Before Andrew McConnell was founder and CEO of Rented.com, he had a cushy job making a ton of money. But all that changed one afternoon while on vacation and talking to some friends about the vacation rental business. VRBO, a platform he had never heard of, was the topic of conversation, and the discussion was all about the money that could be made by using it to remove the friction from finding renters for those vacation rental properties.
But digging deeper into a business he admitted he didn’t know much about uncovered a number of other frictions that property owners faced when listing their properties on those sites. And the more he dug, the more convinced he was that he could make a business solving for them.
“Initially, my friends made it sound like [VRBO] was just this magic website that generated a bunch of money,” he explained.
But renting the place was just the first — and, arguably, the easiest — step. There was the vetting of the renters, in addition to cleaning and stocking the rental, changing the lightbulbs, repairing appliances that went on the fritz and even the simple things, like getting the renters the keys, were all huge frictions that cost property owners their precious time — and their precious money.
“You don’t change your own oil, much less fix your own car — you go to professionals for things like that. Why are you not working with professionals in this aspect of your life?” he asked his friends that afternoon. But his friends explained that using property managers usually meant owners dealt with higher charges and would have to take on the financial risk themselves.
That’s when the lightbulb went off: Property managers can’t make money unless they have homes to manage, so property rentals were the bait. So, why not throw the bait to the property managers by asking them to commit to a set amount of money based on what the listing is worth and then create a marketplace where managers bid against each other to add properties to their portfolios?
The answer he received from his friends was simple: If there was a way to do that, everybody would already be doing it
“I heard ‘everybody,’ and that sounded like a big market,” McConnell said. “All these companies do the same thing — they’re all trying to be Expedia or Booking.com for this alternative space. But everybody we talked to wanted this totally different thing, so we went and created that totally different thing.”
In this week’s episode of The Matchmaker Is In series, host Karen Webster was joined by McConnell to learn about the marketplace that brings together those with a property to rent with property managers and enabled the creation of something the industry hadn’t yet seen — guaranteed rentals for homeowners.
Here is an excerpt of the conversation…
KW: How did you start? Did you start with onboarding property managers? Or did you start talking to property owners about a better way to manage their properties?
AM: Ah, yes — the perennial marketplace question: the chicken or egg? We really had to go after both at the same time initially because we didn’t know which side was going to be more difficult or which side was really going to drive growth. We were the only, and are the only, website in the world that creates this competitive marketplace for managers and guaranteed income for the owners. What we learned was getting a bunch of those owners where we did not have managers was wasted effort on our part and the owners’ part. Our real path was finding good managers who were really looking to grow and do good guaranteeing and then being responsive to their specific needs.
When we actually went to market, we signed up a bunch of owners initially and then would take it to managers. The difficult part was, if the manager wasn’t open to doing guarantees or didn’t want that specific inventory, that was just wasted effort. We kind of tweaked it at that stage and signed up a handful of managers that we worked with directly for their specific needs and got really good at acquiring targeted homes and homeowners.
KW: Is the demand specifically around vacation rentals? How are you thinking about the market and spreading the demand across cities in warm places so that you’re not just renting people places between May and September?
AM: There’s four ways we address that. One is: We do wholesale contracts for a full year at a time. That way the manager doesn’t just buy the peak season or the off-peak. What they are buying is the entire year, so it gets around that seasonality.
The other thing that we do is use future-based contracts. They typically don’t start from today or tomorrow. In many cases, they start in two or three months to give the owner time to get out of their existing contract or relationship or get the home furnished and ready for rental. By being able to push back whatever the right amount of time is, you can again get around that seasonality.
The third piece is geographic diversity, and we have listings in over 700 cities at this stage. While the Florida Panhandle is peak during the summer for rentals, it means the managers don’t have a lot of time to try to add new homes, and so, the ski markets do most of our transactions over the summer. But during the winter, the ski markets are very busy finding guests, so the beach markets do more deals. We’re counter-cyclical in that way, and by being geographically dispersed, we’re able to offset that seasonality.
The final piece is that Airbnb really changed the market in that the fastest-growing segment of all of our business is urban, so those are not really subject to cyclicality.
KW: How do you ensure that the properties in the marketplace are, in fact, good and that property managers want to have them as part of their portfolio? Or do you leave that to the property manager to decide?
AM: We leave that to the manager for the most part. What we found in this market is that it’s big. We have some transactions that go over half a million dollars for really expensive homes, and it’s not just about the dollar value — both sides really want to find someone they trust. You don’t want to commit to paying someone half a million dollars, and you don’t trust them. As a homeowner, if you own a house that rents for that much, you’re not going to hand over the keys to just anyone. It’s not just a click of the button, and money changes hands. A lot of times, before any check is sent, the manager is physically in the house because they need to set it up for rentals anyway.
KW: It sounds as though you have the density of the property managers and the portfolio of homeowners that want to take advantage of your service, and you’re spread across a bunch of markets now. At what point did you and your cofounder realize that you had ignited?
AM: We would argue that we still haven’t scaled it. This is a $150 billion global market, and even today, we are the only player doing it. For people looking for managers and that competition, we are the only ones they can come to because nobody else is providing that service at all. We’re getting much bigger, but we’re still a drop in the ocean. It’s an enormous market, and we can deliver so much more value, and a lot of it is building that awareness. Being an entrepreneur, you have to be a little bit delusional, to the extent that I knew before I even had the business that it was a scalable business. That’s why I quit my job to go do it, but I still don’t think we’ve scaled anywhere near where we want to.
KW: Why isn’t there another entrant in this space?
AM: It’s a fascinating question! I think it may be because it’s two-sided, and those are inherently hard businesses. But I also don’t think it’s sexy enough for most startups because we’re not a B2C business, and we’re not an app. Everybody wants to be the Airbnb copycat, but this idea of doing a wholesale market behind the scenes where nobody is really seeing it just wasn’t sexy enough for people to get excited about. Even though, if you look at most businesses, it’s the ones that sell B2B that make money because businesses will pay you money, whereas consumers don’t. I always thought the sexier business was the one that made money, but I think most people think the other way around that the sexier business is about user growth and app downloads.
The other side is that we are relentless in the sense that we were right at the wrong time. I initially had this idea back in 2012 and created this concept of guaranteed rentals. I even wrote the Wikipedia page. But if there are 15,0000 property managers in the U.S., there are probably less than 10 that were willing to do guarantees at that time. Each year, that number goes up a little bit. We go to conferences to talk about this concept, and 99 percent of managers say, “Absolutely not, I would only lose money.” The next year, as they are losing a lot more owners to VRBO and other things, they decide they might want to start working with us. This was not even close to an overnight success. We did this before it made sense to do it, and we just stuck at it a lot longer.
KW: Let’s talk about the business model. How do you make money? How do the property managers make money?
AM: We make money only from the managers. For homeowners, we don’t want them to have to do math or take a cut of what they receive. The number they see is the number they get — clean, simple and easy. We charge the managers a subscription fee annually as a gating mechanism to ensure we only have serious managers in the marketplace. Then, managers pay us success fees, so each listing has a price that, if they end up signing that contract, that’s what they pay us over the course of the year.
KW: Does your platform enable property managers and property owners to communicate and send money electronically? How involved is the platform from a servicing perspective?
AM: What we’ve learned is that it’s not a pure auction. It is a matchmaking function, so messaging became incredibly important. When you create a marketplace, you’re always afraid of disintermediation. We used to charge a ton of money up front because we were so worried we’d get cut out, but over time, we’ve taken down those walls more and more to create increased transparency and connection between the two sides of the marketplace. I think you’ve seen with Airbnb and a bunch of these others — it’s wide open, and there is a lot of direct communication. I think that’s important in this space as well.
KW: Your platform doesn’t just make the match; it provides other ways for the two sides to do business. It would also seem to me that’s where you can add additional value to keep both of those sides pretty sticky.
AM: We want to build more and more of that over time. The whole communication, contract negotiation process and contract signing is all on the platform. Payments are on the platform as an option, but most managers have their own systems in place with all of their existing homeowners. So, for accounting purposes, it gets difficult to do homes on our platform separately. We certainly offer a lot more than just one party talking to the other party. We’ve found that we need to deliver more, and we’re not at the end of that journey.
KW: What are your thoughts and practices with respect to governance on your platform?
AM: There are all sorts of checks and balances in there. One is, just by opening that messaging back and forth, the owners can get a pretty good feel of the relationship with a manager even before signing. The filters that we put on the managers in the first place include that they must pay to get in the marketplace, and certain managers are Rented-certified, where we’ve partnered with Equifax to do legal, financial and operational background checks. We also have a next tier of certification where we will actually do the guarantees because we trust so much in that particular manager in that particular market. If there’s a bad actor, whether it’s with an individual homeowner or the manager, we kick them out. They will no longer have access to our platform or users.
KW: As you and your cofounder took this journey to create your own matchmaker marketplace, who did you look to as inspiration?
AM: Airbnb is by far the biggest leading light for us. We’ve been able to read their stories, meet the various cofounders and talk with them to learn the trials and tribulations faced and what ended up ultimately working for them. It wasn’t going to be the same for us, but it’s about knowing that you have to keep poking away to figure out what is the thing that’s going to get you from zero to one, one to 10, and 10 to 100, but it’s not a static answer. They were definitely instrumental for us. Looking just at the space, HomeAway with what they did with VRBO and the others was more of a private equity play by just buying up a bunch of companies. By doing that and going public, they published a ton of data that was really useful. Talking to their executives and reviewing the stuff that they put out was helpful.
We also looked at different things that venture capitalists published and tried to learn from those who have done this multiple times with not just an individual company that’s really taken off but maybe an investor that’s worked with Uber, Airbnb and OfferUp, etc. What have they learned across these different experiences that may be applicable to what we are trying to accomplish here?
KW: You mentioned that you have to be a little delusional to get into this space because it is very hard and many matchmaker businesses don’t make it. What piece of advice would you offer someone thinking about establishing their own marketplace or matchmaker?
AM: Be honest with yourself about what you’re trying to accomplish. Everybody wants to be an Uber or Airbnb, but not everybody can or will be a $30 billion—$60 billion company. In fact, 99 percent will not be.
However, you could serve a very valuable function and build an incredibly valuable business that’s a great lifestyle business. If you’re going to do that, though, don’t take venture money because they really only want the $30 billion—$60 billion type companies. The worst thing you can do is build what, at the end of the day, is a really successful business but capture none of the value from it because it was only a $25 million business and every single cent went back to investors. Really be clear on the front end what your ambition is and how you’re going to achieve that.