Dan Liftshits & Ilia Drozdov, Co-founders of Dwelly: Entering the London market:

0:00Dan Liftshits:Hello and welcome back to Scaling Europe show presented by Deal. I'm Seb Joltson. I'm joined today by Dan and Ilia, two of the co-founders of Dwelly, which is a very interesting, very exciting AI roll-up consolidation business, acquiring traditional independent lettings and real estate agencies across the UK and integrating them into a big unified AI-enabled tech stack. Thank you both for joining me. How are you doing?

0:20Ilia Drozdov:Thank you, Seb. Thank you for inviting us. Doing quite well and happy to share exciting news today.

0:26Dan Liftshits:Take it away. What's the news? What's going on?

0:28Ilia Drozdov:Yeah, I think we are entering the kind of the heart of the UK London market, which is effectively 40 % of the GMV in our industry. And we know that the market is specific and works kind of slightly differently from the regional players. So for us, it is very, very important to see the applicability of our model and tap into pretty much almost half of the market size, basically, in the UK. Big city. Super important.

0:53Dan Liftshits:How are you doing this? Like, you know, your model is acquiring, who are you acquiring and why?

0:58Ilia Drozdov:We are acquiring leading local agents, usually aiming to buy an agency that manages at least 500 properties. In London, probably the threshold was slightly lower, but it's going to be a local within the neighbourhood, kind of in the central of London agency that has a very established brand and super strong reputation with its customers.

1:20Dan Liftshits:And why London now? As you mentioned, it's 40 % of the UK market more broadly. Why is now the right time to be entering into London?

1:27Ilia Drozdov:I think for us, we first kind of believe that entering the capital requires kind of a little bit more preparation. We have to be confident in how we operate. This is the first thing. And you also have to have enough dry powder to actually start scaling within a city. Let's say a couple of years ago, OK, we can make one acquisition and that's it, basically. But right now, this is just the first acquisition and we have very ambitious plans to continue scaling within London. For that, you needed capital and we have capital now.

2:01Dan Liftshits:And you just raised, well, recently raised, I think it was just under 100 million almost of both equity and debt. Was part of that money that you raised always going to be about tapping into London? Was that like the strategic reason behind the raise?

2:15Ilia Drozdov:Actually, I think talking about the Rays, I wouldn't say that there was any specific milestones that we wanted to achieve in terms of CDN trends or something like that. In general, the roll-up business model is a very capital-efficient business model. So reality is we have burned very limited money throughout the business was found because we're buying the profitable businesses and they become even more profitable kind of pretty soon. So meaning that they overcome our kind of central costs that are going into developing the platform and product and acquiring those businesses and integrating them very, very fast.

2:50Ilia Drozdov:That's why what we've always been focused on is rather buying great, established, outstanding businesses across the UK. And I think what is more important for us is rather the customer base and the strength of the underlying portfolio and the underlying business that we acquire. and this strategy was always the case and continues being the case. It's just that obviously with entering London, you need to make sure that you have more capital because it's not that helpful to buy one, two of the small agencies in London with lack of opportunity to expand further. And now that we're confident that we can do that, this is a good time to...

3:23Dan Liftshits:And you're managing, I think, thousands of properties now. What was it like making that very first acquisition?

3:30Ilia Drozdov:It is, it was very exciting. I think additional context is that we are kind of both immigrants and we didn't have much context about obviously British culture and local operations of the kind of late things agencies we obviously kind of got ourselves slightly educated but buying the first business and thinking that you are actually kind of running the business Are two different things and that's why we actually made a very strong commitment We moved with our families up north to Hau, the city where we acquired the first agency, and spent there 15 months. That's what it means, actually, to run the first agency.

4:07Ilia Drozdov:You just have to move there. I think there are even some fun stories associated with that. I remember when we had the first dinner with the agency owner that sold the first business. Actually, absolutely amazing professional. His name is Sam Humphries, and he is with us now running all our M &A activities, effectively. I remember that when we had a lunch and after, I was asking Ilya, because Ilya in general may be not the most talkative person in the world, but I was asking him, you've been even more silent than usual. I mean, why is that? And he's like, mate, I mean, because honestly, I probably was understanding only kind of 25 % of what Sam was saying.

4:41Ilia Drozdov:Kind of you are in the UK, have lived already longer, and I used to study here in London School of Economics, so it was a bit easier for me. But Ilya was trying to triangulate the thing what Sam was saying by the fact of what I was answering and some kind of just emotions, right? And he was like, oh, well, if I understand only four, how are we going to run business with WhatsApp? So, yes, that's how it was buying the first business. I was very anxious at first, but I think at the same time, incredibly exciting. Because clearly it was the moment of time when it was obvious for us that we're on to something huge.

5:12Ilia Drozdov:Because it was obvious that you can really reinforce and I think that obviously transform existing businesses with AI pretty significantly. I think it was a bit ahead of time when I think no one of the investors and still even to these days, I think limited amount didn't stand the thesis. So it was pretty obvious that we're doing something highly contrarian and super non-obvious where we once it becomes a big thing, we'll have hopefully a first mover advantage. And hopefully now we do.

5:41Dan Liftshits:And it's certainly becoming more hot, the industry, like more people are talking about this, be some viral moments about AI rollouts more broadly. I've spoken to Konstantin at Arbio and I was speaking to Brenner. You know, there are some companies doing it. You guys, as well, like all of you guys actually been doing it for a few years. Why do you think it's got so hot? Like it's become a really exciting sector industry. Everyone's talking about it. Why do you think it is now versus when you started?

6:09Ilia Drozdov:I have some thoughts, but I mean, to be honest, I mean investors probably would be better to say why it is the thing there is fundamentals and then I think there is catch up moment in terms of fundamentals traditional service businesses and industries are described by the fact with super labor intensive pretty manual operational activities where a lot of those you could have tried to kind of I think digitize in pre AI era but like the extent of the impact that you could have shift was limited, where I think with the current development of technology and especially all the recent fundamental progress that I think Claude and the kind of other foundation model have done, especially in the last six months, I think just now proves to everyone how fundamental the capabilities are and how transformative they might be, especially for the human-centric workflow orchestration industries, especially where most of you do is communication.

7:06Ilia Drozdov:And I think that it was clear that the science of that was starting to happen a few years ago. Now I think it's just obvious to everyone on one end. I think that this is talking about the fundamentals. And I think talking about a bit of a catch-up, I think that with that happening, I can only see from the kind of other side that I think a lot of investors were probably a bit puzzled with all the kind of upcoming investments of the kind of SaaS and other industries. I mean, obviously, there is a tendency that a lot of funds are raising a big amount of capital. And I think that they're obviously looking for the opportunity to deploy this big amount of capital.

7:38Ilia Drozdov:At the same time, I think it was a bit of an inflection point where what used to work before, typical SaaS investments and other things, felt like stopping to work at some point of time. And I think at this point of time, you're sitting down and reconsidering, okay, kind of where to go next and what to do. And I think it took a bit of time to just reconstruct back some of the thinking and thesis and I think get alignment about some thoughts that obviously I think general catalysts were the pioneers in the thesis, obviously but i think right now that's why we see this bigger trend at the moment that's how i would say it plus obviously kind of in the service industries you can go for astronomical outcomes that is bigger than the sas by the magnitude of times because just simply your addressable market is like almost 50x bigger than the sas industries itself probably that would be my recollection but no i think exactly right kind of maybe a few words from my side is that i think in many industries right now, especially labor intensive industries, AI allows to drive both kind of efficiency and level of service just insanely.

8:41Ilia Drozdov:That can justify kind of quite a significant investment into the buy and build strategy because also the speed of that buy and build strategy is unlocked. In traditional PE roll-up, the integration is pretty much manual exercise. In an AI-enabled roll-up, integration is just kind of a process that is significantly automated and you can scale faster And that's why there is so much attention, because through PE roll-up, you can deploy only that amount of capital. You either have to buy expensive big platforms, but small integrations, you cannot run like hundreds, hundreds, hundreds a year. Only very few roll-ups achieve that.

9:20Ilia Drozdov:In the AI-needed roll-up, I think you can run even thousands of integrations a year, probably in a couple of years from now, we'll get there, because it's like fully automated process.

9:28Dan Liftshits:And what happens, though, that you've just acquired a business, right? maybe it's old school, traditional, old workflows, old tech. What is the first thing that you do to kind of improve the margins, disrupt the business model?

9:39Ilia Drozdov:I think actually the first thing we do is not kind of the improvement of margins or disruption of the model. The first thing to do is to give teams comfort because the first thing that happens with every acquisition is people become anxious. What's coming next? And I remember when Uber emerged business with local competitor with the Amdex back in 2018. my first immediate reaction was as well like what's going on like I feel pretty much threatened right like what happens like what comes next etc and appreciating that feelings we for the first month focus on getting people kind of up to speed on what's going next getting them comfortable presenting them changes in a way that they don't feel threatened that their job will be automated with AI because a lot of what they actually do day to day will be automated.

10:28Ilia Drozdov:It's not kind of a secret, right? But what they can do with that new technology, to which kind of level they can elevate the service level to customers, to the end customers, and how much more they can deliver with a lot of stuff, very simple admin stuff being automated, you need to inspire them. You need to kind of show them that there is actually a nice future which they can be part of. And on that, we spend the first month not the disruption itself but getting people in our yeah that's

10:56Dan Liftshits:super interesting i guess it's like aligning around the mission and getting people on board and excited to that point is there a specific culture at dwelling you know is there a certain certain ways of working or cultural kind of points that you then have to try and bring the acquisitions into you know do you try and adopt try and get them to adopt like the dwelling way of working the dwelling way of life how does that work culturally when you're acquiring so many businesses?

11:21Ilia Drozdov:Spot on, actually. Amazing question. The answer will be, we don't yet have kind of a very kind of clear culture that you can formulate in a set of a few kind of principles. And there is a reason to that. The reason to that is that previously, no tech company was buying so many traditional businesses. And the kind of, the friction between tech first mindset, which kind of we have here in the HQ and property kind of mindset that comes with the companies that joined Valley Family. Like, there is no playbook how to address that. But we appreciate and where we are moving to, we are moving to the kind of environment in which these worlds can coexist and they understand why actually they coexist and which kind of impact is driven by either property mindset or tech mindset.

12:11Ilia Drozdov:And we're already doing quite kind of good steps towards kind of that alignment. but this is the road we have to kind of probably drive for the next couple of years to figure out actually how it looks like.

12:22Dan Liftshits:And both of you, you know, not being from the UK, why was the UK where you decided that this was the right place to build your business?

12:30Ilia Drozdov:I think there were a bunch of reasons. It was both across personal and across professional. I think across personal, we actually were living here already. And I think it's obviously kind of easier to build something when you base here. You feel the empathy. I think we all experience the process of rentals, how fragmented and how kind of effectively outdated sometimes it is and how it can be improved. So kind of you feel empathy as a customer. And I think professionally, UK, if you talk about all of the countries in Europe, for sure, and even the US, is effectively the market where the kind of the cut of an agency that they create, that they charge from the rents is one of the highest, meaning that effectively proving some of the first thesis points potentially is like just one of the easiest in the UK.

13:12Ilia Drozdov:Doesn't mean that our plan is to kind of stay in the UK forever, even the opposite. There is definitely a plan to go beyond UK at some point of time when we're ready for that. But UK is like definitely big enough market to build a pretty iconic business in the UK alone.

13:26Dan Liftshits:And so right now you're focusing on London, I guess. Is this like a part of a stage transition of like, you know, you've been focused kind of in the north and in the regions. Now you've started to go into London. Once you kind of nail London or you kind of capture it off ground there, then And will you start thinking about international? What does that roadmap look like, I guess, as you expand geographically?

13:47Ilia Drozdov:I think the way we look at this is as London being almost half of the industry size in the UK in terms of the rent roll combined for us is just like a definitive acceleration of the UK growth. We will continue growing in regions, obviously. But London opens up the second half of the UK market effectively for us. The way we look at the international expansion is less kind of stage through regions to London to international, but more in terms of how stable and predictable kind of the growth of our business here in the UK. But in terms of sequencing, it's probably going to be going to look as you mentioned.

14:28Ilia Drozdov:Now we double down London, we double down regions, we go to a certain scale, we make sure our service is extremely reliable, and then we can go after following European markets as well, and maybe US.

14:42Dan Liftshits:And what would success in London look like?

14:46Ilia Drozdov:success in London look like I think for us success in London and everywhere looks for me as well for the first circuit for me kind of the success looks like I look at the success on the level of the individual customer I would say for me when landlord and tenants say that the experience they got through Valley is by far much better than with a traditional agency when they constantly repeat that feedback this is the success no matter whether it's how no matter whether it's London Birmingham or like Paris or New York I think this is how we look at the success but in terms of the size I think we want to be like something that people from the outside can look at us and say look yeah Valley is successful to become number one agency in London currently number one agency is Dexter's and they think they have I think around 30 ,000 properties or so 35 ,000 properties so we need to bypass them and hopefully within just a year two years and the broader AI roll-up market seems to be doing there seems to be a lot of opportunities in property right that's

15:54Dan Liftshits:where we're seeing a lot of the players raise a lot of money where are the other industries where

15:57Ilia Drozdov:you think this model could work I think that honestly we're probably a bit of a bad people to comment on that because like we're not investors and i think know much more about our industry specifically than about others what we do see obviously investors investing a lot into is effectively all of the businesses and industries that describe by the same fundamentals such as highly sticky revenue uh where you admin kind of people centric or effectively kind of costs driving the kind of service delivery um where a lot of it especially if communication centric can be automated. And I think that the level of service as a result improved pretty significantly.

16:37Ilia Drozdov:And hence, I think that kind of even talking about general catalyst portfolio and some other guys, Lightspeed and the others, I think it's accounting, it's law firms, it's ITMSPs, I think, come up pretty often, right? It's recruitment kind of agencies, et cetera, et cetera, et cetera. But I think that to me personally, one of the thinking that at least I think we think about here day and night is kind of AI automation and increased the level of service in some of the traditional service industries. I mean, genie is out, right? You will not put the genie into the bottle. I think everyone would be doing it from different angles.

17:10Ilia Drozdov:Private equity guys will start adopting some technology. There would be AI native companies growing organically, starting to do that. Some of the companies would be trying to effectively transform them inside out. I think the bigger question to me is what is the long-term mode and what is the long-term defensibility of all these models? because I think the fact that five years from or 10 years from now, I don't know the specific date, but like in some point in pretty close future, definitely would be the case where kind of AI would be so easy to use that every single kind of household and every single person would be able to tap into that and automate some of their own workflows.