Scaling Neighbor As A Leading Storage Marketplace With Joseph Woodbury | EM Group Chat #220

Welcome back to Everything Marketplaces, where we talk about founders and leaders from some of today's top marketplaces. So this is episode 220, which is a group chat that I just had with Joseph Woodbury, who's the co-founder and CEO of Neighbor. Neighbor is a leading marketplace for storage and parking. They've raised over $75 million in capital from top investors like a16z and Fifth Wall. So it's a great chat with Joseph. We went back to the founding story and first steps to starting Neighbor. Joseph shared how it's evolved and scaled. We did a deep dive into Neighbor, a leading marketplace for storage and parking today, how they're leveraging AI. Joseph shared his key fundraising learnings after raising $75 million in capital. We also had a great group Q&A, but did unfortunately run into some Zoom issues and had to make few edits, but I know you'll enjoy this conversation and find it a great watch to the end. So Joseph, it's been a while since your past group chat and things have really changed since then. So I'm excited to have you join us again here today. We of course have a lot that we're going to dive into with Neighbor, but I thought it'd be great if you could start off by briefly sharing your background for those that are newer to the community or might not know you.

Yeah, so, um, we started Neighbor when we were still in college. Both myself and my co-founder Preston had no intentions of starting a company. We had both, I had just accepted a full-time job with Bain and Company and he had accepted a full-time job as well. And then the summer before our senior year, Preston and his wife, they got married and about a week after they got married, they moved down to South America. And of course, you know, you just got married, you need a place to put your stuff in the US while you're going to be in South America for 4 months. They look into finding a storage unit. They kind of have the same experience everyone has when you're looking for storage, which is they're all full. They're all on the outskirts of town and he was going to have to pay quite a bit of money for a student. So he called around to some friends, found a friend that was willing to let him store in his garage. Fast forward 4 months later, he gets back from South America. He goes to pick his items up. And, you know, as he's in his friend's garage, he just has the thought, This was such a better experience. You know, I felt so much more peace of mind knowing my items were in a nice clean garage in a neighborhood I trusted. Plus I saved a ton of money. Why doesn't everyone do this? There's got to be empty space in every neighborhood in the country. Why hasn't someone created a, you know, a directory or marketplace of some sort? So we ran into each other at the start of our senior year in college. He told me about this concept that he'd had. And I remember going home to my wife and saying, Preston just had the most brilliant idea I've ever heard of. I had done some research on marketplaces while I was in college with a professor. And one thing I knew is like marketplaces need a very, very large market to be successful. You get this tiny little take rate of every transaction. Marketplaces are dead by default. You look at the ones that have been successful, Airbnb disrupted hospitality, like major category. Uber went after transportation. DoorDash went after food, very, very large categories. And I mistakenly had kind of made the assumption that all of the large categories were taken. So when I heard Preston talk about this, the little I knew about storage and parking, I was like, These are also massive categories. And the more I learned about it, the more like conviction I got in this idea. Um, and, and we ended up starting the idea and launching in our senior year, getting customers, and we both called our full-time jobs and told them we weren't going to show up. Been doing it ever since.

Really cool founding story. And you also mentioned lots of topics that we're going to get into in a little bit of detail here. You know, if we go back to the very beginning, you know, what were the first steps that you took to, uh, to start it? And of course, as marketplaces, we all face the cold start problem. So how did you solve for that in the beginning?

Our first website was just Like a simple WordPress page with a Google Form that you could click if you wanted to become a renter and a Google Form that you could click if you wanted to become a host. And what would happen when you filled out that form is we would call you as the renter and say, hey, what do you need to store? And you'd tell us. So then we call the host and say, okay, they want to store this. Are you cool with that? And they'd say yes. And we'd say, okay, what do you want to charge them? Then we call back the renter. Okay, they want to charge you X amount of dollars. Is that good? When do you want to move in? We call back the host, we confirm it, we'd send them a PDF that both of them would sign. And then we would have the renter Venmo us the money, and then we would Venmo out the host their portion. And that worked until it didn't. And it just got to be too much for us to do all these calls. So then we bought this like clone script of Airbnb's website. Uh, for $500 and retooled it to do monthly payments instead of, uh, monthly transactions instead of, of, of daily. And so now people could find each other on a map and they could connect themselves. It still didn't process payments. So once they booked each other, it saved us all the booking time, but then we still had to reach out to them and collect Venmo payments. And that worked until it didn't. Mm-hmm. And then my co-founder got his Venmo shut down because at the time you weren't supposed to do business transactions on Venmo. I think he's still locked out of Venmo to this day. So then we had to build payments into it. So that's how we solved it on the technology side. On the marketing side, the first thing is like, we didn't market, you know, at least spend marketing dollars. We would go knock doors to find hosts. That's like how we found hosts. And I remember we made these cool little flyers. We were dropping off flyers and I remember we were walking a house and we literally saw someone come and take the flyer off their door and walk right over to their trash can and throw it away. And it was like, okay, this is not efficient. So I had this brilliant idea to take a dollar bill and paperclip it to every flyer. And then the flyer just said, this is the first dollar you make on Neighbor. At least now they have to look at it, right? They can't just, no one's going to throw away a dollar. That wasn't that efficient either, but like, this is the sort of things we were doing and we really just let users come to us and experiment. We were tiny, you know, thousands of dollars in MRR each month. And we just really, really worked on the technology without thinking about user acquisition too much. Fortunately, we were venture funded, so we raised a $2.5 million venture round probably 3 months after graduating from college. And so we had some venture money to allow us to just focus on the product. And we really did not take that venture money and spend it on marketing. So it wasn't until we felt like we had a scalable process. We'd spend about a year and a half just operating in our local market, which was Utah. And then after a year and a half, we felt like, okay, we've got the technology at least in a fine place. The user experience is better. Our net promoter scores are going up. And then is when we finally launched in LA. That was our first launch outside of Utah, and we were really able to accelerate the process with marketing. So I think we got as many hosts in the first like 6 or 7 weeks in LA. as we'd gotten in the first year and a half in Utah. I'll stop there, but that's kind of how we solved the original cold start problems.

Yeah, there's lots of great examples you shared about doing the things that don't scale, whether it's like the product or customer acquisition. And I think those are going to be really relatable here. So you also mentioned, you know, Neighbor is a local marketplace and, you know, launching that next market. So can you kind of walk us through, you know, what went into launching a market? And then, you know, if we kind of like fast forward to now, just thinking about like growth and expansion,

a lot of early adopters in Utah were kind of, you know, young business professionals, more likely to adopt a new technology. And we knew they worked for these companies. And so we started out doing these lunch and learns where we'd like go in, we'd buy everyone lunch, but they had to listen to us talk during lunch. But that was terribly inefficient and kind of expensive really to buy everyone lunch. So my co-founder Preston found this water bottle manufacturer that made these really cool looking water bottles. They look kind of like a smart water bottle. Yeah, we're talking like plastic water bottles, like Smartwater. And we were able to print the label on them and it kind of explained how Neighbor worked around the label and there's QR code to download our app. And we would go drop off a case of these waters at the front desk of like every office building in Utah. And we knew like the receptionist was not going to throw this away. You're not going to throw away a case of waters. It's going to end up in their company fridge. And then people would send us photos. They're like, this empty water bottle's been sitting on a conference room table in our office for the last like 4 months and no one's thrown it away. And so we did stuff like that. Then when we went to launch LA, we took a very Uber-style approach where we had like a market launcher that flew out there and then hired a community manager to, or, you know, GM-style position to run the market. And again, like we, We just replicated this boots on the ground stuff. So, you know, we distributed like something like 500,000 water bottles in Los Angeles. We would also do some like local billboard marketing, kind of targeted to specific areas we were going after. And that's what we did for our first 5 markets, 5 or 6. Then we raised our Series A round from Andreessen Horowitz. And as we were growing, One of the things our board member, one of our board members pointed out, we reported on this metric called non-target markets, which is all the revenue we were getting from markets that we hadn't launched yet. And you'd think it'd be zero because we're a hyperlocal marketplace. We should be earning no money. These are places we've done nothing in. And yet, somehow, We couldn't measure it. Word was getting out and we were getting all this revenue in this big bucket called non-target markets. And our board really encouraged us to think about a more national approach because, you know, when something's pulling on you, like that's usually what you want to pursue is like whatever's pulling on you the hardest. A lot of times as a founder, you have an idea of how things should be and you really kind of want to force that to happen. But it's far better to follow like what people are begging you to do because that's product market fit. I was candidly a little scared to launch nationally because I felt like we had something that was working, this like local market launch strategy. When you have something that's working, you stick with that thing that's working and it could be very expensive to launch nationally and we could waste a lot of money and become irrelevant quickly. But we bit the bullet, we launched nationally on the advice of our board. It was one of the best things we ever did. Like, it massively accelerated the business. There's just a lot of early adopters in a lot of geographies. Now, it's not the strategy I would take if we didn't have access to a lot of capital. You know, times were different in 2020, whenever this was. So, you know, there's a lot of inefficiencies that happen when you launch nationally and you haven't dialed in everything. And even today, like we're going back and in some places taking a more local approach to really get saturation. And so I think on average, the local approach is probably the best way to build a marketplace, but The exception is it massively accelerated our market to go nationwide and it massively accelerated our learnings because we were able to see all sorts of diverse supply in different geographies. And that was, that gave us so much data to say, okay, this type of supply is actually what works really well. And sometimes that was different by geography. You know, in this region of the country, this type of supply works in this region of the country, this type of supply works. And it would've taken us a long time to figure that out without going national like that. Yeah, I'll stop there again.

No, that's going to be really helpful. So growth and expansion is, of course, a topic that we're always discussing in the community. And, you know, related to that, you know, managing growth and capital efficiency as well, which you covered in a little bit of detail. Another topic that I wanted to discuss is trust. And so, of course, you know, marketplaces, you know, they help create and facilitate trust. How important has that been for Neighbor? And then what are some of the specific ways that you've been able to, you know, help create and facilitate that?

This is another important learning for marketplace founders is you don't sell what you think you sell. Like we don't sell storage and parking even though we're a storage and parking marketplace. That's not our product. That's our host's product. They, our hosts sell storage and parking. We sell trust and that's the only thing we sell. And so your job as a marketplace is to like help people set prices and to sell trust. And that's kind of your core responsibilities. As a marketplace. And like, however early you think you're focusing on trust, like you're not focusing on it early enough and you're not focusing on it enough. The story I like to tell is we were probably, you know, 4 years into building our marketplace and we had some indicators that the quality of our supply was not what it should be. But we'd spent a lot of money, like a lot of time and effort had gone into acquiring that supply. And a lot of that supply was earning money, maybe not as much as it should have been, but it was earning money. And we had long discussions about this, but we made the decision to cut about a third of the supply on our platform. And that's a tough decision to make. You're basically, for us, that was lighting like several million dollars on fire that we had spent. And the sunk cost fallacy is such a strong feeling like, man, we worked so hard to get that supply. It was one of the best things we've ever done for the marketplace. Like it, again, going back to accelerations, yes, that supply was earning money, but the revenue we were losing by losing users' trusts. You know, some people were willing to book those spaces, but far more people were leaving because we had those spaces. And by having a really high quality standard, the other thing we implemented when we rolled that out is we now review, and we do this even at our scale where we're operating in basically every city in the country. We have a human review every single space before it's published. And it is like well worth it. You know, we think that is well worth it. And we have lots of automated systems that review it as well. You know, like we're, it's not like we're neglecting what can be automated. It's still worth, still, you know, maybe with AI coming on board, that'll change, you know, over the next couple years. But even still, we think it's valuable to have a real, you know, human set of eyes on every single space before it goes live on our platform. The other thing I'll mention is early on, you have to do some things that again, may not scale even from a cost structure standpoint. So we provided a $25,000 renter guarantee to all of our users. We had a million-dollar guarantee to our hosts and a $25,000 guarantee to our renters. And we just went and found like a, it took us forever, like 6 months of searching, but we found this insurance underwriter that was willing to underwrite this policy and we paid the premiums and we didn't pass that cost Onto our users at all. We just kind of ate that cost. And that was really helpful for our renters being able to say like, look, we know this platform is new, but if you store with us, we're the only place in the country where your items are going to be protected up to $25,000 for free. So by providing this, it was a catalyst and a kickstart. Fast forward 4 years later, we had all the claims data. And so we were able to launch our own property protection plans and just cut out that underwriter Altogether and launched this really cool product on our platform because we had that claims data. But for the first 4 years of the business, we just had to like kind of give this away for free. And that was worth every penny in the trust we gained.

Those are really helpful examples that help highlight the importance of trust. And then in this case, the guarantee as well. Now, some more good examples of the common theme of doing the things that don't scale. Also too, you know, it's worth noting that, you know, you started out with kind of more of like a peer-to-peer, so, you know, residential homeowners offering space and then, you know, eventually having larger storage facilities, you know, on your marketplace. So like, what are some of the considerations do you think that go into like the supply strategy and maybe tips for founders that are, you know, navigating this?

I think this is another good example of like pull, you know, it tries, try to push your startup as little as possible and let it be pulled as much as possible. I know that's easier said than done. And certainly at no phase of our business has it like in the present has it felt like we were being pulled, but in hindsight, you can just tell that's what was happening. So yeah, we started very Airbnb style, people renting out their garages, their sheds, their basements, their driveways, and we expanded that fully nationwide. And that's still the largest category of our business today and growing really nicely. So will probably always be the largest category of our business. But 3 or 4 years ago, we had a bunch of commercial real estate owners and not storage facilities, mind you, just commercial real estate, think like apartment buildings and office and retail approach us and say, hey, we notice your residential folks are earning a lot of money. Like, could we earn some ancillary income too? And we were like, well, it's not, you know, we'd never really thought about doing that, but okay, sure, let's do a little pilot. And we did it and it worked phenomenally. So then we started a motion around this and we started actually going and pitching these big property owners that may own properties all across the country and saying like, hey, you have your property. Let's say you're an apartment building. You have a bunch of parking spaces that the city made you build that you're never going to use. Let's rent those out for long-term vehicle storage. Someone's going to park a car there. You're not going to ever have to talk to them. It's going to be monthly recurring revenue, just like your core rents. So it's going to match your accounting really nicely. And then also you have these storage lockers that you built on the inside of your apartment building for your tenants, but your tenants never use 'em. So let's take those and rent 'em out to the community. And instead of being 30% occupied, let's have 'em be 90% occupied. So, and, and this grew and grew and grew to the point where we're now working with a bunch of like 10, 20, 30+ billion dollar property owners and they're earning, you know, instead of, Instead of earning thousands or tens of thousands like our residential hosts per year, they're earning millions of dollars a year on our platform. So there's these big major hosts. And then we raised from a group called Fifth Wall, led our Series B round, so $50 million Series B round. And Fifth Wall is the largest property tech investor in the world. And They only invest in property tech and they have a lot of relationships with large commercial real estate owners. In fact, most of their, the LPs, the limited partners in their fund are actually commercial property owners. And so they were able to help connect us and really build out that motion even more to get some of the largest REITs. And then about a year and a half ago, we started onboarding the storage facilities themselves, like the actual storage owners. And professional parking garage owners and stuff like that. People that do this for a living. And the idea there is our goal is we want to create the platform where you as a renter, you have no reason to start your search anywhere else. And sometimes marketplaces have taken this like either you're the bookings.com of the industry or you're the Airbnb of the industry. And for us, we were like, why, why would we pick? Wouldn't the best experience be if you could go to one website and see all the Marriotts and all the Airbnbs all in one place and compare 'em? Sometimes I book, you know, a hotel when I'm traveling for work. Sometimes I book an Airbnb when I'm traveling with family. And that's, that's what we are today. Like, there's no reason to start your search anywhere else. We've got all the storage facilities. We've got all the, that are in the industrial areas of town. We've got all the commercial properties near where you work. We've got all the residential properties near where you live, and different people have different use cases for that. And interestingly enough, adding the storage facilities actually increased the conversion rates on our residential peer-to-peer options. And the reason for that was because We've been saying for years that our peer-to-peer residential spaces are cheaper. You know, they're like 30 to 50% cheaper on average than a traditional storage facility. They're closer to your home, so they're more convenient in a lot of ways. And you can say that and you can say it in your marketing and you can say it all over your website, but there is nothing more powerful than a direct comparison. So now you can go to our website, you can see the storage facility, and right next to it, you can see the garage. And so all these individuals that may have come and been interested in the garage, but kind of doubtful in the experience, now they can see it in real life and they can be like, oh, it is a lot cheaper. And they don't have to go visit another website to do the comparison and they just book with us. So it increased the conversion rate on our peer-to-peer listings, plus all those people who would've bounced and just gone and booked with a storage facility. Now we make money on them as well. We just, we are the market now. We're not a marketplace, we're the market.

That's really interesting to hear about. So, and, you know, I did want to spend some time, you know, discussing Neighbor today and the age of AI because it's, of course, you know, a whole new world versus kind of when you were just getting started. But I guess for, you know, some brief context, can you give us an overview of Neighbor today?

Generally what Neighbor is, is like I've been mentioning, it's a storage and parking marketplace. So you can come and you can book someone's space to store your boxes or your items, or you can store your boat or your RV or your car. We even do like monthly parking. If you're in downtown Chicago or New York, you can, you know, store your daily driver with us that you're going to be accessing every single day and driving to work. Really any types of space. We even like touch on warehouse space where we do some small warehousing for, for businesses. We do fleet storage for people that own like hundreds of cars and everything in between. We're, we are the marketplace for space.

I think that's going to be helpful. I realize we didn't do an overview kind of, you know, when we were talking about the earlier stages. So, and then I guess if we, if we now, we, you know, focus on the AI, right? So, you know, how have you approached that AI and then how are you leveraging it today?

I don't know that I need to educate anyone on, you know, how essential AI is to a technology business today. It, it's, it's everything, right? 95% of the code that our software engineers are writing is generated by AI, and they're really kind of guiding and managing the AI systems. And that's even in a big scaled-up company like us, that's how it is. And increasingly we're building tools internally for all stakeholders in the business to be able to contribute. We have our internal product we call Neighbor Studio where anyone can create pages on our website, your marketing landing pages without ever talking to a software engineer, that just plain text, They can talk to it. It uses our design system. It will look and feel exactly like a Neighbor page should. Kind of fun, fun experience. A couple weeks ago, I was giving an offer to a candidate, and when we give out offers, you know, I walk them through kind of an equity calculator so they can see different scenarios of like how much their equity might be worth. And I've been using it for 8 years. And I go on and Google it to get it pulled up on my screen and ready for this offer that I have at noon. And it's like I'm getting like a 404 screen and the company for whatever reason had just like deprecated it. I'm like, oh shoot, this is my favorite part of the offer. So I just go to Neighbor Studio and I told it to build me an equity calculator, exactly what I it wanted it to look like. Now we have this Neighbor equity calculator that looks like this third-party calculator. It did it in, you know, 2 hours, but really like 20 minutes of my time in between meetings, just kind of like talking to it. And now that's the equity calculator we use. So AI's all over the place and I'm a non-technical founder, so that's pretty awesome for me and my marketing team and all these non-technical people to be able to go create. I think AI in a marketplace is is underrated for use in, in fraud. Um, you know, increasingly, like, your website's going to be hit with all sorts of bot attacks and, and, and everything in between. And, you know, now even with recent tools like Jev, you can pretty affordably, like, review every single message sent on your platform and all these things and quickly route it to the right model to do a quick analysis and decide. You know, whether this is something we need to take action on or not. And so while the tools are getting more sophisticated to attack marketplace spaces, which as a marketplace, you have lots of pages, you're, you know, if you sell water bottles, your product pages are pretty limited. Like you've got your water bottle page, you can click through all the different colors and that's it. And you have like a checkout page. Maybe you have like 5 pages on your whole website. But marketplaces, like we have hundreds of thousands of pages across our website, probably millions of pages at this point, because we've got a page for every single listing. We've got all these different dynamic landing pages for every single city in the country and every single storage type. So we have a Las Vegas self-storage page, but also a Las Vegas boat storage page and Las Vegas, all these different pages. And we have millions of messages going back and forth on the platform, so it's just a lot to review. So while the tools are getting more sophisticated, also the tools to fight it are getting more sophisticated as well. So AI's helpful there. Increasingly, we're embedding AI into search experiences. We've been doing a lot of testing around the ability to ask questions about a space. we even rolled out like an AI listing creation flow where you could just upload a photo of your space and we fill in all the information for you rather than you having to go through like a 10-step questionnaire to onboard your space. We, let's see what else. Of course, we're working with the LLMs, like we have an OpenAI experience where you can search all of our listings through OpenAI and It will take you to our webpage to finalize that transaction and book through us. It's nice that we have a subscription experience. That's one thing I love about our marketplace, because while you may come through one of the LLMs, ultimately when you book, we're going to process that payment every single month into perpetuity rather than the LLM itself. So you can't create a checkout experience through the LLM. Even if they wanted to manage that space. So that's one advantage of being a subscription marketplace. And in the age of AI, I think marketplaces are the place to be, right? Like there's very few business models left that will be defensible long-term, certainly not business software, right? Traditional SaaS, I think, is largely not in the short term, but over the long term is dead as a business model. But marketplaces with network effects, if you wanted to duplicate our website, you could duplicate the technology overnight, right? You could have some bot come and scrape everything and duplicate our website, but it would take you years and a lot of money to go city by city and acquire all the physical supply we have. And that's the other thing is marketplaces by themselves with network effects, You know, you could duplicate Facebook tomorrow and you could even create a better Facebook, but people use Facebook because that's all where all their friends are. And you can't duplicate that. There's nothing you can do to duplicate that. But there are some digital marketplaces out there where they're selling a digital product, and I think maybe those marketplaces are at risk. Where we're protected is because we're a physical marketplace tied to the physical world. And I think in today's, you know, to build a big long-term business, you have to be tied to the physical world in some way now. Yeah,

you get a lot of head nods with some of those mentions. And, you know, you did mention network effects. So, you know, what do those look like for Neighbor?

Maybe we have, I'm trying to think like a geography everyone would be familiar with. Like maybe we have some hosts in Brooklyn and some renters in Manhattan, and they don't do a ton for each other because it's hyperlocal. Like you don't really want your stuff stored way out You know, or like Long Island, that, that would just be inconvenient for you to access those things. And so we may have users, but they don't help each other at all. And so like, why would anyone ever use our platform? Because all the renters that come on, there's no supply for 'em. And all the supply that comes on, it takes them forever to get rented. And then we get more and more and, and we start to have more options in your area. So it increasingly becomes a better experience for the renters because they have more supply, more options. more price options. Plus our renters store all sorts of different things. So if you're listing your basement or your shed, that's not great for storing a boat. And so, and if you're listing your boxes, an RV pad or, you know, a carport, that's not great for storing boxes. So the more spaces we get, the more types of renters we can serve and the better experience, the faster they find what they're looking for. Which attracts more renters to the platform. And the more renters we get, the faster our hosts get reserved and the more money they make, which attracts more hosts to the platform. And it's just this virtuous cycle that keeps spinning and spinning and spinning to the point where, why would anyone list? You know, if, if, if Mike goes and duplicates our site tomorrow, why would anyone list with him? Because Our hosts, if they went and listed with him, they'd make no money because he's got no renters. And the renters wouldn't go to his site because he'd have no supply. So now that we're the first mover and we kind of have taken this market, it becomes incredibly difficult. It was already expensive for us to build this marketplace. It would be 10 times as expensive to build the same marketplace and to try and rip away everything. Marketplaces, In eras where capital is free, you do see competition among marketplaces, but as soon as the business models have to work, it's really a winner-take-all concept. You see this with Uber and Lyft, right? When we first started Neighbor, Lyft was a $30 billion company and Uber was a, you know, $60 or $70 billion company, something like that. Today, Uber's a $150 billion company and Lyft's a $5 billion company. So it ended up being very winner-take-all. Same thing with Airbnb and VRBO. Airbnb kind of took that space. So that's where the renters were, is Airbnb. There's still a niche market available for VRBO for certain hosts that want a little more control over their property, I think. But, and VRBO's been around since the '90s, right? Or something like that. I think it's been around for longer than Airbnb, which by itself is now a 17-year-old company. Can you believe that Airbnb was started in 2008?

Building marketplaces are about the, about the long game for sure. So, you know, you mentioned as far as, you know, fundraising, you've of course, you know, raised over $75 million capital, you know, from top investors like a16z and Fifth Wall. So, you know, what are some of your key fundraising learnings that would be helpful for other founders?

The most powerful force in fundraising is the current market environment. So unfortunately you don't control that. And because you don't control that, you focus on what you can control. From 2010 to 2020, capital was essentially free, right? Interest rates were at 0%. And I think it's important to understand the dynamics of a venture firm and like how a venture firm works and why it works. Because companies at the end of the day are all valued on cash flow. Like a company is actually worth nothing except for its cash flow. And startups earn zero cash flow. And so what are you valuing a startup at? You're valuing it at its future cash flow. And venture capitalists are actually terrible at doing this, but like Wall Street will value a company on a discounted cash flow, right? So they take their future cash flows and they discount 'em back because cash today, is not worth the same as cash tomorrow. You'd rather have cash today than cash tomorrow. Well, when interest rates are 0% and that's your discount rate, effectively, like cash in the future is worth the same as cash today. And so that makes startups very valuable because their future cash flows are very valuable. When interest rates go way up, it does the opposite. If you're discounting you know, 10% every year, then cash flows in 10 years are actually worth $0 to you today. So the interest rates actually have a decent impact on startups. Startups are some of the most affected businesses by interest rates. And the other thing is you see different hype cycles, right? And you just have to deal with it. Like, You can rage against the machine, but unfortunately there's nothing you can do about it. So you gotta focus on what you can control, which we'll talk about in a second. But the hype cycles during my time as a startup founder, you know, before we started, there was like a big D2C hype cycle with all these like direct-to-consumer e-commerce businesses and kind of out-of-the-box subscription models like Blue Kitchen or Fresh Kitchen or whatever they were called. that raised all the money and, and then blew up. Right. And then marketplaces were all the rage. Like still when we started Neighbor in 2017, there was still pretty big buzz around marketplaces and a lot of people starting the Airbnb of this and the Uber for that. And so you could raise capital as a marketplace. Marketplaces, no one invests in marketplaces anymore. Like, I think you should just be aware of that. Like marketplaces are completely out of vogue. today in the venture world. And as a rule, a venture capitalist is gonna be like, no, not interested in investing in marketplace. It's stupid because marketplaces are actually the only businesses worth anything anymore. And I think marketplaces have produced some crazy percentage of all venture returns of all time. Really, if you think about it, every large business is a marketplace. Like Amazon's a marketplace, even Google's a search marketplace. It's website creators and website viewers come together in this marketplace and And Google charges for advertising and that's how they make their money. Probably the best business of all time, Google. Apple makes a lot of their money from their actual App Store marketplace. Yes, they build the hardware, but they own the app ecosystem. That's what makes them incredibly valuable. You've got all these people spending millions of dollars to build apps for Apple for free. Apple doesn't pay them anything. In fact, you pay Apple. So marketplaces is the most powerful business model. It'll always be that, but That doesn't change what venture capitalists are focused on. You've, you know, you go back 3 or 4 years, Web3 was huge, right? And cryptocurrency. And then that collapsed. And right now it's AI. And a lot of money, you know, there's a lot of smart money going into AI around more foundational stuff. But there's a lot of dumb money going into AI too, around like AI SaaS apps that are going to be You know, it's a competitive race to zero and they're going to be worth nothing, but that's just what it is. So what can you control? Well, one, no venture capitalist will ever ignore growth rates. And ultimately, like, venture capital is about growth. They need— so maybe some more venture capital dynamics here. Maybe you all know this already, but if you raise a Call it a $500 million fund, which a lot of firms these days raise billion-dollar funds. If you raise a $500 million fund, you need to like 3 or 4x that fund. So you need to return somewhere, you know, guide me here, Mike, but like $1.5 billion to $2 billion in capital, right? To be considered a successful fund. So let's say you invest in a SaaS company and SaaS companies, if they're very successful, exit for around $1 to $3 billion. And let's say you're the largest owner at that SaaS company at the time of exit. And so you own like 20% or something like that, and it's a billion-dollar exit. So massively successful. You don't get very many billion-dollar exits in a fund. Well, now you returned $200 million to your fund. In other words, it didn't matter at all. Like it didn't do anything for your fund. It did nothing. You're nowhere closer to getting to $1.5 billion and $2 billion. You need to own 20% of a $10 billion company at exit. Okay, now you're talking. Now you just returned your fund. And typically like 1 to 3 companies are kind of going to generate all your returns. You can get like, 50% of your companies are going to lose all your money and another 30 or 40% are going to make you back your money. And then it's like that top 10% that makes you all your money in a fund. And so that's a $500 million fund. $500 million and billion-dollar funds, they don't return very well, but people raise them anyway. The best returners are these like $100 million funds. And they can, they can make money with that billion-dollar exit, but everyone, even the smallest funds, are looking for billion-dollar exits. So they cannot invest in you unless you're going to be a billion-dollar-plus exit. Otherwise, you don't matter. If you're a $100 million exit and they make $20 million back, you don't matter at all. They might as well have deployed their capital elsewhere. So, so you should also know that when you're pitching a venture fund, like you have to be a billion-dollar market, and no one's going to buy that you're going to take 50% of a market. So you need to be in a $50 billion-plus market in order to be successful. So you can make the argument that like, oh, we could come in and take 5% of this market doing $50 billion in revenue, and we'll be doing $2.5 billion in revenue. Right? Uh, and that, that starts to get exciting for, for a venture fund. Um, the other thing is unit economics are important now. When Uber and DoorDash raised money, unit economics didn't matter. Like DoorDash raised $40 million for their Series B and, um, at, at, at sub $10 million ARR. Um, and they had spent all $40 million in one year. So 12 months later, they went back out to raise and they couldn't because their unit economics sucked and people cared somewhat about unit economics back then. And so Sequoia led a bridge round, which was like a $120 million bridge round at a flat valuation or something like that. I think it was technically a down round. for them. And then they spent all of that money in like a year and a half. And then they had this like undisclosed follow-on bridge round to their bridge round that was like another $60 million that they burned, you know, in like another year. So in the course of like 3 years, they burned like $250 million, just lit it on fire. And then they raised their $400 million SoftBank round. That doesn't happen anymore. That doesn't exist unless you're a core AI company. Uber wasn't just at negative unit economics, they were burning at negative gross margins, like literally on a gross margin basis, they were negative at their Series B round. The market doesn't support that anymore. So we could have you know, complained and they're like, oh, it's impossible to build a unit economic, a healthy unit economic marketplace at our stage without a lot of capital. But it's what we had to do. We had to shift entirely the thinking of how we build a marketplace post-2022 to be a really healthy unit economic marketplace. And that was kind of considered impossible. Like Tony Xu, founder of DoorDash, is an investor and he told me, he's like, If we had to do, if we had to operate in the current environment, like DoorDash wouldn't exist. Like we just, we never would've made it. But you have to. So those are the rules now. You gotta grow really fast and you gotta have really healthy unit economics. And so, and you gotta do it without a lot of capital because no one's investing in marketplaces anymore. So good luck.

That's gonna be helpful tips and definitely the reality. So gonna lead to some questions when we get to the group Q&A and I realize we should probably get to it because there's some some founders that raised their hand and you and I could probably just go on for quite a while. So we'll get to the group Q&A. Hey, Godfrey, I saw you raise your hand. Do you want to come on and help us kick things off?

So I'm thinking at the early stages of Neighbor, given that it's hyperlocal, it seems to me that there might be issues of disintermediation since it's easy for the renter and the host to probably know themselves. So how did you guys deal with disintermediation at the early stages? Did it happen? And how did you guys manage that?

Great question. So there's, there's 2 ways to prevent disintermediation. Um, you can provide value, uh, and you can enforce penalties. And that's, that's it, right? So you gotta think how, how you're going to do that. And hands down, the more effective of the 2 is providing value. Um, you can enforce penalties and that helps around the fringes, but like, people are smart. They know how to get, get around stuff. So you just got to think like structurally, like Why would someone use us? Like, not, not why do we deserve to, you know, to be used, but like, why do they have to use us? For us, if you think we're helping these people start a very passive income business that they didn't want to start, right? Like we went to them. No one's out there being like, oh, I wanted to start a storage and parking business at my house. We're the ones that advertised to them and even told them this was a possibility, and they just want us to take care of like everything. So they like that we help set their price, you know, with our smart pricing tools. They like that we process the payment for them on their behalf into perpetuity. They never have to deal with payment disputes. They like— most people don't know, but you actually can't get rid of items. Like if someone stops paying, you're not able to throw those items away. You have to run this like auction process that's regulated differently in all 50 states. Like some states you have to send certified mail notices. Some states you have to post in the newspaper, a local newspaper that you're, you're about to auction the items. All these like hoops to jump through. We manage that all on behalf of our users. We're the only company in the world set up to run storage auctions in all 50 states. And so that's another reason someone doesn't want to be stuck with a boat on the side of their house for the rest of their life that they can never get rid of. Um, we also provide a million-dollar guarantee to our hosts, which provides them peace of mind. They would lose that if they went off platform. And then of course, like, we have penalties as well. You know, if, if, if we catch you disintermediating, you owe us like something like 24 months rent, um, in our terms of service. But like, That's not what does it for people. What does it for people is the value that we're providing. We also have a payout protection guarantee. So if the renter stops paying us, we'll actually continue to pay you as a host while we work to remove those items. And then we can recoup our costs in the auction itself. So we do all these things to benefit our user, which is like, why would I, for this, this take rate, why would I go off platform? That would be crazy. When I could, I rent out my space. Actually, I rent out the RV pad on the side of my home because I don't own an RV, never want to. The guy stores his trailer on the side of my house. My current renter moved in about a year and a half ago, and I spent about 20 minutes helping him move in. You know, I showed him the space. I was like, okay, here's where you— I helped him back in for the first time and get to know it. Then I told him, If you ever need to come get your trailer, just come get it and text me on the Neighbor app that you got it so that I know it was you that got it and not someone else. And I have not done a single thing, like not 5 minutes of work in a year and a half. And I get a direct deposit in my bank account every single month. It pays 100% of my utilities every month. It's awesome. It's free money. Every other marketplace is a labor marketplace, right? Like Uber's a labor marketplace. DoorDash is a labor marketplace. Instacart's a labor— you have, you're trading your time, your labor for money. You have to go drive around. It's input in, output out. Neighbor is one of the only marketplaces out there that's like truly passive, especially if you let Neighbor run all of it. So I think most of our hosts are kind of like, why would I not use Neighbor? I don't want to deal with any of this stuff.

That's a great question. So, hey, Michael, saw you raise your hand. Do you want to jump on here?

Joseph, congrats on the success of the marketplace. I know you guys have been at it for a while. In fact, I remember seeing guys from your team at some marketplace conference in San Francisco like 10 years ago. So I know you guys have been hard at work. I'm curious, as you go back and look at that first pitch deck when you raised your first round, how much of the expansion that you've done now beyond peer-to-peer, you talked about the marketplace pulling you, but did you foreshadow a lot of that expansion in some of those early pitch decks or no?

No. So in some ways our pitch deck hasn't changed at all, like new designs. But when I'm pitching investors, I'm using like largely the same concepts around the market that we're attacking and what we expect to be and who we expect to be that I was using, you know, back in 2018 or 2019 pitching for our A round, like almost identical, just with different designs. You know, I walk 'em through, like most investors have no idea how big the storage and parking marketplace is. So I had, I have to like get them up to speed and be like, oh, the industry has built more storage facilities than we've built, you know, Starbucks and McDonald's and Dunkin' Donuts and Wendy's and Walmart's and Home Depot's and Costco's combined. Like, you get it? It's big. It's bigger than you think it is. And it does 10 times more revenue than the entire taxi and limo industry that Uber and Lyft disrupted. Like, storage is way bigger than you think it is. So those slides are the same, but I didn't pitch them at all. on working with commercial real estate or working with storage facilities or expanding into the more of this like monthly Parker customer type or any of that stuff, or, or adding property protection plans that are a huge part of our monetization now, standing up a captive insurance entity. Like I had no idea, not even a, a concept. What's, what's the, What's the Trump phrase? A concept of a plan or something. I had none of that.

Yeah. Charlie, saw you raise your hand. You want to jump on here?

You were mentioning in the beginning, you know, you were doing knocking, flyers, flyers with a dollar, and that was all inefficient. I guess what was sort of, what came after that, that sort of like maybe increased your efficiency or what was the next idea or what sort of got you going before the money came in? And then sort of on the flip side of that, You know, you said you were going market by market, you did like 5 or 6 locally, yada yada. What were some of the main tweaks to the go-to-market or the launches as you went through those first half dozen markets?

When I say those early methods were inefficient, but what I really mean is on a fully loaded cost basis, they would've been inefficient. They were efficient because we were free, you know, like we weren't paying ourselves anything. And, and all of those relied on our labor, right? Uh, and, and that was free. So it cost the company nothing, um, for us to go knock doors and, and, um, uh, you know, drop off water bottles. So you're always going after what the most efficient channel is. And that happened, at least from the company perspective, to be the most efficient channel. It's just not a scalable channel, um, because people willing to work for free don't scale. Because there's only 100% equity of the company you can give out. So what we did after that is a little bit of everything. Like we started spending some small dollars on the digital channels and kind of testing around that. You know, we started building out SEO pages to bring organic traffic to the website. We did, like I said, you know, some small billboard tests. We posted on job boards, uh, you know, that like you could earn money by becoming a host on Neighbor. Um, we joined all of these Facebook groups nationwide. Um, we started doing, you know, some kind of like some PR, um, some social media stunt sort of stuff. We kind of played with our identity as a company. And, you know, at one point we did this like mortgage giveaway where we're like, we'll pay, you know, everyone who participates in our referral program, whoever the top referrer is every month, like we'll pay their mortgage that month. We did everything because we had no idea what was going to work. And we just responded to kind of like, oh, we're seeing something here. And we got a lot of it wrong. Like we got so much of it wrong, where we went after the wrong thing and we had to like go down this path to realize it was the wrong path and back way up and then go down another path. And it's gonna be different for, for every marketplace. That's the other thing. I remember when one of our board members, the guy that led our round from Andreessen Horowitz, he is like the marketplace guru. He, he, a guy named Jeff Jordan, he ran all of eBay North America from like 2000 to 2005, basically the heyday. He was then president of PayPal when they bought PayPal. Then he was the CEO of OpenTable. He took them public. Then when he joined Andreessen, his first couple investments were these little, you know, one was a little tiny startup called Airbnb where he still sits on the board. He's on the board of Instacart. He's on the board of Pinterest. He's on the board of OfferUp. He's on the board of, you know, Lime Scooters. He does marketplaces. Like there is no one that's a better marketplace investor. So of course we as founders were like, okay, tell us what to do. One of the things he told us in the first year was that the single most successful feature ever rolled out at Airbnb was Instant Book. They rolled out Instant Book and it was liquid gold for them. And they actually couldn't get most of their hosts to adopt Instant Book because They were used to a different experience. They were like, no, we want to approve every guest. So they just got all their new hosts and they were growing so quickly that very fast, very quickly, all 100% of their hosts were new hosts. So they just got all their new hosts to sign up. They got like an 85% adoption rate on new hosts. So we were like, oh my gosh, it was amazing for Airbnb. And Airbnb's a property marketplace. We're a property marketplace. Instant Book's going to be the best thing ever that happens to us. So we worked really hard. We rolled out Instant Book. We actually called it Quick Move-In, um, uh, was our, was our experience where you didn't have to get approved. You didn't have to take 24 hours to get approved by your host. You just got auto-approved. It was an absolute disaster. Uh, it was one of the worst things we've ever done. We had all these renters showing up to host spaces. Uh, the host didn't know they were coming and There just turns out like, it's easy for me to show up to a vacant house. And, and I'm just bringing me and I just need to sleep on the bed. But like, if I'm going to be storing something at your place for the long term and I need to move in and I'm not necessarily going to have like access to this space all the time, there's some coordination that needs to happen. Before then. And people are looking for storage very last minute. You plan your trips way out in advance. A lot of people do. Some people book last minute, but like for the most part, people are booking their Airbnb with some lead time. 75% of our renters book with, want to move in within 72 hours of booking. Like storage is the last, storage and parking is the last thing that people think about. They're like moving houses and then they're like, oh shoot, We need a storage facility. And they're like, quick, go get a storage facility. Or quick, go find— we bought a boat. Oh wait, we don't have any place to put this boat. Now we own one. And it turns out we can't park it on the side of our street with an HOA or something like that. So people need storage and parking very quickly and they need some lead time. So what's going to work for you and your marketing and growth channels? I promise you it's going to be different than every other marketplace. It sucks, but that's just the way it is. If you can avoid the digital channels, avoid them at all costs. Like you should try to scale your marketplace in every other way besides, you know, getting hooked on the Google and Meta drugs. And this is coming from someone who spends a lot of money on Google and Meta. Like, they have their place, but just make sure they pencil economically and invest organically wherever possible.

We're almost out of time, but that's a great way to wrap things up here. And, you know, really appreciate taking the time to join us today for the group chat, you know, sharing about all of your experience and, you know, Liz with Neighbor and helping answer some of the questions that we had during the Q&A. Of course, all big fans of what you're building and appreciate, you know, taking the time to pay it forward. So I want to ask my usual closing question. We can make it quick, which is, you know, if you could go right back to before you started Neighbor, what would you tell yourself about marketplaces?

There's a quote I love that says, we did this not because it was easy, but because we thought it would be easy. So I'm not sure I would want to tell myself anything because I might not have done it. You, you, you kind of have to be a little ignorant. And I guess I'm spoiling it for all of you, although you probably already know this already since you're— you've already started a marketplace. It is so hard. You, the economics don't make sense. We have to build a full e-commerce platform to attract, you know, renters in every city in the country. That's like what most businesses spend all of their time doing and they spend all their marketing dollars. But guess what? They get 100% of the revenue. So we have to build this whole full e-commerce platform and only get a fraction of the revenue. To return. And then we have to build this full SaaS platform. Like for us, some of these commercial hosts, like they're $20 billion companies. Their CFO needs different access than their head of operations and their regional property manager needs access to those properties and their property manager only needs access to his property. You have to build this whole like pretty sophisticated SaaS suite. And a lot of companies, that's all they do. And they get 100% of the revenue. Guess what? We give that product away for free. You know, we make $0 on that. That's just like, we're just giving SaaS away for free and building this e-com and spending all the marketing dollars. But guess what? We have to spend marketing dollars to attract renters and we have to expend marketing dollars to attract hosts. And in the middle, because there's no off-the-shelf payments product that'll do all these custom monthly billing with proration and first month discounts and Refunds the way we had to build our own payments company. Airbnb has a 600-person payments company subsidiary. We had to build this whole payments company and we have to do it all with double the marketing costs on, you know, a fourth of the revenue. So that's probably what I would've told myself, but I don't know that I, that would've been productive to tell myself. So only do it. Here's what I'd say. Do not start a marketplace to make money. They're the most lucrative startups, but like, do not start to make money. You have to like believe in your soul that this should exist and that it's the best thing ever. Like, I think Neighbor's the best thing ever. I think it's the first purely passive marketplace that is literally just enabling people's lives. We have people that make $100,000 on our platform and they do nothing every month, like nothing. And that to me is magical. And I think we're solving the, the, the number one problem in America, which is housing affordability. Everyone is trying to solve housing affordability on the housing side. And they're failing because it's actually not a technology problem. It's a regulatory problem. So good luck convincing every city in the country to change their zoning laws. It's just not going to happen, unfortunately, because it's political. But no one's trying to solve it on the space side. If we're going to live in these 1 and 2 bedroom apartments, and that's just the reality of of America today, you need more space. You just have to have it. And so how can we make that space more accessible, more affordable? So I think Neighbor's the best thing in the world, and I think it's connecting people at the local level that they're really getting to know and forming these long-term relationships with. And that's why I do it. And so do not do a marketplace unless you really believe in what you're doing. That's what I'd say.

Yeah. Great parting advice for everyone here. And then last but not least, time for a quick plug. Where can we all keep up with you and follow along at?

LinkedIn, Twitter, neighbor.com is our website. So yeah, follow us. Awesome.

I'll include our links in the recording and in the recap. So you'll have lots of founders coming your way and hopefully have people using Neighbor. So once again, really appreciate taking the time to join us today for the group chat. And thanks everyone for the, for the questions.