One of the most highly valued startups to launch from Canada in the past decade, travel accommodation provider Sonder Holdings Inc., is closing in on a nine-figure financing investors believe will help it ride out the economic impact of the pandemic.
Sources familiar with the situation told The Globe and Mail that Sonder, an alternative to Airbnb Inc. and traditional hotels, has closed almost US$100-million of an intended venture capital funding of between US$150-million and $200-million, valuing it at roughly US$1.1-billion prior to the receipt of funds. That is unchanged from the valuation Sonder, which moved to San Francisco from Montreal in 2016, attained after raising US$225-million in 2019.
Observers say that is a considerable feat considering the dire state of the global hospitality trade. Some Sonder rivals, including Stay Alfred, have suspended operations or cut staff since travel largely ground to a halt in March. The Globe is not identifying the sources because they are not authorized to speak publicly about the deal.
Sonder in March laid off 22 per cent of its roughly 1,250 staff and furloughed another 11 per cent, largely sparing its Canadian operation, where 15 of 162 people were affected. Sonder also wrung $20-million in concessions from landlords.
But existing investors were willing to put more into a technology-enabled hospitality company they believe has the right strategy and team to emerge from the crisis in better shape than its rivals, sources say.
Sonder’s Canadian founder and chief executive officer, Francis Davidson, declined to confirm any details of the financing. “We’re really happy to ... continue to have the support of investors, but we’re not ready to comment on any kind of capital raises at this time,” he said in an interview.
Mr. Davidson did say that Sonder, which has raised more than US$350-million to date, had started the year intending to raise up to US$200-million in 2020. “I’m a bit risk-averse when it comes to capital. I’d rather have a stronger balance sheet than a weaker balance sheet.”
Mr. Davidson launched the company in 2012 after his freshman year at McGill University, renting his Montreal apartment to travellers to earn extra money, while also valeting their cars and providing bottles of wine to guests.
The next summer the Gatineau native managed vacant apartments for several students; by 2014 he was generating $1-million in revenue and quit school. He raised $5-million from Canadian backers in 2015, including Business Development Bank of Canada and Real Ventures, and has since added big-name U.S. investors including Greylock Partners, Spark Capital, Valor Equity Partners, Greenoaks Capital, Fidelity Investments and Canada’s iNovia Capital.
Sonder’s growth plan differed from Airbnb as it sought to lease directly from real estate companies, giving it more control over spaces and furnishings. (Sonder does, however, advertise listings on Airbnb’s platform.) It targeted digitally-savvy millennials seeking “authentic” experiences rather than generic hotels or the uneven quality of Airbnb accommodations.
Forgoing costly amenities such as room service, front desks and gyms, it provided keyless entry to rooms appointed like hip boutique hotels, scattered in buildings in cosmopolitan neighbourhoods in cities across Canada, the U.S. and Europe. Sonder instead offered “digital concierge” services to guests through their phones, connecting them digitally to local services such as food delivery.
By 2018, Sonder had figured out the unit economics of its model and stepped up expansion efforts, leasing more than 1,000 rooms a quarter, up from less than 400. It also attracted rivals that launched similar ventures, including Oyo Homes and Hotels from India.
Sonder ended 2019 with 14,000 rooms under contract, up from 4,000 a year earlier, and had 5,000 properties available for guest bookings at the end of February. It was generating US$260-million in annualized revenue and taking over management of boutique hotels where it could bring its economies of scale to bear. Its imminent plans included selling copies of the art and furnishings in rooms to guests, reaching profitability and gearing up to go public in the next few years, Mr. Davidson said.
Plans changed in February. In addition to cost-cutting efforts and curtailing expansion, Sonder slashed rates by 45 per cent and marketed its properties as temporary shelters for health care workers, displaced students and stranded travellers. That helped it reach nearly 50-per-cent occupancy, better than other accommodation providers, although revenue a room is expected to drop by 50 per cent to 70 per cent in April.
Mr. Davidson anticipates a “difficult and deep and long recession" that could last two or more years. “But,” he added, “at the same time this might be one of the best opportunities” to add properties. Amid the crisis, "it’s probably one of the most important moments for our business model to shine.”
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