- Sonder announced that it’s going public via a SPAC deal that values the company at $2.2 billion.
- This comes as the travel and short-term-rental industries are set to rebound after pandemic lows.
- We spoke with Sonder’s Francis Davidson about the deal and his outlook on the hospitality industry.
- See more stories on Insider’s business page.
Sonder, the hospitality technology company, announced on Friday that it plans to go public via a SPAC deal with Gores Metropoulos II, a blank-check company sponsored by the private-equity firm The Gores Group and the billionaire Dean Metropoulos.
The deal would value Sonder at $2.2 billion, almost $1 billion more than its June valuation of $1.3 billion, and includes $650 million in total cash proceeds. The
merger also includes a $200 million PIPE investment from Fidelity and funds managed by BlackRock and other firms. The company expects the deal to close in the second half of 2021.
Sonder, founded in 2014, operates short-term rentals out of different types of properties: The company began by operating out of traditional apartments in residential buildings, before expanding to full-building apartment hotels and, more recently, standard hotels. It’s like a hybrid of Airbnb and Hilton, turning apartments into hotel suites.
The announcement follows a grueling year for hospitality. Sonder had to lay off or furlough one-third of its workforce last spring, while some of its highest-profile competitors were forced to shutter (Lyric) or pivot their business models after layoffs (Zeus Living).
Now, Sonder is joining a SPAC wave that’s seen deals surge to record highs this year, though momentum has slowed in recent weeks. It’s joining others in the real-estate tech world, such as WeWork, iBuyer Opendoor, and property-management technology company SmartRent.
The company projects GAAP revenue, a standardized accounting measure, to increase from $116 million last year to almost $4 billion in 2025. Last year, because of the pandemic, it lost almost $198 million, but projects profitability by 2023.
We sat down with Francis Davidson, Sonder’s cofounder and CEO — who founded the company by renting out his college apartment — to discuss the deal and the future of travel.
This interview has been edited for length and clarity.
Can you talk me through your decision to go public?
The goal has always been to go public as part of the path of achieving our overall goal: the mission of the business. We’ve never thought of positioning the business for a quick acquisition. We really wanted to build an iconic 21st-century brand, and this is just one of the transitions that are required for it to make that happen.
After the tough year that we’ve been through, there’s one approach, which is stepping back and saying, “Hey, this is rough. We should be conservative.”
Our view was that we wanted to lean into the recovery. There might not be a better time, in the history of hospitality, to bring our revolutionary concept to the forefront. Equipping the balance sheet with hundreds of millions of dollars through this transaction allows us to do that in a way that is super financially sound and finances a plan that can bring really rapid growth and investments in technology we think are really going to pay off big time.
The pandemic was a challenge for the entire hospitality world. Why are you in such a good position to go public now when it’s been a challenge across the board for your competitors?
I remember being in a war room in February 2020, seeing our Italy numbers start going down every week.
We’ve been an international business since 2015. We saw that there’s a chance that this would spread to the US and our core markets, and if that happened, we needed to be ready to respond.
The Hail Mary at the time was identifying other use cases. “If travel demand dries up, let’s find traveling nurses. Let’s find people who need to relocate. Let’s find people who are in need of temporary housing, or who don’t want to live with their roommates during a pandemic.” It proved to be really successful: We managed to bring occupancy rates back to pre-pandemic levels quite rapidly.
On the supply side, the new deals that we struck with real-estate owners meaningfully improved. We improved unit economics by having landlords funding all of the investments required for a company to become a Sonder. We’re not cutting a check 90% of the time now when a property opens. The landlord is funding it.
This kind of financial discipline, with a really rapid response to the pandemic, has meant that we’ve been able to outperform a lot of the competition and be in a relatively strong position. And this is kind of the force that the capital markets are, in a sense, designed to go and bet on.
Why are landlords willing to fund that much capital expenditure?
In the past few years, we’ve shifted away from trying to get into existing buildings that are up and running, but rather working with developers to build new ones or do really substantial renovations on older ones.
And when that happens — if you’re building a building where every unit is $500,000, spending an extra $10,000 to bring it up to Sonder standard — it’s easy to show the owner the benefits we bring to the table. We can show the value proposition on a spreadsheet.
On the other side is our expansion into the hotel business. Now, roughly 50% of our growth is conversion of independent hotels into Sonder hotels. And in those cases, it’s commonplace in the hospitality industry to have a reserve for capital improvements. And it’s typical for the landlord to fund it.
These two things have meant that we’ve gone from funding 84% of the capital expenditure of the deals we did in 2019 to now funding 10%.
As a company that came to prominence with short-term rentals, can you tell me more about your hotel business?
The idea is that Sonder is not a short-term-rental company. We have built technology that our guests can benefit from, like the mobile app where you can manage your entire stay. We’re a design company. We bring beautiful spaces to life.
We provide modern service through the phone, and we bring quality and standards to the industry. This works really well for apartments, which is where we got started, but we realized that we could actually do this and operate hotels more effectively.
We could partner with independent hotel owners and figure out a way to say, “Hey, let’s put our design capabilities in here to uplift the aesthetics of the property to attract our modern travelers. Let’s also plug in our technology and modernize this hotel so that the customer experience can be improved and the cost structure can go down.”
We’re talking about a cost structure that’s roughly, on an operating-cost basis, up to 50% lower than traditional. This was a theory back in 2018, and we tested it out for a few dozen properties, and it was proved that it’s worked extremely well. So now it’s about 50% of our business.
What are you expecting to see in hospitality this year?
There are a lot of organizations that put out forecasts, like Smith Travel Research and CBRE. Their view is that we’ll see a full recovery of revenue per available room by 2023 or 2024, depending on the market.
What we know is that we have a lot of favorable characteristics that would allow us to recover faster.
One is the fact that our guests are much more leisure-oriented: 80% of our guests were leisure. Arguably, business is going to take longer to recover. Two is that the vast majority of our travelers are domestic, not international. Three is demographics. The vast majority, around 80%, of our guests are less than 50 years old. We really skew toward Gen Z and millennials, where there’s an expectation that these categories will come back.
From an overhead view, how has the pandemic changed things for the business?
We’ve always built a really financially diligent company, but we took this to the next level. The pandemic was such a black-swan event that now we are even more robust when it comes to down-side investment.
We have a lot of processes that are frankly akin to an investment committee at a private-equity firm. We’re not acquiring these assets, but we’re running a process that’s just as thorough. I sign off in DocuSign on a summary of all the deals. It’s a really robust process to ensure that we’re covered on the downside and that we only take on properties that are going to be really, really profitable and valued by our guests.
Another interesting observation is on consumer behavior. Before, we had to make the pitch that the lobby should be on your phone and you should be able to do everything there. Why should there be a concierge desk if you can message back and forth with a concierge in the same city you’re in and get immediate responses?
We thought that’s where the hospitality industry was bound to go and where the customer would prefer to go, but COVID has really accelerated that. The idea of contactless service and skipping the front desk and going straight to your room are things that are now sought out by a larger share of consumers. So we think there’s actually been a leapfrogging of behavior that maps really closely to the way that we’ve been operating our business.
Your goal is to grow quite rapidly and become a leading force in hospitality. Obviously, tech and automation are part of why you have better profit margins compared to hotels. What does that mean for hospitality jobs?
I think it’s really important to underscore that we are a technology meets operations company. We hire and we invest heavily into the communities in which we operate. In the markets that we’re in we’re talking about substantial investments into those local economies either through our partners or with the employees that we have on the ground. There’s no Sonder city where there’s no Sonder employees, so we do provide meaningful employment.
On top of that, I think the benefit of our technology here is that it allows us to provide a really elevated stay at a much more affordable price point. Our mission is really one of democratization here. We don’t think it makes sense to spend several hundred dollars a night for a place to stay.
There are some luxury hotels that do a great job, but it would be way better if those kinds of experiences were accessible to the many. And this is really the purpose that the technology serves.
A trend that I’ve been watching the development of is the “digital nomad,” where remote workers move between different cities instead of settling down in one location. I noticed in the investor presentation that they were mentioned, and I also know that you yourself have spent some time living as a digital nomad.
In the last year, I spent nine out of last 12 months in Sonders across 20 plus of our markets, driving from place to place and working from them. There’s nothing like it. There’s no product out there that is as high quality, consistent, affordable, and perfectly well set up to work while you’re on the road.
It’s a growing share for sure. It’s early to say how large that demographic is going to be in the years to come, when the world is reopened and offices are reopened, but it’s going to be more than what it was before the pandemic. It’s going to be really interesting to see how we might be able to capture some of that demand.