Modal’s price point is a real bargain and rates highest among all its metrics. Modal is raising capital through a convertible note at a valuation cap of $12.5 million with a 20% conversion discount and a 5% interest rate. This is a moderately high valuation, but considering Modal’s revenue multiple of around seven times, it’s quite reasonable.

Because Modal is specifically building ADUs rather than so-called “tiny homes,” data on its national market size is difficult to find. ADU construction is highly regulated and often illegal. In addition, because ADUs are often built by homeowners themselves or by contractors, public paperwork and data is limited. However, regulations are beginning to swing in favor of ADU construction in certain parts of the country, so Modal could capitalize on the trend if it continues.

There are around 140 million housing units in the US, and the average price of a Modal unit is around $120,000, which comes out to a $16.8 trillion market opportunity. It could be smaller, though, as many households are unable to support an ADU. This uncertainty means Modal’s market rating is on the low end.

Modal’s leadership team has built the startup into an expansive and growing network of employees. Co-founder and President Dallin Jolley, who attended but did not graduate from the University of Utah, has found his way onto the Forbes “30 Under 30” list for manufacturing and industry in 2021. In addition to co-founding Modal, he co-owned Base Develop, another construction startup that appears to have been the predecessor to Modal. Co-founder and Chief Operating Officer Colin Jube has a BS in economics from the University of Utah and was a managing partner at Base Develop. Prior to getting into the startup space, he worked in investments for Fidelity and in sales at Qualtrics while in college.

While the founding pair’s credentials are limited, they have diversified their team by handing the CEO role over to Scott Stowell. Stowell holds an MBA in finance and marketing from the University of California, Irvine, and has more than 30 years of experience in the home-building space. He started out with Standard Pacific Homes, which would eventually become CalAtlantic Homes and was the fourth-largest homebuilder in the US before being acquired by Lennar in 2018. He led CalAtlantic through that acquisition and joined Lennar’s board afterward. He has also served on the board of directors for Pacific Life, an insurance company providing mutual funds and retirement benefits, and founded Capital Thirteen as an engine for his angel investing and real estate advisory business. While he leads Modal, it is unclear whether he retains his other commitments.

In addition to the leadership, Modal has a competent team. Director of Finance Dan Barrell is a CPA and has an MBA from the University of Utah. Barrell has more than a decade of experience in accounting and finance. Overall, the team is strong and has executed well.

Modal doesn’t exactly set itself apart from its competition, and the competition is extensive. Startups like Boxabl, United Dwelling, Homestead, Abodu, and an abundance of others are flooding this market. The market is largely centered in parts of California that are relaxing housing standards with regards to ADUs. The market isn’t necessarily a winner-takes all space, so there is room for Modal to exist alongside its competition. 

Modal’s units boast no particular innovations that could be patent-protected, nor do its units appear significantly specialized or higher quality compared to competing offerings. It is also no cheaper than existing offerings. While it does offer smaller office spaces, the average price point is around $120,000. One considerable differentiation is that Modal does the work of determining whether its customers’ units are even eligible for ADUs, which saves customers time and hassle in researching their local codes and ordinances. Still, Modal’s lack of differentiators gives it a low score here.

While it may not have much to offer in terms of product differentiation, Modal has managed to distinguish itself in its first two years of operation. The startup secured $1.6 million in revenue last year, up from $113,375 in 2019. That said, revenue didn’t exceed cost-of-goods sold in either year, so the company has yet to break even.

Through prior fundraising, Modal secured two investors and $50,000 in investments and has sold more than 50 units across California, Utah, and New Mexico. The startup has assembled a network of manufacturing partners, contractors, and consultants — the extent of which is unclear — and has been using a direct-to-consumer model. This performance has come at the expense of high operating costs. Overall, Modal’s performance rating is its second-highest.

Modal’s team has proven capable of leading the company to early success, but in a crowded market, it remains to be seen how much Modal’s lack of clear differentiation and defensibility will hurt its prospects. As of yet, the ADU market hasn’t seen a dominant leader, but that could change. Regulation around ADUs is in flux and could lead to wider acceptance of ADUs and tiny homes. Either way, Modal’s units will need to comply with ordinary building standards and controlling homeowner associations (HOAs).

On a more pressing note are the startup’s finances. Thanks to its expansive leadership team and network of contractors, operating costs for Modal have been quite high. In its first two years, the company has accumulated more than $5 million in debt, split between short- and long-term, and its cash reserves are draining rather quickly.

Though one can appreciate Modal’s early business success, the company comes with numerous risks. Its combined $5 million in short- and long-term debt is a significant burden. While some level of liabilities is not unusual for startups, these debts are quite formidable and could stifle Modal’s growth potential. That risk is particularly concerning, and the business doesn’t have sufficient cash on hand to play out the next year, so it will need to do well with this raise.

Additionally, regulations around ADUs are complex. HOA regulations and housing requirements can be quite stringent in the US, even in places where specific rules banning ADUs are being relaxed. As this space is quite new, it remains to be seen how these regulatory burdens will affect Modal’s business.

Finally, Modal doesn’t seem to be bringing any new ideas to the table to set itself apart, making it one option among many. While Modal does employ a network of manufacturing contractors, this isn’t unusual. Some ADU and tiny home-building startups do build their own facilities, but many rely on contracts with outside entities. Consumers might be drawn to Modal in large enough numbers for it to scale up or be lured away by more appealing and unique options.

Though it faces challenges in its growth, Modal has done the hard work up front of building a competent and hardworking team. The company has yet to break even, but achieving dozens of sales across multiple states is a positive sign of good traction. It could lead to further revenue growth as the US housing system continues to go through changes. While some of its metrics are less than impressive, Modal offers a good deal for investors on the price side, with a $12.5 million valuation cap against $1.6 million in revenue. Even if the business performs moderately well, investors could still generate a decent return.

As the US faces a housing shortage, some parts of the country are turning to alternative tiny homes and accessory dwelling units, or ADUs. Modal Living is an ADU manufacturer and provider, making units from small backyard offices to rentable living spaces designed to fit on existing property. Its units are built off-site and assembled in a day, an increasingly popular method among startups in this space. The mission is to help existing homeowners increase their property value and generate passive income while addressing the nation’s current housing crisis.

Modal has sold more than 50 units so far, with unaudited sales coming out to more than $5 million. That traction bodes well for Modal’s future, and audited revenue makes a moderate $12.5 million valuation cap quite reasonable. However, the ADU startup space is fairly crammed with competitors that Modal has done little to set itself apart from on a technological, quality, or price level. In addition, the business must address significant regulatory hurdles around ADUs, and high operating costs have resulted in massive financial and funding risk for the business. However, the leadership team is strong and has executed well, and while the market is crowded, it is not dominated by other players. Therefore, Modal Living is a Neutral Deal.

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Analysis written by Benjamin Potts.