WhyHotel, a company that runs pop-up hotels in luxury apartment buildings, said Wednesday that it had raised $10 million in a Series A round of investment.

Highland Capital Partners led the round. WhyHotel raised seed funding of $3 million earlier this year, accounting for all of its other venture funding to date.

It’s not traditional for venture capital to fund the building of hotels.

WhyHotel is one step removed from being an actual hotel. So far this year it has instead created a series of “pop-up hotels” that are really glorified vacation rentals available by the day, with daily housekeeping service.

The company has worked with professional property owners and developers in Washington, D.C., and Baltimore, to borrow units and split the income.

But WhyHotel would like to expand to open new pop-ups and also create a permanent presence in some places.

Venture Capital Discovers Hospitality

WhyHotel is one of a few lodging companies, broadly conceived, that have attracted equity funding lately. Earlier this year, Selina, an operator of hostels and other mixed-use spaces for travelers, raised a $95 million Series B investment round. Its backers include Abraaj Group and WeWork CEO Adam Neumann.

In August Sonder, a boutique vacation rental startup, closed an $85 million Series C round of funding. Greenoaks Capital led the round. Greylock, Spark Capital, Structure Capital, and Harbourvest participated.

Sonder faces a rival Lyric, which similarly has a “design-forward, consistent amenities” approach to rental management and marketing. Lyric works with multi-family property developers to source units and has raised about $19 million from investors like Fifth Wall Ventures and New Enterprise Associates.

WhyHotel’s latest round also had participation from Camber Creek, Revolution’s Rise of the Rest Seed Fund, Mendacre, MetaProp, and Geolo Capital.

Why are more venture capital firms investing in hotel and vacation rental companies than before? Chris Hemmeter, co-founder and managing director of Thayer Ventures, which has invested in Sonder, offered his take:

“Several interesting forces are at play here,” Hemmeter said. “First, the ‘sleep away from home’ market is proving to be increasingly dynamic. Airbnb, Sonder, and others are examples and provide indicators that this massive market is vulnerable to disruption and share shift.”

“Second, entrepreneurs are innovating with asset-light models that are decoupled from real estate and heavy operational overhead (Reddoorz for example),” Hemmeter said. “When these models work, they become sales and marketing games with, hopefully, falling acquisition costs. In other words, they scale in ways that VC’s recognize.”

Hemmeter also said that there’s a great deal of capital in a low-interest rate market chasing high returns and that the alternative lodging, soft brand category provides the impression of having great potential scale in a large addressable market and against a fragmented industry backdrop of no dominant players.

But investors need to remember the risks.

“What some investors fail to recognize, however, is the inherently local complexity of the space, the innovative capacity of the major hospitality brands that may compete more heavily here, and the multi-layered stakeholder ecosystem that has always dominated the lodging category,” Hemmeter said. “Just because VC money is pouring in doesn’t mean all bets are good bets!”

Seth Borko, a senior analyst at Skift Research, is also surprised by venture capital showing a recent interest in sectors, like hotels and soft brand alternative lodging, that it eschewed in the past. “Just knowing how much of a herd mentality venture capital can be, I wonder if Oyo raising about $1 billion is getting people interested in making more traditional hospitality plays through VC funds,” Borko said.

Airbnb Creates Niches for a New Generation of Vacation Rental Startups: Skift Research E-Book

In a new e-book, Skift Research talks about the recent interest in alternative accommodations, with funding radiating beyond early interest in Airbnb and other distribution platforms to other parts of the ecosystem, such as operators, owners, and back-end tech.

“We see these startups championing a partial convergence between alternative and traditional accommodations from both a consumer behavior, and technological back-end perspective,” Borko said.

The funds will be used to launch new pop-up hotels, beginning with three locations in Virginia, and to continue expanding nationwide in 2019. In addition, the funding will be utilized to hire new positions across multiple areas including technology, brand, sales and human capital.

Craig Driscoll, a partner at Highland, which invested in WhyHotel, said, “The WhyHotel team has taken a leadership position in helping modern cities and leading property developers provide visitors with a more flexible and cost-effective housing option.”

WhyHotel’s move to target new, yet to be leased luxury apartment building units is echoed by other moves in the industry.

This fall, Vacasa, a vacation rental property management service, began to provide its services to real estate developers and property managers for their temporarily vacant units in multi-family residential communities.

This fall, Expedia Group said it had acquired two small startups — Pillow and ApartmentJet — which help owners of multifamily residential communities list and manage short-term rentals while complying with local regulations. Last week it told hoteliers not to worry, and that vacation rentals won’t steal hotel business.

WhyHotel currently has 50 full-time employees and is planning to hire “a few hundred more” in 2019 to support its expansion.

Photo Credit: Ballston Quarter units, along with the other two properties, will be available to guests to book tomorrow following the announcement. Ballston is actually a neighborhood within Arlington County. WhyHotel