Does yet another big funding round signal that the vacation rental property market is over-heated? Nah. It's reasonable given the huge size of the opportunity and how much investment will be needed to digitize and automate the sector.
Investors continue to pour money into startups claiming to use technology to automate and improve vacation rental property management.
TurnKey, an Austin, Texas-based startup, said Monday that it had raised $31 million in a Series D round of funding.
Existing investor Adams Street Partners led the round. Altos Ventures and two new institutional investors also pitched in. The funding brings the total that Turnkey has raised to $72 million.
The news comes on the heels of the February 2018 report that Wyndham agreed to sell its European division, which manages 110,000 properties, to a private equity firm for $1.3 billion.
Sonder, another property management company, has publicized a total of $13 million in funding. The Information reported in January 2018 that the startup had raised about $30 million in an undisclosed Series B last year and is seeking a fresh round.
Promise or Fizz?
Skeptics look at the fundings and see an exuberant mood in private equity and venture capital as investors look for higher returns.
Optimists see the activity as a long-overdue validation of the sector that is enabling different tiers of specialization for diverse parts of the market.
As context, the startups that have received funding in the past 18 months managed fewer than 25,000 properties in the U.S. collectively out of an estimated hundreds of thousands of properties. Competition at this stage of such a fragmented market development may not be an overriding concern.
Vacasa is the second-largest in the U.S., it said. It manages more than 8,000 homes globally, without specifying its U.S. numbers.
A couple of analysts named TurnKey as the third-largest, full-service U.S. vacation rental management company by the number of homes under management. The company said it had signed more than 3,500 U.S. private accommodations.
The three companies are similar in that they are full-service providers that handle everything from listing a property on sites like Booking.com to handling the guest’s stay and providing upkeep to the property.
Evolve is a Colorado-based property management company that claims 6,800 active units of inventory — a unit count greater than TurnKey’s. It expects to double its unit count under management this year. Last summer, Evolve received $11 million in financing led by T. Rowe Price.
Evolve uses an a la carte model for owners which can be appealing in certain situations, such as if they want to keep the housekeeper or caretaker they’ve liked for years or if they want to greet guests when they arrive.
Which of these is best-positioned to win?
Downplay publicly touted unit counts and funding totals, experts said.
Investors said they look instead at private metrics like churn, or whether owners are sticking with the company; the pace of gross bookings growth; and operational efficiency as a proxy of how a company’s cash flow compares with its rivals.
Built for the Long Haul?
TurnKey’s latest funding round, the doubling of its revenue in 2017, and its positive cash flow ought to let it hum along for a couple of years.
Some industry critics said that the startup has the hallmarks of being a short-term play. They point to the presence of many former HomeAway executives at the company. They suggest the management is building the company to flip in a couple of years to a larger player, such as an online travel company like Expedia.
That’s not an indictment. Many startups would love to do the same.
It’s true that TurnKey’s Chief Financial Officer Jen Ford used to be a key mergers and acquisitions negotiator for HomeAway and that co-founder and Executive Chairman John Banczak used to be a vice president at HomeAway. About nine other employees had past stints at HomeAway, according to LinkedIn.
On the other hand, both tech companies are based in Austin. There are only so many places to work, and TurnKey has been in operation for four years.
What’s more, it isn’t obvious that HomeAway wants to start buying property management companies.
“If you actually look at the facts, we’re built for the long-haul,” said TurnKey co-founder and CEO T.J. Clark. “From day one of our founding, TurnKey has invested in developing and implementing our own technology that allows us to provide better hospitality service at lower cost.”
Clark said that TurnKey managed 85,000 stays in 2017. It is run more efficiently than competitors, which is obvious because it can afford to charge significantly lower fees to homeowners, he said, adding that lower fees support word-of-mouth, organic growth, keeping marketing costs low.
“Our funding has been conservative and used to improve our offerings and reach, as opposed to fueling acquisitions,” he said.
TurnKey has invested a lot in technology, Clark said.
For example, its HomeDroid mobile app runs on tablets left at all of its properties. Guests use the app for check-in and as a virtual binder, or manual, to answer their questions about the house.
The app and tablet also can do other tricks. For example, it has sensors that detect sudden jumps in volume that, in conjunction with sensors on the doors, can measure activity that might indicate an unwanted party is under way.
In another sign of its tech investment, the startup built electronic door locks for maximum security, rather than purchasing them.
TurnKey also has a tool for homeowners to use to check out how their property is being managed, such as when they wonder when upcoming repairs are scheduled and how many people are staying in their place per month.
The company is adding support for remote heating and cooling control and scheduling via Nest and Honeywell Wi-Fi thermostats.
The company also built a FieldSync housekeeping mobile app to automate and help validate housekeeping work remotely, cutting costs.
“We offer more transparency than others about what’s happening in an owner’s property with a mobile app that lets homeowners see the critical elements at all times,” said Clark. “Others make the owner call around to piece the full picture together.”
Hotel Soft Brand Metaphor
Clark believes that, over time, consumers will look to soft brands as a way to tell what kind of amenity and quality guarantees they can expect as they choose among properties. He foresees the emergence of an array of soft brands, similar to what has happened in the hotel industry.
He said TurnKey would be one of those brands delivering a consistent standard of quality and customer service, with guest-ready properties as advertised.
He anticipates the rise of “micro-hoteliers,” or homeowners who choose different “flags,” or brand promises, to fly just like hotel owners choose among franchises to affiliate with today.
How many consumers will look to most non-luxury rentals for a brand promise the way they do with high-end hotels today? TurnKey is making a bet on the size of the addressable market within the larger vacation rental booking trend.
If brands do become important to consumers, TurnKey, Vacasa, and others may eventually need to spend digital marketing dollars to drive direct traffic to their websites for bookings.
At this point, Vacasa attracts about 40 percent of its traffic directly and relies on search engine optimization for about 30 percent of its total monthly traffic of about 250,000 visitors, according to analytics firm SimilarWeb.
That’s much lower than HomeAway’s estimated 5 million visitors a month and Airbnb’s estimated 50 million visitors a month, based on adjusted SimilarWeb data — which is estimated and inexact.
TurnKey’s numbers are significantly lower than Vacasa’s, though the company hasn’t pushed direct to a comparable extent yet.
Building a strong brand would take years, and in the meantime TurnKey, Vacasa, and the others would have to increase spending on sales and marketing to drive traffic to its growing list of properties — a costly proposition.
Business Models Diverge
Different startups are taking divergent paths. TurnKey has opted to be a full-service host management company, where it runs the show. Vacasa has done the same, albeit with some premium services that come with a higher overall fee.
A more lightweight path is to offer digital marketing as a baseline service to owners and then offer a la carte other services, such as housekeeping, via a vendor network. That model helps keeps costs down, and is the one followed by Evolve.
Another business model is to offer guaranteed incomes to owners. Rented.com, which is used by Vacasa for a financial guarantee program, Sonder, and StayAlfred are companies that have partly bet on the appeal of guaranteed fixed incomes for owners.
Owners often care the most about how much money they are going to make. So the guaranteed income model has its attractions. Today’s standard model instead means the owner doesn’t make money if the manager doesn’t fill the property.
Domio is another management company in this space that raised $4 million in January. Once a property is leased from a landlord, Domio guarantees a rent payment each month. It brings in interior designers to provide a consistent guest experience.
Clark said he is not a fan of leasing homes.
“It is invariably a poor deal for the homeowner with an upscale home because the owner doesn’t share in the financial upside that a commission-based arrangement provides,” Clark said. “Looking at the upstarts who are renting commercial apartments and then renting them out on a short-term basis, we don’t feel those units provide the authentic, unique experience that guests seek.”
Vacasa is somewhat following an acquisition-based, biggest-is-best approach. That is not unlike the approach that was taken by ResortQuest, a company that rolled up a lot of property management companies to try to achieve returns at scale.
ResortQuest lacked the tech savvy of Vacasa and TurnKey, though, and ended up being sold to Wyndham.
Clark said his company is being more methodical about growth and thus avoids the distraction that comes with lots of mergers and acquisitions. He trusts that perfecting his company’s model will provide its own marketing value in positive word of mouth for scale in the long run.
Overall, technology from multiple companies has upended the sleepy sector of vacation rentals at several touch points.
The key differentiator between success stories and those startups destined to fail lies in products or services that cannot be easily replicated by larger competitors, according to Vacasa Founder and CEO Eric Breon, as quoted in the Skift Research report “Venture Investment Trends and Startup Opportunities in Travel 2018.”
Clark said the key geographical gap in the U.S. he intends his company to fill in 2018 is in ski, beach and metro markets, such as by expanding further in the Hawaiian islands — one of the largest U.S. vacation rental markets. TurnKey also plans to roll out a variety of tech improvements, he said.
Things will continue to move fast in the vacation rental management sector for some time yet, it seems.
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Photo credit: TurnKey has raised funding for its vision of next-wave property management. Shown here is how the company's FieldSync housekeeping mobile app helps automate and validate housekeeping work remotely, while its HomeDroid photo comparison service lets staff, guests, and property owners know the current state of a home at any moment. TurnKey