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🎢 #62 - Neyborly: No more vacancy
+ how Ben and his team pivoted twice and came back from near bankruptcy
👋 Hi fam!
This week’s star, Neyborly, is a bit outside the B2C realm but has a story that is relevant for anyone interested in founding or investing in startups no matter the core market. This is a story of resilience.
Before diving into the story, I am excited to announce an experiment I will be running in the next few weeks making 1:1 introductions between you all (aka Consumer Startups readers). Matches will be made based on similar industry interest (worth 40% of the match), what type of people you’d like to meet (40% of the match ), and years of experience (20% of the match). Fill out this 30-second form to join!
Commercial real estate was facing a slow and painful death before COVID, a trend that may continue to accelerate as companies increasingly adopt hybrid and distributed workforces.
I just moved to SF this week and was surprised by the sheer number of closed or empty retail spaces everywhere I went. This problem does not just apply to SF - at any given time, the U.S. has one billion square feet of vacant retail space. Anyone who’s taken basic economics might recognize the oversupply of commercial space relative to the demand for commercial spaces, another trend only accelerated by a global pandemic.
This is what Ben Seidl set out to solve at Neyborly, a marketplace for short-term commercial real estate.
But before we dive further into the business, let’s rewind the clock to understand Ben’s “why”.
🌱 The genesis
Similar to many entrepreneurs I have spoken to in the past, Ben has had an entrepreneurial drive from a very young age.
He bought and sold sports cards, ran a video game and music business in high school, and hustled in the lemonade biz (ofc 😂).
“I did all types of hustles. I would go buy drinks in bulk then go sell them next to the golf course.” - Ben
Another big part of his identity is his passion for solving social issues and working on logistical challenges. After graduating from Boston College, he went on to become a Fulbright Scholar under the U.S. Department of Justice and spent the next few years working for non-profits like World Water Relief and One World Play Project and implementing many ops/logistics-heavy projects (e.g. shipping soccer balls to around the world).
In 2016, Ben started to get the startup itch and decided to work on his own thing.
🏬 From shared retail to short term renting
The first idea for Neyborly was a shared retail space for artisans. Even though the concept was different at the time, the mission was still the same - repurposing urban spaces to make cities and neighborhoods more open, rich, and exciting.
“There are many innovations happening for cities. You have Airbnb for hospitality and lodging, Uber for transportation, DoorDash for food, and a million other great ideas and companies to help bring innovations to these industries, but there isn’t anything in commercial real estate that helps people to get access to space in a more fluid way.” -Ben
🥚MVP (October 2016)
The first experiment took place in Berkeley, California, where Ben leased out a storefront and outfitted the space to create a shared retail store for artisans and makers.
Artists and makers would sell online through Instagram or Etsy while the shared retail store allowed them to build a physical presence to showcase their products and gain a brand presence.
“We just went online and looked for local artists and makers with large followings who didn’t have a store and reached out to ask them if they wanted to sell their inside a shared retail store.” -Ben
Well.. what could go wrong with this? It sounded like a smart idea at the time.
Nevertheless, it failed quickly due to one crucial problem - the business model 📊.
Instead of charging artisans rent, Ben and his team adopted a commission model, for which they would take a cut of the profit from item sales. It would work if the volume was there, but unfortunately, the items were not selling.
They made $4K a month, which didn’t even cover the rent.
⏎ First Pivot (Jan 2017)
It didn’t take long, about 3 months, for Ben to realize the shared retail space idea was a no-go. He quickly pivoted the business to a different model - hourly commercial rental space. To cover the leasing expense, Ben came up with the idea to re-rent out space to other companies for events, meetings, and pop-ups by the hour.
In the early days, it was unclear if there was sufficient demand for this idea. To get the ball rolling, he listed the space on all rental marketplaces such as Blazer and Storefront. The result was instant - Ben and his team made over 10K in rental income the first month after the pivot which was well above what they paid for the lease.
Besides the revenue number, another signal for an early sign of product-market fit was that many big corporations were interested in booking the space.
“Amazon called us at one point and started booking every week for training purposes. It blew my mind because the space was a small furniture and art gallery not that long ago, and all of a sudden, we were getting enterprise clients. I started to wonder what else we could sell them and decided to double down.” - Ben
Doubling down indeed. Ben and his team found and leased out another space in Berkeley which did even better than the first one, bagging over $20K in revenue per month with only $6K in rent expense (that’s 70% margin 🤯).
To further validate the model, they decided to level up and look for a space in San Francisco - the bet was that if the model could work in San Francisco, it could then be replicated and scaled to other cities.
And fortunately, the SF space worked beautifully, achieving over $18K in revenue at over 50% margin. They would then scale and open another space in Oakland, which again surpassed their expectation and did over $35K in revenue.
They were killing it. Everything was perfect, and it would be another smooth billion-dollar story, right?
Wrong.. the team would soon face a seemingly insurmountable challenge - fundraising.
🎢 Fundraising ordeal, the second pivot, and near-death experience
🌊 Fundraising ordeal
As the company scaled and more locations opened, the rent cost also started to creep up - it was getting more and more challenging to cover the expenses.
The money was so tight that Ben’s brother had to sleep in the store. Every dollar was going back to the business. They would also take on any loans they could access and put them into the business.
“We were always looking for sources of funding. We would take Square loans, Clover loans, and QuickBooks loans to fund the business.” - Ben
Naturally, Ben also started to seek VC funding. The traction was good - they were doing 100K a month in revenue and had just secured a handful of major partnerships with companies such as Rent the Runway. Nevertheless, a commercial real estate concept was a tough sell when all the VC investors were looking for high-margin SaaS businesses.
Ben pitched to 40 VCs and got 40 rejections...
Money was running out. It was looking really really tough. It was time for a Hail Mary.
The last attempt was an application to the Founder University event hosted by the famous Jason Calacanis. This move turned out to be a home run for Ben and his team. He got into the event, and subsequently, Jason’s LAUNCH Accelerator, which helped them to raise money from David Sacks’ Craft Ventures.
The key lesson here - you only need one yes so don’t give up too early.
⏎ Second Pivot & Near Death Experience (2019/2020)
The VC funding gave the team some breathing room to grow the team and invest more into the technology. Customers were loving the product. Neyborly had good amenities, accessibility, and great geography.
However, this cash flow problem surfaced again after the COVID hit which exposed a bigger problem in the business - monthly fixed lease.
They operated in the traditional real estate business, meaning they had to sign a lease with the landlord. No matter how the business was doing, they still had to pay the fixed, hefty leasing fee. When the pandemic hit, they had to return all the customer deposits back to their customers and close all spaces outside of Bay Area.
Neyborly embraced the second pivot - partner with CRE brokers and landlords to help them monetize from vacant spaces.
“What if we just operated our model in those vacant spaces with ‘or lease’ signs in them? They always exist. There is no economic value attached to them. They sit and wait for a suitor to come along and negotiate. Median time on the market was sure to extend during a global pandemic.” -Ben
Instead of signing a lease with them, Neyborly signs a license agreement (50/50 revenue share) to help them rent out spaces in the short term as they look for long-term tenants.
This new model is a win-win-win-win situation for all parties involved (landlords, operators, cities). Chantal Wirekal has a great explanation on this synergy but here is a quick summary:
1.Landlords - Neyborly furnishes the space and if the space performs well, the landlord earns thousands of dollars per month from revenue share; if not, then at a minimum, the space is clean, staged, and shows well. -Generating income -Brokering long-term relationships -Creating buzz 2.Operators/Neyborly - This new model allows the business to scale faster and spread the risk with the landlord. -Reducing risk and capital outlay -Streamline delivery -Unlocking scale 3.Businesses/users - they benefit from a brand new neighborhood amenity and uses the space on demand -Supporting small business -Low-barrier to use space and amenities -Unparalleled access 4.Cities - Empty stores look bad. Occupied commercial spaces make the city look more lively and exciting -Doing away with vacancy -Engaging the neighborhood -Infusing the local economy
This model was quickly validated through initial email campaigns. Over 50% of the landlords and CRE brokers wanted to learn more about this model and many joined right after.
Current traction - Ben and his team doubled down on this new model and now they have completely surpassed their previous new high, achieving over 200K in monthly revenue. The main difference - a way leaner marketplace model that will allow them to continue to scale faster than ever before.
🚀 Future of retail and commercial real estate
Calling it a retail apocalypse is definitely an overstatement but this entire industry requires tremendous adjustments to adapt to the changing consumer behaviors. I believe space-as-a-service is here to stay, and I absolutely love Neyborly’s focus on entrepreneurs and creators.
One interesting opportunity for Neyborly is to partner with all the burgeoning D2C brands like Italic that don’t currently have a physical presence. A retail store is great because it builds community and it provides those D2C brands with an additional distribution channel. As more and more D2C brands grow and people go back to doing more in-person shopping, Neyborly is poised to bridge the gap between D2C and retail.
A hint for the next post — tattoos ⏳
See you soon,