How One Niche Can Change Your Value Proposition
Since the first time the idea of starting a coliving crossed my mind, it was obvious that Startup Embassy had to be for startup founders only. At the time, my complete vision wasn’t fully realized.
What I did realize was the need to pay rent for my business. Subletting the space to other entrepreneurs in need of affordable housing in Silicon Valley made sense from a value perspective.
Still, it would’ve also made sense if I had accepted anyone with the same needs. The actual reason I only accepted entrepreneurs was that I would’ve felt awkward sharing my space with a stranger with whom I had nothing in common. Entrepreneurs are my tribe. Surrounding myself with them made sharing feel natural.
My Tribe, My Niche
Fast forward to today, I have concluded that targeting a niche was fortunate because it’s the best way to verticalize my coliving. The reasoning is simple, and it relates to the business model.
At the beginning, I didn’t consider Startup Embassy a business, but it turned into one. Today, colivings are trending and are real businesses. But I see over and over again new coliving operators targeting a vast audience. I’m sorry, but millennial digital nomads should not be your target.
When I do consulting for other coliving operators, I see why they find that profile attractive: they want to scale, and the only way to prove merit to their board of directors is by waving a large market number in their faces. No funding otherwise.
Millennials look like a large enough market, but I tell the future managers, would you be excited to join a coliving just because there are people from your generation there? Coliving should be about the excitement of living with your tribe. The selling point here is a community, even if affordable living is another major factor.
You can probably tell I’m dogmatic in this regard, and anytime you ask me, I’ll be in support of extreme-verticalized colivings. The more, the better, as long as you do it carefully and always guarantee diversity in your coliving, as I’ve previously advised.
I know that this is counter-intuitive because to take a huge investment risk, most businesses justify it with an optimistic market forecast—but it’s the other way around. In the age of weirdos, where anyone can become an influencer in their strange niche, there are infinite potential markets out there.
The Community/Business Axis
Ok, I’m sure that I haven’t convinced you, and that’s fine. Let’s try not to be that extreme.
Imagine when you initially design your coliving community and decide its target; you put it on an axis to measure how vertical it can become. Zero means super broad community, like, millennial digital nomads. One hundred means extreme verticalization, like, let’s say, summer alpine skiers training for jumping in glaciers. (Ok, that might be too extreme, but you get the point.)
Considering this niche on the verticalized axis, two variables are affected:
- Community: The more verticalized you are, the stronger the community you will have. It will be much easier to manage, and the sense of belonging for its members will be stronger. This is the magic any business needs for fervent advocates.
- Business Model: What’s your business model, selling overnight stays as units? As you get more to the right of the axis, you find additional revenue streams. So many in fact, that at some point your goal should be to make your revenue from selling beds entirely anecdotal. You could even give the beds for free.
I’m sure that the first point doesn’t need much explanation. Just imagine a community where members have nothing in common except their age versus another one where they share the same passion. (We can keep the ski jumping example).
Imagine their conversations over dinner, the events they organize, or the content they generate and share. Can you feel a sense of belonging coming from people without that shared interest? The first community can be managed, but it will be much more challenging than if you had the second, which will instantly grow into a living organism.
How Community Affects Profits
That brings me to the second point, or how stronger community verticalization affects your business model. If you take that ski community and add a strong brand identity, merchandising, content (podcast, Instagram stories, Clubhouse, YouTube channel), and sponsors, you could easily gain additional revenue streams, which would be challenging (if not impossible) to achieve with the wide-target example.
I had a similar situation at Startup Embassy. For years, I would have strong arguments with my cofounders regarding our revenue. When we reached an average of 100% of occupancy (In fact, we even got to 110%, but please don’t ask!), we shifted to discussions on how to increase profit. Of course, there are only two ways: You either increase your number of available beds or raise your prices. That’s it.
For eight years, I kept prices the same. A typical conversation with my cofounders would go like this:
– My cofounder, “We reached top potential revenue. We need to increase our prices.”
– Me: “Hey, our entrepreneurs are by definition broke. They come to Silicon Valley to raise funds for their companies. We charge 1200$ for a bed in a fucking shared bedroom. How on earth do you expect me to increase the price with a straight face?”
– My cofounder: “But we need to increase revenue!”
My cofounder was right, we did need additional revenue; it’s part of growing a business. But my point was that if we increased our pricing, let’s say 10%, all of that stress goes to our client. For their pain, we would only see a minor increase to $1300, and that is considering our occupancy rate would stay at 100% after we tell them we’re charging more.
The Solution: Networking
The solution came from running events with a large European company. Organizing events is core to maintaining a healthy community, but they are a pain to organize; and in my experience, they are difficult to monetize and wind up being an expense (unless you get my point and verticalize your community, of course).
We found that some companies were interested in networking between their managers and entrepreneurs, and what better place to do so than Startup Embassy?
At first, it was an excellent way to have someone else pay our event expenses. We found out that their budget was literally ten times larger than ours! We didn’t profit from it as we thought that events were not our business model; we just made our events much better with the extra money.
But then, after some time doing events together, they would invite us for dinner and propose the following:
They offered a three-year paid contract in exchange for Startup Embassy to provide networking opportunities with entrepreneurs working in their sector.
It was a way for them to innovate by potentially acquiring those startups. The amount offered? 25% of our yearly revenue! For three years!
Now think about this— we were struggling to increase our revenue by 10% because we didn’t want to put stress on our colivers, and now a company offers us more than double that amount.
And it gets better. My very first thought was, “If one company has this need, how many more do? Can we focus on this and find ten companies? I bet we could.”
That would mean increasing our revenue by 250% without raising prices or the number of beds! Could this have happened if we didn’t focus on the startup founders’ niche?
If you take it a step further, you could even forget about charging for your beds. Your beds would then become an asset for your business model—a way to gamify, perhaps, your community. In fact, this is what we are doing in the new Startup Embassy: we are becoming a venture fund that invests in startups via coliving. Coliving for equity! The entrepreneurs will not need to pay for their stay with money. The fund is our client.
Mama Carlos says: Intentional Value Exchange
Imagine a percentage (or even all) of your beds are offered for free in exchange for actions instead. These actions would be designed to build community value, and this would reinvest in the flywheel action building from your networking contacts. It’s a win-win all around if you stick with the extreme niche we spoke of.
With this method, you could identify the best potential community members to join your space. I won’t go over this in detail here as I plan to write about it soon, especially how all of this can turn into a coliving framework. But hopefully, you get the point.
You can have a broad target for your community, but you will miss business opportunities, and managing your community will be harder. The more you verticalize, the easier it becomes to build a strong community and unlock additional revenue streams. You will grow a strong brand which inherently brings customer recognition, a competitive edge on the coliving market, brand loyalty, and credibility. (Not to mention lower price sensitivity, of course.) Only one category will make you profitable and allow scaling.
Hola Carlos, thanks for this. Great reading as usual. How do you explain the fact most of the fastest-growing urban/residential coliving do not have vertical communities? and How do you see this developing?
My opinion: Right now, there’s so much demand that anything will work. But when the market saturates:
a) Colivings that don’t have a value proposition that makes colivers EXCITED to live in their communities (and I don’t see that happening if you don’t verticalize) will become a commodity. Their only option will be to compete in price.
b) Colivers will mature and demand real colivings (because at this stage, they’ll know what it is) and will be wary of faux-livings (thanks, Caterina Maiolini and Matt Lesniak for the term!)
Current fast-growing developments are probably more worried about getting a large piece of the pie and scaling as fast as possible than understanding what building a community means. But unless they start focusing on the community, they will fail. And it’s very difficult to have a healthy community if you are not verticalized to some degree.
I’m very dogmatic: No community, no coliving. But to be clear (and I hope I made it clear on my post), this is not a black and white thing (0 verticalization or 100). There are grays. But you must know that the more verticalized you are, it’ll be easier to have a healthy community. You will unlock additional streams of revenues for the business up to a point where selling beds should be “airplane peanuts.” This is counterintuitive: If you want to scale strong, verticalize.
Another post I wrote on the subject: http://trench.es/vertical
btw, Gui Perdrix made a Twitter thread about coliving economics here: https://twitter.com/guiperdrix/status/1369138930927493121 replying to the founder of Nomadlist Pieter Levels https://twitter.com/levelsio/status/1368952630102405126
Can’t agree more, Carlos. I’m also a fan of vertical focus (although I come from another type of spaces – such as accelerators and startup hubs). I found the article on coliving community models very insightful. I guess the investment in community (mgmt, space, focus, technology etc.) is very much dependent on the governance model of coliving spaces, who’s financing, their expectations, and whether they are able to see a business case for community…
True, Marta. Let’s hope that whoever is financing those large projects understands this. For their own sake 🙂
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