HEADQUARTERS: San Francisco, CA
YEAR FOUNDED: 2012
2018 REVENUE: $100,000,001 - $500,000,000
Like many college students, Francis Davidson needed to find someone to sublet his apartment in the summer of 2012.
Unable to find anyone who could commit for three months, the rising McGill University sophomore figured travelers wanting to book brief stays in Montreal might be interested. A quick search online confirmed his instincts. Outside of hotels, there weren't a lot of options--he says when he looked on sites like HomeAway and Airbnb, he was surprised at how few listings were available in the city.
In short order, Davidson teamed up with Lucas Pellan, whom he met at a dinner party, to sign leases on five other apartments and turn them into vacation rentals for travelers. It turned out to be a lucrative summer job--by 2014, Davidson and Pellan hit $1 million in revenue--and very soon a full-fledged startup idea.
Short-term vacation rentals were booming at this point, with Airbnb and HomeAway offering unique alternatives to chain hotels. The co-founders saw an opportunity to create something that could combine the two models: the quality standards of a hotel with the character and convenience of an alternative rental. In 2015, Davidson and Pellan raised a seed round of $3 million to build the hospitality brand Sonder.
Now headquartered in San Francisco, Sonder leases entire apartment buildings or floors within a building and adds amenities like a 24/7 concierge and gyms. Each boutique-like short-term rental has a living room and kitchen, and the company says on average the properties are 20 percent less expensive than nearby hotel rooms. Tourists currently can book a Sonder in at least 16 cities across North America and Europe through its site, Airbnb, Expedia, and other booking sites.
"The idea is that the hotel industry hasn't changed in so long and, frankly, there's a way to offer a stay that is far more authentic and less cookie-cutter," the 26-year-old Davidson says.
Sonder takes a data-driven approach to expansion. Before launching in a new city, the company considers, among other factors, the size of the market, the number of existing hotel rooms and short-term vacation rentals, and people's travel patterns. Sonder partners mainly with developers to find new units. Outsourcing the cleaning and maintenance to third parties helps keep the operation streamlined.
The startup is in hyper-growth mode--the 700-person company has 26 offices and plans on doubling headcount by end of year. With $135 million in funding to date from investors such as Spark Capital and Greylock Partners, Sonder is adding 200 rental units a month, says Davidson. In 2018, revenue hit $100 million; Davidson estimates revenue will quadruple to $400 million in 2019.
While moving fast has served the brand well, Davidson says he realizes it's not only OK to slow down, it's also become necessary--he can't make decisions on the fly as he did when the company was starting out. Sonder now has much more data to consider.
"I have a better dial for uncertainty," he says. "And what I'm learning as the business gets larger, moving quickly isn't always a virtue."
Sonder now takes a collaborative approach to entering new markets. The company will spend months working with local experts and studying regulatory matters such as zoning laws and building size requirements. For instance, the team has been out in L.A. for the past two years, but only in 2020 will Sonder open its first building. The company suggests that its deliberate approach to growth--and its focus on commercial and mixed-use zones--is what sets it apart from other vacation rental companies, especially as the industry has come under fire for driving up the cost of local housing and hurting communities.
Now Sonder has reached a critical inflection point. "The biggest challenge for any company that has gotten to this breakout stage of their growth is just holding it altogether, making sure the product is amazing even as you're trying to scale like crazy and keep up with the culture," says Nabeel Hyatt, Spark Capital investor and a Sonder board member.
The company faces competition from many VC-backed startups trying reinvent the $570 billion hotel industry. Other startups in this space include Stay Alfred, which raised $47 million in funding last year, and the Guild, with $9 million in funding. Last February, Airbnb launched a hotel-like service called Airbnb Plus, homes that come with higher-end amenities and a "verified for quality" badge. This month, Airbnb was the lead investor in a $160 million funding round for Lyric, another company in the business of leasing apartments for travelers.
Meanwhile, Davidson likes to say that his biggest competitors are hotel giants like Marriott, Hilton, and Hyatt. While Marriott has over a million units worldwide, Sonder currently has lease agreements on just north of 4,000 units.
"We think there's an opportunity to make a consumer brand that people would really fall in love with that resonates in the next generation of travelers [in a way] that Hilton or Marriott doesn't," he says.
Correction: An earlier version of this article misspelled co-founder Lucas Pellan's last name.