Private accommodation is already being heralded as the comeback kid for post-pandemic trips, with many travel intermediaries putting their focus on domestic markets and short-term rental specialists reporting an uptick in consumer interest as well as actual bookings.
Expedia Group said last week that its Vrbo brand is the largest contributor to the steadily improving booking trend.
And, more recently, Airbnb announced that one million nights for future stays had been booked for the first time since early March.
But like the rest of travel, private accommodation has been hard hit by the pandemic, leading some in the investment community to ask whether the size of the opportunity will be as great when the travel industry recovers.
Lio Chen, senior vice president for Plug & Play, points to the fact that investment in alternative accommodation businesses made up more than a third of travel tech deals in 2019, describing it as “too fast, too furious” for everyone to make a return on.
Already, some startups in private accommodation have been battered by the coronavirus outbreak.
As the virus spread in March, Lyric, which received $160 million in funding last year, shed 25 employees and closed 30% of the locations it serves.
More recently, reports emerged saying the company, which offers apartment-style accommodation, has closed all but one of its destinations.
Luxury rental brand Stay Alfred suspended operations in mid-April, while Sonder cut its workforce by a third in late-March but still went on to land $170 million in funding in late-June.
Chris Hemmeter, managing director of Thayer Ventures, still sees huge opportunity for private accommodation and believes the reason some are failing to attract investment is because they haven’t achieved scale.
“The reason we like the private accommodation space is that we have always felt like it was an asset class that suffered from a lack of brand standards.
"A lot of travelers did not book vacation rental assets because of a lack of reliability; they did not know what they were going to get but in lot of ways assets are superior to hotels," he explains.
"Even today you can’t book connecting hotel rooms, there’s no guarantee you’ll get it. Part of our thesis when we invested in Sonder was that that lack of brand standards was an untapped opportunity.”
Sleeping giants
Hemmeter notes that some of the brands are failing to attract investment and closing while others are raising. This, he believes, is an illustration of the importance of scale and, more specifically, how quickly companies have been able to onboard properties.
He says: “Investors are realizing that the winner coming out of coronavirus will likely emerge into a landscape that is dramatically different at least as regards competition and investors back the likely winner.”
Hemmeter explains that Sonder, which counts Thayer as one its investors, made cuts to right-size the company to adjust to the downturn and that, even with those cuts, it will take “effort and grit for even it to thrive.”
There are other signs that the market may not be as enamored with private accommodation as it once was - namely the significant drop to a valuation of $18 billion for Airbnb as it secured a $1 billion in funding in April from a previous valuation of $31 billion, according to a Wall Street Journal report.
In a note to corporate partners in April, Plug & Play said that the success of Airbnb’s IPO, which was slated for 2020, would influence how venture capital would view the private accommodation sector.
The note goes on to question whether there might be a “cascading effect” in terms of how venture capital groups consider investment in the sector in the short term.
Hemmeter doesn’t recognize that trend, believing that people are not willing to give up their vacations, and, echoing what Expedia revealed last week, he expects a surge in demand for vacation rental homes.
Regarding Airbnb, he sees a potential scenario where it continues on the path it started over the past few years.
“You could see theoretically an argument being made that the private accommodation space has gotten an unfair step change in terms of consumer interest and consumer demand and the greatest distributor of that product type is Airbnb," Hemmeter says.
“They could make the strong argument that they are the world’s next OTA - OTA version 2.0. They have the proprietary product, the different angle, and I wouldn’t not be surprised if over time we see more and more mainstream hotel product on Airbnb’s platform. Air will eventually be on it, ground transportation.
“I wouldn’t be surprised if they’re not hunting for the crown that is being worn by Booking Holdings. Will the public markets buy into that when they go out, who knows?”
Rather than any cascading down of concerns over Airbnb’s valuation, Hemmeter believes that the category is seeing an acceleration in people giving it a go for the first time and realizing the potential cost benefits over hotels.
Room for growth
Hemmeter’s prediction is that in a few years the pandemic will have accelerated the growth of the private accommodation space.
And there will be other changes, with many predicting increased automation and the use of technologies such as machine learning to boost efficiency and productivity.
Hemmeter says travel suppliers generally are going to be on an accelerated path to digitization as they seek out new ways to run their businesses more flexibly, with old-fashioned forecasting effectively a thing of the past.
“We’re going to just see more innovation and anybody who tries to stick with the pre-coronavirus status quo and use antiquated technology to run their business is going to suffer. We’re focusing on companies, software and services that are leading out on that edge of productivity and flexibility.”
And yet perhaps, as Plug & Play suggests, there won’t be a continuation of the fast and furious nature of deals in private accommodation that dominated in 2019.
Much-heralded unicorns are elusive beasts - but that still leaves room for plenty of smaller deals.
* Check out these two interviews with well-known investors for the New Reality With... series on PhocusWire.
New Reality With... Jamie Wong and Erik Blachford of Narrative Fund
New Reality With... Amir Amidi and Lio Chen of Plug And Play