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“Bad companies are destroyed by crisis, Good companies survive them, Great companies are improved by them.”
While it is certainly too early to label Airbnb as one of the Great companies, a consistent theme in Airbnb's almost 14-year history indeed indicates that it has often found itself in a more advantageous position following a crisis. Take the most recent crisis: the pandemic, for example. While initially there was major doubt whether Airbnb could escape this crisis unscathed and had to layoff one-third of the whole company to weather that existential question mark, Airbnb recovered faster than any of its peers and is on track to post ~70% higher revenue in 2022 than it did in 2019. Although nobody on their right mind welcomes a crisis, Airbnb may be tempted to salivate at the opportunity to be "improved" by the next crisis. Perhaps this dogged resilience and adaptability isn't surprising when you dig into the company's early days.
Brian Chesky and Joe Gebbia, the co-founders of Airbnb (Nathan Blecharczyk is the other co-founder who came to the scene later), were friends and went to the same school for college: Rhode Island School of Design (RISD). Chesky's parents were social workers and all they wanted for their son was to have a decent job with health insurance. Chesky, however, went astray as he left his job with health insurance for San Francisco (SF) to start a company with Gebbia. What is the company going to be about? They had no idea. With $1,000 savings in his bank account, Chesky just showed up in SF and assumed he would figure something out.
However, reality said hello when Chesky reached SF as it turned out his savings was $50 short for first month's rent. At the same time, there was a design conference held in SF; Chesky and Gebbia realized there would be thousands of people coming to the conference, but the hotels would not have the capacity to accommodate this sudden influx near the vicinity of the conference. Chesky and Gebbia came up with the idea of "AirBed & Breakfast" and decided to host three people to help them pay for the rent. While the initial idea of Airbnb came to them mostly by accident, they were moved by the experience. Following the conference, the first iteration of the idea was to help people find roommates. After working on the idea for a few weeks, they came to know the existence of roommates.com and hence quickly abandoned the project. They decided to pursue the idea of hosting strangers at your home.
As one might imagine, that wasn't quite a compelling pitch. When Chesky was introduced to seven VCs back in June, 2008 to raise $150,000 at a $1.5M valuation, five sent out rejections. Two of them did not even reply. You can glance through the rejection emails below which Chesky shared with the world in 2015.
Since the idea of hosting strangers at your home wasn't getting much traction, Airbnb cofounders decided to focus on the breakfast market because "everyone needs to eat". Chesky and Gebbia indeed got into the breakfast cereal market to fund their startup, sold 800 boxes of Obama and McCain themed cereal boxes for $40 each, and made $30,000 profit. While that wasn't a sustainable solution to their woes, it made for a terrific story when they applied for Y-Combinator (YC) in 2009. Paul Graham too wasn't quite sold on the idea of Airbnb, but he thought if these guys could sell $4 cereal boxes for $40, they might even be able to convince homeowners to let strangers stay at their place. Chesky fondly reminisced that Graham equated them with cockroaches.
Chesky also mentioned how some of the early suggestions from Paul Graham made a material difference to their fate. One such advices was "Do Things That Don't Scale". Graham wrote:
The most common unscalable thing founders have to do at the start is to recruit users manually. Nearly all startups have to. You can't wait for users to come to you. You have to go out and get them...
...Marketplaces are so hard to get rolling that you should expect to take heroic measures at first. In Airbnb's case, these consisted of going door to door in New York, recruiting new users and helping existing ones improve their listings. When I remember the Airbnbs during YC, I picture them with rolly bags, because when they showed up for Tuesday dinners they'd always just flown back from somewhere.
Graham also instilled the philosophy that it is far more important for a startup to have 100 users who absolutely love the product than having a million users who may be at best lukewarm about your product. Their doggedness led to some traction and Airbnb won among all the YC startups in their batch by a wide margin on a poll. Following YC, Airbnb raised $585,000 from Sequoia Capital and by February 2011, Airbnb had 1 mn cumulative bookings since their launch in August 2008.
However, in 2011, a new crisis emerged: Samwer brothers. Samwer brothers built quite the reputation among many Silicon Valley companies as they were known for being quite adept at cloning the successful startups. When Samwer brothers came to the scene, Airbnb raised just $7 mn, hired 40 employees, and had just one office. In contrast, Samwer brothers allegedly funded their clone project with $90 Mn, hired 400 people, and launched 20 offices in Europe. As Chesky recalled, they were really scared as they could not possibly concede the European market since for a travel startup, if you fail at Europe, that's too big a hole to build a global business. Chesky even called Mark Zuckerberg who said "Don't Sell. Whoever has the best product wins."
Facing the threat from Samwer brothers, Airbnb ramped up their velocity to new markets. Within just three months, they opened almost 10 new offices in Europe. Again, a crisis led to an outcome for Airbnb that they would not be able to get there if they did not find themselves in the sea of turmoil to begin with.
Today, Airbnb is ~$70 Bn market cap company and at its peak (November, 2021), its market cap was ~$130 Bn. The journey from credit card debts to cereal boxes to almost being decimated by Samwer brothers to facing existential questions during the pandemic to a ~$70 Bn market cap: it must be downright incredible for Chesky, Gebbia, and Blecharczyk that all this happened in less than 15 years! I highly recommend watching Chesky's conversation with Reid Hoffman back in 2015 to appreciate how improbable this journey was!
Of course, this Deep Dive is primarily about the future of Airbnb, but it's important to have a good grasp on the history. Let's start with a simple question.
How exactly does Airbnb make money?
If a host lists their home at $100/night, Airbnb charges the host ~$3 to cover the payment processing costs; hence, the host receives $97 for a night's booking. Essentially, Airbnb doesn't make money from the hosts; it's the guests who, on that illustrative $100 booking, will pay ~$12 to Airbnb, $4 in lodging taxes, and therefore, $116 to book for a night. As a result, Airbnb takes $3 from hosts, $12 from guests, so $15 in total. To recap, guests pay $116, hosts receive $97, local authorities/govt. receive $4, and $15 goes to Airbnb (implied take rate ~13% of the gross booking paid by the Guest).
Airbnb mentions they have five key stakeholders: Hosts, Guests, Communities, Employees, and Shareholders. For current or potential shareholders of Airbnb, Hosts (the supply) and Guests (the demand) are two of the most critical stakeholders to understand and hence, I will spend considerable time on them in my Deep Dive. Here's the outline for this Deep Dive:
Section 1 Understanding the supply side: I elaborated on Airbnb's current unique supply (hosts), the challenges of scale with such supply, and why it may be inevitable that professional hosts will end up becoming the majority of booking mix in the long run.
Section 2 Understanding the demand side: Airbnb's demand side (guests) may be where the eventual battle will be fought. Airbnb's strategies to increase its share on the travel profit pool is discussed here.
Section 3 Competitive Dynamics: Competitive dynamics among Airbnb, Booking, and Expedia are the primary focus in this segment.
Section 4 Management and Incentives: Airbnb's management and incentive structure is discussed in this section.
Section 5 Model Assumptions and Valuation: Model/implied expectations are discussed here.
Section 6 Final Words: Concluding remarks on Airbnb, and disclosure of my overall portfolio.