Skift Take

The short-term rental manager says the changes will let it turn cash flow positive next year, but it may face a cash squeeze before it gets there. Watch out for the very similar Vacasa, too.

The once-hyped short-term rental startup Sonder faces a long road back after a painful restructuring it announced this week in a bid to save its fast-dwindling cash pile. And even if the San Francisco startup succeeds, its image and its stock will likely never be the same.

That’s the takeaway from a key analyst and a leading rival, after Sonder said it would lay off 21 percent of executives, 7 percent of other staffers, and cut back on adding new apartments and hotels spaces to rent. With its shares now down 83 percent from their peak after Sonder went public this winter, investors have clearly soured on the idea that Sonder’s addition of apps and analytics to make rentals easier to manage and market didn’t change the fundamental economics of what is, after all, a real estate business rather than the technology company it has positioned itself as.

“As the stock market fled to value and cash flow, it ran against companies that lose tens of millions of dollars a month,” said Steve Milo said, founder and CEO of vacation-rental rival Vtrips. “Sonder was WeWork Jr.”

WeWork, of course, was the unprofitable New York-based operator of coworking spaces whose 2019 initial public offering attempt spectacularly flamed out. Like Sonder, when it tried to go public WeWork found that the broader stock market wasn’t as enamored of technology buzzwords as the venture capitalists and post-IPO investors who put $840 million into Sonder, a company now worth $384 million.

Sonder’s news has certainly ratcheted up attention on another profitless vacation rental company, Vacasa. Vacasa loses less money than Sonder, but its already-battered shares have fallen another 15 percent since its rival’s announcement, as investors wait to see if it will also announce a course change.

For now, Sonder’s new plan is to hang on and cut costs, curtailing its cash burn even as it keeps growing. Revenue will still double this year, the company said, and it believes it can turn cash-flow positive sometime next year, after negative free cash flow of as much as $182 million in 2022.

“While our business has never been better than in the past month, it’s increasingly clear that broader market conditions have changed,” Sonder CEO Francis Davidson said on a conference call. “A greater urgency needs to be applied to shift our focus from hypergrowth to sustainable, positive free cash flow.”

But the clock is ticking. And that clock is marked by the $407 million in cash Sonder has on its balance sheet as of March 31, in a market hostile to money-losing growth companies where it will be challenging to raise more equity.

Sonder is likely to lose $211 million this year before interest, taxes and non-cash charges like depreciation, Goldman Sachs analyst Stephen Grambling says. He sees another $170 million in 2023 — and, unlike Sonder, $124 million more in 2024.

That takes Sonder perilously close to $407 million, even after backing out the money it lost in the first quarter, before it updated its public balance sheet.

Sonder decided to go public when Wall Street was enamored of growth stocks, especially those like Sonder that went public through special purpose acquisition companies, or SPACs. SPACS are financial shells constructed by private equity players to acquire startups, letting young companies reach the public financial markets with less than the usual scrutiny from regulators and investors.

But that ardor has faded. The market bought 613 SPAC deals in 2021, but only 68 so far this year, according to research firm SPAC Analytics.

And Sonder management’s big turnaround on strategy in the four weeks after it released first-quarter results has threatened the confidence it will need to raise more money.

“The news comes shortly after the first-quarter [earnings] release and filings, which flagged a big
increase in headcount globally (+700, from 1,000 at the end of 2021 to 1,700 during March 2022),” Grambling wrote. “As such, the pivot in the business raises questions around the visibility and viability of the model.”

Which is what Vtrips’ Milo has been saying all along about Sonder and Vacasa, another unprofitable venture-backed vacation rental startup that went public, also through a SPAC, last December 7 and has lost two-thirds of its value since.

Despite some technology features Sonder uses to streamline vacation rentals, its economics are those of a real estate company, Milo said. Until Sonder demonstrates it can rent real estate for more than it is paying to procure it and renovate it — mostly, it buys or leases its spaces from hotels or apartment developers — the market isn’t going to redeem it, he said.

And even when Sonder and Vacasa do turn profitable — if Sonder doesn’t run out of cash first — the reward will be the much lower stock multiples awarded to real estate businesses, not the fat multiples awarded to tech companies with ever-widening profit margins, Milo said.

“We’re valued on EBITDA (earnings before interest, taxes, depreciation, and amortization) — we’ve always been valued on a multiple of EBITDA,” said Milo, whose company took a big investment from a private equity firm last year and is using it to buy up smaller rivals that, like Vtrips, are profitable, he said. He uses debt to beef up his returns on equity, he said — a standard tactic for property companies, but not popular with tech firms. “This was obvious to anyone who understood mathematics.”

If that happens, it will duplicate what happened to WeWork. It’s still around, worth about a tenth of its pre-2019 valuation, and went public through a SPAC last October. It doesn’t make money yet.

Tags: coronavirus recovery, future of lodging, hotels, ipo, lodging, online travel newsletter, sonder, startups, stocks, vacasa, vacation rental

Photo credit: Sonder is under fire as investors question whether its vacation rental model will ever be worth the technology-stock valuation Sonder