Before going public, Selina has offered a 63-page investor deck, touting its brilliance. But can the hospitality startup scale? We dig into the data and the premises behind the pitch to weigh the risks.
As the numbers of upwardly mobile millennial workers grow, a group of companies has emerged to provide relevant travel accommodation — grabbing the attention of investors.
That’s key context for understanding why hospitality brand Selina is going public by merging with BOA Acquisition Corp — a special purpose acquisition company (SPAC) — in a $1.2 billion deal. The startup is selling a story many retail investors are currently hot for.
Selina runs 134 properties, most of which are premium hostels, usually with private rooms but sometimes with dorm-style halls. It occasionally runs traditional hotels, too, such as Selina Chelsea.
Brandwide, it delivers reliable facilities for remote working. It adds a veneer of local flavor and artsy decor. It also encourages guests to mix socially through activities, such as parties, surf lessons, and pole-dancing workshops.
We took a look at Selina’s recently released investor pitch deck. A few points stood out.
Profitable at a Unit Level
If Selina were building a niche business, it could be a delightful small company with a profit margin of perhaps 7 percent to 15 percent.
Selina says its core model is profitable for units open more than two years, at which time its occupancy tips over into more than half full, on average.
“In 2019, mature Selina beds generated $9,000 in revenue per bed at an 18 percent unit-level adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin,” the company’s presentation says. After two years, a property’s average revenue per occupied bed per day is $43.
Can the Model Scale?
Selina runs a total of about 22,400 beds. But it forecasts it will have 101,600 beds in 2025. Whether Selina can scale depends, in part, on supply and demand.
To believe in Selina, you have to believe all those memes about the future of work that receive thousands of likes on LinkedIn posts. More than anything, Selina’s ambitions depend on long-distance remote working remaining relatively common post-pandemic. That’s a gamble.
On the supply side, you have to believe Selina’s offering is rare in catering to early-career digital natives. The startup says hotel chains lack remote working capabilities, hostels have limited amenities, and short-term rentals have inconsistent quality.
But Selina covets a youth market that has been pursued in different segments and from various angles by Airbnb, Casai, CitizenM, Freehand, Generator Hostels, Graduate Hotels, Hostelworld, Life House, Loge, Meininger, Oyo, Sonder, The Standard, and The Student Hotel — as well as by traditional hotel operators, such as Marriott with its Aloft and Moxy brands; IHG with its Even brand; and Accor-backed brands Mama Shelter and Treebo and Accor-owned Jo&Jo and The Hoxton.
Established hospitality players and their investment backers have no plans to cede the youth market to Selina or other upstarts.
For some critics, it’s also unclear whether developers and real estate owners will accept Selina’s somewhat unconventional approach to allocating who pays capital expenditures — and how. It’s also not clear how consistently Selina maintains operational protocols compared to other potential partners for developers.
Developed Markets Surprise
One knock against Selina’s potential is whether it merely grabs low-hanging fruit. For example, the company had early success in countries like Panama pinpointing underperforming lodging in scenic locales, increasing the efficiency of the operations, and then marketing the properties online via the latest techniques. Its aggressive negotiating strategy helped it snap up some gems.
A skeptic might assume that the revenues and margins for that model in developing countries would probably be more limited than in developed countries. Mature markets presumably are more competitive, making it harder to find underexploited opportunities.
Yet Selina argues strongly that its inventory in developed markets — 5 percent of its portfolio in 2019 — are its strongest revenue gainers. In 2019, developed markets delivered 136 percent more revenue than emerging markets.
The company says it is demonstrating that it can convert old, tired hotels into exciting, contemporary properties that generate much higher revenue and profit than previous owners were achieving. As an example, it cites a property in Lisbon that, after conversion, generated twice as much unit-level revenue.
Yet this is essentially the same pitch as next-gen hospitality operators such as Sonder and Oyo make for their different hospitality offerings. While it’s possible to believe hotel operators have underestimated how much they need to improve their operational and marketing efficiency, it’s less credible that Selina will be the only new brand to try to find underexploited inventory.
Selina is partly a bet on how many underutilized-but-easily-convertible properties you believe exist in popular spots such as Miami, Tel Aviv, or Sydney — and that you think can be turned into profitable travel lodging for a budget-constrained youth market.
Subscription Model Looks Intriguing
Selina has led the hospitality sector in experimenting with a subscription model for buying lodging. In September 2020, it launched a “nomad passport” that lets guests stay at any property for as long as desired with full amenities.
Through June 21, 2021, it has sold 2,600 subscription “packages.” The pitch deck doesn’t reveal how long these packages were or how profitable they were for the company. But the 2,600 number is more than we’ve seen from any other hospitality company except Inspirato, a luxury vacation club with 12,500 subscribers across two products.
Remote Year had 55 percent more “new member signups” in the first quarter of 2021 than in the first quarter of 2019. The caveat is that this figure doesn’t come with a revenue or profit number attached.
Remote Year’s business potential may be modest. Since its founding in 2014 and its acquisition by Selina this year, it has served only 3,000 customers.
Selina’s management enjoys touting the brand’s emphasis on building community, which it says is distinct in the market.
It’s certainly true we don’t remember the last time a hospitality company tracked the number of friendships made at its properties. Selina claims it tracks metrics like that, and the pitch deck quotes from a survey that fielded 6,734 reponses, with 66 percent of guests saying they had met a new friend.
But how much of this is Selina’s friendliness as a brand, and how much of this is putting numbers on something that just hadn’t been tracked before and was already happening? Anyone who stayed at a hostel in their early 20s can easily imagine the microwave friendships that have happened at hostels for decades.
Selina’s on firmer ground when it says it offers co-working spaces that are more appealing to millennials than the average hotel or Sonder or Oyo does.
But the underlying premise about remote travel and friendship, which Selina pushes hard, is worth questioning. In a chapter titled “The Loneliness of the Digital Nomad” in a new book called Four Thousand Weeks, writer Oliver Burkeman summarizes a bunch of research on the best circumstances for fostering friendships. In short, the best conditions for forming lasting friendships often require a groundedness and synchronicity with others’ lives that is the polar opposite of the classic experience of having a Selina “nomad passport.”
Of course, real friendships happen at Selina properties. But the marketing pitch that Selina is uniquely good at fostering friendship isn’t fully proven yet.
The biggest argument going for Selina is that its management is much faster at iterating its model for the next wave of hospitality than either the typical global hotel brand is or the typical independent mom-and-pop operator is.
There’s every reason to believe there’s whitespace for a new brand to succeed. On several of the basics of hospitality, from acquiring distressed inventory to converting it and marketing units and running operations, Selina could plausibly outpace traditional hospitality players. For example, its experiments in having dynamic labor contracts so that workers fluctuate more like Uber driver pools and in managing properties remotely through internet-of-things devices are intriguing.
In many non-travel sectors, countless upstart brands have become global names on the strength of getting the basics of operational and marketing efficiency right in ways that are much more effective than legacy players. Selina (or Life House or Sonder or Oyo, etc.) doesn’t necessarily have to invent a secret sauce to take ground from existing hospitality brands.
But Selina may have to pivot its model over time. Scaling will likely put its theories to new, harsher tests.
Given all that, is Selina well priced for investors? Valuations in today’s markets, distorted by unusual liquidity and an unusual pandemic, can be tricky.
Of note: The company’s enterprise value of $942 million is less than twice its forecasted 2023 revenue of $506 million. That’s broadly in line with current valuations for major hotel groups. Intercontinental Hotels Group (IHG) trades at a market capitalization of 3.4 times IHG’s projected 2023 revenue, while Hilton trades at 5.1 times its own and Wyndham trades at 5.5 times its own.
So it’s reassuring that Selina isn’t overvalued by investors today when compared against the rough proxies of today’s hotel conglomerates.
Photo credit: View of a pre-pandemic co-working space at a Selina property in Maderas, Nicaragua. Photo by Kuba Okon for Selina.