Last year, when the owner of European Medical Massage & Spa in Shillington, Pennsylvania decided to sell her company, she had an immediate potential buyer. Her employee Linda Roll, a first generation mother of four, was eager to take over the 22-year-old institution. The only problem: Roll didn’t have enough capital to buy the building in addition to the company. Her only option was to try to find a landlord that would be interested in keeping her on as a tenant at a reasonable rent price. Says Roll, “We were in the state of mind that we would probably just have to take the loss.”
Fortunately, Roll found an alternative with real estate startup WithCo. The company, quietly founded by 31-year-old Kevin Song in 2019, helps put established businesses like Roll’s on the path to ownership. Rent is the typically second biggest cost for proprietors, right behind labor. While small business owners can usually qualify for a lease, it’s much harder to gather the capital necessary for a down payment on a favorable mortgage. Instead, WithCo programmatically identifies and buys commercial real estate that houses existing tenants deemed to be high-quality small businesses. They negotiate and buy the property, while placing the tenants on equity-building, lease-to-own plans.
“My parents ran a grocery store in Brooklyn for years until the day they got a phone call from the new landlord of the building,” explains Song, whose parents had immigrated from South Korea. “A developer had just purchased it and decided to double the rent. We lost the business in a matter of weeks.”
After putting over 100 small-scale entrepreneurs like his parents on the path to ownership over the past three years, WithCo is emerging from stealth today. The company has raised $30 million from celebrities like Venus Williams and Will Smith, as well as venture firms like Founders Fund, Canaan Partners, Initialized Capital and NFX. Song says they intend to add an additional 100 proprietors to their roster in 2022.
Unlike successful startups like Trulia and Zillow that facilitate purchases between owners and buyers, WithCo actually takes on the liability inherent in owning the real estate themselves. That makes it a slightly unusual fit for venture capital. However, WithCo notes that the small business commercial property market sees over $90 billion worth of deal flow every year. While commercial real estate ownership is typically more of a target for private equity firms, small businesses are usually small, single-occupant properties that make them less than ideal for private equity purposes.
“This idea sits at the intersection of real estate and finance. This is very much a technology and data business.”
Part of Song’s pitch to investors is that his company is bringing sophistication to a historically unsophisticated area of the real estate market. On the buying side, they approach local landlords with “data-driven offers” that promise both speed and liquidity in the closing process. On the tenant side, small businesses open up their books and undergo comprehensive evaluations to determine if they are a healthy company suitable for the path to ownership. WithCo also sticks with the small businesses over the entire lease-to-own cycle as a financial business consultant.
“Most of what we’ve been investing in in the proptech sector is actually proptech-meets-fintech, and that’s exactly where this idea sits at the intersection of real estate and finance,” says Trulia founder Pete Flint, who led the round for NFX. “This is very much a technology and data business.”
The past two years have shown how important ownership and stability is for small business owners. The Payment Protection Program, which aimed to help small businesses weather the pandemic, required that three-quarters of the money be spent on payroll if businesses wanted their PPP loans become a grants that did not have to be repaid. That became an issue because many tenants’ largest expense was rent, which they struggled to meet while their doors were closed and the economic forecast was uncertain. WithCo’s founder Song wants to ensure that his company provides stability and support for small businesses to gain equity in their real estate so they do not wind up losing their businesses like his parents.
“It became really, really challenging to be a small business owner in America over the past hundred or so years,” says Song. “Every business owner that we support and every property that we buy, we’re putting a new business owner on his or her path to ownership making a huge impact. So now we’re trying to scale this into a platform that can do hundreds of thousands of deals every single year.”