adults, which gives a pretty accurate depiction of how they operate. Tons of startups have been capitalizing on these trends to bring affordable living to young professionals and even families in expensive cities across the US. Like most real estate, coliving took big hits in the pandemic, but recovery is starting to shape up in the space. With coliving becoming more and more common, Martin Ditto, CEO of Ditto Residential, gave his take on what a coliving company needs to do to compete:
Building community and connection amongst residents is accomplished through design, programming and culture — companies that do this successfully will have to nail all three.
Common is one startup streamlining coliving, acting as an operator for residential properties and offering private rooms with communal spaces to tenants while bundling in utilities and other perks. They raised a Series D near the end of last year, bringing total funding to over $113M. HubHaus was a similar company that leased properties over the long-term and raised over $13M before closing its doors late last year, citing the pandemic as the primary reason for its failure.
Scale: Common
Common was founded in 2015, kicking off operations in New York. One of the Managing Directors, Brian Lee, summed up the need succinctly:
There are 70 million Americans living with a non-family-member roommate today. These living situations are generally ad hoc and inconvenient. Common’s goal is to elevate the current roommate living situations. We’re acknowledging that a lot of people live with roommates, and creating a product that caters to this population, which is large and growing very quickly.
They opened up their first building in Brooklyn that same year, and had two more up and running early into the next year. By 2017, the company had expanded to Chicago and several other major metro areas, and in 2019 announced development pipelines to expand to four more big cities over the following three years. They’re up and running in 11 major cities as of right now with no signs of slowing down the nationwide expansion. Late last year, the company secured a $50M round to fuel an expansion of its platform as well as prepare for a launch in Europe. This article provides an inside look at the life of Common’s residents during those early days in Brooklyn, long before national expansion and improvements to the initial model. Starting with small, renovated buildings for young professionals using Slack channels to communicate, Common has come a long way with its ground-up development partnerships, different living environments, and an advanced technology platform with its own app for residents. Common now operates coliving, multifamily, private individual, and a variety of other property types powered by its technology platform and attractive bundled amenities and utilities model.
Common has also launched two other brands specializing in specific aspects of the company Common has found successful: technology and community. Noah focuses on leveraging technology and automation to improve returns for property owners and create a better experience for residents in workforce housing. It reduces friction on a lot of friction in typical apartment functions like paying rent and submitting maintenance requests via an app as well as providing discounts and a host of programming with partner companies. Kin, launched in collaboration with Tishman Speyer, aims to make urban living a more affordable and more convenient option for young families, applying its technology and programming from coliving and tailoring it towards families with amenities like communal play spaces, babyproofing, soundproofing, and stroller parking. CEO Rob Speyer of Tishman Speyer said of the collaboration:
Kin is a natural extension of our ongoing efforts to ensure people can access the lifestyle they crave in and around our nation’s urban centers. We partnered with Common to create this new model for young parents who prefer to stay in cities and want community, support, amenities and tech infrastructure to help them navigate the demands of parenting.
What was going on during the height of the pandemic for Common? Although occupancy took a hit last March during the onset of the pandemic, the summer saw record numbers for Common for leases signed. Even before the pandemic, CEO Brad Hargreaves stated that:
The best amenity is affordability.
In regards to COVID, he explained:
That need for affordability didn’t change when COVID came around. In fact it only became more acute. In fact, the type of people we serve haven’t left cities.
Affordability is certainly a central focus of Common’s business model, as the median income of a Common resident is $30,000 and the median age is only 30 years old. The young and less wealthy need to stick around in the cities and keep working, after all. While they don’t always offer the cheapest housing option, Common strives to provide serious bang for your buck by being cheaper than comparable properties.
Common differs from many other coliving startups in the way its business model works as well. Rather than developing its own properties or subleasing properties it rents, Common partners with developers that will build to its specifications then handles the design, operations, leasing, and management of the spaces in exchange for a revenue-sharing agreement. This operator business model reduces a lot of the risk for the startup, as they don’t need to invest a massive amount of capital into building their properties or get stuck holding the bag if they have issues renting out spaces or getting payments. Lee defines the value proposition for developers and renters alike:
“Common’s secret sauce is taking a building envelope and creating more rentable square footage than a traditional scenario. Co-living buildings are able to generate 15-30% more NOI due to the higher density. It’s really a win-win for the developer and the renter. The developer gets more rent per square foot, and the renter can access a well-built apartment building, generally in a good location, for a much cheaper price than a studio. And it’s more convenient and less lonely than living by yourself in a studio.”
With a 98% occupancy rate, many more applications than it has spaces, and the nonstop growth of properties, it’s clear that both ends of the housing market are satisfied with Common’s coliving solution.
Fail: HubHaus
HubHaus was started in 2016 in Silicon Valley, a coast away with even worse housing costs than New York. Rather than provide apartment rentals (San Francisco doesn’t seem to like building upwards very much), HubHaus worked to sublease out large houses to its customers after signing a master lease and tailoring the homes to coliving. Using houses instead of apartments was a key part of their community strategy, as it would promote more interaction. They raised a seed round in 2017 led by General Catalyst and worked on getting more properties up and expanding the team, expanding out to Los Angeles and DC as well. HubHaus was selective in those it would allow to live at its properties, signing only one-year leases and reviewing applicants for open spaces with input from current members. The aim was to only bring in residents that were invested in building out a community rather than just living in the space. With a Series A raise of $10M in 2018 and rapid growth, things were going well until they weren’t.
Shruti Merchant, the founder and CEO of HubHaus until February of 2020 gave her perspective on HubHaus’s collapse in a Medium article. Two factors were critical to the downfall in her eyes, the first being WeWork’s failure and the second being the pandemic. While HubHaus was amidst its Series B raise, WeWork’s IPO implosion had negative consequences for real estate technology overall:
Prior to WeWork’s failed IPO, we were close to getting a Series B. Investors’ feedback was that our metrics were best in class (for this model of co-living), and we quickly got our first offer for a piece of the round. As WeWork crashed from grace, the real estate tech market crashed with it. Our deal was pulled off the table and other formerly interested investors went cold.
With VC funding not an option for the time being, the company worked to become self-sustaining by cutting costs and team members, though this led to poor experiences for residents. After that, the pandemic gave the deathblow to HubHaus as vacancies skyrocketed, rent payments didn’t come in, and restrictions prevented evictions and new people from being moved into properties. Nonpayment and vacancy costs were passed onto the property owners, but this couldn’t stop the capital bleeding. By September of 2020, it was clear the pandemic was not passing anytime soon and the leadership at the time made the decision to shut down HubHaus.
As many landlords and tenants were left without any understanding of their current leasing situations, they were understandably upset and the media promptly (and rightfully) eviscerated the dead startup’s reputation. They had already dealt with services not being provided when paid for, claims of rent not being paid to homeowners even though tenants were paying, utility payments not being made, and a host of other issues for months before the end. The house of cards had come crashing down.
Lessons Learned
Common’s greatest move over HubHaus and many other coliving startups was its decision to act as an operator and not sign a master lease, as it wasn’t left to cover costs when cash flows weren’t coming in. This split the risk more reasonably between property owners and the startup and created more reliable sources of income with fixed revenue sharing for units filled. That risk mitigation is precisely why Common sailed through the pandemic and has continued to scale rather than folded like many others. The unit economics of providing apartments also worked out better; a single development could have a lot more units available for capital invested than a home already built and subject to many zoning regulations limiting the people that could live there. Managing 40 people coliving in one building is a lot easier than 40 people across 4 or five houses in an area, and it’s a lot easier to get 40 people into that one building. While HubHaus was well adapted to the regulatory environment of The Bay (affordable housing and more developments drive down property prices and rent after all) where it’s difficult to build large apartment buildings, that type of model doesn’t fit a lot of cities outside of California where housing costs have fewer factors coming into play. HubHaus was better positioned to capitalize on the national housing market.
While Common may have sacrificed some of the upside potential through its operator model, the risk mitigation it did through its business model has helped it flourish. Every founder will need to decide their risk tolerance in how they build their business model, but the more things that need to happen just right for a startup to succeed, the greater the likelihood of the cascading miracles pattern of failure. A stress test that evaluates how many things can go wrong before a company fails is a good exercise to frame how risky the model is. While the pandemic was an unpredictable event, things like failed fundraising, legal tussles, payment delinquency, and vacancies are all variables that could factor into a chain of failure test. In this case, Common’s business model was more resistant to all of these variables falling since they wouldn’t bleed as much capital. Strike a balance between risk and profitability in your business model that can increase chances of survival when things veer off course. It may not be the fastest way to grow or raise more capital, but nobody makes money if the company dies.
More Reads and Info
Thanks for reading! If you’ve lived in a coliving property, let me know how the experience was! If you found this interesting, consider sharing it with friends and subscribing if you haven’t already!
Cheers,
Amil