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SplitSpot Investment Rationale

The status quo in the apartment rental market is generally accepted by renters and landlords, but leaves a lot to be desired on both sides of the market.

Renters continuously face a process that lacks trust, simplicity, and flexibility — not to mention the high upfront expenses, both expected and hidden, like brokers fees that create an unsatisfactory feeling even when a renter signs a lease. Landlords, on the other hand, have to spend time and money to market their properties and find acceptable tenants. Once they fill their rooms, they have to manage the renters and handle requests and conflicts. This is a tiresome burden that consumes time and resources, whether the landlord is renting out a room for passive income or owns numerous properties and relies on rent collection as their primary source of income.

In short, the status quo is ripe for disruption.

York IE’s latest investment, SplitSpot, is a Boston-based startup aiming to be the disrupting force needed in this market. SplitSpot, founded in 2019, is already the largest flex-lease room platform in the city of Boston, and the company aims to enable a trusted, flexible, and streamlined rental process across U.S. metros and beyond. The founders, Ernesto Gaxha and David Mazza, started the company as business school classmates at the MIT Sloan School of Management. Looking back on their experiences as renters and landlords, living in cities such as Boston and New York with brokers’ fees, high costs, and inflexible leases, they saw the opportunity to offer a more tenant-friendly experience, as well as a supportive tenant placement and management platform for property owners and landlords.

They also had the belief that their platform could have a positive impact on the communities they worked in. Flex-lease, room rental options, such as those offered by SplitSpot, increase access to desired living accommodations while simultaneously reducing prices compared to traditional rental units. The primary factor preventing more co-living options was the cost and complexity of management for landlords and developers. With SplitSpot significantly reducing that burden, they are helping create a win-win scenario for renters and landlords.

York IE has led a $2 million seed round in the company. Boston-based firm One Way Ventures joined the round, and existing investor PJC also participated in the round along with strategic angels. SplitSpot will use the funds to build out the engineering team, expand into new cities, and mature internal operations. York IE has named Bryan Goodwin, York IE investment partner and TorchPro co-founder, president and CRO, to the Board of Directors. Bryan has extensive experience in consumer marketplaces, having been the first hire at FlipKey (acquired by TripAdvisor) and a long-time executive at Drizly (acquired by Uber for $1.1 billion). He will be an extremely valuable resource to the SplitSpot team as it begins its national expansion. York IE’s advisory services team is also engaged with the company and will help SplitSpot with marketing and growth initiatives.

Ernesto and David were not only business school classmates but were also members of the same graduating class at Harvard University. In between their shared academic stints, each had differing professional positions that will provide them with valuable operational insights to go along with their experiences in the rental market.

After graduating from Harvard, Ernesto joined Harvard Management Company and spent nearly four years helping manage and invest the university’s multibillion-dollar endowment. He moved on from HMC to join Lovepop, a Boston-based startup, as a data science associate. The technical skills learned at Lovepop helped him develop the early iterations of SplitSpot’s website and will be very useful to him as he oversees the company’s vision.

David spent his years between undergrad and business school as an investment banker at Sonenshine Partners. During his time at MIT Sloan, he participated in Amazon’s Finance Leadership Development Program. David’s financial and operating acumen will be invaluable as SplitSpot matures and starts expanding their team, operations, and geographic reach.

While Ernesto and David’s academic and professional bona fides are impressive, what really drew the York IE team’s interest was the grit they showed in building out their Boston presence. David and Ernesto were in business school when they founded the company and balanced their academic workload with all that starting a business entails.

As previously mentioned, Ernesto built SplitSpot’s initial website and platform on his own. Both founders also hit the pavement to sell landlords on their platform, inspect apartments, and show rooms to prospective renters. A great example of their ingenuity and mettle in the earliest days of the company is shown by the strategies they used to build up their network of local landlords. They spent months emailing landlords that had their rooms listed on Craigslist and Airbnb hoping to pitch their new offering. (Eventually, Airbnb banned them both from the platform.) These efforts allowed them to onboard hundreds of rooms without spending money on marketing to landlords.

These and other examples of their work ethic, commitment, and humility proved to our team that this was a founding team that will be able to execute on its vision.

At its core, SplitSpot is a flexible room rental platform centered on trust and formalizing the process of renting. For renters, it offers a turnkey experience, instant community, and a transparent process. On SplitSpot’s website, renters can view rooms that are sortable by move-in date, price range, and location. Comprehensive photo galleries, video walkthroughs, and 3D tours are available for potential renters to view and accompanied by descriptions of the apartment, location, rental terms, and restrictions. Site visitors can also book tours with a SplitSpot representative (virtual and in-person) and submit their application through the website.

When a potential renter determines they are interested in a room, SplitSpot starts a vetting process that includes a background check and helps coordinate a virtual meeting between the current and prospective roommates. This meeting gives both parties the ability to screen potential roommates and voice any concerns to SplitSpot prior to a lease being signed. The comfort provided by allowing SplitSpot customers a voice in who their roommates will be is one of the main elements helping the company differentiate from the status quo and build a trusted brand.

SplitSpot also distinguishes itself from the market with the flexible lease terms offered on its site. Renters are no longer locked into the 12 month leases they are used to. Leases are based on a four-month minimum, but have much more flexible move-out terms after that period. SplitSpot renters also pay no realtor fees and typically only need to pay a $400 security deposit along with first month’s rent. This is drastically lower than the standard first, last, and one month equivalent security deposit demanded by most landlords. The transparency and flexibility built into the platform are greatly appreciated by renters, who rave about the lower upfront and overall costs.

Landlords see value in SplitSpot’s platform in the form of increased rental income, downside protection, lower vacancy rate, tenant management, and lower management and placement costs. (For example, brokers’ fees are more and more often being pushed onto landlords.)

By renting out an apartment on a room basis, SplitSpot typically enables landlords to increase their rental income on a unit. This was validated in a CNBC profile of  Bungalow, a co-living startup focused on suburban single-family homes, in early 2020. Bungalow’s founder claimed, “We’re able to capture 40%-50% higher rents, and so what that allows us to do is then work with homeowners, so we can actually create a higher revenue stream for them.”

The key to this value proposition is helping landlords ensure a high occupancy rate. SplitSpot achieves this by handling all the listing and marketing of the rooms. SplitSpot will list rooms on all the major rental listing platforms as well as its own site. Once a prospective renter becomes a lead through a listing, SplitSpot will continue to market to them through email with videos and offers of additional walkthroughs. This amplified marketing and vetting engine allows landlords to hand off the process of finding tenants to SplitSpot while increasing top-line rental revenue. Additional benefits afforded to tenants by the SplitSpot platform, such as the increased flexibility, lower upfront costs, turnkey community, and a streamlined living experience, also enable landlords to achieve strong rental income.

SplitSpot also offers some downside protection to landlords; in return for an exclusive contract the company guarantees a portion of market rate revenue after the room has been on the platform for four months. This guarantee, combined with the renter vetting process and tenant management, helps landlords reduce vacancy rates and minimize occurrences of property damage, superfluous maintenance requests, or unforeseen tenant departures. As highlighted earlier, the vetting and management of tenants is an additional unwanted burden for landlords. SplitSpot significantly reduces this burden with their tenant vetting process by ensuring that respectful tenants are occupying rooms and sharing units with roommates that they can live harmoniously with.

SplitSpot’s business model is based on a revenue share agreement with landlords. Landlords sign exclusive contracts with the company and agree to share the gross rental income; SplitSpot effectively becomes their ideal tenant – a long-term partner who handles all churn, communication, and hassle, allowing the landlord to focus on what matters most to them. The York IE team believes that with continued research and development investment, SplitSpot will be able to offer additional tenant and property management services, enabling a subscription offering for landlords. SplitSpot is also testing out ways to potentially monetize the renter side of the platform by offering services renters may find useful once they have moved in.

SplitSpot has built the largest flex-lease room platform in Boston primarily on hustle and a great reputation with landlords. By leveraging its reputation and word of mouth, the company saw significant growth in 2020. The company also acquired the assets of PlaceMe, a Boston-based co-living startup, to help add to the room supply on the site. With plans to expand to new cities in 2021, the company is projecting another record year.

When reviewing the amount of revenue SplitSpot has been able to generate off of the rooms on the platform, and the amount of rents collected in the U.S., one is able to see how large of a market opportunity the company has in front of it. Based on U.S. Census data, in the top 20 U.S. metro areas, the amount of rent collected at the average rental price for renters that share an apartment is over $400 billion. SplitSpot estimates that at least 15% of that demographic is in its ideal customer profile of young professionals, ages 22-35, representing a $65 billion market opportunity. This large market size is backed up by the idea that for most young professionals, rent is the largest expense in their life, usually making up one-third to one-half of their budget. Even personal finance recommendation sites such NerdWallet say the rule of thumb is to spend about 30% of gross income on rent. Offering a better, more trusted service to this demographic has positioned SplitSpot to be able to capitalize on a massive market opportunity.

The large market opportunity outlined above has not gone unnoticed. SpliSpot faces a crowded competitive landscape that is most easily broken down into three groups: do-it-yourself and listing sites, the existing landlord and broker network, and co-living companies. The first two should be fairly familiar to most people and only require a brief description and comparison. A deeper examination of the co-living players will help show SplitSpot’s differentiation and why York IE believes the company is executing on an optimal strategy.

When many landlords decide to rent out their units, especially by room, their first instincts are to either handle the process themselves and place their rooms on listing sites such as Craigslist, Facebook, and, or hire a broker to help them. In each of these scenarios there are tradeoffs being made by the landlord and negative dynamics for the renters. The listing sites come with higher burden of time and resources for the landlord and don’t possess the trust inherent in SplitSpot. The use of a broker adds cost to the process, whether that falls on the renter or landlord, reducing the utility found by at least one of the parties in the transaction. Additionally, in either of these scenarios renters are generally facing inflexible leasing terms and conditions and have little say over who their roommates will be.

The co-living space has gone through a similar, but far less extreme, hype cycle as the adjacent co-working space (except without a spectacle like WeWork). There are startups such as Bungalow and Common that have raised large amounts of capital and seem to be successfully executing on their vision, while others such as Bedly and HubHaus have recently gone out of business. When analyzing the players in the co-living space, there are several ways SplitSpot differentiates itself, but almost all add up to one primary differentiator: cost.

The rooms on co-living platforms are expensive and, as noted earlier, are rented for 40%-50% higher than market rate. SplitSpot markets its rooms at 10%-20% above market rate (market rate being what the entire unit would cost for one tenant). The company is able to do this because it runs a much more capital-light business model. SplitSpot does not typically own or furnish units on its platform and does not engage in purchasing a master lease from landlords. At least one of these capital intensive practices are used by the co-living vendors and that is reflected in the price of their rooms.

Interestingly, when SplitSpot surveyed customers, it found the lack of furnishment was one of the most valued features. SplitSpot customers want to make their rooms and units feel like their home and not short-term accommodations. Another difference between SplitSpot and some of the others is that it is solely focused on apartments in metropolitan areas. Bungalow, for example, predominantly rents private bedrooms in large single-family homes. While the other co-living startups offer similar services as far as roommate introductions and vetting and tenant management, the York IE team believes SplitSpot’s combination of a tenant-friendly experience with a lower cost will propel the company to be the preferred co-living platform in metro areas.

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