Closures, Faulty Finances And Legal Challenges: Alt Hotel Company Sonder's Snags Piling Up
Less than three years after going public, alternative hospitality company Sonder faces a growing pile of problems that has led the company to shutter a chunk of its portfolio as it issues warnings about the reliability of its financial reporting.
Although the hotel and short-term rental industries overall have enjoyed a solid rebound, experts say elements of the landscape and capital markets in general have changed since the pre-pandemic days in a way that could be crunching Sonder and companies like it.
Changing investor expectations and a traveler pool that may be thinking twice about urban destinations could also have a role in the company’s faltering finances, shuttered locations and layoffs.
“I suspect that a big piece of their renewed focus on profitability — finding a path to profitability — is new or existing investors saying they want to see that before they're going to put more money into the company,” AirDNA Chief Economist Jamie Lane told Bisnow.
“[Sonder was] probably hearing the exact opposite from their investors in 2019, when they were just telling Sonder to grow and grow at all costs,” Lane said.
When Sonder went public via a special-purpose acquisition company in early 2022, it did so at a $1.9B valuation. Today, its market capitalization is roughly $44M, according to Nasdaq. The company has said its most recent financial reports can’t be relied on and it is in the process of closing 25% of its reservable units. At least two class-action securities fraud complaints have been filed against it.
Sonder declined to comment for this story but confirmed its annual report for 2023 and its reports for the fourth quarter of 2023 and Q1 2024 are pending submission to the Securities and Exchange Commission.
The company began in 2014 when co-founder Francis Davidson started a business renting vacant sublets as short-term rentals. The modern Sonder business model has largely been to enter long-term leases with owners of apartment and hotel buildings, taking up blocks of rooms or whole buildings, and then renting those out as short-term rentals on its platform.
Guests book rooms online or through Sonder’s app, then have a contact-free experience upon arrival, checking in through the app, which also connects guests to concierge-type amenities like room service. The company has billed itself as a more cost-effective hotel alternative that brings more predictability than independently run short-term rentals.
Sonder started as a short-term rental company but evolved its business model, pushing further into the hotel space and creating a mix of the two, Lane told Bisnow.
“As the industry has evolved and grown significantly, Sonder was one of the first companies that tried to scale very quickly from the beginning,” Lane said.
However, the types of markets it sought to grow in — namely, lively urban markets — haven’t grown as rapidly as anticipated.
Traditional hotels and short-term rentals have enjoyed a strong recovery from the pandemic, Morningstar Senior Equity Analyst Dan Wasiolek said. The U.S. hotel industry’s overall revenue per available room as of April had recovered to about 115% of 2019 levels, Wasiolek said. Airbnb’s Q1 bookings, which account for both volume and average daily rate, were 229% of 2019's level.
“Hotels continue to have demand, and demand for alternative accommodations, including short-term rentals, continues to grow,” Wasiolek said.
But demand hasn't been even.
“Urban demand really lagged the recovery in the short-term rental industry,” Lane said. “We've seen quite a few of the competitors in that space essentially all go out of business.”
He pointed to Milwaukee-based management-focused operator Frontdesk. The company began 2024 by laying off its entire staff following failed attempts to raise additional capital, TechCrunch reported in January.
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Sonder went public via SPAC as a notable boom in the model was dying down. So-called blank check companies raise hundreds of millions of dollars with the goal of merging with a private company to take it public.
In 2020 and 2021, 860 SPACSs raised $246B, The Wall Street Journal reported, citing SPACInsider data. In 2023, just 31 companies went public through SPACs, raising only $3.8B. At least 21 firms that went public via SPACs went bankrupt in 2023, Bloomberg reported.
Part of the reason for the waning popularity of the investment type is that the SEC began to target it for greater regulation, aiming to create more transparency for would-be investors in the process, the WSJ reported.
In its annual reports filed with the SEC, Sonder includes among the risks that it has “a history of net losses and we may not be able to achieve or maintain profitability in the future,” noting that it had incurred net losses and negative cash flow “each year since our inception.”
In its 2021 annual report, Sonder said it had posted annual net losses of $294.4M in 2021 and $250.3M in 2020. As of the end of 2021, the company had an accumulated deficit of $814.8M, it said. By the end of 2022, that accumulated deficit had grown to $980.6M, the company reported.
While the risk factor section of SEC filings is supposed to include worst-case scenarios, this admission presents a picture of a company with much to overcome if profitability is the goal.
In June 2022, about six months after going public, Sonder announced it would lay off 21% of its corporate workforce and 7% of what it called front-line staff in an effort to restructure and boost its cash flow.
Davidson, Sonder's co-founder and CEO, positioned the layoffs at the time as a reaction to the financial markets, telling investors on a June 2022 conference call, “The market dynamics have shifted clearly from a growth-oriented market to one that prioritizes cash flow positivity,” Business Travel News reported.
Since then, there have been additional layoffs. And this month, the company announced it would shutter about a quarter of the 12,200 rentable units it has online by the end of the year. With the latter, the company said it was aiming to “deliver sustainable positive free cash flow as soon as possible.”
Competitors have taken up some of Sonder’s former spaces, but at others, landlords are struggling, too, like at a former Sonder location in Los Angeles where the property’s owner defaulted on a $56M loan.
Lane said there are some comparisons between Sonder and another company that famously went public via a SPAC merger: WeWork.
Sonder’s practice of signing long-term leases with landlords and then trying to cut up the space and rent it out for a higher price is similar to the practice that helped WeWork rise quickly, but it was also blamed in part for its more recent financial struggles.
“It did allow companies to grow very quickly, like Sonder, and essentially take out a lot of the risk for the building owner working with them,” Lane said.
But after WeWork’s stumbles, “the spotlight shone greater on the risk associated with that type of business model.”
