HubHaus

The story of HubHaus, a Californian co-living startup, is very interesting. Their failure has left a lot of stakeholders, namely their tenants and landlords, crying foul and even taking legal actions after they were notified by a letter from Diablo Management (the company overseeing the liquidation of HubHaus) that, essentially, they aren’t going to get paid what they are owed when the company liquidates.

Naturally, besides losing money, the landlords and tenants are left in a complicated situation because a large portion of them are left to search for new tenants or new affordable housing in California.

What makes the case even more interesting is that HubHaus had product-market fit, at least before the pandemic hit.

What was HubHaus?

Rent in California is expensive, which is very prohibitive for young professionals who want to move to the state on their own to chase career opportunities.

However, startups like HubHaus have noticed that the price per room drops significantly (while the quality of the property rises) if you rent a large property. The difficulty is that very few people can organize 5+ acquaintances and friends to move into the same property, which is where startups like HubHaus come in.

Through their online platform, you can rent a house and find people willing to live with you. And even though they act as a middleman and take a cut, the final price per room is still below the price you’d pay for a one-bedroom studio.

Another attractive side of co-living is that it allows people to make friends more easily once they move to a new city. Co-living duplicates the college dorm experience to a degree, which is a very attractive proposition to people who don’t have a family yet and who are moving to a new city alone.

Since they filled a real market need (i.e. they had product-market fit), co-living startups like HubHaus, Bungalow, and Common were growing successfully.

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What Happened to HubHaus?

Once Covid hit, however, things changed drastically. Clara Arroyave, founder of PlaceMe, a co-living startup in Boston said:

“Similar to everyone else, in the middle of March, we saw 40% of our revenue disappear in a matter of five days. By the middle of June, 60% of people had left, which was not enough for us to cover obligations.”

There were two main reasons for this:

First, a lot of people started working remotely during Covid, and it was much more economical for them to move back home and work from there. The less the pandemic seemed temporary, the more people made this choice.

Second, living with a group of other people didn’t seem that smart during the pandemic, as one person could easily spread the despise to all their housemates.

Most businesses that have something to do with rent were struggling during the pandemic, but the co-living startups were hit especially hard. Moreover, the startup business model of thin margins and rapid, ultra-ambitious growth meant the businesses were not self-sustaining anyway.

The only reason startups like Bungalow and Common survived is because they had managed to raise impressive amounts of capital before the pandemic hit ($96M and $130M respectively).

While HubHaus also had a considerable Series A leading to a total of $13.4M of funding, they failed to raise a consecutive Series B. According to HubHaus founder Shruti Merchant, the main reason for this was the WeWork IPO fiasco, which made fundraising much harder for startups in related niches, like co-working and co-living.

With not enough money in the bank to sustain itself, HubHaus was forced to lay off 16 employees and transition to a traditional, sustainable growth model, rather than the VC-funding-driven hyper-growth.

When the Pandemic hit, however, the company quickly started generating considerable losses.

In its struggle to survive by out-lasting the pandemic, the company made a lot of dubious decisions:

• It started not paying homeowners in full. They stated that this was because their tenants were struggling to make ends meet and weren’t paying their rent in full. However, some landlords still had full properties, and upon talking with the tenants they understood that the tenants were paying in full. In reality, HubHaus was likely trying to manage the financial situation by spreading at least some of the losses of their problematic properties to their healthy properties.
• It stopped paying utilities because the Covid measures meant that utility services wouldn’t be stopped even for properties that weren’t paying.
• They stopped paying their employees fully and led them on for a long time by saying it wouldn’t happen again when in reality this became a regular practice.
• They minimized cleaning and upkeep services, while still collecting payment for them.

Finally, when they realized the pandemic wasn’t going away soon, the startup decided to close doors and essentially told their landlords and tenants that they would have to figure things out among themselves and that HubHaus didn’t have money to pay anything the company owed, which understandably led to a well-justified outcry.

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Why did HubHaus fail and who should take the blame?

A lot of the stakeholders for whom the company created serious problems, naturally, blame the management. This is even more understandable considering the company’s history of what could be called dishonest communication.

In reality, however, no co-living startup without substantial funding in the bank would have been able to live through the pandemic regardless of good or bad management. Unfortunately, the “14 days to flatten the curve” turned into more than a year of on-and-off lockdowns, which changed the environment in the niche fundamentally and utterly destroyed the product-market fit those companies had.

The reality is that the product-market fit will likely slowly return once the pandemic is finally over, so the startups that managed to outlast it are likely to do well in the long run. However, out-lasting such a long pause in business isn’t something you can do without a lot of financial help (in the case of startups, from VCs). HubHaus’ failure to raise a Series B meant the fate of the company was already sealed, despite the people involved not knowing it yet.

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Lesson from HubHaus: Graceful Failures are Important

The death of a company can be painful for all involved stakeholders, but it doesn’t have to be. Since failure on different levels is an inevitable part of the startup game, as a startup founder you need to learn to fail with grace.

When you plan for projects, you need to also plan for the worst-case scenario. You need to make sure that if you are unlucky, you’ll have the opportunity to wind down operations without generating damages for your stakeholders.

This is true not just out of pure morality: painful failures will burn bridges to past investors, employees, partners, customers, etc., while graceful failures will not. As it is well documented from our startup founder interviews, persistence over multiple projects is one of the main drivers of startup success, and it helps a lot if during your persistence you’re building a network, rather than burning it down.

There are a couple of principles that make graceful failures much easier:

1. Stay lean and flexible for as long as possible: Have a small core team of employees and out-source the bulk of the work to freelancers and sub-contractors if possible. Also, operate on short, flexible contracts with business partners whom you have to pay. Although this might increase your costs in the short term, it will make the majority of your costs easy to trim down if necessary without much drama.
2. Be agile: As a startup, you are usually sailing in uncharted waters. Be ready to change course if necessary. You’d often have to do this in your search for product-market fit in the early startup stages, but you need to preserve this ability for as long as possible in case unpredicted changes occur. Your biggest competitive advantage as a startup is flexibility, don’t be in a hurry to lose it while growing.
3. Communicate truthfully: Last but not least, most stakeholders are willing to forgive failure if you are truthful, while even a single uncovered lie can destroy any trust you’ve slowly built. As a startup founder, without your clients, team members, partners, and investors, you are helpless. Take care of these relationships. This doesn’t mean to under-sell yourself. Reveal your biggest, most bold ambitions, but make sure people are aware of the risk and tell them honestly what would happen in the worst-case scenario so that they can decide independently whether to get involved while being conscious of the risks.