Startup Review

Rent.com Case Study: Value of strategic investors

written by Nisan Gabbay, posted on August 20th, 2006

Why profiled on Startup-Review.com

Rent.com was acquired by eBay in February 2005 for $433M in cash. The company was founded in 1999 and became the most visited apartment listings site in the US.

Key Contributors: Two - both from sources who preferred not to be disclosed, but were involved with the company in its early days.

Key success factors

Pay for performance business model that fit market need.

Rent.com was the first and only pay for performance rental listing site, while competitors went with subscription, listing fee, or cost per lead business models. Rent.com matched property managers and tenants, only charging the property manager when a lease was produced through the site. Property managers pay $375 – verified by the consumer through a $100 reward to anyone who signs a lease and acknowledges Rent.com as the referring source.

This type of pay for performance business model was very successful in cities having high vacancy rates, like Houston. The model is less successful in cities like SF or NY where property managers typically don’t have a lot of problems filling vacancies and can rely upon Craigslist to publicize a vacancy. Where competition to secure a tenant is more intense, the pay for performance model is ideal since landlords can’t be sure what type of results conventional local advertising will produce. They might take out an ad that costs $500 in a local apartment guide without securing a tenant.

Although the pay for performance model was hard to implement early on and took about 18-24 months to show results, Rent.com stayed true to the vision. This was before “pay for performance” business models became en vogue.

Committed strategic investors.

Rent.com had some of the country’s largest REITs (real estate investment trusts) as strategic investors in Rent.com’s $17M round of financing in November 2000. These REITs were important customers because they controlled nearly 20% of the rental apartments in the US. This made it possible for Rent.com to open new local markets by having an immediate source of apartment vacancy listings. Having these important customers as investors helped raised the degree of customer commitment.

More detailed user registration process.

Rent.com collected more information from consumers than other apartment listing sites during the user registration process, which resulted in a better ability to target listings to consumers. Thus, Rent.com enjoyed exceptional conversion rates. Rent.com has since refined the user registration process, delaying the collection of certain pieces of information to later in the process. However, it is interesting to note that a lengthy user registration process is justified in cases where collecting such information can improve the value to the user significantly and hence increase conversion rates.

Cash reward for the end user.

If consumers find an apartment on Rent.com that they sign a lease for, the end user is entitled to a $100 reward – a nice incentive for driving repeat usage and word of mouth marketing. This is a successful example of a revenue share model with end users, as Rent.com needs the participation of end users to ensure that the pay for performance model is properly administered.

Launch strategy

Rent.com spent no money on traditional marketing, instead relying solely on search engine marketing. One of the key success factors mentioned above was the role that Rent.com’s strategic investors played in the company. By having access to apartment listings from large property managers across the US, Rent.com was able to open many markets without a severe chicken and egg problem. Having some listings to start with in a market enabled Rent.com to target consumers via SEM to those listings. Thus a key differentiator in Rent.com’s strategy was to open multiple markets quickly rather than wait to build critical mass in one market before opening another.

Exit analysis

Rent.com was rumored to have had $40M in 2004 revenue, with healthy profit margins, when acquired by eBay. At a $433M all cash exit, this represents an excellent 10X trailing revenue multiple for a lead generation business. Even if assuming a doubling of 2004 revenue to $80M in 2005 with a 40% net profit margin (note: I believe that Rent.com is close to these numbers today), this would be a 13X forward EBITDA multiple. Thus, the valuation metrics are all strong from any perspective. Why did eBay pay such a premium? I don’t have a strong perspective here, but Rent.com does fit well into eBay’s push into the classifieds market. Secondly, Rent.com had not only a good consumer brand, but also a stable, loyal install base of property managers providing the supply listings.

Food for thought

What I found interesting about Rent.com was how they implemented a pay for performance model that really made sense for the target customer (property managers in high vacancy rate cities). Many web companies today are trying to implement pay for performance models assuming that they are superior without truly understanding the value chain and market dynamics in their industry – I think it is important to give the model careful consideration, because in the Rent.com case it took some time and perseverance to prove successful.

Another topic that Rent.com got me thinking about was how much information to collect during the registration process. While no user likes to spend a lot of time registering for a service, in some cases it is actually important to do so if the service needs that information to provide a differentiated benefit to the user. eHarmony is an upcoming case study where this also held true. Counter this to some Web 2.0 services like the photo slideshow companies Rockyou.com and Slide where there collect a very minimal amount of registration data in order to increase the virality of the service. In the case of Rockyou, you don’t need to customize the service to each user, so why collect more data if you don’t need it? Thus, the registration process should be finely tuned to the goals a company is trying to achieve with their service.

Reference Articles

There are many similar articles regarding the eBay acquisition of Rent.com, based on the press release. Here is a link to one of these better “acquisition” articles:

EBay gets into rentals: Online auctioneer to buy Rent.com listings service

Here is a good post in Silicon Beat about new Rent.com competitor MyNewPlace.

If anyone has some other links with more insight into Rent.com, please leave a comment below. And as always, please comment on what you think were the key success factors for Rent.com.

Print This Post