An easing of laws around the construction of Accessory Dwelling Units (ADUs) around the U.S. has opened up opportunities for companies that build such structures.
Cottage is one such company. The San Francisco-based startup has developed software and a marketplace that connects homeowners that want an ADU with contractors who can build them. And it just closed on $15 million in a Series A funding round led by proptech-focused VC firm Fifth Wall to grow its business.
Alex Czarnecki, founder & CEO of Cottage, was inspired to start the company after growing up in the Bay Area, where housing prices are among the highest in the country. As longtime Bay Area residents, his parents sought additional income upon his father’s retirement. So they looked into building an ADU that they could rent out to local students. The practice is not uncommon. Many Bay Area residents are turning to ADUs as rentals to bring in extra income since laws in the state have relaxed.
“What followed was an over a year long nightmare and process around the feasibility, permitting and construction,” Czarnecki recalls. “The complexity of the process, the opaque pricing and the difficulty of finding the right contractor was the inspiration for Cottage.”
Czarnecki emphasizes that Cottage is not a prefab homebuilder. Rather, he describes the startup as a SaaS-enabled marketplace for residential construction, starting with custom ADUs. By digitizing the design-build process, Cottage says it saves homeowners months of time and thousands of dollars, while providing its contractors a “predictable pipeline of projects and time-saving tools.”
“We match contractors to residential homeowners and provide them with software tools to make them more efficient,” he told TC. “There are better outcomes all around.”
For now, Cottage partners with small to medium-sized local, “qualified” residential general contractors. Since it helps homeowners with architecture, design and permitting, the projects are essentially ready to go for contractors, the company says.
Czarnecki began thinking about the business in late 2019 and launched in late Spring of 2020. So far, it has completed “hundreds” of projects and expanded from the Bay Area to Los Angeles, where the company achieved market level profitability in four months’ time, according to Czarnecki. The startup plans to soon launch in San Diego as well and then another five to six markets over the next year.
“These are relatively small homes but they have a pretty interesting impact on the housing supply,” Czarnecki said.
Cottage solely advertises to homeowners and charges them a fixed fee to handle the whole pre-construction process.
“We see this as money they would have spent working with an architect or project manager,” Czarnecki said. “And, charging fixed fees is nontraditional in the industry.”
The arrangement works out well for contractors, he believes, in that Cottage comes to them with projects so that they have “a 4x higher win rate than typical projects they source themselves.”
“They are vetted, designed and permitted,” Czarnecki added. “They get in at a stage where they have a longer lead time into the visibility of their pipeline so that they can take on new projects.”
In the future, he sees opportunities to monetize the other side of the marketplace, sourcing general contractors with projects and providing them with software tools and then taking a percentage of the transaction volume.
“Plenty of lead gen services are charging 5 to 8% for project sourcing but they’re not getting as much value as they would with us,” Czarnecki added. “Eventually, we will be their operating system.”
The founder touts an asset light business that doesn’t require a factory or warehouse, like some ADU providers.
“We’re connecting homeowners to fragmented providers,” he said.
1Sharpe Ventures, DivcoWest Ventures and existing investors Susa Ventures and Base10 Partners also participated in the financing, which brings the company’s total raised to just over $20 million.
The company plans to use the new capital in part to increase its headcount from 30 to 50 or 60 by year’s end. It will also put the money toward building functionality so that its offering is “useful to GCs for all types of projects and all methods of sourcing, not just our sourcing.”
Down the line, Czarnecki said Cottage could move into other types of projects while capitalizing on the fact that “lots of markets are changing ADU laws.”
The California legislature changed laws in 2017 to make it easier to build Accessory Dwelling Units (ADUs). Then on January 1, 2020, the state of California made it dramatically easier to add extra housing units to single-family home sites. Cities and local agencies have to quickly approve or deny ADU projects within 60 days of receiving a permit application. The state also now prevents cities from imposing minimum lot size requirements, maximum ADU dimensions or off-street parking requirements.
“We’re not pigeonholing ourselves to just doing ADUs,” Czarnecki said. “The competencies around building homeowner distribution, and building a network of suppliers and contractors that can fulfill on these projects that could be applicable to other types of renovation or construction.”
Dan Wenhold, partner at Fifth Wall, believes Cottage is offering a new, more efficient way for homeowners to design and build ADUs.
“Cottage’s entire model is incredibly unique. From the ability to design a custom ADU online to having a curated group of contractors available to complete the project is beneficial to both homeowners and builders,” said Wenhold, who is joining the company’s board as part of his firm’s investment. “Homeowners enjoy a streamlined building process while contractors have access to a pipeline of projects.”
Notably, Fifth Wall is also an investor in another proptech, Homebound, which in February raised $75 million in a Series C funding round led by Khosla Ventures toward its efforts to help address housing inventory shortages with its technology. That company’s self-described mission is to serve as a “next gen” homebuilder to make it possible “for anyone, anywhere to build a home.”
“Both companies are working to advance the technology of the Built World and dedication to innovation is exactly what we look for in our investments,” Wenhold said.
Over the past year, there have been a number of other startups focused on the ADU construction space that have also raised venture dollars.
Last July, TC reported that startup Abodu had raised $20 million in a Series A funding round led by Norwest Venture Partners. Redwood City, California-based Abodu, which builds prefabricated ADUs, was founded in 2018 to serve as a “one-stop shop” for building an ADU, or as some describe it, a home in a backyard. It too says it helps homeowners obtain permits.
Also last July, TC covered Mighty Buildings, an Oakland-based startup building ADUs and other housing that raised $22 million. That company said it is focused on innovation in construction with a 3D-printed method. And Villa, a startup founded out of Atomic’s venture studio, raised $15 million last August.
Meanwhile, Austin-based Kiro Action is a bootstrapped startup that is set to deliver “hundreds” of its structures, which the company describes as “modern refuge, crisis response housing & consumer dwellings deployed in hours.”
