#36 When Two Startups Love Each Other Very Much ...

I’m Josh Muccio and from Gimlet Media, this is The Pitch, where real entrepreneurs pitch to real investors. 

Phil: Sh. Settle down. Hi!

Margot: Hi.

[hellos]

Margot: I’m Margot. Nice to meet you. Daniel.

Margot Schmorak is here raising 2 million dollars for Hostfully. A company that she says will usher the stodgy vacation rental industry into the 21st century. 

After working at two other Silicon Valley startups, Margot discovered that she loves the process of bringing new companies into the world. Even though it can get messy. Today, she’s hoping the investors will roll up their sleeves and join her. 

Here’s who she needs to convince: 

Daniel: I’m Daniel Gulati 

Daniel is a serial entrepreneur turned vc with Comcast Ventures,

Jillian: I’m Jillian Manus

Jillian is a partner at Structure Capital and an angel investor on the side.

Phil: I’m Phil Nadel

Phil is with Forefront venture partners where he has over two decades of investment experience.

Nicole: I’m Nicole Verkendt

Nicole runs a software company and in her spare time she’s an angel investor.

Alright here we go.

Margot: So can we get started here?

Jillian: Yes.

Phil: Please.

Margot: So, let’s see. so I went to business school at Michigan, I went to work for Apple. And I was on the worldwide developer relations team. I left because I really wanted more visibility into what was going on at the company, and I knew that wasn't going to happen at Apple. So I went to an early stage startup called Coveroo. we did some really fun stuff there and realized that I love the fast pace of startup life. Like I just love the challenge, I love the new problems.

She loved the challenge so much that two years ago she decided to start her own company. 

Margot: And I actually had two kids at the time, and I thought that I would be done. Like I'd be tired and I'd be not wanting that. But it was the opposite. I was like, no, I want more.

Now, with her third kid on the way, Margot’s here to pitch her startup

Margot: The company name is Hostfully. My cofounder, it was my cofounder's idea, he's an Airbnb super host, he lives in San Francisco So we started out with the idea that one of the biggest stress points when you're a traveler is like how do I get to where I need to go when I go there? Where's the grocery store? Where's the coffee shop? How do I make sure that I enjoy the local things that are going to make this stay really special? But we went to the Airbnb host conference a few months later to validate this idea. And we built a prototype, and it was an iPhone app, and we said if you had a guidebook that you could send to your guests, a digital guidebook like this, would you pay for it? And we interviewed 200 people and 197 of them said yes. So we were like, wow, there is something here.

Hostfully started out making these digital guidebooks that property managers could share with their guests. And Margot and her cofounder saw a lot of success with that model. But that’s NOT the company she’s pitching today...

Margot: This is the really exciting thing that just happened, we merged with another company in our space.

Jillian: Who?

Margot: It's called Orbirental. Orbirental had a very feature rich platform solution. And Stefan, the CEO/CTO or Orbirental, We had been integrated with him for over a year. Our products had been integrated. So we popped the question around July or August of last year. I can't remember the date, actually. It was at a coffee shop, and it felt very much like dating, because I was like, hey, what do you think about a more serious relationship? And he was like, yeah, I'll think about it. And then he came right back within two days and he said, I'm really excited about it. I would love for you to be the CEO. I need a team, you guys are an awesome team, I've loved working with you, let's do it. So we just did that about three weeks ago. And our revenue went from 11,000 to now 25,000 monthly revenue. 

Nicole: Congrats. 

Yep heard that right. The Hostfully that Margot is here to pitch is just three weeks old. This is the first time any investor has gotten a peek at this new version of the company. And this, is their new pitch.

Margot: it is a platform for vacation rental companies - not Airbnb hosts - like, companies that manage multiple properties to manage their business. And what I mean by that is it helps them take multiple properties and put them on different bookings platforms. We put them on Airbnb, VRBO, Homeaway, Booking.com, TripAdvisor. And then we also help them with streamlining the operations of their business. 

Phil: What's the interface like though for the property manager?

Margot: So the interface, it's like a SAAS product. They log in, they get a pipeline of the incoming reservations that they can see. They can assign it out to their team members, they can book those reservations within the tool. They can also integrate with a lot of third party solutions. And so when the booking is made we say, hey, there’s these automatic guest communications that need to go out so that the guest knows how to reach the property, how to actually get into the property. All those things that actually are kind of stressful for vacation rental travelers. 

Nicole: This is pretty cool. 

So that’s why Margot decided to merge with their competition, instead of just providing a digital guidebooks to guests, Hostfully can now help property managers run their entire business from one central hub.

Now that investors understand what the new business does, they’re ready to analyze the hell out of it. 

Phil: How are you marketing?

Margot: So our marketing is primarily content marketing. Our number one growth source is actually referrals. Which is awesome. We developed a white paper last year on hospitality and vacation rentals, and we branded it, and my cofounder and I did it in like three weeks. And we've gotten 700 leads out of it. So we're very good at creatively doing that. It's actually prevented us from investing too much in paid marketing channels, which I'm totally fine with, because I think for this B2B niche solution it's so hard to target effectively.

Daniel: Let it be product led. I think that's great. What’s your view on barriers to entry? My view on it is kind of just so ingrained... I think the answer is like you’re so ingrained in the workflow of these property management companies that it’s kind of hard to rip out. But I was just wondering whether there’s something more around defensibility.

Margot: Yeah. There’s definitely the first mover advantage, which is what you’re talking about, where if we get in we’re super sticky.

Daniel: And you see that in the churn numbers?

Margot: Well, on the Hostfully side, the churn is zero. The original Hostfully. There are two companies, right. On the Hostfully side the churn is zero. On the Orbirental, the churn is... It's not low. It's actually, we have a lot of inbound customers that are coming in with the APIs are a little bit funky, they leave. But we still have a lot of growth in that business.

Phil: Well, what is the churn on that business?

Margot: Um... It's probably 30% right now.

Daniel: Annual?

Margot: Yeah. 

Daniel: You had eleven...

Margot: I'm not happy about that, that's why I...

Nicole: Yeah, one third of all customers.

Phil: Yeah, that’s really...

Margot: And I sighed, because this is a business we inherited and we’re working on. So I know we can improve that. 

All these numbers Margot’s talking about - that 30 percent of customers that Orbirental is losing - represent what’s tricky about a merger. You get all the other company’s flashy new features … plus any problems that might be lurking under the hood. 

Jillian: What is your burn?

Margot: What is our burn? Oh... Sorry, I just have to think for a second because we just merged. So I want to make sure to give you the right number. Our burn is around 25. And our revenue is around 25. So we're basically break even.

Jillian: But these are contracts? Okay.

Margot: We're within a month or two of break even.

Nicole: So you’re not burning money?

Margot: No. 

Daniel: if you just think about the listings side, the Airbnbs, the VRBOs - on one end of the spectrum you’ve got a world where there is one listing monopoly. On the other end of the spectrum you’ve got complete fragmentation on the listing side. What is reality?

Margot: I’m so glad you asked this question.

Daniel: And how does that change over time?

Margot: So okay. If you have a pie chart, Airbnb has 4% of the market, Homeaway has 11%. The rest of one half of it is online. Other online providers.

Jillian: What?

Margot: The rest is offline. This is in 2015, so the data is a little bit old.

Nicole: No!

Margot: This is a Piper Jaffray report. I can show you the slide. I have it in my bag.

Jillian: But 2015. That's 2015. That's three years ago.

Margot: It's changed. But Airbnb hasn't, they haven't even doubled their business since then. t's still just, it's a cottage industry. It's been neglected by technology for a really long time. And Airbnb, thankfully, has pushed all this forward. And the reason why they've pushed it forward is consumers now are demanding hotel like responsiveness when it comes to price and when it comes to time to book. 

Yeah, this is crazy. In 2015, only half of all vacation rental properties were listed online, leaving the market wide open for someone to come in and snatch up all those analog listings. And Margot thinks Hostfully is the company that can bring all those property managers out of the stone age. 

Phil: So when you think about your target market of managers of 50 to 100 properties, that's sort of your sweet spot, how large a market is that?

Margot: There are about 100,000 of these companies in the world. And they spend about a quarter of a million dollars every year on software. So it's a $25 billion market. 

Phil: How much are you raising?

Margot: We are raising... We’re just starting to raise a seed round, $2 million, it’s a convertible note with a $10 million cap. 

Phil: How’d you come to a $10 million cap when you’re doing 25,000 a month in revenue?

Margot: Um... Okay. Well the 10 million cap comes from two things. One is we raised before, when we had about 3000 in revenue on a $5 million cap. And we were one company. And now we’ve doubled the company in terms of the value proposition. Probably more than that, in terms of the value proposition. But certainly the revenue has grown 10x since then. So I felt like a 10 million cap was a reasonable amount to raise right now. And I haven’t had any questions about that yet. What do you feel about it? 

Jillian: But you’ve only pitched to one person.

Phil: I disagree with you. I disagree with you. Based on my experience, and all the companies that we look at and invest in, that’s not market. That’s just not competitive with the deals that we see. A company doing 25,000 a month in revenue... Everything else being equal, a 10 million cap is just way high.

Daniel: So what would you do? Would you do flat to the last cap?

Phil: I mean, that’s what’s closer to market for sure. 5 million cap. 

Daniel: Would you do flat to the last cap? 

Margot: Another $5 million round? A cap at five? No. 

Margot's trying to figure out the value of this new and (hopefully) improved version of the company. And it’s tough to know what the magic number is when you’re just coming off a merger. One option is to throw out a number and see how investors react, and boy, are they reacting.]

Phil: If you can 10 million cap then go for it. I still don’t think it’s the right thing for the company in terms of long term. But if you want to go that route, and you can raise 2 million at that then 

Margot: Yeah, see... The goalposts are moving and it’s really hard for me to know To be honest with you...

Jillian: I think 7 makes more sense.

Phil: I would invest at 5 or even 6.

Margot: Okay.

Phil: But I don’t think I’d go beyond that.

Nicole: Go for 7.

Jillian: I think 7 makes more sense.

Margot: I don't think I'd take anything less than 7.

Jillian: No. 

Nicole: Anyway, if we're talking about a 2 million delta on your cap. But overall, I think you're really on to something.

Phil: No, I agree. Otherwise I wouldn't be interested in talking about the cap.

Valuations can get messy, but as Phil just pointed out, the investors wouldn’t bother negotiating if they didn’t like what they were hearing. Margot’s caught their attention, now they just need to dig a little bit deeper. 

Daniel: Do you... What's your ambition as a founder? What does success look like for you here? What are you trying to build?

Margot: I want to build a big company that makes our customers really happy and makes a lot of money. I... I don't like to put numbers around it, because I think it's early days about what that looks like, but my goal is to reach as many property management companies in the world as I can with the best solution. My other goals with this startup were, I want to see what it's like for me to make the decisions once in a while. I've worked for other people and I'm like, I think I can do this. And so now I'm doing it and it's going really well. And I see that continuing. My goals with the company are to build a great team that I love to work with. I want to have a great product that our customers love to use. And I want to contribute to value in the world. And I think startups are kind of magical in that they can create something out of nothing, and I see that we've done that for some of our clients already and I just want to continue with it. 

Nicole: You just seem like such a good leader.

Phil: I agree.

Nicole: I get this vibe that you’re just a really, really good leader.

Margot: Thanks.

Jillian: Really knowledgeable.

Nicole: And calm. And this is how we solve the problem. I have two kids at home, a third one's coming, this is nothing. Everyone calm down.

Jillian: I actually think people who have children use their time more wisely. Women who do. Because they really have to. They don’t have a choice. And so I really find that time management, interestingly enough, for working mothers is more efficient. They work more efficiently.

Margot: I totally agree.

Jillian: Because they don’t have a choice, right?

Margot: And you just don’t have the energy to spin out over something at work. You get into a conflict at work, you resolve it and you move on. Because it’s like, you gotta work. And you’re not going to think about it at 9pm at night because you got to put your kids to bed.

Jillian: Yeah. Kids to bed. Absolutely.

Margot: It’s actually... I considered that an advantage of having children. Because it balances you in that way. And it’s sort of an unspoken thing. I remember being young and single and not being married and not having kids, and having all this time to spin about what happened at work and what should I do differently. And it’s not very productive.

It’s decision time. The investors have put Margot to the test, but she’s stood her ground. Now it’s time to see what they think. 

Here’s Phil

Phil: Well here's my feeling. I think you can tell that I really like you, and your approach, and the company that you're building. I think that you're onto something in terms of offering a real solution to property managers. And I always look for founders who are solving a real pain point, and I think that's what you're doing. I think there are probably some more direct competitors, but you've made the point, I think well, that it's a huge market and it can probably support a few companies doing the same thing. I have a really good feeling about you. And I'd like to invest. The only issue is the valuation for me, as I mentioned before. Seven cap, which you said you would do, or seven price round, either way is certainly at the very high end of where I would go. So what I would do is I'd invest 250 as the final 250 in a $2 million round. So you get the rest done, because I want to make sure you have that runway. If you can get the rest on at 7 million cap or price round, then then I would do it. But I will still be the last check in. 

Phil’s in, IF they can come to terms on the valuation. It’s on to Daniel. 

Daniel: Yeah. So where I'm at is, I came into this kind of hating the business. I think that like... [laughter] I think that like, you look at this business and you're like this is niche SAAS as you said. This is a zero network effects race to the bottom commodity business with no defensibility run by a founder that has just merged with another pre-product market fit company that's trying to figure out...

Margot: Like what kind of a crazy person are you?

Daniel: Yeah. But, during the course of the pitch, I've come to really respect you. And I think, um, I think you could potentially be a great founder. And like quite frankly, I think this space is more interesting than maybe I initially thought. I think it's huge. So the next step for me is, I'm not a no, I'm not a yes. So I think, you know, if you're up for it, would love to kind of walk through the product with you and just kind of hear your updated thoughts on the round.

Margot: Yes. 

Daniel: Yeah, that and feedback on you.

Margot: Okay. 

Daniel: So why don’t we take those next steps?

Margot: Okay. Awesome. Thank you. 

Margot: Jillian?

Jillian: Um... what I see is a tremendous founder with all the IQ and the EQ that’s important to us. your execution and your ability to really assess the challenges and be very transparent - I was struck by that, the transparency. So I would like to see a deck. I’d like to show it to my partners. 

Margot: Okay

So, with 3 investors interested in learning more - it’s on to Nicole. 

Jillian: drum roll.

Nicole: So I'm a founder as well. So I was in your shoes five or six years ago. And I'm actually in, I actually called a niche SAAS play.

Margot: Oh you do!

Nicole: Yes. And so I kind of want to put it back to you in terms of how I could help you. I'm not going to show up with 250 or 500k. My check sizes are 25. And there's just a few friends in this angel fund that we run. So I'm happy to get involved. But I'm not sure... I think you just need capital here. 

Nicole: I also have a company I think you could partner with, that I'm thinking of. So I think there are areas I could add value.

Jillian: Oh for sure.

Nicole: So I’d love to be included on the email in terms of getting information and going through it. 

Nicole: But look, I think you rock. And to me, it's all about the founder at this stage.

Jillian: Agreed.

Margot: My team is really great.

Jillian: So I think what we're all saying is we're all in pending the due diligence. And this has been a real pleasure. 

Margot: Thank you so much.

Phil: Yeah, you were great. Great job.

Margot: It was really a pleasure to meet all of you. 

Daniel: Thank you.

[thank youse]

Margot leaves the room, but the investors stick around for another minute. 

Jillian: Wow, she's crackerjack.

Phil: Yeah, she's really good.

Phil: She has great experience. She's sharp.

Daniel: She kind of pitched without pitching.

Phil: Yeah. She was just talking.

Nicole: Which is why it was good.

Daniel: Yeah. She never... She just told the...

Phil: She was just telling the story and it sounded very good.

Nicole: Very matter of fact.

Jillian: Had an answer for everything. But a really keen answer.

Phil: And like you said, she's very self-aware, which I like too.

Jillian: Very self-aware. 

Nicole: I just love these old stodgy industries that are all paper. Because there’s no one else there. Like I find so many startups are young people, they’re out of university, and like what do they know about life? They know how to order pizza more efficiently and how to date. But like, then you have to... To me it’s about finding these pockets of industries that are old school, that...

Phil: There’s so many of them.

Nicole: Right? 

Margot hooked all four investors! Which is impressive.

When we come back, we’ll see how things played out, after the fact. 

[BREAK]

Welcome back. We caught up with Margot 3 months after her pitch… and not a moment too soon.

Margot: I am very pregnant. Um…

Josh: I thought you might say that.

Margot: I, um, I’m 36 weeks pregnant this week and for those of you who are not parents, um, this is kind of the last stretch when you start to just get really, like tired and it’s hard to move around. I’m actually feeling very mentally clear though, so that’s been a nice surprise.

Josh: Huh!

Margot: And um, yeah, this is great. I’m punching out my last list of 30 things to do before I try to go on maternity leave in a week and a half.

Josh: Oh my goodness! I’m glad we’re sneaking in this call

Margot: Yeah.

Josh: When we are. Okay, so, uh, switching to the to the other fifty percent of your life. I don’t know if it’s an equal balance, but, how is the the fundraising round going?

Margot: Oh, you know, the fundraising round is going well. I have several interested investors. Um, I, I haven’t pulled the trigger on opening the round formally yet because I just wanted to make sure that I have enough time to do everything properly, so I actually reached out to them all recently and said, “Hey, putting a pause. Everything’s going really well with the business. It’s just not the right time for me to jam in closing a round before I deliver, especially because that’s kind of an ambiguous date.” [06:03] Like, I could go into labor tomorrow, so it didn’t seem fair to the investors, to the team, to me And um, and we’re fine so we’re not feeling the pinch, and we have plenty of time to raise in the fall. We’ll just go back to it then.

Josh: Oh my gosh. You decided to pause the round. 

Margot: Well, I mean because I don’t have time to close it properly — 

Josh: Yeah.

Margot: Like we were going out to raise, um, a certain amount, right, and then as we moved down the conversation, we realized that raising was very much a reality but we needed to adjust, um, some expectations around where the company was, and that had to do with, very frankly, some risks that investors saw around the merger. 

Josh: Yeah.

Margot: and then about a month and a half ago, we realized that the fundraising would not be quick and because of some of this added risk that investors were seeing in the business with the team, and when we realized that we said, “You know what? Let’s kinda like take our foot off the gas on fundraising and just focus on the business. Get the stuff done that the investors are thinking about, prove it out to them, and we’ll come back and we’ll do it again.” And we don’t really have any downside with that. Our revenue’s just going to go up and it makes you know, us able to negotiate with a higher valuation, so anyway, it’s all good for us.

Josh: it’s kind of crazy that you did this merger and then like so quickly afterwards, went to raise money. Do you think that that was, like, like in retrospect do think that was the wrong move?

Margot: So there are two seasons of fundraising in the year. There’s one in like February, March and then there’s another one that’s like August, September. That’s like, when they start. And what happened when we, when we merged, which was like right at the end of January, was we said, “Well, you know what, like let’s go in and dip our toe in the water.” And that’s kind of what it was when I talked to you. I mean, it was sort of like a — 

Josh: Oh, got it, let’s see if we can raise in this fundraising cycle that ends in February, like you’re like, we got a month, let’s see what we can scrounge up, right?

Margot: Yeah, yeah. Yeah, let’s just do like a hyper, hyper quick, like two to three weeks, Margot’s on the road, she’s out, um, the story’s tight, I didn’t like, need to involve very many other people on the team, in the process that I was going through. I did it all on my own and it was just like, seeing what was out there, and we actually got a much bigger response than was expected, so as you could kind of sense on the pitch like— 

Josh: Yes. Yeah.

Margot: It was, it was overwhelming for me honestly. And I was able to get to some amazing investors and I’m still talking to them, so, um, like, but a lot of them said, like I went into due diligence probably with like four or five and then I was like, “You know what? This is not going to close soon,” so I had to stop. 

Josh: Yeah.

Margot: What ended up happening with the pitch was the first day, and like three weeks later we were like, “You know what? It’s not going to happen quickly. So let’s just take the foot off the gas,” but you’ve already started a lot of conversations so there’s kind of this like, trickling effect after that, and that’s what, you know — 

Josh: Yeah, you planted a lot of seeds.

Margot: yeah 

Josh: So then like what happens after the fact, like you start talking with each of the investors, but then you obviously encountered some resistance. Like what was that resistance, what were some of the factors.

Margot: um, I’ll be open. So my first meeting was with Daniel Gulati, super nice guy. I went to meet with him in the Comcast offices. Um, I totally did not do a good job at that meeting with him, and and it’s okay. I mean it was like one of my first meetings and I actually walked out and I said, “You know what, like, can’t win them all. I’ve got a list of like a bunch of others, like keep moving on.”

Josh: Yeah.

Margot: I knew it did not go well and I sort of stumbled on a bunch of simple questions I should have known and I just didn’t do a good job. But, when he said, “Yeah, like I don’t think I’m really interested in coming into this round,” I was like, “Okay.” Now, do I think if I went back with him later on and I said, “Hey, now we really do fit within your portfolio, your thesis, and I really want to have another conversation with you, would you take my meeting?” I think he probably would.

Josh: Yeah. 

Margot: It wasn’t even about actual numbers. Like I just didn’t have a good, crisp story about what was going on. and I

Josh: You weren’t on your game that day.

Margot: I knew it, when, in the meeting I knew it and I was like, “Oh my God. What am I doing?” But it’s okay

Margot had that conversation with Daniel before deciding to hit ‘pause’ on the round. And she stopped raising before finishing due diligence with the other investors. Which is something that hasn’t happened before on the show. 

And then there’s the other thing we’ve never seen before - the merger.

 I was really curious about how that had affected the raise, especially since there was this tight three week timeline set ...

Josh: Which is, three weeks, like that’s crazy, number one. Um, like, I guess that’s awesome that you’re like in a position to be able to do that, but like — 

Margot: Yeah.

Josh: Do you think it was, ultimately, like that was maybe the thing that hurt you guys from raising right now, and is why — 

Margot: Mmmmhmmmm.

Josh: You’re having to punt to later on in the year?

Margot: Yeah, I think the merger was the impetus for raising and I think it was also, I don’t think the merger was why we didn’t raise, I actually think it was the opposite. It, the merger because things had changed so much, was an opportunity for us to test the market. We tested the market in a short time frame. We found out what we need to find out and we’re still working on building our business together. Was the merger a mistake or something that we shouldn’t have done? Absolutely not. Like, the entire team is a thousand percent onboard with the company merging. Um, that’s not a question for us. It was more just like does fundraising fit in with that, that timeline? And I think the answer was no. But if we had not done the merger, then we never would have gone out to raise in the first place. 

Josh: So it’s the reason for the round… and also the reason why the round didn’t work out in the three weeks that you wanted.

Margot: Exactly. That’s right.

Margot was trying to do something pretty ambitious here … merge two companies together, pitch to investors and close a $2 million round — all while getting ready to go on maternity leave. With kid number three! I totally respect the fact that she realized there just wasn’t enough time to do it right. And she told me she’d be picking things up with the investors again in the fall.

Margot seemed basically unfazed by all these challenges. Which was something I noticed, and I think the investors noticed it too. She had no problem answering their tough questions, and she struck everyone as sincere and down to earth ... 

She’s one of those people who puts you at ease. After talking to her, you leave feeling really good. And you can’t quite put your finger on why.

It left me thinking that if anyone can make a merger work and come out with a stronger company on the other side, it’s Margot.

Hey, so I wanted to let you know about something new we’re doing that I’m really excited about. Today’s founder, Margot, will actually be doing an AMA (ask me anything) on Reddit, 

It starts on Thursday May 24th at 2pm eastern, 11am pacific. 

You’ll find it on the /r/Entrepreneur subreddit and it’s the perfect opportunity for YOU to ask any lingering questions you may have about Hostfully, Margot’s experience on our show, or whatever...

So put it on your calendar, Thursday, May 24th 2pm eastern. I’ll “see” you there.

Our show is produced by me, Josh Muccio, Molly Donahue and Kareem Maddox. We are edited by Devon Taylor and Blythe Terrell.

We are mixed by Enoch Kim. Original music composed by The Muse Maker. Our Theme Music is by Breakmaster Cylinder.

Lisa Muccio planned the recording of this pitch.

We discovered Hostfully because of an introduction from Christie Pitts and the team at backstage capital. Startup founders who are raising money can apply to pitch by going to thepitch.show/apply

And as a reminder, no offer to invest is being made to or solicited from the listening audience on today’s show.

All right -- you’ve been listening to The Pitch from Gimlet Media. We’ll be back with a brand new episode, next Wednesday.