Invest Like the Best with Patrick O'Shaughnessy - Francis Davidson - Design-led Hospitality - [Invest Like the Best, EP.253]

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Starting point is 00:01:12 Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at join colossus.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management.

Starting point is 00:01:46 All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaunicee asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy asset management may maintain positions in the the securities discussed in this podcast. My guest today is Francis Davidson, founder and CEO of the hospitality brand Sonder. Francis launched Sonder in 2013 as an alternative to traditional hotels and rentals with a

Starting point is 00:02:17 specific focus on technology and design. During our conversation, we discuss where Sonder fits into the hospitality ecosystem and why design is so key to their offering. We also touch on Francis's unique views around customer-centric focus, the nuances of hiring a team and how they approach decision-making. Please enjoy my conversation with Francis Davidson. So, Francis, I think we'll begin the conversation with some overall philosophical thoughts on business. I love this first question. What do you think about the idea that everyone has to deliver the best possible customer experience? This seems like the most commonly accepted

Starting point is 00:02:53 trope thanks to probably Jeff Bezos and a few others. What do you think about this idea that it's the obligation of a business to deliver the best possible customer experience? Love this topic. I'm generally not a believer in absolutes. Oftentimes, the team will ask me to come up with what's the most important company goal or what is the thing that we're going to prioritize. So the way I see it is that there's obviously customer experience is valuable for it to be good, but not at all cost. So if we were to plot both the value on growth and customer experience, so there's a very

Starting point is 00:03:21 simple tradeoff. Suppose that it cost me one unit of customer experience to get 10 units of growth. I'm getting a 10 to 1 return. The next day, I'm going to do a decision that has 10 units of customer experience in exchange for one unit of growth. The sum of these vectors gives me a really nice advancement of nine points on both customer experience and growth will forego the really great tradeoff that they could have other dimensions of the business that are equally valuable to be successful.

Starting point is 00:03:44 Probably the right time to just at a high level give the thumbnail sketch of what Sonder is and does. But maybe give me an example from your own experience of making a decision that actively went against customer experience as the North Star. Sonder is a modern hospitality company beautifully designed spaces that we manage and run our own So we've built quite a lot of technology that allows us to offer some hotels and apartments that look really great, especially to millennials and Gen Z. And we build a lot of tech to basically manage those spaces far more effectively so that we can cut the fat in the industry and offer some really incredible guest experiences,

Starting point is 00:04:17 but at price points that are affordable. So, I mean, it's really a visual business as well. So going on our site and checking out some spaces, bringing it to life more than how I can explain it. And, you know, maybe one example in which that occurs is, for example, we work with some property owners and sometimes they're building property from scratch for us. The other times, it's an existing hotel that will convert into a Sondra asset. There's quite a lot of investments that need to be made in order to bring it up to the brand standard and to make the spaces

Starting point is 00:04:41 really look incredible. And so, for example, one of our competitors' approach has been to really go balls to the wall in customer experience and require that the level of investment is really extraordinary. And frankly, one of our competitors had built the top performing property in New York. Like, it was the number one trip advisor rated property in New York City, like a huge accomplishment, but I think they'd spent something like $40,000 of their own capital per unit in order to make that happen. We decided to go with a model where we source directly from factories overseas and optimize the cost structure such that, you know, it costs to something like 10,000 per key. And it was small enough so that we can convince owners to actually foot the bill for it.

Starting point is 00:05:15 And so we had a model where basically our payback periods are in a single digit months on a new property, whereas this competitor, we're talking about potentially multiple years in order to pay back the investment. Their customer experience was a little bit better than ours. Ours, though, was still way better than other hotels and better than most of our comp. So it was a beloved customer experience. It just wasn't the number one. But because of our unit economic advantage, we could then generate substantially more growth with less capital invested in the business.

Starting point is 00:05:41 And then economies of scale start kicking in and the flywheel start spinning in a way where we're just so far and above the competitor's size that we win the market. So there's plenty of other examples like that. But growth, unit economics, and customer experience, I view as three really crucial components that have to be carefully weighted one against the other. I think it's a mistake to just think that customer experiences, the ruler above all other business objectives. There's a lot of these other philosophy type business questions that I want to ask.

Starting point is 00:06:04 But I think before we do that, it makes more sense to tell the Sonder's story and describe the business in some detail because that would be the rich context on which we can then lay some of these other questions. So maybe take us back to Sonder's founding. What was the first risk moment where you realized that there was something to build here and had an original product view that you could start doing back in 2013? It's been such a surprise to me building this business. I wasn't coming from an entrepreneurial family or wasn't my life's journey. I just stumbled upon this problem as a college student. I was in

Starting point is 00:06:34 Montreal studying at McGill and I saw a bunch of my fellow classmates were leaving for the summer, internship opportunity, going back home, whatever it is. There's thousands of empty apartments that are just lying around the center of Montreal and the high season during the summer when all the tourists love to come. And I thought that I could make use of these assets. I could rent them out to the travelers pay some money to those students that otherwise would have an empty apartment. And I did that for a couple summers as a side gig just to earn income to get me through my college degree and realized a couple of years in, I had some like 80 apartments that was managing for the summer. There was no brand that was offering an apartment alternative accommodation,

Starting point is 00:07:09 alternative to a hotel that came with really high consistency and quality. There was no brand in that space. You'd seen in the hotel industry large brands like Hilton and Marriott offer standards, consistency holiday. And actually is a phenomenal, all-American story of consistent driving huge value, but we haven't seen that in the short-term rental space. And so that was the original insight. And of course, the vision has expanded substantially since then. We stopped working with student apartments, now work with developers, as I mentioned, hotel owners that modernize their assets so that we can offer a better experience specifically to millennials in Gen Z. And also developments of new properties that are specifically built for Saunders use case, about 50% of what we

Starting point is 00:07:46 do as apartments, the other 50% is hotels. But the original insight just came from my summer at McGill. And it's been just a while journey since then, you know, incorporated the business when I was 19 years old and had to learn everything on the spot, made a ton of mistakes along the way. But ultimately, the insight that there could be a new kind of hospitality company that started off with alternative accommodations, but grew into hotels as well, now has the ambition to move to any accommodation category, frankly, villas and cottages and even glamping, I think all of them could benefit from really great, beautiful design, which I think one of the Achilles seal of the hospitality industry is not enough of a focus on design. And second,

Starting point is 00:08:20 in the application of technology to modernize the service, meaning you can do everything on your phone, on an app. You can request an early check-in and you can connect to Wi-Fi with one tap. And basically all the services and information that you'd require from staff at a hotel can be transposed onto your phone. And by doing that, really rethinking the cost structure of the industry so that we can offer some really elevated high-quality, almost luxurious experiences, but at price points that most consumers can afford. Talk me through that cost story. So I'd like to hear more specifics on what the technology experience for the customer feels like, but also just where and why that cuts out cost. And maybe you

Starting point is 00:08:55 could compare that to a hotel's overhead or some other hospitality zones cost structure and why yours is different. What are the big muscle movements there that you've been able to take costs down as a result of technology? Basically, we've broken down what it's like to operate a hotel and what are all the work streams that are involved in delivering a customer experience and realize that the vast majority of what happens is done manually. So I gave this trivial example of early check-in, but one reason why I love to give the early check-in and late checkout example is because over a third of all of our guests ask for an early check-in or late checkout. And the process to go and figure out, is the room available and, oh, do I need to change rooms in order to offer it to you? And even the time it takes

Starting point is 00:09:34 to interact with the customer, at what time do you need it and pulling up your reservation, etc., consumes quite a lot of time. And we've just completely automated that process. You open up the app and you just select a new time. If you look as well at services that were once necessary, but that aren't in our view in an era of on-demand apps. So for example, room service is oftentimes a money-losing operation for hotels requires quite a lot of staff. 24-7 is a requirement for a lot of four or five-star designation properties. What we do is just say, hey, you know what, let's make it easy for you to get food delivery. We've done a partnership with one of food delivery companies so that we can just completely eliminate that service offering. Obviously, the taxi stand is another

Starting point is 00:10:10 example. A lot of hotels still provide someone that whistles for the taxi. And on the Saundr app, you'll be able to just request a ride directly from the app. If you're at the airport, for example, you'll be able to say like request Uber automatically puts in your destination address so you don't have to type it in. Or if you're in London, for example, where there's like seven King Streets, you're not confused. You just arrive at the right spot. So it's basically I could go on and on about the kinds of examples of things that basically require manual intervention that are either things that can be automated

Starting point is 00:10:36 or things that frankly just aren't necessary and can be obtained or can be delivered to the customer through a partnership that basically requires no cost on our side, but for an equally good customer experience. Where does this manifest most in margins and operating margins and gross margins? How do you think about the economic model of the business and where it differs most in the most apples to apples comparison you can make? So maybe in one of Saunders' properties that's most hotel-like versus a Hilton next door or something, what are the areas that that would most show up if I was to lay the two

Starting point is 00:11:05 income statements side by side or the two balance sheets side by side? You'd see the operating costs at a property level. If you look at the real estate investment trust, for example, there is these publicly traded companies that have basically a bunch of hotel assets on their books. And they're going to generate free cash flow margins of call it 15% to 20%. We call it pre-COVID 2019 levels of free cash flow margins. For Saunders, we can generate a similar amounts, if not better. I think what we showed is our steady state, what we think once we've fully built out the technology, we think we're going to be at roughly 30% what we call property level profit margins, but without owning the underlying

Starting point is 00:11:39 real estate. So what's crazy is that we can generate cash flows that are similar to that of those who own the real estate, but by still delivering a large quantity of economics to the owners. So by taking on an asset, the stream of cash was the present value of our operations in that asset is equivalent to the underlying value of the real estate, even though we don't own it. So if we were to own the real estate, then you'd be talking about margins that are much, much higher being in the 60 plus percent range instead of being in the 20 to 25 percent range as a result of these costs going out the window. We say that roughly the operating costs, advantage that we have versus a traditionally operated

Starting point is 00:12:14 hotels in the realm of about 50%. So walk me through, let's just say there's a $100 transaction. I go to stay somewhere for $100. Just talk me through how that $100 revenue event flows through the traditional system, including the real estate owner, and versus how it flows through Sonder. I just think it's like such a wild comparison that you can have the same margin without owning the property. At a Sondre, there's no process to receive your luggage.

Starting point is 00:12:39 We have luggage lockers that are self-serve. We have also a what we call an essentials section where you can find extra coffee. And so basically like call it guest requests are going to be self served by the guest either in person through the physical things that we put in the property or digitally by just interacting with the app and getting that early checking and that late checkout. Housekeeping, for example, instead of offering it daily and having someone go in, it's an opt-in mechanism. So you have to request it through the app.

Starting point is 00:13:06 And there's some properties, specifically our larger apartment properties where we also charge to the guests per use. And we realize that actually, if people knew how much it cost to clean their room every day, they would opt out of it almost always. It's not a good value trade. Going back to the ROI of that investment. Again, I'll come back to $100. If the building owner, let's say, or the apartment owner, was to put this on Saunder, how do they get cut into the economics? Now maybe Airbnb is the apt to comparison. Like if I'm someone that owns someplace and I want it to be on both of those two things. How might that differ? How might the experience differ for the owner of the asset itself? It sounds like you don't own any of the assets. That's right. The way we structure

Starting point is 00:13:45 our contracts, obviously, it has to be a win for them. And so what we're going to look at is side by side of what their pro forma looks like. Ideally, even historical results, if it's a hotel conversion, if it's a new development, we're going to look at comp properties around and what would be the P&L of the asset. And then we're going to position, we're going to put together an offer that's just slightly better than that. Epsilon more than what they would have gotten is where we're going to start off our negotiations. And so the vast majority of the value creation of our superior cost structure is something that we get to absorb. And we have to offer only a small slice of that value to owners to incite them to work with us. How do you think about density?

Starting point is 00:14:20 So a lot of the times companies like this that are providing, whether it's Uber or Airbnb or whatever else, the network density matters. So having a big inventory in one city to start, for example, and really winning that market before moving to the next has been a common strategy that you hear about where is Sondra? How many cities is it in? Is it primarily cities? How do you think about the geographic focus and markets and how you roll from one to the next? Yeah, I think that's great insight. And I think we probably could have done a better job. We're in 39 markets today. We're just scratching the surface of market penetration. And there's a lot of advantages in scaling locally, of course. If I had done it differently, we'd probably be at 39 markets today, but would have had

Starting point is 00:14:59 fewer markets to begin with and reach scale in them. I think there's advantages for economics, for just organizational complexity, even frankly for the quality of customer experience, it's better to be more focused. So we're increasing now our concentration into these markets really substantially. I also think there's another piece of concentration, which has been a painful lesson for us, which is even within a market, how concentrated we want to be. So we started off with student apartments and then one or two apartments in a building and then maybe a small hotel. In 2018 is when we started doing independent hotel conversions. And now the majority of what we do is over 100 units or 100 keys per property. And we also almost never take a partial building. It's an entire development and

Starting point is 00:15:38 increasingly completely custom made for our design standards. We've built the capability over now seven plus years of figuring out what exact details there should be the shower pressure, what it should be and like the temperature ranges that are part of our design standards. These documents have become really thorough. I view it as a competitive advantage. It's continuous improvement over nearly a decade to try and figure out exactly what we need and then get these assets built up and then manage the whole thing and control the entire experience from what it looks like on the curb through the common areas, the hallways, and just like every single detail being thought through. So concentration in terms of more units and more density inside a single building is probably even in the

Starting point is 00:16:14 more transformational shift of our business beyond the fact that going deeper into existing geography is also valuable. You mentioned design earlier. And if you go to the website, there's a very distinct feeling to it. I'm not a design person, so I wouldn't know how to describe the aesthetic. but it definitely looks like, oh, yeah, this feels like a saunders space. Just talk me through the importance of that. After that, I want to talk about the supply chain stuff. Like, how do you get your couches? And what have you learned about that sort of thing, assuming you're the one,

Starting point is 00:16:40 either financing or buying those things or directing the owners to buy them? But first, teach me about design. What have you learned matters? What is your philosophy of design? And how did you develop it? Yeah, I mean, honestly, it's really simple. Go on Instagram and follow a bunch of popular architecture into your design accounts, study some of the good architects. And even, I mean, the Bauhaus movement, I think now is 100 years old.

Starting point is 00:17:01 And the Eichler homes and mid-century modern is now not something that's new. It's just really incredible design movements that have existed for a while, but just haven't been applied in the hospitality industry for what I call the mid-scale to upscale segments. There are some luxury boutique hotels that adopt that design standard that clearly like millennials and Genzi really love and aspire to in their own homes. But it's for some odd reason, I frankly can't. still piece it together today. Why is it that the hospital industry keeps churning out these ugly hotels? I don't know how else to say it. Maybe it's a generational thing. Maybe it's just there was less importance placed on it. But we're just basically studying some of the good design

Starting point is 00:17:39 that exists out there and applying it. And we've hired some folks on our team that first thing I asked was, hey, is it possible to get design that looks like this, but without breaking the bank? And yeah, totally. Like it doesn't even cost more to be thoughtful about it. You just have to care about it and that's to be part of the ethos of the organization. Design is a word that's part of our mission statement. I don't think there's another hospitality company that has the word design inside of their mission statement. So having built that as the core value of the brand from the start has enabled us to do something that's quite differentiated. I'm always interested in the jobs to be done in any business, but certainly in this one too. And I remember reading about, I think it was Weston that did some

Starting point is 00:18:13 study and found that really the only thing people cared about was the comfort of the bed and the strength of the showerhead. And they over invested in those two things at the expense of everything else because those were the two key jobs to be done that people were looking for. What have you learned about that. What do you think matters most to people staying? I guess another way to ask this question, if I was to try to build a guest room in my house, what should I overspend on and what should I underspend on to make people happy? Yeah, so I'm not sure I'm going to have a great answer for your guest in house, but I can tell you for the hospital industry what the opportunity looks like. I think there's three dimensions that are super important, the one we just discussed, which I'll call

Starting point is 00:18:46 inspiring design. It doesn't mean there's just one aesthetic, but it's just excellent. I am a believer in the objectivity of aesthetics, being a philosophy student in college. It's a profound multi-thousand-year debate, but I do believe that there's such a thing as better and worse that is objective when it comes to design. And we ought to offer things that really look great that make people feel really good. So work with an interior designer and make sure that it's really thoughtfully done. Number two is what I call modern service. The idea that there is a really easy way for a frictionless way for people to check in and get

Starting point is 00:19:20 into their units, for example, for us, there's no front desk check-in process. You book on your phone. You verify your ID. Once you've done it once, you don't need to do it for other stays with us. And then you just get in your room with your phone and you're just like, it's just completely seamless. And this is something that, for example, like having an in-person interaction for our customer demographic isn't necessarily preferential or preferred to simply messaging back and forth

Starting point is 00:19:42 and interacting with a brand using emojis and jiffies. It's just really convenient. You can do it on your phone wherever we're at in the city. You don't have to pick up a phone in the room or go down to the front desk in order to get service. But you can just do it before, after your stay, wherever you are. on a device that's native without really having to wait for someone to pick up the phone on the other side. So all these little benefits, but I think the modernization of service and

Starting point is 00:20:02 specifically tailoring the message and using a medium that feels native and natural to the younger demographic that is going to be the majority of travelers the next handful of years. The third thing I'd say is exceptional quality. That's something where things cannot go wrong. Travel is a high cost of failure. Hospitality is a high cost of failure market. If you spend three nights somewhere and something goes horribly wrong, it can ruin your trip. And so making sure that of the hundreds of thousands of things that could go wrong, just kind of continuous improvement system that yields really high quality, consistency, and predictability. So those are really high level things, but I find that the Weston question is a little bit reductive. I much prefer Jeff Bezos's

Starting point is 00:20:37 analogy. I was reading his shareholder letters recently, and he asked the question, like, what are the things, instead of trying to predict the future, what are the things that are not going to change? And his view is just, well, I know that people are going to want more selection and they're going to want faster delivery times and they want lower prices. And then we can invest into that for a decade. So instead of something that feels, from my perspective, a little gimmicky, like a better mattress for sure it's important, but there's hundreds of things that are really valuable. And what are those meta categories? Well, the categories that we can invest into for a decade plus are inspiring design, modern service, and exceptional quality.

Starting point is 00:21:06 Especially on the modern service front where technology really seems to figure strongly, and I'm thinking about like the keyless entry via your phone, how do you decide around building versus partnering versus buying solutions like that? Like, what is the tech behind that phone entry into the room? Is it like a hardware device? Do you build that? Do you partner with somebody? And how do you make those kinds of decisions generally? This is an area where we've done both. We actually have two systems running in parallel right now, one that's in source that we've built from scratch and one that's outsourced. I think that's probably one of the mistakes that I've done building this company is that we started off doing too much in-house. Maybe that's the Hutzpah,

Starting point is 00:21:43 the entrepreneur that's building company for the first time and then being confronted with the real world and the fact that actually the most simple thing, like changing light bulbs at scale is a lot more challenging than what it turns out to be. So I think now we're much more focused on figure out what are the true areas of R&D where differentiation is crucial. I think keyless entry systems, maybe five, six years ago, there wasn't something great, but increasingly there are great solutions out there. I don't see us investing meaningfully in that area of R&D into the future. But there are other areas, for example, like using messaging as a key component of interaction, like shifting the paradigm of service within hospitality to be messaging focused and using

Starting point is 00:22:18 automation and AI in order to respond to customer requests that are frequent in real time in a way that feels warm and not a clunky chat bot. I find that that, for example, is an area of R&D of a lot of value where we're going to be putting in a lot of resources. And back on the design side, something you can continually invest in, how does that work? Do you have the property owners do all the spending on the property, meaning buy the chairs, by the beds, by this kind of stuff, and you advise them up to a standard or do you get involved there? It sounds like it's just a very asset light mentality as a business, but how do you handle that? Yeah, we have manufacturing partners overseas in the U.S. that we work with. We source and we buy from them. And then the owners will either give us

Starting point is 00:22:56 an allowance or buy the furniture, the artwork from us. And so that way we can ensure that we're benefiting from economies scale. There's quality control that's in place, but at the same time, we get the capital light nature of it. So that was an evolution in our business. It's only been about a couple of years that we've been doing these fully asset light deals where, we're owners are actually footing the bill and we're putting in almost nothing, which allows us really rapid paybacks and allows us to scale really rapidly without consuming an inordinate amount of capital. We love to have the control end to end. And there's a lot of learnings there. Hey, something so trivial, but it's taken us years to understand what kind of couches to buy. What kind of fabrics can

Starting point is 00:23:29 you use for hospitality grade that will clean well and that will age well. And what kind of sofa bed mechanisms can we use because a sofa bed will increase revpar, revenue per available room by 8% in a one bedroom apartment, just all these kinds of learnings. We're still not a 10 out of 10, even though we've been doing this for seven plus years. So we wouldn't want owners to then just go out in the market and purchase what's available because there really is institutional knowledge. That's crucial for the whole thing to work there. What have you learned about working with overseas manufacturing partners?

Starting point is 00:23:57 It's not something that you can improvise. There's a whole industry of broker dealers and people that will sit in the middle, whereas we've just ended up hiring folks that came from the industry where they actually did furniture and artwork and bedding linen's procurement for some large brands and had already contacts overseas and new and had worked with certain factories before, hiring people that really, really understand how it works was really crucial there. Maybe one thing that comes to mind now is the idea that planning for the useful life of these assets, so for example, when you work with a manufacturer, they should also send you extra chair legs and they should send you markers for the

Starting point is 00:24:30 exact finish of the wood that's being used so that you can do touchups and maintain them over time instead of having 20% extra inventory and swap out the whole thing. You can actually repair and keep these assets useful for very long time if you work with manufacturers that are used to delivering that care package. How about on the growth side? So you mentioned at the very start of our conversation, this balance between customer experience growth and union economics. What's the growth equation for Sondra? Like, how do you think about the key levers that will drive your future success or failure? And then how do you build strategy around those levers? We need to have a value proposition to property developers on the one hand that have maybe a plot of land or maybe they're in the process

Starting point is 00:25:08 of building a building or converting an office, given that they're not too bullish on office anymore, and they want to convert that to a hospitality use. And on the other side, it's operating assets, primarily independent hotels, of which there's like a plethora, especially in Europe, our strategy there in markets like a Barcelona or an Amsterdam or a Paris where there's the vast majority of the property stock for hospitality is independently owned and operated, not under a flag. There's oftentimes in these cities regulations that limit even the construction of new hospitality uses. And so we're really constrained to the existing supply. So there's kind of a finite

Starting point is 00:25:40 universe in some markets and other markets where the zoning is a little bit more lax. It's more about figuring out how we can entice property developers to work with us as their highest and best use. So listen, I think developers and convincing real estate owners to work with us is the way that this business grows. We're not a demand-constrained organization. It's very easy to fill our properties. They look good. They have a good price point. They're offered with really high quality and consistency. So it's really all about supply growth. And on the supply growth side, the developers are homo-economics. Like, they respond to ROI. And so it's all about basically the pitch is a side-by-side spreadsheet. It's a model. It's also the capacity to convince their lenders and other folks around them.

Starting point is 00:26:16 So developers will go and have LPs and they'll even syndicate their GP stake in some of these developments. And they'll have lenders, construction lenders, and then take out lenders. Once the building is complete, they're going to swap out an expensive construction loan for much more inexpensive permanent financing. And so we've built a team, a capital markets team to help them interface with their lenders so that objections that we can handle with the property developer themselves are still others that we have to convince in order to, especially for big development projects, multi-hundred units, you know, could be in the tens of millions of dollars, $100 million plus projects where we have to have a team that's really credible and knows to speak the language of these other market

Starting point is 00:26:52 participants. It's all about creating the growth engine that makes it the best possible decision for a developer or property owner to work with Sondor and it really comes down to the numbers. Kind of surprising, I guess, as a non-hotel or hospitality insider, to hear that it's not demand constrained and you can fill the rooms. What does a typical occupancy rate look like for hotel and Airbnb properties versus Sonder? Help me understand the rough numbers of how that tends to shake out in this industry. So in the last 18 months, we've been very, I'd say, resilient and quick in adapting to changing market conditions. Travel demand evaporates overnight. Revenue falls 75% for us from March to April 2020. What we decide to do is basically pivot towards what we call

Starting point is 00:27:32 an extended stay offering. So instead of having people stay in our our spaces for three, four nights out of time, which is our core business. We found folks that would stay in saunders for 14 days, 28 days plus. I myself did that for nine months with my girlfriend. We stayed in 20 plus saunders across nine countries. So summer of 2020, we were right back to where we were pre-COVID in terms of occupancy rate. Of course, prices were lower. We had to lower prices in order to entice that longer term demand. But nonetheless, we managed to really outperform. That's been a really beautiful story for us of resilience because our business model takes quite a lot of risk. We actually operate these properties. It's not 90% growth.

Starting point is 00:28:05 gross margin, SaaS, like we have operating costs, even though we're more efficient in the industry, there's some risk to our business model, but it was really wonderful to see that in the most extreme example of demand shocks that we would be way better at finding alternative ways in order to keep those rooms out filled. You've hit on something which I've become obsessed with, sparked by your comment about pivoting to longer term stay, which is this idea of, I think Stuart Butterfield said it best, innovation literally is just behavior change, that innovative companies cause consumers to do something that they didn't do before or do it differently. And the idea of traveling

Starting point is 00:28:37 around the world, working from anywhere, staying for a month at a time in a Sondor property, that's kind of a cool emergent property of the system. How do you think about category creation or category design in that context of changing the way that people behave? Let me maybe start with a Sondor specific example, which is that I think there's no better way to be a digital nomad than to stay at a Sonder property. The cost is check. text that box, the Wi-Fi, the comfort, the service, the consistency. If something goes wrong, we have these large buildings where we can flip you to another unit in a matter of minutes. And I've done it myself for several months in the last year and a half. And it's been absolutely wonderful.

Starting point is 00:29:14 And I'm not sure the extent to which we're going to be able to change consumer behavior. I think there's just a lot of people that are waking up and be like, wow, I mean, I have the capacity to spend maybe a month in Mexico and work from there because my employer is comfortable with it. And what a nice life experience that could be. And I think that's going to be like a lot more people than we have rooms to fill. And we just happen to be a beneficiary or have a offering that works really well for that new demand segment that is much more substantial. It's accelerated probably by a decade plus as a result of the pandemic. It's interesting to hear also how you think about if that new lifestyle is unlocked, which obviously it seems to have been your personal example of

Starting point is 00:29:49 this. How do you think about market identification or qualities that make if you're in X cities today, X plus one, like how do you think about the qualities of a great new market to go attack? What are the things that drive success in terms of market qualities? I mean, we've built a market prioritization model. I'll call it prioritization because the ambition of the business is to be everywhere. That's going to take decades, but we truly want to be everywhere. So which places do we go first? There's a lot of variables in that model.

Starting point is 00:30:18 But I think one of the things that's most important is just like the depth of supply. Once we start seeding a market, we want to know there's going to be years and years of growth that's available there. And then, you know, our estimate of what the economics are going to look like. And of course, markets that are better for remote work are going to do a little bit better, all-lseq, than they would have prior to the pandemic. And I've been recovering faster. That moves them up a little bit. The bigger factors are really the size of the market, the total aggregate dollar opportunity behind a market. And then it's operational complexity. Like, is it nearby other markets that we currently operate in?

Starting point is 00:30:47 So, for example, like we're not in Asia. And so even though like a Singapore or a Seoul or Tokyo sound like very appealing opportunities, when you look at the spreadsheet, operationally, it's kind of complex to do that versus, say, opening in Abu Dhabi, because we're very successful in Dubai, and we have a network that we're getting known and our business is working really well, and therefore it might make more sense to launch Abu Dhabi as an hour away than to launch something that's in a completely different geographical area. Since you've been building the business for a while, now it's a good excuse with a lot of good groundwork laid on what Sondra is and how it works and why it's interesting, to ask some

Starting point is 00:31:19 more philosophy of business type questions. So we talked about customer centricity. and customer experience. Another common one on the company building side is this Netflix notion of talent density and that if you're going to do anything as a business, just focus on A's higher A's and B's higher C's or whatever that trope is. And I'm just curious what you found about building a business, talent density, the need for A players, because I think you might have another interesting contrarian viewpoint here.

Starting point is 00:31:47 Funnily enough, I met Reed Hastings once. And that's one piece of advice that he gave me very tactical. He said, when you hire people, references are super. for important. Probably even a better signal than the entire interview process. And the way that people do it is wrong. People lie when they do references and therefore you need to basically be on video with them. And that was, I guess, pre-COVID, pre-Zoom, but he said, just FaceTime them. And don't tell them who the reference is about and do back channels only. And that's how you see the truth. And anything that's under a, that person was absolutely extraordinary. And I was so gutted that they left and I would do everything to bring them back is effectively a bad reference.

Starting point is 00:32:20 And so it's a really interesting filter to use. Another thing that we started using is, is the latest 360 or performance evaluation. I mean, that honestly, there's so much more signal there than there is in conversations with people. People are very good at interviewing sometimes, very difficult to know how they're going to do on the job. But when you see an actual 360 of peers and their reports and their boss performance evaluation that wasn't meant to be shared with a prospective employer, this true, honest perspective

Starting point is 00:32:45 as to how they did in their last job, it is so much more valuable. And then what I'll do is I'll reciprocate with my own 360. It's just a really weird way to start a relationship because it's a true. It's supposed to be about courting and I'm so great and you're so great and there are no problems. But when you just say, hey, here's all the stuff I'm good at, but also all the stuff that people tell me I'm terrible at, it just builds this amount of trust. And it just kicks off. I think the relationship in a much better way. It allows us to also have a differentiated interview process.

Starting point is 00:33:10 There's a lot more stuff that we do there to be different than most companies that make it such a candidates that really are into that goes kind of innovations are not only impressed by the fact that we're having these kinds of conversations, but they're like, wow, okay, I mean, there is meaningful innovation. going on that organization and I'm going to learn more tricks. If I'm seeing this in the interview process, what about how they do planning or how they hold meetings or all the other rituals that exist in the organization are likely to be things that are worthy of learning as well? Sounds like you're one of these companies that I always think about companies that treat their jobs and their hiring funnel like a product do really well. And I'm curious you've referenced the things you do differently. What are the features of your jobs product? So if a job at Sondra is a product to be sold, what are those tactical or strategic differences in the experience for

Starting point is 00:33:53 for those you're hiring. The hiring process is really about doing two things. The jobs to be done are twofold. One is a prediction problem, which is will this person be a top performer? So everything in the interview process has to basically help give you signal. If you're a Bayesian thinker, basically every conversation you have, every note you take, every part of the investigation is to give you a better shot at predicting whether they're going to be at the top of the performance ladder.

Starting point is 00:34:17 And then the second one is sales and closing. And so I think we've designed an interview process that allows us to at least remand It's very heavy, so not going to do this for every IC, but for managers and executives in particular, something that's really thorough that is going to give us a much better prediction and a much better likelihood to close and bring that candidate in. Something that we look for that I think is potentially a little bit unusual is that we look for executives that are also masters of their craft. That's what we do in the second interview.

Starting point is 00:34:44 The first interview is getting to know each other's story, actually laying the tracks for the sales component if it's useful at the end, just knowing the person's life story, taking some notes and then having that as nuggets to build connection later on, accelerate trust building and relationship building. But the second one is what I call a deep dive domain expertise interview. And so they'll just ask questions like, what are basically your jobs to be done inside of your function? And then tell me things that you do that few people do in your function that give you a differentiated capacity to reach these kinds of outcomes. And what I'm looking for here, frankly, is to learn stuff. There's a lot of people, it turns out, that have fancy, impressive resumes,

Starting point is 00:35:17 but actually just don't do anything that's really different than anyone else. When it's like, If we're claiming that we're a company that's about top talent and people that really will do something special for the business, give us differentiated shot at building something great. They must be doing things differently. And if they can't articulate that and in one hour conversation, I think we're unlikely to get that kind of outlier performer. Whereas there are some folks that are just truly masters of their craft and they can't wait. That's kind of their favorite interview. Like, oh, I have so many tricks to share. Here's one thing that you could do in order to improve team engagement. And then you hear this idea like, wow, that sounds awesome.

Starting point is 00:35:46 No one's ever told me this. And it sounds very credible. And that person's telling me it's already working and I'm really excited about having that person implement some of these tried and true tactics inside of the organization. Another side benefit of it, especially for a first time entrepreneur, like me, was just learning a function. So I want to hire a head of HR. I'm going to interview 20 heads of HR and I'm going to go through 20 hours of domain specific interviews where I'm going to basically learn from people across the market, what are their best tricks in order to perform in their function? And I'm going to start building this knowledge base and familiarity with the discipline that's going to be really helpful and overseeing it later. That's really cool. And I'd love to

Starting point is 00:36:19 see your condensed notes on each function. After 20 conversations, it's a cool way to build knowledge while also hiring and recruiting. What do you think about A players and the density of A players on a company-wide team? Does everyone at the company need to be an A? Does that present different problems? What's your view here? Again, I'm a big believer in trade-offs and everything that one does in an organization. Everything that you take on is implicitly something that you're not taking on. And likewise, for customer experience, there's this belief that a company has to have only A-Player's. And I've come to realize just in practice, it's just not really the case. Sometimes you have, especially for like capabilities, functions that don't drive core company

Starting point is 00:36:56 goals where you have someone that's doing a fine job. And then you just have to prioritize, is it really worth it to try and find an A to replace that person if they're doing a fine job? Or should I just double down in other areas of the business or other teams that are performing extremely well? So it's just almost treating organizational up leveling in the same way that you would a tech roadmap where you have a backlog and you can't do everything and need to prioritize. So there's an inherent lack of focus in trying to.

Starting point is 00:37:19 trying to have A's absolutely everywhere. Obviously, everyone knows what to do with C's. But B's is something where I think there's actually a healthy amount of B's in an organization, especially as you scale, need to add so much headcount so rapidly. It could be practically just irrational if you have a bunch of open roles and you're dying under pressure because you're growing really rapidly. You're like, oh, let me like fire this B so that I can upgrade them with an A. Like, I mean, you're going to cause more organizational harm by doing that. And I think practically that's what most organizations do. I don't think it sounds sexy to say it. But whenever I hear like A's only, I become skeptical.

Starting point is 00:37:50 Either your bar isn't all that high or you're actually causing quite a lot of damage in the organization, not prioritizing the things they're going to have the highest R. And once you have these people on the team, how do you think about synchronicity of the team, the culture and rituals that drive or customs that drive that culture? How have you gotten better at that over time? And what's your philosophy here? If I look at just in a very abstract basis, what is it that us knowledge workers do all day? We sit in front of our computers.

Starting point is 00:38:16 and then we read stuff and then we write stuff and then we hear stuff and then we say stuff. That's basically the work that is done. And hopefully the things that we say and things that we write are going to cause an organization to perform better. So the way in which that speaking and that writing and that reading occurs is really crucial how it's organized. And one of the biggest time sucks is meetings, especially for managers, business functions and so on.

Starting point is 00:38:37 So the way in which meetings are run, in our view, is a massive decision. And so the approach that we've taken, I think there's quite a lot of innovation again with Amazon, big students of Amazon. reference them a few times, but I think there was a lot of cultural innovation there is the memo. But instead of having a memo and a reading hall at the beginning of the meeting where basically, you know, you pass out a printed document, I guess in the late 90s and everyone reads and then has a chat about it. What we do is that the memo is sent 24 hours before the meeting. It has defined sections. This fits a recurring meeting. For example, for a company goal meeting,

Starting point is 00:39:06 there's going to be progress against OKRs. Every two weeks, we're going to look at that green, yellow, red commentary on which OKRs are on track versus off track. We're going to do a similar thing for the roadmap progress. So of all the things that we said we'd do, are we on track or not with some commentary, holding that accountability to inputs and outputs. And then the third part is going to be what we call a problem solution. What are the blockers and what is the biggest issue that we find delivering better outcomes? And what are some changes, a proposed solution and changes that we want to bring to the organization in order to just generate better output? And instead of just having someone write to problem

Starting point is 00:39:38 solution and then having a discussion, we ask every participant in the meeting to submit their written commentary ahead of time. And the people that are invited to the meeting are called kind of the brain trust of the meeting. So for the decisions discussed during the meeting, who are the most important relevant people in the organization, whether they're senior or junior, it doesn't matter. Let's bring in the six to eight most important people and have them actually weigh in on that decision. If it's deemed to be a really important company level decision, surely we want to have five, six brains think about it and reviewing each other's work before actually calling an important shot. And so every participant is going to write down their feedback. And then the meeting

Starting point is 00:40:10 owner is going to appoint like a decision maker for that decision maker. Now, the shouldn't maker will go through everyone's feedback and then write down a proposed decision after conversation. And then every person that's attending the meeting will either will write down whether they agree or disagree, a plus one if they agree, if they disagree, what they would have done differently. And so it's basically like a decision making mechanism and a way to ensure that we're collecting 360 view, multiple departments, multiple individuals before actually committing to a decision. So these meetings are highly structured in a way that basically forces us to have conversations in a way that's far more productive, avoid a bunch of cognitive biases, be really robust when it comes to tracking

Starting point is 00:40:45 action items and due dates. And there's a whole system that connects afterwards with Asana, where we make sure that those things are kind of being kept track of. And we inform out what the decisions made are being kind of transferred to the right people afterwards. But that infrastructure that relates to decision making and meetings, in my view, is a super important lover for organizational efficiency. How does all this relate to building intentional, strategic competitive advantage inside of the business? I'm assuming you're a student of this as well, where the classic seven powers or five forces or whatever your framework might be for advantage versus peers and competitors, obviously there's other players in hospitality and you're trying to do something new and

Starting point is 00:41:21 drive a wedge and eventually be everywhere. How do you think about intentionally tying everything you just described in the meeting structure or the hiring or the product or whatever back to competitive advantage? And what do you think those can be for Saunders specifically? What are the areas that you might be able to build real competitive advantage over time? Huge, huge fan of the Seven Powers, Hamilton and Hemler. Seven Powers, Foundations of Business Strategy, I think is just a masterpiece, read the book through Saunders lens and tried to see how each of these powers could be built into the kinds of strategic initiatives that we pursue as a business. And really, it comes down to us to five, call them co-equal company goals. And again, while

Starting point is 00:41:57 avoiding the prioritization, I think it comes down to the quality of the customer experience. for which there's a series of measurements, the growth, volume, and quality of growth. Of course, in the OKRs of each of these company goals, there's counterbalancing metrics to ensure that we're not going one direction at the expense of another. And then the third is our capacity to generate demand. So what we call in the hospitality industry, Revpar, Revenue per available room, just how much monetization can we squeeze out of a room, occupancy in price, the product of occupancy in price. And then we have the cost to serve, these efficiency metrics that we described earlier in

Starting point is 00:42:27 terms of our capacity to deliver an experience at a really efficient cost structure by leveraging technology. And then finally, the employee experience, do people really love it here, the level of employee engagement. So those are the five dimensions of the business where we think that there is huge value. And then for each of these, we have a much more routine cadence where we ask ourselves, what are the biggest problems to solve. So every two weeks, we do one of these decision-making meetings and review of the roadmap and the OKRs. And then for other departments, Obviously, other things that are important in an organization, it can't just be five metrics. Then we have a monthly cadence.

Starting point is 00:43:00 So we've built into our customs, a distribution of time that's proportional to the importance that it has to move the needle organizationally. And then there's clear executives that are responsible. They're stewards of each company goal. And they're a company goal because every department works on them, but we've appointed individuals within the organization that are really the ones that we're going to look towards in order to actually deliver on the most important things. If you tie all this up and think about the most radically positive version of the Sonder

Starting point is 00:43:23 story five or seven years from now, what do you think that looks like? What position if you've hit on all cylinders between now and then? What will the company look like then relative to today? I'm hoping that we're actually going to fulfill the vision of being able to offer truly modern and automated operations within the hospital industry. But we're really, I'd say, 20% of the way there right now. It's kind of crazy to think about the fact that we have like an engineering organization of over 100 people yet in many years we've only been able to build 20% of the stack. It is really a complex, meaty problem to bring this industry into the modern era. So I'm hoping that we'll be much further along there. That will be all over the world,

Starting point is 00:44:00 call it the top 100 global cities, including Asia, including Latin America, that our spaces will be featured in design magazines. I really, really love the idea of Ray and Charles Eames, for example, that not only were incredible designers, but were one that shared this philosophy, that great design ought to be democratized and available to the many. And so I'm hoping that we're going to achieve $1,000 a night boutique hotel levels of design, but at a $150 price point. So hopefully you see that modern service, you see the incredible design, and then things almost never go wrong. The process power that Hamilton, Hamler, would call it, of 15 years of having identified

Starting point is 00:44:35 micro issues and identified root causes and implemented system-wide solutions that make the probability of that issue coming back to the system near zero. So I think 15 years into the building the business, hopefully we really far along these three investment areas that I think are not going to change in the next decade. And be truly global brand, right? Be recognized Sonder is really relatively unknown today simply because we don't have enough supply to serve. Even the customers that do know us are filling our spaces. And so we're really working hard to multiply the size of the business so that it's almost unrecognizably large, pursuing extremely, extremely rapid growth rates over the next seven years so that we can have millions

Starting point is 00:45:09 of people stay with us a week after week. What does that tech roadmap look like? So it sounds like you understand the stack that needs to be built, and you've built some of it. Keyless check-in is a good example, the integration on the phone for so many of the functions that were not great investments. I love the housekeeping thing. What are the things that are coming soon that you're most excited about or interested in in the tech stack specifically? Messaging, all of the investments that could be done within messaging. So, I mean, maybe messaging is underselling it. It's not just the idea that you can go back and forth and that you can do that with rich media and so on, but that we're going to incorporate features functions within the messaging interface. So for example, you're going to

Starting point is 00:45:44 say something like, hey, can I extend my stay? Which, by the way, you can do on the app with a couple taps, but we know that some guests even today will reach out to us to send us an SMS or message us and say, hey, I want to extend my stay. So instead of redirecting them or doing the work manually, having someone on our team actually changed the dates on their behalf, what we're going to do is pop up a calendar inside of the messaging interface and then allow you to just select that date and then complete the payment within that same interface. And likewise for a variety of other features that are present inside of the app, but roll them in with sometimes even a visual UI so that you can complete those tasks by yourself, using increasing amounts of natural language processing

Starting point is 00:46:18 in order to deliver those kinds of features. So if you message us, hey, I want to extend my stay, instead of having someone on our team, push a button that says, hey, here, like, pop open the calendar so that the guests can then figure out when they want to extend their state until to have that happen in real time automatically. That's what we mean by modern and frictionless service is that without even a human in the loop, allow you to, through a messaging interface, complete a lot of the actions that otherwise would require someone to step in, but do so in real time. Are there any other trends in hospitality specifically that you think are notable as a result of COVID or that were accelerated by COVID or cut short by COVID that we haven't talked about yet? Obviously, Airbnb has been a huge story in this space, but it seems like hotels have been interesting stories as well.

Starting point is 00:47:00 And I'm sure people's appetite to travel and do new kinds of extended state travel, for example, like we already talked about, are on the rise. Anything else just away from Sondor just at the hospitality level that you think is exciting and changing and maybe different in the future? Well, I think that some brands are doing a better job of modernizing their service and is a dynamic market. And so that actually motivates us quite a bit to keep innovating really rapidly. But we're seeing some brands announced that housekeeping is going to be by request only instead of being offered as a default in certain brands, and so kind of sub-segments

Starting point is 00:47:34 of their brands. we're seeing the importance of offering a completely keyless, frictionless, contactless, check-in experience as something that I know is on the radar of a lot more companies right now. So there's some of these themes that the industry is waking up to and be like, oh, yeah, you know what? We are behind and we need to invest some more. And so there's going to be quite a lot of need in the hospitality. What it means for us is that part of our vision that I didn't explain because it doesn't

Starting point is 00:47:58 quite relate to the customer experience, but it is a meaningful business driver for us will be to white label and offer our suite of software services, what we call the hospitality operating system to other operators and other brands. And so it's going to take us again years in order to really perfect the technology that we're building and even for our own selves. But once we feel really good about what we've done and we feel like there's substantial areas of innovation and R&D that are ready to be packaged and offered to other companies, we're going to be offering our software tools a little bit like AWS style, build it for

Starting point is 00:48:26 your own self, but really with in mind the idea that this is something that's going to be appealing for a lot of others as well. How do you think about the other segments in the market and whether or not you want to play there? I think I've heard of a company called Inspirato, which as far as I understand it, does luxury or higher end variety of different properties that you can get as a member of Inspirato or something. Are there other models in this space that intrigue you and you have in your radar? There's a lot of players in the space. Even our business model is one that over 10 companies have decided to pursue, like a really obvious idea to pursue and therefore there's a lot of competition for it. I like what I'm seeing on the glamping front and experiences that are almost nature forward,

Starting point is 00:49:05 but still with a high degree of consistency and quality. I think I'm seeing the rise of also some boutique brands in Europe and the U.S., typically ones that are that are led by someone who's really designed-centric, designed forward. I think there's a model that's been really great. They've been around for much longer than we have, but there's a lot of innovation going on in a brand like Citizen M. There's a lot to learn there based in the Netherlands and they're expanding to the U.S. There's a lot of interesting models out there and source of inspiration that we could have. I think what becomes challenging is to reconcile models are really interesting from a guest experience perspective and ones that can really scale from a business perspective. I think the key

Starting point is 00:49:37 component there is really the cost optimization and the utilization technology, the kind of rebuilding of the hospitality technology stack. If I may add a little bit on the reason why it's puzzling, why is it that that hasn't been done? There's really large, there's $100 billion of market cap of companies of hospitality brands. Why is it that they haven't built this technology already? and there's been an interesting shift that occurred in the 90s mostly, where hotel companies used to actually operate and own even the properties that they had under their flags, but then they decide to actually split these companies in half. And on the one side, there were the real estate company, the real estate investment trust. They spun it out. That trades separately. And now they have basically the core, the hospitality

Starting point is 00:50:14 brands that we know today are mostly franchising businesses. And the franchise contracts, once you dig under the hood, really what they are is a percentage of revenue contract. They take, call it 15% of top line. there's no incentive in there to ensure that the cost structure is reduced. In fact, if the cost structure is reduced, and that means that some of those gains can be passed over to customers that will deteriorate the value of these franchise contracts because they make a percentage of the top line. So if I cut costs by 50%, and I can offer 20% lower price to my customers, that would actually return a negative ROI to whoever would be building that technology and offering it to their franchisees. And so even though it was a really great trick for Wall Street back then, and it did create some value, at least on paper initially, it really caused this, technological adoption debt that we think now provides for really, really interesting opportunity that no one's pursuing.

Starting point is 00:51:00 Francis, this has been so interesting. I mean, what a cool business in this. I'll put this category as my friend Carl Kwajah calls it, the empire strikes back of older industries that are building tech-enabled or tech-emphasized businesses in things that, like you said, are not going to change. People are going to want to travel. They're going to want to stay some more wonderful and have a really great clean consumer experience.

Starting point is 00:51:19 I really enjoyed learning about the journey for you so far and look forward to watching you as you go public here soon and hopefully hit some of those 15 year milestones. I ask everybody the same traditional closing question. What is the kindest thing that anyone's ever done for you? So this is really a funny one. So my girlfriend, she knows me very well. I mean, we started dating March 14th, 2020, which was perfect timing for COVID, I guess. And we've spent every day together since then. It's been a really wonderful story. And she knows me quite well. And she introduced me to squash like a couple months ago. So I started playing squash. But like, I'm a beginner. I don't know what I'm doing. was my birthday month ago. And she decided to organize a squash tournament called the Francis

Starting point is 00:51:56 Games, where a bunch of people showed up and we played a squash tournament as a beginner, but against players that were actually quite good. And for as a birthday present, I basically got my ass kicked by every single player at that tournament and finished at the bottom of the pile. But she knew that that would actually be something that would motivate me quite a lot. And that found really funny and entertaining. Now I'm super motivated for Francis games number two. Hopefully if there's a rematch next year, I'll be much better. but I thought that was such nice kindness because it's unusual and it's unexpected. And she knows that it can be a wonderful gift to get your ass kicked by good squash players

Starting point is 00:52:29 if you're getting introduced to something new that you're really interested in getting better at. So I really was happy to see that. Well, Francis, thanks so much. It's so nice to meet you. Appreciate learning everything about your business today. Thanks so much for your time. Thank you, Patrick. This is great.

Starting point is 00:52:42 If you enjoy this episode, check out join colossus.com. There you'll find every episode of this podcast complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.

Invest Like the Best with Patrick O'Shaughnessy - Francis Davidson - Design-led Hospitality - [Invest Like the Best, EP.253]

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