In this technology-obsessed market, the term "start-up" usually evokes ideas of cloud computing companies, machine-learning platforms and shiny software as a service interfaces.
However, these are by no means the only way to hit it big in the venture capital arena. Because of the remarkable success that Airbnb has experienced, achieving a reported $30 billion valuation, investors have taken notice of the vacation rental property sector and are shuttling funds to other start-ups homing in on this trend.
Vacation rental property start-ups have been attracting big bucks from some of leading VC firms. Companies that specialize in travel booking, including alternative accommodations such as rental properties, attracted more investor interest last year than any other sector.
In the first quarter last year, $100 million in VC money funded a total of 11 vacation rental start-ups. Although the majority of these start-ups were based in Europe, more than 50% of the total funding went to three American companies, including Vacasa, a platform for both consumers and property managers.
Vacation Rental Start-up Funding, January to April 2016
|<p>Company</p>||<p>Funding Round</p>||<p>Headquarters</p>||<p>For Consumers or Property Managers</p>|
$35 million, Series A
$20 million, Series B
$17 million, Series D
$10 million, Series B
$5.4 million, Series A
$4.5 million, seed
$2.7 million, Series A
Almere, The Netherlands
$2.5 million, Series A
$2.2 million, seed
$2.2 million, Series A
$1 million, seed
The industry has become fertile ground for investment.
Although it comprises just 10% of the global hospitality industry, the rental property segment is valued at more than $100 billion, leaving room for entrepreneurs to make their mark. That means abundant opportunities for investors, if they know where to look.
Consumers are becoming increasingly interested in bespoke accommodations that offer authentic, local experiences unavailable at high-rise hotels and resorts. Research suggests that, in 2014, twice as many people reported staying in a rental property as opposed to a traditional hotel, an increase of 100% in the past six years.
Even the big corporations know that they need to adapt to this changing trend.
Hyatt Hotels Chief Executive Mark Hoplamazian said that the company is "looking beyond hotels to serve evolving needs of guests" in a recent interview.
Evidence of the fertility of this industry is also visible within a broader hospitality context, as travel giants take notice of their small competitors.
In 2015, online travel powerhouse Expedia acquired rental property start-up HomeAway for $3.9 billion. Last year, TripAdvisor jumped on the bandwagon after purchasing London-based start-up Housetrip.
Furthermore, many VCs think that the industry itself needs the help of technology.
"This is a super-fragmented market where almost every property is individually owned and ripe for technology to help aggregate all the supply," said Anthony Lee, managing director of Altos Ventures, which recently acquired TurnKey Vacation Rental.
He sees the vacation rental landscape as a horizon of start-up possibility.
Because the fecundity of this hospitality segment is so well-known, investment opportunity within the sector is rapidly approaching a saturation point, making it necessary for new investors coming on the scene to think strategically. The next wave of success is likely to be dependent on specialization and narrowing of market scope.
Investors shouldn't be looking for generalists within the vacation rental sector but for specialists, those companies that focus on beach-front, high-end or urban properties, for instance.
There are a few vacation rental companies that have realized the benefit of specialization.
Onefinestay, a London-based vacation rental company that was recently acquired for $170 million, bills itself as a luxury-version of Airbnb with hotel-style services. In addition to marketing assistance for property owners, the company also offers unique guest services, such as complimentary iPhones for those staying abroad.
Joe Liebke, founder of Luxury Rental, has homed in on the need for specialization within the greater industry. He recently launched, Villaway, a global version of Luxury Rental, that connects luxury home owners to consumers though a collection of certified professional luxury property managers.
By maintaining low marketing fees, Villaway is able to offer property managers higher profit margins than most other booking platforms, while connecting them to interested and targeted customers.
The company boasts an impressive inventory.
"We have curated over 7,000 professionally inspected luxury homes available in more than 100 destinations worldwide," Liebke said.
The company wants to increase its property catalog by 3,000 within the next 18 months.
It offers a superior level of guest amenities through its Les Clef d'or designed and managed white-glove concierge service, which includes lifestyle amenities not seen from any other platform.
"We have a catalog of astounding properties, but we also offer a level of customer service that you won't find with other booking platforms: private chef, tough table reservation, top personal trainer. We don't stop at shampoo and conditioner," Liebke said.
The vacation rental sector has been a solid investment sector for years, as consumers increasingly crave alternative accommodation venues. However, without market segmentation, opportunity will stagnate.
Savvy investors and VC firms should look for innovative companies within the broader industry that have identified a niche.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.