With present housing costs skyrocketing in cities like San Francisco, New York, and Los Angeles, even grads with well-paying jobs are struggling to make lease on a spot of their very own. As a consequence, millennials and Gen Z’ers who don’t need to transfer again in with mother and pop are turning to co-living, sacrificing privateness for affordability, flexibility, and neighborhood.

While this mannequin might remind you of communes within the 1960s and ’70s, co-living isn’t an indication of the counterculture anymore — the truth is, it’s beginning to turn into mainstream. The rise of this new sort of residing has sparked curiosity from the VC neighborhood, with quite a lot of VCs inserting bets on Common, Roomi, Bedly, and others.

But there are some apparent pitfalls relating to the precise financial fashions of those startups making an attempt to faucet into the newest technology of housing angst. Here’s what we’ve realized from speaking with the founders of 15 venture-backed corporations within the house, and the place we expect co-living is heading.

Cost is what counts. As co-living has expanded past the socially-focused commune mannequin, tenants now see an absence of privateness as a drawback. For all their discuss forming communities and making real connections, on the finish of the day most millennials desire a house to name their very own. Offering high-end facilities or an incredible location isn’t sufficient, co-living items should be priced under market to be interesting. Co-living properties additionally usually can’t get away with providing a typical 12-month lease, as they’re focusing on tenants who don’t need to be locked down for quite a lot of months at a time. Successful co-living managers must discover ways to thrive on this high-turnover atmosphere.

The small home co-living mannequin (<50 tenants/home) might not ship enterprise returns. Small co-living homes undergo from diseconomies of scale — designing the house, paying a neighborhood supervisor, and organizing occasions have a reasonably fastened value whether or not you might have 10 residents or 100. Signing administration agreements for big new builds (like Ollie does) might be a greater wager, as a startup takes on no monetary or operational danger from development however collects ongoing charges and a share of lease. Many of those bigger properties market their items as “micro suites,” providing single rooms which can be 50-75 p.c smaller than a typical studio with shared lounges and workspaces. Tenants prepared to surrender a few of their non-public house are rewarded with high-end furnishings and complimentary companies like laundry and cleansing.

Millennials are open to a long-term Airbnb-type platform, however this house is hard for startups to enter. Marketplaces like Airbnb and VRBO don’t work nicely for longer-term stays. Listed properties are sometimes too costly to lease for quite a lot of days or are unavailable for months at a time. Most faculty college students and up to date grads use Facebook, electronic mail lists, and Craigslist to search out housing, all of that are inefficient and generally unsafe. However, it’s robust for a startup to combination listings on their platform to draw potential tenants, as incumbents (like Craigslist) have vital market share and can sue startups that scrape their information (e.g. RadPad). Startups additionally should sort out quite a lot of tough points like insurance coverage, lease compliance, and id verification, that are essential for longer-term stays.

Roommate matching is an actual want however probably not a venture-scale enterprise. We haven’t seen any massive corporations centered solely on roommate matching. Unless the platform prices customers to enroll (which is hard with so many free choices), it’s exhausting to earn money; as soon as a person finds a roommate, they will simply end the method off the platform to keep away from charges. A extra enticing mannequin (adopted by Wanderful and HomeShare) entails working with buildings to match roommates and refer them to properties, typically growing capability in present rooms by way of pressurized partitions. This is enticing to property managers as nicely — many luxurious buildings have just lately struggled with excessive vacancies and are desirous to broaden their potential tenant base.

We’re excited by the surge of curiosity within the co-living house and predict that as millennials more and more look to spend their cash on journey and different experiences, residing in co-living fashion communities will turn into much more widespread. While we urge startups to be cautious round how they construct a mannequin that’s scalable and worthwhile, we’re anticipating to see some massive winners within the house within the coming years.

Justine Moore and Olivia Moore are buyers at VC agency CRV.

This article sources data from VentureBeat