Sonder's Evolution: Insights from CEO Francis Davidson at the Skift Summit

Francis Davidson, co-founder and CEO of Sonder, engages in a conversation with Seth Borko, Skift's Director of Research, at the Skift Short-Term Rental Summit in New York City on June 7, 2023.

Davidson reflects on the significant evolution of Sonder from its inception as a college project renting student apartments in Montreal to a global hospitality company. Sonder now operates a diverse portfolio that includes full buildings branded as Sonder, boutique hotels, and a focus on high-quality design and modern guest experiences, supported by a robust technology platform.

Davidson explains the strategic shift towards controlling entire buildings to enhance guest experience and operational efficiency. This change allows Sonder to ensure consistency and predictability in service, manage housekeeping more effectively, and maintain the quality of common areas, which is crucial for creating a welcoming atmosphere.

In discussing regulatory challenges, Davidson highlights New York City as Sonder's largest market, where they operate several hundred licensed hotel apartments. He emphasizes the importance of securing properties that meet fire and life safety requirements, allowing Sonder to provide a home-like experience while adhering to local regulations.

Davidson articulates Sonder's identity as transcending traditional categories of short-term rentals and hotels. He emphasizes the company's focus on understanding guest needs rather than fitting into predefined classifications, indicating a desire to innovate within the hospitality space.

Sonder aims to cater to a wide range of traveler needs by offering various accommodation types, from two-bedroom apartments for families to smaller rooms for quick business trips. The goal is to provide a comprehensive portfolio that meets different stay occasions, whether classified as hotels or short-term rentals.

Sonder has successfully onboarded over 250 key hotels, including a recently opened 265-key hotel in Boston. The company has also integrated more than 100 boutique hotels into its platform, significantly expanding its offerings in urban markets and across Europe by converting many independent hotels into Sonder-branded properties.

Sonder has pushed the boundaries of professionalization in the hospitality industry by focusing on consistent guest experiences and custom technology. The Sonder app allows guests to communicate 24/7, manage check-in and check-out times, connect to Wi-Fi, and request services, enhancing both guest experience and operational efficiency.

Sonder's approach to hospitality emphasizes maintaining a reasonable price point while delivering high-quality service. By leveraging technology to streamline operations, the company minimizes labor costs, allowing it to provide a full-service experience without the financial burden typically associated with traditional hospitality models.

Looking ahead, Sonder recognizes significant opportunities in leisure markets, particularly in areas like glamping, villas, and cottages. While the company has primarily focused on urban markets, it is exploring ways to expand its offerings to include more leisure-oriented accommodations.

Sonder is focusing on enhancing its brand through meticulous design and photography, showcasing a new building in Mexico City with 120 units, built to their specifications. They are proud of their attention to detail in art direction and marketing, having recently revamped much of their website photography. This initiative involves collaboration with top photographers across 10 countries and 40 cities, adopting an editorial style that captures 'traces of life' without featuring people. This artistic approach has reportedly increased their conversion rates by over 10%.

Francis Davidson reflects on Sonder's success amidst a competitive landscape of short-term rental companies, many of which have failed. He attributes Sonder's resilience to a bold strategy focused on rapid supply growth, emphasizing the importance of operating within regulatory frameworks. In 2018, Sonder analyzed potential markets and identified properties that complied with regulations, allowing them to aggressively pursue available inventory. This strategy was crucial during the COVID-19 pandemic when many competitors faltered, as Sonder's approach put them in a strong position to capture market share.

Francis Davidson, the founder of Sonder, expressed that while the company's stock price has been disappointing since going public via SPAC, it does not keep him up at night. He believes the business is fundamentally undervalued, as highlighted in their last earnings call. Davidson noted that the company went public during a period focused on rapid growth, achieving a 155% year-over-year growth in their first quarter, which led to investor expectations for even higher growth rates. He acknowledged the shift in market philosophy towards cash flow positivity that began around mid-2022, stating that it is rare for companies to grow 100% year-over-year while also generating cash flow. Despite the current challenges, Davidson is proud of Sonder's progress in cutting losses by half while doubling revenues, aiming for cash flow positivity.

Davidson discussed the broader implications of going public via SPAC, noting that many companies in the disruptive growth technology sector have faced significant stock price declines, with some experiencing drawdowns of 80-90%. He acknowledged that while SPACs have been particularly hard-hit, companies that maintain a disciplined approach and demonstrate a strong business model are likely to recover. Davidson emphasized Sonder's focus on unit economics, revealing that each property onboarded generates cash flow, with a current property-level margin of 19%, which he believes can be increased to 30%. He stressed the importance of balancing growth with profitability.

Addressing concerns about employee stock compensation amidst the declining share price, Davidson highlighted that Sonder has achieved record low attrition rates. He noted that the team understands the business well and is aware of the financial metrics, which helps maintain morale despite the stock price challenges. Davidson pointed out that while the share price may not directly impact operational decisions, it does matter for employee compensation, especially in a hyper-growth startup like Sonder, where stock options are a significant part of employee remuneration.

The B2B sales efforts are thriving, with property owners expressing confidence in the bright future of the business. This positive sentiment is reflected in the attractiveness of the current moment for the company, especially for employees holding stock options with low strike prices. The company has recently hired a new CFO, the former CFO of Brand Expedia, who brings extensive experience from his previous roles, including being the divisional CFO at Expedia and CFO of Blue Nile.

The discussion highlights the importance of cash generation at the property level, moving beyond standard GAAP accounting. The company focuses on cash flow from operations, deducting overheads such as corporate expenses and capital expenditures to derive the cash contribution margin. This metric is crucial for both private and public market investors, as it provides a clearer picture of profitability by accounting for customer acquisition and marketing costs, similar to how restaurant and retail businesses assess profit at the unit level.

Despite achieving a contribution margin of 19%, the company still faces significant operating expenses, estimated at around 45% that are not directly tied to property operations. The conversation emphasizes the need for a strategic plan to bridge the gap between the contribution margin and the overall operating costs, with a focus on maintaining profitability while managing fixed costs.

In the previous year, the company experienced a remarkable growth rate of approximately 100%. Alongside this growth, there has been a strategic reduction in overhead expenditures by about 20% as of Q1, indicating a proactive approach to managing costs while scaling the business.

Sonder is experiencing significant growth while maintaining low corporate overhead, demonstrating what they term 'Overhead leverage.' The company has made substantial improvements in cash burn over the past 18 months, aiming for cash flow positivity in the future. Although they initially planned to achieve cash flow positivity for at least one quarter in 2023, this goal has been adjusted to 2024, with a focus on achieving a full year of capital positivity instead of just a single quarter, reflecting a commitment to sustainable, self-funded growth.

Sonder's investment in proprietary technology is central to its mission and differentiates its guest experience. With approximately 50-80% of their customers under 50 years old, the company recognizes the importance of mobile technology. Notably, 97% of guests booking through Sonder's direct channel verify their bookings via the app, which enhances the guest experience with features like mobile key access. This technological edge is believed to drive repeat bookings, with 47% of revenue in Q1 2023 coming from direct bookings, a significant achievement for a company of Sonder's scale.

Sonder is contemplating expanding its brand portfolio to enhance its value proposition as it grows. Currently, Sonder operates under a single brand, while competitors like Marriott manage 32 brands. The discussion suggests that diversifying their brand offerings could be beneficial as they explore various accommodation types, including camping and resorts, to better cater to a wider range of customer preferences.

Francis Davidson discusses the importance of brand clarity in the short-term rental market, emphasizing that having multiple brands can confuse customers. He notes that the focus should be on clearly communicating what guests can expect from a property, moving away from the pre-internet era where brands like Holiday Inn had a specific meaning. Davidson highlights Sonder's philosophy of being 'design-forward' and 'tech-driven,' which aims to provide a modern service experience. The website effectively communicates property details such as type (apartment or hotel), number of bedrooms, style, and location, reducing the need for numerous brands.

Addressing a question from a guest named Rofit regarding check-in and checkout times, Davidson explains the challenges of operating unique and larger apartment buildings, such as a 25-unit building in Rome with only two three-bedroom apartments. He acknowledges that the standard 4 PM check-in and 11 AM checkout times can be restrictive, especially in the vacation rental industry where longer times are often necessary. To accommodate travelers, Sonder's app allows guests to select their preferred check-in and checkout times, putting control in the hands of the guests and addressing their needs for flexibility.