9 Add-Ons in 24 Months | Dan Lifshits of Dwelly Interview

00:11:29 · S0Play from here

[00:11:29] S0: So eight acquisitions so far. What is your take on... Obviously, building roll ups. So what is your take on buying customers versus winning winning them?

00:11:37 · S2Play from here

[00:11:37] S2: Actually, I announced ninth acquisition today, so you can congratulate us. Already ninth today in the morning. It comes back to kind of effective organic growth versus roll up. Letting agencies in the industry that is structurally described by the fact that average tenancy term when one tenant lives in the property on average around two and a half, three years and average idle time between the tenancies. So when the property is idle and the kind of landlord is potentially idle to consider switching agencies is usually on average around two weeks, sometimes even less than that, because usually kind of it's known that there is like a fight for the good properties. There is always more tenants than kind of good properties out there. And whenever you, as a landlord, have the current property tenanted, you're not looking to switch really, because all agencies are kind of the same. So kind of the service that agencies are provided is not highly differentiated between different agencies. So, effectively, to try to grow the landlord base organically, it implies that you need to try to catch a landlord for this two weeks window in between two, three years old kind of rental periods of the tenancies. And that's exactly what makes the kind of the switching of the kind of landlords very, very difficult. At the same time, new kind of landlords, effectively investor, property investors that are buying the properties to to let them, it does exist and it does happen. But if you will check the statistics of what is the percentage of new builds being built across all of the Europe, I think that it's barely around 1% on the country level. So in general, there is no more than 1% of new customer base, new kind of landlords buying the properties for rentals coming to the market every single year. So hence, effectively, kind of that makes organic growth pretty slow in terms of acquiring landlords one by one, because finding new ones, there are not that many coming to the market every year and switching from existing agents. So that happens very rare as well. That's exactly why it works the other way around. Because if you will be sitting here and I'll be telling you that there is a ton of organic growth, but we just started with a roll up. If I'll be you, I'll be asking myself, man, Okay, sounds great. But why did you buy in the first place?

00:13:37 · S2, S0Play from here

If you're telling me that kind of there is effectively organic growth that can be happening in the industry, why then to buy? Because, as we know, buying is not easy. I mean, all the kind of anxiety management of the kind of preserving the existing kind of team and the people and culture and processes and everything. Buying is not easy. Buying the business and operating it and transforming it is not easy. So, kind of, that's why I think that the framework here is pretty simple. If the retention in the industry of the customer base is, let's say, 95% plus, then probably roll up potentially makes more sense because it's a highly sticky customer base. If in the industry there is natural leakage of 10, 20% every year, these customers gotta get going somewhere. And then why not then to consider building kind of an AI native services business that just effectively be the place where all these customers go, just by winning in terms of level of service, price and other things? I think that's the framework. But in our case, yes, retention is very high, meaning organic growth is more limited. [00:14:33] S0: Okay. So the real asset you're buying is really the sticky customer? [00:14:36] S2: Sticky, highly recurring customer base. And then the brand of the agency and the management team to which these landlords are connected and tied with to some extent. Where usually it's going to be kind of a few key people in the business that own most of the relationships with the landlords. And some of the kind of ways that these landlords are being served.

00:14:36 · S2, S0Play from here

[00:14:36] S2: Sticky, highly recurring customer base. And then the brand of the agency and the management team to which these landlords are connected and tied with to some extent. Where usually it's going to be kind of a few key people in the business that own most of the relationships with the landlords. And some of the kind of ways that these landlords are being served. [00:14:59] S0: I don't really understand. Why was it so hard to raise capital? It's pretty simple to understand what you guys are doing.

00:15:06 · S2Play from here

[00:15:06] S2: I think that it's the question probably at which capital structure are you trying to raise the capital. If you're trying to raise the capital at, let's say, kind of venture style philosophy, then I think that the kind of the question is kind of but this is a roll up, where is my venture alpha? And then kind of it takes time to build conviction to understand what we're actually building, what is the vision and where the venture alpha is. If you're trying to raise it under the kind of typical private equity structure, then I think that the challenge there would be is we understand how to underwrite this investment. Should you guys be doing a typical roll up? But you'll be kind of building your own technology. You'll be hiring your kind of engineers. So you'll be hiring your forward deployed engineer, kind of volunteer style kind of people. And this is pretty kind of chunky cost. At the same time, you investing all this cost on the right, that there is going to be kind of technological transformation of the business, hence better kind of EBITDA margins, returns, etcetera, down the line. And again, this is not the very typical private equity style investments that the guys are making, right? Because I think that the kind of tech transformation business case is not a worry bread and butter business case in the PE world. So that's why I kind of falling between the cracks a bit. I think that it ended up with a bunch of, like, flexible style minded investors, begin capital, venture capital kind of guys, and some of the family offices that I think that understand kind of the conduit of the two worlds in the best way.

00:16:30 · S0Play from here

[00:16:30] S0: So where do roll ups fail in this category?