Investment bubble or the reality of the private accommodation sector?

Selina’s announcement last week of $100 million in Series C funding has sparked discussions of an alternative accommodation investment bubble.

Headlines position the accommodation-combined-with-workspace concept as the next hospitality "unicorn" with its total funding of $225 million to date and a valuation of $850 million.

A post on LinkedIn by Jordan Hollander of HotelTechReport questioned the economics around the valuation, comparing it to the acquisition of Two Roads Hospitality by Hyatt for $430 million last year.

Enter HEBS Digital founder and director Max Starkov, who calls it an “accommodations digital bubble created by digitally unsavvy investors at best.”

Not one to mince his words, Starkov adds that he has nothing against Selina but that only investors “unfamiliar with our industry" would buy into the “cultural hubs for digital nomads” mission of the company.

He points to some of the challenges the company faces and predicts that without more venture capital money the company might not make it.

But, Starkov isn't the only one to chime in, with Justin Butlion of ProjectBI seeing a huge opportunity for a strong brand to dominate the co-living and co-working space in countries including Spain and Greece.

Butlion says: "My next destination is a small surfing town in Costa Rica. One of the only reasons I'm going is because I know I'll have a reliable internet connection at the Selina co-working space located in the town.

“There is more and more data showing that the digital nomad trend is here to stay and growing significantly.”

Investors also see huge opportunity in the alternative accommodation space in general.

Endurance of brands

At last month's Enterprise Ireland event in Cork, Katherine Grass, a partner at Thayer Ventures, highlights “alternative lodging models” as of particular interest to the company.

In an interview with PhocusWire after the earlier comments, she says: “I can't speak specifically on Selina as I’m not sure about their bed and occupancy metrics, but as a category, we don't think it is a bubble.”

Grass points to the let-to-let model from companies such as Selina and Sonder (a Thayer investment), saying there is still growth in the category as “these companies are carving out niche spaces within it.”

Thayer is also keeping a key eye on the “asset-light model/franchising model” with companies such as OYO Rooms and RedDoorz making their mark there.

“This is where a brand comes in on top to try and unify a long tail of budget properties, offering them a brand name, consistency and also help them with distribution. We are primarily seeing this successfully in Asia," Grass believes.

Another case in point is OYO's expansion, building a footprint in vacation rentals in Europe this week with the acquisition of @Leisure for €360 million.

OYO says the deal is a "massive opportunity" for it to capitalize on a $2 trillion market in private accommodation, with Europe accounting for somewhere in the region of 30% to 40% of it.

Certainly, there is a great deal of movement in the space, with Selina and OYO not the only ones attracting attention.

Business travel hospitality startup Lyric announced its $160 million Series B round in April, led by Airbnb.

In partnership with real estate developers, Lyric’s model is to turn multifamily buildings into short- or long-term rentals with hotel-style amenities for the corporate market.

Inevitably, some of the conversation in the space is centered on whether these are real estate companies or technology companies.

Grass says while the real estate angle might be the reason for the large investment, the focus for Thayer is more on the technology space.

It’s an interesting point and goes back to Hollander’s post comparing acquisition versus venture capital investment and valuations.

Hedging bets

John McAuliffe, who helps accelerate businesses and is currently president of Achiga, says it’s not about the category or the company but how venture capital looks at the market.

“Venture capital is looking at this and saying what can this company do and how much funds does it need to get it there. They’re providing fuel," he claims.

He says that VCs do look at the metrics to assess the potential growth and size of opportunity, but they’re less worried about EBITDA and just want to put in enough money to bring a startup to the next level.

He agrees with Starkov that Selina will require further funds but doesn’t see a bubble, adding: “All of these early stage companies typically go out and secure enough funds to get to the next level. Then, they secure more to get to the level after that.

"They’ll probably go through three or four rounds of venture funding before they even start looking at public markets. They’re constantly looking at where do we need to get to next and what money do we need to get there.”

McAuliffe, who is also not familiar with Selina, adds that it’s about the stage the company is at with its growth.

“That's what dictates whether an investor sees that this company is worth X or Y," he says.

He adds that VCs look for categories and companies that are disrupting the norm and what the opportunity is to “change the dynamic of that category” might be based on the company they are investing in.

Hospitality is not only a huge industry but also one that has been in an almost perpetual cycle of disruption for some time.

The large hotel chains moved to asset-light models some years back. They then had digital age e-commerce and online travel agencies to contend with, and most recently competition from the private accommodation sector.

Little wonder then that the sector continues to garner such attention from the investment community.

McAuliffe sees no sign of the current investment trends changing with the amount of venture money swirling around, as well as no signs of saturation for the market, with perhaps plenty of "concepts" not even formed in the market.

“The biggest challenge that most VCs have is deploying their capital," he says.

"The dynamics of the venture world is that they will make a percentage on funds under management and a percentage of the exit price of a company. They don’t get paid if that money is not deployed.”