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    Airbnb

    Airbnb made its public debut after declining bookings growth and ballooning costs post-COVID. Is this a permanent shift in travel behavior or unrealistic expectations?

    enDecember 11, 2020
    1
    Acquired

    197 Episodes

    What is Airbnb's initial valuation during its IPO?
    How many countries does Airbnb operate in?
    What percentage of Airbnb hosts are outside the US?
    What business model helped Airbnb succeed in rentals?
    Who are some key investors in Airbnb's IPO?

    • Airbnb goes public, highlights global presence and community movement.Understanding investor incentives and strategies is essential for startup success. Follow Tiny's example of a simple business deal process.

      Airbnb, the travel company that operates in 220 countries and 100,000 cities, is going public today raising over $3.5 billion and initially valued at over $47 billion. Despite the slowdown in growth compared to other unicorn IPOs, Airbnb has grabbed a significant market share and is a true global company with 86% of hosts outside of the United States. The company may face market saturation, but it has also sparked a global community movement that could still be getting started. Understanding the incentives and strategies of investors is essential for both aspiring and current VCs and founders in any startup. Tiny, a company discussed in the podcast, boasts a simple and straightforward process for making business deals.

    • The Birth and Rise of AirbnbAirbnb started as a platform to connect people for unique stays and thrived on trust through reviews and aesthetically pleasing photos. The friendship of co-founders Joe and Brian at RISD led to their successful startup.

      Airbnb started as a mission to connect people and facilitate interesting experiences by having people stay with each other in the site's homes. They built trust on the site with reviews and discovered that photos are really important for listings. CouchSurfing, which had a lot of similarities to Airbnb, didn't facilitate payments and for a long time, was a registered 501(c)(3) nonprofit. The similarities between the two companies don't end there, Brian and Joe actually had dinner with Casey and Daniel right before they applied to YC and talked to them about what they were doing. The story of Airbnb started with the friendship between Joe and Brian at RISD, a very artsy kind of place.

    • How Joe and Brian Founded AirbnbStarting small and being determined can lead to massive success. Keep in touch with like-minded people and take inspiration from emerging technologies to create something new.

      The co-founders of Airbnb, Joe and Brian, met at RISD and became friends with a shared interest in entrepreneurship. Despite working in different places in the design industry, they remained in touch and eventually decided to start a company together. They were inspired by the emerging technology of YouTube and the desire for a different lifestyle than working for someone else. Joe had already started a small business selling cushioned seats for design critiques, while Brian was working as a junior designer in LA. They started Airbnb by renting out air mattresses in their own apartment and eventually expanded to other cities by convincing users to rent out their own homes. The success of Airbnb is a testament to their entrepreneurial spirit and determination.

    • How AirBed and Breakfast started as a creative way to solve a problemCreativity and seizing opportunities can lead to success, even when things don't go as planned.

      AirBed and Breakfast started as a creative way for two designers, who needed rent money, to accommodate young designers who couldn't afford hotels during the annual conference at Moscone Center. They created a website and emailed a few design blogs, and quickly got some takers. One of their guests became friends with them and even attended a lecture at Stanford with them. This experience led them to pitch the idea of becoming the official accommodation provider for the Industry Association at the conference. Although their idea didn't materialize, it was a great way for them to make some money while they strategized their next moves. The lesson here is to be creative in solving problems and seize opportunities when they present themselves.

    • The beginnings of AirbnbAirbnb's founders were persistent, willing to pivot and took advantage of an opportunity to launch during a high-demand event, leading to early success and securing funding with help from their network.

      Airbnb started as a side project and a second attempt by its founders. They were inspired by AirBed and Breakfast and came up with the idea of roommate matching. Despite roommate matching already existing, they decided to give it another go by pitching it to Nate, who had a relevant background and expertise in internet marketing. They launched Airbnb during the South by Southwest festival in Austin, Texas, as hotels were fully booked and reservations were expensive. Although they only had two bookings, one of them being a founder, they got a 100% growth rate over their previous attempts. Michael Seibel, who was running Justin.tv at the time, helped them find angel investors to make the company a reality.

    • How Airbnb Co-founders Overcame Rejection and Started a Successful BusinessSuccess requires perseverance, creativity, and a willingness to take risks. Brain and Joe's story of starting Airbnb with innovative ideas and entrepreneurial grit is proof that determination and hard work can pay off in the end.

      Brian and Joe faced many rejections before finding success with Airbnb. They attended Startup School in April 2008 where they were impressed by Sequoia partner Greg McAdoo and decided to apply for the winter batch of Y Combinator. To keep the company going until then, they found success by selling limited edition boxes of Cheerios named Obama O's and Cap'n McCain's during the presidential campaign. Their innovative thinking and entrepreneurial grit kept them alive until they began Y Combinator. This story is a testament to the fact that success often requires perseverance, creativity, and a willingness to take risks.

    • Airbnb's Success and Lessons for EntrepreneursUtilize your talents, address a need, focus on smooth payments and trust, value survivorship and grit, observe trends, find solutions, innovate and pivot to meet changing market needs for ultimate success.

      Entrepreneurs should focus on utilizing their own talents and resources to maximize profits. Airbnb succeeded due to timing and addressing a need during the financial crisis. The company's focus on smooth payments and trust in the sharing economy helped them achieve product-market fit. The importance of survivorship, grit, and default alive were valued by Y Combinator and Sequoia. Observing trends and finding solutions to solve existing problems also contribute to success. Innovation and timing played a crucial role in Airbnb's success, as they provided an affordable alternative for people to travel during the housing crisis. The success of a company also depends on its ability to pivot and adapt its model to meet the changing market needs.

    • McAdoo's Convincing Argument for Airbnb's Seed CheckEven with a small investment and faced with pushback, Airbnb's growth was fueled by clever marketing strategies, such as leveraging Craigslist and social media ads. Always seek creative ways to capture value.

      Despite facing pushback from the rest of Sequoia partnership, McAdoo convinced them to invest in Airbnb with a small seed check of $585,000. Sequoia owned 24% of the company while the angel collective of Keith, Jawed and Kevin got 1% of the company for their $30,000. The post-money valuation on the round for the total round was $2.4 million. Even with this small amount of money, Airbnb grew its demand by encouraging listings on Craigslist and running Google and Facebook ads for places to stay in New York, Paris, San Francisco and other locations. This approach allowed them to capture the value created on Craigslist and made them the way to capture it.

    • How Airbnb Disrupted the Travel Accommodation IndustryAirbnb's success was a result of understanding and tapping into emerging trends like unique experiences and affordable travel. While growth hacking tactics and publicity helped scalability early on, being the global winner of the travel accommodation market is crucial for sustained success.

      Airbnb's success is a result of tapping into trends such as the financial crisis, the need for affordable travel, and the desire for unique experiences. They realized that not everyone wants a traditional hotel experience, and created a platform that allows travelers to stay in unique accommodations. The company grew quickly with the help of growth hacking tactics, but these strategies are no longer viable in today's market. Airbnb's successful public relations and publicity efforts also contributed to their growth. The company raised significant amounts of funding to compete globally and avoid being cloned by competitors. Unlike other industries, being the global winner of the travel accommodation market is crucial for success.

    • Airbnb's Winning Formula in the Short-Term Rentals MarketAirbnb's success can be attributed to their focus on building trust through reviews, a unique business model of holding onto payments until check-in, and global acquisition of smaller competitors. Reviews and trust continue to be crucial factors for success in the industry.

      Airbnb's success in the short-term rentals market was due to their focus on building trust through reviews and global presence, which allowed them to win in both a global and local market. Their killer business model, which involved holding onto guest payments until after check-in and relying on growth to finance future growth, was also a key factor in their success. This approach worked because of the unique nature of the industry, where guests were willing to pay upfront for bookings. In contrast, hotels couldn't take advantage of this dynamic. Airbnb's growth and customer trust enabled them to acquire smaller competitors, which also contributed to their success. Reviews and trust remain critical factors in the short-term rentals market.

    • The Benefits and Risks of a Dream Business Model for AirbnbWhile a self-sustaining business model like Airbnb's can bring immense success, it's important not to become complacent and always strive for improvement. Aspiring entrepreneurs should aim for a similar model, but remain vigilant in maintaining the high standards that got them there.

      Airbnb's growth model and global network effect allowed them to fly high and not operate at the lowest level of detail. The company hit a point where it was just going whether they touched it or not. This dream business model enabled them to move into a new headquarters with a five-story atrium, 24/7 kitchen and three meals a day, seven days a week that were all free for employees. The growth covered a lot of sins, but the lesson is not to rest on your laurels once you have that. As an entrepreneur or investor, this is exactly the type of business you want to start that just goes on its own and that you don't have to keep pushing the rock uphill.

    • Challenges and Opportunities in Airbnb's Growth Journey.Airbnb needs to balance its aspiration of fostering community and belonging with the reality that most users perceive it in a transactional way, and remain analytical to keep growing in a competitive market.

      Airbnb's growth has been remarkable and they have expanded their business model from just homestays to also include Experiences, Places, and Trips. However, some of their product launches, such as Places and Trips, have not been successful and there seems to be a disconnect between management's aspirational vision of fostering community and belonging and how most people actually use Airbnb in a transactional way. Investors are still very interested in Airbnb and the company has a war chest of cash, but they may need to ensure that they stay analytical and keep figuring out what's next to keep growing in a competitive market.

    • Airbnb's Shift from Growth to Profitability and IPO PlansDespite early successes from a shift to experience-based offerings, Airbnb's focus on growth at all costs led to a growing cost structure and slowed growth. The COVID pandemic further impacted bookings, leading to a shift towards profitability and IPO plans.

      Airbnb shifted from price-based to experience-based value proposition for travelers, offering unique and local neighborhood experiences. However, as prices equalized with hotels, Airbnb became just one option among others, especially for shorter trips. Despite impressive growth rates in the early years, Airbnb's growth started slowing down after the first five years. The company's focus shifted from growth at all costs to profitability, but the cost structure kept growing even as bookings growth slowed down. This trend is concerning, especially as the COVID pandemic hit the travel industry hard, causing Airbnb's bookings to decline significantly. The company's IPO readiness has been a topic of speculation, but Airbnb is now set to go public in December 2020.

    • The Impact of COVID-19 on Airbnb's Finances and OperationsThe COVID-19 pandemic caused Airbnb to face significant financial challenges, leading to the need for capital infusion, layoffs, and cost-cutting measures. The experience highlights the importance of operating leverage and the impact of fixed costs on struggling businesses.

      Airbnb experienced a significant growth in both fixed and variable costs in 2019, but the leverage on fixed cost decreased instead of increasing. In 2020, the COVID-19 pandemic hit the business, leading to negative bookings and major distress. To survive, Airbnb raised $2 billion in capital from Silver Lake and Sixth Street Partners, with onerous terms of 11% interest rate for debt and a 50% haircut in valuation for equity. Airbnb also had to lay off 25% of the company and cut $800 million in marketing expenses. The pandemic highlighted the importance of operating leverage for tech companies and the impact of fixed costs on shrinking businesses.

    • Airbnb's Resiliency in the Pandemic EraDespite a massive drop in bookings due to the pandemic, Airbnb was able to recover by providing safer travel options than hotels. Their successful IPO highlights their adaptability as a business and long-term potential.

      Airbnb's business was hit hard by the pandemic, but the company was able to recover in the second era of the pandemic by providing a safer option for travel than hotels. The company experienced a 39% drop in gross bookings for the first nine months of 2020, but bookings started stabilizing in August and September. The company went public in December 2020, and its IPO was a huge success, with the company's value soaring to over $100 billion. Despite slower growth rates than other successful tech companies, Airbnb's ability to weather the pandemic and pivot to meet changing consumer needs is a testament to its resiliency and adaptability as a business.

    • Airbnb's Growth Struggles and IPO Success.Though Airbnb's IPO was a success, it's struggling with growth due to issues with performance marketing. Bamboo helps with growth marketing while the IPO benefits investors.

      Airbnb's growth rate has slowed down since pre-pandemic times and the company struggles to lean into performance marketing to increase growth rate with precision and profitability. Bamboo, a growth marketing firm, helps tech companies to earn growth marketing budgets back faster and retain customers longer. Airbnb's IPO cap table shows the difference between dilution methodologies and capital intensity in businesses. Airbnb's IPO has benefited many investors including Sequoia, Founders Fund, Greylock, Andreessen Horowitz, and many famous individuals. Despite the success, Airbnb's growth as a company has decreased, making it less exciting as a growth company.

    • Airbnb's $7 billion chest and unique supply make it a strong player in the travel industryAirbnb has a $1.8 trillion opportunity in the short-term stays market and the pandemic may have permanently shifted travel behaviors in their favor. While growth is slowing, their unique supply and direct traffic give them an advantage over traditional hotel bookings.

      Airbnb has a large cash chest of $7 billion after raising $3.5 billion in their IPO. They have the most unique supply and 91% direct traffic, which makes it easier for them to acquire and retain customers, unlike other online travel agents. One bull case is that they have a $1.8 trillion opportunity in the short-term stays market, which they can fully saturate. The coronavirus pandemic may have permanently changed travel behaviors in favor of Airbnb. TAM is not a question for Airbnb as the travel industry is big, with a TAM of $3.4 trillion, and they are not competing with traditional hotel bookings. The biggest bear case is that growth is slowing, and it remains to be seen how much of the TAM they can access.

    • Maximizing Revenue Through Multi-Homing in the Short-Term Stay MarketTo avoid the risks of blocked or banned listings and increase revenue, short-term rental hosts should consider multi-homing on alternative platforms that prioritize revenue over filling rates, especially as competition grows in the market.

      As the competition in the short-term stay market grows, hosts are looking to multi-home to maximize revenue and minimize vacancy. There are viable alternative platforms, though not as nice to use as Airbnb, that hosts can trust to bring in guests and maximize demand for their listing. The pricing algorithms of Airbnb are biased towards filling rates over maximizing revenue, which can be a disadvantage for hosts. With a growing belief that recurring acquisition costs will become an issue for Airbnb, hosts will have to consider multihoming as a way to spread their risk and yield higher revenue. Airbnb hosts could also face a risk of being blocked or banned without any proper justification, so it's essential to be on multiple platforms for hosts to ensure stable income.

    • Third-party software tools are transforming the vacation rental marketHosts can expand their property listings across multiple platforms with software tools like Beyond and Guestly and should consider specialized and verticalized marketplaces as alternatives to Airbnb.

      As the vacation rental market matures, more people are unwilling to take the single provider risk. Third-party software tools like Beyond and Guestly make it easy for hosts to have their properties listed across multiple platforms. While Airbnb created an innovation ecosystem and does well in its initial bread and butter, its attempts to expand into adjacencies have largely failed. Its personality seems to be one where they're proud of their ideas and want to make something their way. This has resulted in diluting concepts like Airbnb Plus and Superhost. Airbnb is more like eBay with a global network effect and enormous TAM. However, like eBay, the market is becoming specialized and verticalized marketplaces are emerging that offload markets from Airbnb.

    • Airbnb's Two-Sided Network Effect and Potential for Lock-InAirbnb's success relies on its strong two-sided network effect, which creates interdependence between hosts and guests. Its focus on enhancing the host experience could increase the lock-in effect. Market cap is linked to perceived power and success depends on customer loyalty.

      Airbnb's power lies in its global and powerful two-sided network effect, which is amongst the most powerful of its type seen. Guests and hosts both have a high level of dependency on each other within the platform which makes the platform more valuable to them. Airbnb has the potential to create a no-brainer experience for the guests and hosts through its host services, which could potentially add to its lock-in effect. In addition to that, power and market cap are intrinsically linked as the belief in the power that enables the generation of persistent profit margins adds up to calculate the market cap. Finally, the success of Airbnb would depend upon whether people continue to stick to Airbnb or switch to new platforms.

    • How Airbnb's Cost Structure and Rating System Affect Its Take Rates and Competitiveness.Airbnb's cost structure and lack of cornered resources allow it to compete with larger hotel chains despite lower take rates. The rating system, while still important, is less of a lock-in tool due to increased trust in the platform.

      Marketplace businesses can command different take rates depending on whether they are marketplace assign or marketplace assist. Airbnb is a marketplace assist where consumers pick the specific house they want, making it challenging for them to command high take rates compared to ride-sharing businesses, which are marketplace assign. However, Airbnb's cost structure allowed them to be counter-positioned against hotel chains when they started as they did not need to pay to bring new supply on their platform. Airbnb also does not have cornered resources or significant switching costs, making it easy for hosts to list their offerings on multiple systems. The rating and review system used to be a powerful lock-in tool but is less so now because of the increased trust in the platform.

    • A no-brainer approach to success in the hospitality industry.Offering more quality for less money can result in success and profitability in the market. However, increasing scale and expenses without growth in gross profit can be alarming for long-term sustainability.

      Providing no-brainer value to both hosts and guests can create incredible amounts of value and result in success. Expanding the efficient frontier by offering more quality for less money can also lead to success in any market. Despite Airbnb's $5.3 billion in revenue for 2019, they were unable to generate profit due to high fixed costs, while Booking, who had an effective take rate of 15.7%, was able to generate $5 billion in net income. Airbnb's increasing scale and expenses faster than gross profit growth rate is alarming. It will be interesting to see if they can reach Booking's level of profitability at their scale.

    • Airbnb's Unique Market and Free Cash Flow DynamicsAlthough successful, Airbnb faces challenges with performance marketing, host consistency, and maintaining its appeal to hosts and guests. The reliance on reviews helps build trust but does not make the booking process effortless or enjoyable.

      Airbnb's success can be attributed to its ability to create a unique market and set its own terms, leading to fantastic free cash flow dynamics. Despite having a significant presence in Europe, the company has struggled with performance marketing and host consistency issues. While the reliance on reviews has helped build trust, it hasn't made the booking process effortless or enjoyable. Host churn is a concerning issue, and as the company becomes less startup-focused and more profit-driven, it may struggle to maintain its appeal to hosts and guests alike.

    • The Controversy Surrounding Airbnb's Impact on Housing Prices and SupplyWhile Airbnb may benefit homeowners, there are concerns about its impact on affordable housing and long-term rentals. It's important for companies to consider broader community and economic effects.

      The impact of Airbnb on housing prices and supply is a contentious issue. While Airbnb may seem like a positive force for homeowners who rent out their homes, there is evidence to suggest that it contributes to the reduction of long-term rentals and affordable housing, causing an aggregate growth in rents. The lack of data and opinions from different groups make it difficult to make a definitive judgement on the matter, but it's important to acknowledge the potential negative impact on housing stock. This is a reminder that even well-intentioned companies like Airbnb can have unintended consequences on the broader community and economy. Perkins Coie, the legal sponsor of Acquired, provides excellent representation for startups and established businesses alike, including IPOs like Airbnb's.

    • Potential for Long-term Profitability in the Discussed CompanyThe discussed company has room for improvement in operation and cost-cutting. Bringing in talented capital allocators to the management team can increase profitability, despite slowing growth and competition.

      The discussed company has excellent potential for being a profitable business in the long-term, generating cash for years to come despite potential competition. It's compared to eBay in terms of network effect and cash flow dynamics, but there's room for improvement in terms of efficient operation and cost-cutting. Bringing in talented capital allocators to the management team can help achieve this. The company has raised around $2.5-$3 billion and has the potential to generate persistent differential returns. Despite slowing growth and increasing competition, the end state is not a boom or bust, but a steady-state of profitability. Season highlights include Pinduoduo, Epic Games, NBA, and DoorDash, as well as a lo-fi Star Wars playlist and San Francisco Ballet's success in a challenging year for the performing arts.

    • The Nutcracker Goes Digital and Acquired Podcast Offers Valuable Insights for LPsFrom experiencing the Nutcracker online to exploring deeper insights into company building and investing as an LP, Acquired Podcast offers a unique holiday gift for all. Try it for free for 7 days.

      The Nutcracker ballet performance has been made into a digital experience where viewers can watch it online with a virtual opera house tour. This is a great option for those who cannot attend in-person performances or want to try a different experience. Acquired Podcast offers a playbook section for every episode which can be received via email by signing up on acquire.fm. Membership as an LP provides deeper insights into company building and investing fundamentals with monthly LP calls which can be tried for free for 7 days. Acquired Podcast promotes diversity and financial hardship shouldn't keep anyone from being an LP, and they encourage people to reach out to them for assistance. Sharing Acquired Podcast with friends and family could be a unique gift for the holiday season.

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    New! We're codifying our own Playbook notes and takeaways from each episode, and posting them here in the show notes and on our website. You can read them below or at: www.acquired.fm/episodes/eventbrite

    Playbook

    • Seeing the next technology wave before others do is rare. It provides a roadmap for what to build and invest in if you're willing to bet on that knowledge. 
      • Kevin worked at Silicon Graphics in the mid 90's. This led him to realize that internet services like PayPal, YouTube, and many others would be possible long before others (similar to Don Valentine realizing computers would penetrate every industry from his time at Fairchild).
    • PayPal and its subsequent "mafia" was successful in part because of rapid experimentation. They observed what got used by customers and then doubled down. 
      • PayPal's "core" use case on eBay started as an experiment. International money transfer (Xoom) and event ticketing (Eventbrite) also initially started as experiments on the PayPal API before the eBay acquisition — and went on to become large companies.
      • Julia, Kevin, and their cofounder Renaud had a prototype of Eventbrite running and serving customers even before starting the company — which gave them the confidence to do what seemed crazy on paper, but was actually "de-risked": start a company as an engaged couple, have a remote technical cofounder, bootstrap for 2 years after being turned down by VCs, etc.
      • When a company is experiencing explosive growth, they often need to leave other huge opportunities on the table. PayPal knew international remittances could be huge, but didn't build it internally because of the need to focus on eBay merchants.
    • The TAM for bringing an offline behavior offline is often WAY bigger than anything you can calculate beforehand. The range and size of what were previously niche or impossible use cases will often expand dramatically with easy-to-use online tools. This is especially true in long-tail use cases that can only be aggregated by self-serve internet-based software. 
      • One early encouraging sign for Eventbrite was its use to host speed dating events in New York. Before Eventbrite, it was nearly impossible to organize, promote, and charge for something like that. Now, organizers could suddenly become entrepreneurs and make real money hosting events like this. Most VCs ignored or were confused by this data (~"Call us when you attack Ticketmaster."), but they missed that it unlocked a massive new market which previously operated only through word-of-mouth and cash transactions (if at all).
      • All three major dislocations of the 21st century — the tech bubble bursting in 2001, the financial crisis in 2008, and now COVID in 2020 — have only accelerated offline behaviors to online. COVID is unlocking a new wave of online event entrepreneurs for Eventbrite in the same way the financial crisis unlocked a wave of in-person event entrepreneurs in 2008-10.
    • Starting with just one niche can be incredibly powerful; often your customers will then lead you to more. 
      • Before the speed-dating in New York (which was fully inbound), Eventbrite was used to organize tech meetups in the then-smaller tech community in SF. It was even used for the first TechCrunch Disrupt!
    • Too much capital (and too little accountability) can hurt a company much more than help it. Capital covers up problems, distracts focus from customers, and leads to poor resource allocation. 
      • Kevin: "The periods where we had raised the most money privately were the hardest and most difficult for me, because we were really fighting this gravity of overspending and creating inefficiency. And it took us away from our roots as a capital-efficient, highly-effective perpetual motion machine [that we'd had as a bootstrapped company]."
    • Being a public company not only instills more capital allocation discipline, but can ALSO afford a degree of financial flexibility that just isn't possible as a private company. 
      • Within weeks of COVID hitting, Eventbrite dramatically shrunk the size and scope of the company AND raised $375m in new capital from new and longterm shareholders. Both actions would have been difficult to impossible as a private company with a static valuation (and associated anti-dilution, ratchet terms, etc) that no longer reflected the reality of the current situation.
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