Airbnb

Transcript from https://podmenti.com/t/e0ef106d1796725f

I took Tanny's collar off her. So that's we don't have the same problem.
Hm.
Uh, that'll save us some time in post.
Welcome to season seven, episode eight.
The season finale.
I've acquired, the podcast about great technology companies and the stories and playbooks behind them.
I'm Ben Gilbert and I'm the co founder of Pioneer Square Labs, a startup studio and venture capital firm in Seattle.
And I'm David Rosenthal and I am an angel investor and startup advisor based in San Francisco.
And we are your hosts.
Today we cover
the hottest and most anticipated company to IPO in twenty twenty.
And oddly, in a year marred by the global pandemic, and just this month, an all-time high number of stay-at-home orders.
This hot IPO
is a travel company.
Airbnb, originally known as Air Bed and Breakfast Incorporated, is going public today, raising over three point five billion dollars and initially valued at over forty-seven billion dollars.
The company is insanely impressive. They operate in two hundred and twenty countries and a hundred thousand cities.
Last year there were thirty eight billion dollars of bookings made on the platform. There are over fifty million active guests who book nights to stay at over seven million listings. And unlike other companies that we've covered recently, well, yesterday, like DoorDash, this is truly a global company with 86% of hosts.
Outside of the United States.
And yet.
Well, this company has changed the world.
And how a meaningful fraction of the human race travels.
their growth has been slowing more severely than any of the other unicorn IPOs we've covered.
And that's before even looking at the effects of the global pandemic.
Now, of course, David and I did our usual deep homework on the company, but this is one where we've been doing our research for years.
Not just as guests on the platform since twenty ten, but actually as hosts too, starting in twenty fifteen for David.
And twenty seventeen for me.
So
Does Airbnb see its market saturation on the horizon?
Or is this a global community movement that's still getting started?
Today.
We dive in.
Indeed, we do. Well, as always, if you love acquired and you want to hone your own craft of company building, you should join the community of acquired limited partners. On our LP show last week, David and I did a first for us and had our own actual limited partners, investors in our current and former funds on the show.
Jaclyn Hester and Lindell Eckman from Foundry Group joined us for part four of our VC fundamentals series, where we went seriously deep on the topic of portfolio construction for a venture capitalist.
Sure, this is a useful thing for aspiring VCs, current VCs, um, you know, to sort of hone their thinking on that. But if you're a founder or or an employee at a startup, I think understanding the incentives and strategy of your investors, you know, big stakeholders in your company and your potential future investors.
It's just insanely valuable. So uh really awesome to have them on. Um, fun to be diving so deep on this this topic and sharing a lot of these conversations with so many of you. If you aren't already an acquired limited partner, you can click the link in the show notes or go to acquire.fm slash lp and all new listeners get a seven day free trial.
All right listeners.
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So the founders did exactly what great founders do.
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And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legor's Bet Here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work.
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The early Lagora numbers essentially
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Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client.
If your legal team wants to check it out, whether you're a law firm or you're in house at a company.
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And just tell'em that Ben and David sent you.
Alright, David.
Air
B and B.
Take us in.
It's time.
It's it every time. This company is thirteen years old. Come on, well it's like a teenager. We we've thought it was gonna be time for a while now and uh you know, here on the bar mitzvah of Airbnb it goes public.
That's all right. One quick disclaimer before we get going.
Uh, in this case with Airbnb, I actually know and have worked with several people who are involved in this story, uh, in my past history of my previous venture capital firm. Um I haven't talked to any of them about the IPO or about this episode.
They're all great and I'm sure they're very, very happy today. Uh, but just so everyone knows, I don't own any Airbnb stock or any stock in any of its competitors. Um, and I'm not planning to buy any. Yeah, as as always, this show is not investment advice, but we thought it was uh sort of extra important for us to highlight that uh neither of us are our shareholders going into recording.
Indeed, indeed. We do have a very big thank you uh to shout out though.
Again, as so often on this show.
Bradstone and his wonderful book The Upstarts, where he chronicled much of this history that we're gonna
Borrow from and
Wonderful past guest here of Us on Acquired.
Uh so with that.
Let's dive in. Let's do it. Okay.
So
Then.
Stop me if you've heard this one before. Wait, the story of Airbnb's founding? Uh I I never heard of it.
Well, okay. So a group of friends.
From New England.
One of whom is from Harvard.
And the other two with a kinda design and uh adventurous background, uh, start a company.
in the early two thousands with a mission to connect people and facilitate
Interesting experiences.
And they're gonna accomplish that mission by having people stay in other people on the site's homes. Yada yada yada, RISD design conference, out by southwest. I think you know where this is going. So they do this, yep, yep, they build they build trust on the site with reviews, you can review each other, you you have they discover that photos are really important.
of the listings, they add photos, they figure out how to authenticate real identities.
Um it starts to take off.
people start using going through this way faster than I would have expected. I know, I know. Like we got we gotta get through a lot here. And and it seems totally crazy at the time to everyone, including Silicon Valley. They raise money from one of the very
Best.
Venture capital firms.
Storied venture capital firm in Silicon Valley.
Of course, I'm not talking about Airbnb.
I am talking about Casey Fenton, Daniel Hoff, and the crew at
couchsurfing.com and the venture firm that I'm talking about is Benchmark. And the partner who led that deal was Matt Kohler of, you know
Little companies like Facebook and
Instagram fame. Did couch surfing had that many similarities with Airbnb?
They had a lot of similarities. Uh, but there was uh there was one thing that was missing. And it turns out that that was one of the key things that made couch surfing
uh roughly the equivalent, uh, for those who have listened to our Uber episode of the
I can't remember if it was Uber or Lyft or both.
I think it was Uber of the Homobile story.
I think Uber? Good question, I don't know.
I think it was everywhere we did home mobiles, which of course pioneer ride sharing.
Couchsurfing didn't have a way to pay money. It was you just stayed in other people's. They didn't facilitate the payments. And the idea was everybody was just going to do this out of the goodness of their heart for their community. And I think
For a long time the only monetization that happened on couch surfing was um
You paid essentially like a verification fee.
uh to have your identity verified. And I think the way they did that was they took a credit card payment and then matched your
your name with the name on the credit card. And that was the only way they made money, I think. Uh and actually the similarities to homobiles don't end there. Couch surfing was for a long time actually a registered 501 C three.
Nonprofit.
And then they had to convert from a nonprofit into a C Corp when they raised money. It was
A whole mess.
I mean it makes sense it was a nonprofit,'cause in my head the way I always thought about couch surfing, and I think when I first heard about Airbnb, I sort of equated it with the same thing of like
literally a stranger who just lets you crash while you're I don't know, in my at this time I was like a college student. So I was like, Oh I see it's for like other college students or interns or whatever who don't have money and like you can just stay on some stranger's couch.
Yep. Which I think was how cat surfing.
Started, I think uh I think Casey was college student and going on a trip. Did you ever use
I looked at it. I definitely considered it. Yeah, but it always felt a little bit too like
Can I just get a cheap hotel, or do I know anyone in that city that I actually know?
Yeah. It's kinda crazy staying. Stranger's couch. Uh
The really crazy part, and uh this is getting ahead of ourselves, but turns out Brian and Joe actually had dinner with Casey and Daniel right before
They applied to Y C and talked to them about what they were doing. After of course they're they had already started and were working on Airbnb.
Yeah, of course. Uh and they talked about the two sites and anyway. Okay.
On to the real story of Airbnb.
So the year is two thousand. We are back in New England.
Uh specifically in Providence, Rhode Island.
Where a scrappy freshman from Georgia named Joe shows up at the famous Rhode Island School of Design, Risdy, uh wonderful place. I didn't realize actually it was in Providence last year.
Risney and Brown are basic they're like co-located. Like Providence is a very small town. Uh so Brown
And Rizdale, like all the buildings are kinda interspersed and um it's actually very
Very
Pretty very very cute little place.
Uh so Joe shows up as freshman and he
Meets and befriends a sophomore there.
A uh Joe's kinda like a scrappy is like a you know
Skin I don't know, skinny's the right way. He's not he's not like uh he's slight of frame, let's put it that way.
His friend who he meets is a beefy
hockey player.
And uh
I think at this I don't know if it was this at this time or after college, aspiring bodybuilder and uh he would uh go around and compete in bodybuilding competitions. Sophomore from upstate New York, of course we're talking about
The one and only Brian Cheske here.
So they're both at Risdy, but
I don't know other than my one visit to Providence, I haven't spent a ton of time
at Risdy or with people from Risdy. But my impression is it's like a very artsy
Kind of place.
Whether that was the case or not, that certainly was not the mold that
Joe and
Brian fit at Riz D. They become fast friends and get into all sorts of hijinks. They're always talking about
Yeah, doing different projects, starting businesses together and uh and they must have stood out because
They became super popular. Uh Joe actually becomes student body president of RISD. He's a year behind Brian. And Brian uh at graduation is elected by the class to give the graduation speech.
uh when they graduate. So the story goes when Brian is graduating after this speech.
Joe is still there. He has another year of his D takes Brian out to dinner before he leaves and says, Hey, we've got this thing. One day I I predict that we're gonna start a company together, you and me, and somebody's gonna write a book about this. Now, of course, they're telling this to the author who is writing the book about them. Yeah, prove it. Whether it's true or not.
We will never know, but it becomes very apt. So after Brian graduates
In two thousand four.
He moves to the West Coast, he moves to Los Angeles, and he gets a job working for a design consultancy there called 3D ID.
But uh
It's kinda not the fit for him. He's he's much more than designing chairs or something.
Yeah, he's designed chairs medical products and like you know, they're like a d uh a product
design consultancy and he's a junior designer there. Um it's not a
Not not very like glamorous, and he doesn't think this is the life for him. At the same time, so this is what going into two thousand five, two thousand six.
Uh YouTube.
uh get started. I remember I was in college when YouTube got started and like
Oh, this site is amazing. This thing is happening on the internet. You can watch
Video and movies and anybody can
post them and the guys who started it came out of PayPal, young guys backed by Sequoia. Brian starts like researching them, becomes obsessed, like oh this is like a great idea. That's what I want my life to be like. Um meanwhile, Joe the next year in two thousand five, he graduates
from Risdy. He's not sure what he wants to do with his life either.
He r hangs around and he actually starts a
Company? I guess you could call it a company. It still exists today. It's called a Crit Buns.
And Joe's talked about this a lot. Uh if you listen, we went back and listen to the how I built this uh episode, he talks about this.
So I guess the story is
As part of the curriculum at RISD, one of the key things that you do is you have these critiques, like design critiques in in your classes. Like you design something and everybody in the class and the professors, you know, all critique and you sit around. And I guess these go on for a long time.
And there's not comfortable chairs and so Joe has this idea that he makes
literally butt shaped foam cushions that you can carry around with you and you can put down on the floor or on a bench or whatever and then and then be more comfortable during critiques, hence
Crit buttons.
This is still up, right?
Still up.
Yep. You can go to uh
I don't have it written down with the website. We'll link to it in the show notes. Uh you can go online and uh and order a Crit Bun. It's Critbuns.com.
And it is full like
Web one point five glory.
Yes. In fact, I think it was on the front page of the USA Today and they have a big uh area of their site dedicated to letting you know that.
Yeah.
Joe. Joe. Yeah. Joe um
goes around Providence and uh tries to get the uh the bookstore in town to carry them.
Uh I don't know if he actually succeeds, uh but if he does, like this is not uh
He's not moving a lot of product. Let's put it that way.
Uh so in two thousand six
He finally gives in and he moves out to San Francisco. Apparently he always wanted to move to San Francisco. He gets an internship and then a and then a full time job at Chronicle Books, the book publisher, a famous book publisher here in San Francisco. And he's working, he's designing book packaging and marketing materials for them and
He um with a couple of roommates rents a uh uh apartment in the
Then this is crazy to remember now. Uh up and sort of up and coming, but mostly still incredibly sketchy area in the south of Market neighborhood in San Francisco, better known today as Soma. And uh
I remember at the time had friends out here in San Francisco and my wife telling me was from here and I come out and visit and um
You didn't go to Soma. It was it was a real sketchy place. It's still kind of a sketchy place, but uh has transformed
Incredibly since then, of which Airbnb is a big part of.
Joe's now living in San Francisco. Brian's in LA. Remember he's not super
Happy. They're still in really good touch.
One day in two thousand seven,
Joe sends Brian
A package.
Down to LA with a uh with an object in it with a message behind it. And Brian opens up the package.
There's a crit button.
in the package. And uh as the story goes, at least as told to Brad, the point of the Crip Pun
Other than I'm sure just to be hijinky and and ironic was
Hey, let's take another shot at this. It's time to do this together. Start a company.
We're not meant to be employees. Let's go do this.
So Brian comes up to San Francisco after receiving the Crit Bun to visit and and stay with Joe. And uh when he's there, it turns out one of Joe's roommates, uh this tall
programmer guy named Nate, who went to Harvard, but he's working at this kind of like really weird language tutoring company at the time called
boutique and doesn't really seem to be going anywhere, uh Neats moving out of the apartment. And so like, hey, we need another roommate.
Why don't you just why don't you just leave your job down in LA, come up here and and move in with us.
And so Brian's up there, you're visiting, he has a great time, he kinda wants to do it, but he's not sure. So he goes back to LA, thinks about it for a while, and then finally in the beginning of September in two thousand seven.
when uh Nate finally moves out that month, Brian's like, Okay, I'm gonna do it. So he he quits his job, he moves up to San Francisco, he moves into the apartment, but there's a problem, you know, you've replaced, you know, Nate this this programmer who
you don't had a job, he was making money. But this guy Brian, who's designer, who doesn't have a job.
So a roommate is is kinda only as good as they are for the rent money.
And uh Brian and Joe need to need to make the rant.
So they're they're casting about they're thinking about something to do. And it turns out the next month one of the big
Design.
international design conferences is happening in San Francisco, the World Design Congress. And uh anybody who's traveled to San Francisco for all the big conferences that happen nowadays, they're all
Tech conferences that happen at the Month.
Yeah, the the hotel situation in is nuts. It is completely awful. WWDC has since moved down to the South Bay and now online, but like I I remember looking at hotel rooms uh for the week of WWDC before it got announced
because people were speculating on what week it would be and rates were still like five X what you would expect them to be because people were preanticipating that
I mean, just clearly not enough hotel rooms.
And the thing that you figure out, uh, if you live here and you know have family and friends you want to visit, is that that's not just WWT C. That's literally every week. Every week there is a big event going on at the Mosconi Center or elsewhere in the city. And there just aren't enough hotels here for demand. And so, you know, hotel rates can be like a thousand dollars plus
A night during the week,'cause there's always a big conference going on of some type. So they start cooking up an idea and Joe sends Brian an email. Why he sent this over email when they're living together?
I don't know, but uh he sends him a very famous email. They knew that we were gonna be doing a podcast one day and uh they wanted to leave a a paper trail. Well they were thinking about, you know, an author writing the book, so there we go. So the subject of the email is subletter.
And it reads Brian.
I thought of a way to make a few bucks.
Turning our place into a designer's bed and breakfast, offering young designers who come into town a place to crash during the four day event, complete with wireless internet, a small desk space, sleeping mat,
And breakfast each morning. Ha.
Joe.
Yeah.

Ha ha indeed. I'm gonna start hitting my emails with that and see if uh see if that is the magic that made it all work. You know, yeah, I I I never really liked, you know, like bastard cheers, like all the standard, you know.
Uh yeah. Just end with ha. I like that. Ha exclamation point.
Great. Well, it was a pretty good ha. So they take three days, they put together www dot airbed and breakfast dot com on WordPress.
Then they email out a bunch of
design blogs to get some publicity and say, like, hey, you know, all the people that read your site that come into town for the conference can't afford hotels, especially, you know, young broke designers like us.
Come stay with us on Matt in the uh
Uh I don't know where the mats came from. Maybe like yoga mats or something in the uh in the department. I mean like I knew airbeds, right? Like Airbnb, but like airbed and breakfast. So Yeah, so what's it uh do they mean airbeds or do they mean mats?
I assume maybe they they meant as as they were working on the idea and came up with airbed and breakfast, maybe they went out and got some airbeds. So they email us out and surprise they you know, people are like, Oh, this is cool. Uh what a novel idea. And they write about it. And they get a few takers. So they have it was either two or three. I can't recall how many guests stay with them.
That weekend, but uh one in particular.
A young
recent Arizona State grad from India named a mall survey.
Rents one of these airbeds and or mats.
For eighty dollars a night.
Comes and stays with them.
Uh and they
become friends. Like they attend the conference together, they hang out, Joe gives them a tour of the city. It's
Really a great experience. And uh at the end of this day, Amal is staying for uh an extra day after the conference, and he really wants to go down and see the famous
D school.
At Stanford.
No, not not yet famous for having helped produce DoorDash, as we talked about in our episode yesterday, but still pretty famous nonetheless, and especially in the uh in the design circles. There's this famous tie between the D School and IDO.
the design agency. So they all drive down together to Stanford and uh they attend a a lecture by Bill Magridge, who is one of the IDO founders, and uh it's this cool experience. And then afterwards Brian goes up to Bill and just starts
pitching him on, hey, got them all here. You stay with the board designers. Um you know, uh we have Airbendbreakfast.com and you know it's it's really hard for young, you know, starving designers to go to to conferences. Do you think I I think Bill might have been like on the board of the Industrial Designer Society of America or something like this. Do you think we could become the official
Accommodation provider for the Industry Association. Unclear what what Bill's reaction was, but um
Airbend breakfast did not become the official accommodations provider.
Always be hustling. Yeah, indeed.
So this happens.
the conference ends and you know they have this amazing experience. And so you'd think, right, like oh okay, great. Like
This is the thing, this is what we're gonna do.
No, they don't uh they're like, Oh well, that was a good way to make some money during the conference.
What else are we what are we actually gonna do? So they start brainstorming some ideas. They rope Nate, who you know they were still friends with, even though he'd left the apartment, back in to uh start working with them on this since he's actually
You know, a developer. He's left batik at this point and he's freelancing. He's working on side projects, thinking about what his next gig is gonna be.
They start brain brainstorming ideas.
One thing that they think about is uh roommate matching,'cause they're like maybe inspired by air bed and breakfast. Like, this was so cool.
Well, obviously temporary roommates. That's not very big. Maybe permanent roommates, that's what we need. And to be totally clear, was Airbnb and Breakfast like
a website that they stood up for their apartment, or was it like a platform for any w any designer with an apartment to have other designers stay with them?
Uh, that's a good question. I think it was only their apartment. I'm not a hundred percent sure on that. If it was
Others to there were no other hosts during that design conference.
It was a platform of one.
Uh so Nate. Yeah, we've talked about Nate uh a little bit.
Turns out he has a pretty interesting and very relevant background, too. So he majored in computer science at Harvard, right around the same time as uh as Brian and Joe were at RISD. But that wasn't really all that he was bringing to the table, or even really probably the most important thing that he was bringing to the table. So
In high school
Turns out Nate had
not only taught himself to code.
But he put
The code that he was writing to shall we say highly profitable commercial use. So he started
No. Uh he started writing AOL bots and
programs and uh communication stuff. And first he was selling them as shareware. And he kinda stumbles into this nascent field. This is in the nineties of um
Email marketing and perhaps the unregulated parts of the email marketing industry where he operates as a consultant during high school.
And even through college.
He ends up making, he would tell Bradstone, almost a million dollars.
And when you say early unregulated email marketing, do you mean he was a spammer?
I mean he was a spammer. So the the uh the Can Spam Act was not passed until two thousand three, it turns out. At which point then I think sophomore at Harvard and eight
uh closed his consultancy business for reasons that uh have never been discussed. But before that, yeah, he made about a million dollars and um put himself through Harvard and and much more. Pretty amazing. So in other words, like
Not only
Is he a Harvard trained computer scientist who, you know, knows how to code and develop and can stand up, you know, uh internet products all on his own. He also knows how to market online. So it's a it's a pretty potent combination here. They were smart to rope him back in. So they're jamming on these ideas, they're thinking about the roommate thing. Turns out roommate.com already exists.
Couple months go by. It's January two thousand eight.
They're out of other ideas. So Joe and Brian decide, eh, maybe we'll dust off this airbed and breakfast thing. Give it another, give it another go. So they pitch it to Nate. They actually hadn't pitched Nate.
Until January on
working with them on this. It was it was just this side project thing. So this is like attempt number two at starting Airbnb. Attempt two, yeah. And so the idea is South by Southwest is coming up in March.
And people are starting to make their bookings for going to Austin and lots of people from San Francisco go
go to go to Austin still. Well, not this year. We were supposed to go do a live show there this year, but maybe next year.
And as anybody who's been to South Pyre Austin knows once the when these festivals happen, whether it's Austin City Limits or South Bye, you can't get a hotel room. Like it's
Thousand bucks.
Two thousand bucks a night. I guess the first time I went in twenty ten, I couldn't get a hotel room and I booked an Airbnb.
Yeah, I think uh I think every time I've gone
I've done an Airbnb. I've never stayed in a hotel for South Eye. So like, okay, great. Uh this is this is where we're gonna launch. It's gonna be big. They go on Craigslist and uh say, Okay, like who's hosting rooms uh and who's who's in the looking section looking for rooms. They start
pitching everybody on using Airbnbrefast dot com. They get
Huge success, they get two
Actual bookings. Like two, like one more than one for the festival. And one hundred percent growth rate over their previous attempt to the company. Exactly. I guess a one hundred percent growth rate. One of those bookings is Brian. So they have only one they still only have one non founder booking. Brian shows up and uh this is just
It's like you know, we talk on the show about how the internet back in the day was like twelve people. Well, it turns out in the mid two thousands it was it was still only like twelve people. Uh except Brian shows up and he's hanging out there.
And he meets up at Joe's suggestion with another one of Joe's former roommates.
Yeah, just a little guy named uh Michael Sybal.
No way.
Yeah. Guy named Michael Sibel, of course, of Justin.tv fame, which would become Twitch, uh CEO of Twitch and then we just currently would become and is currently the CEO of
Y combinator. So at the time, they're running just in TV.
They've raised some money there, you know what?
Known startup.
In the Valley, which we've covered on our Twitch episode, as crazy a story as similarly crazy story is here in Airbnb. And Sibel says, Hey, I I can I can help you, Brian. Like he takes a liking of these guys and he knows Joe. They used to be roommates. Um I can help you find some angel investors to make this thing.
Yeah. Apparently never
held any equity in the company, was never, you know, a equity advisor or anything. Just uh
Helped him out.
He did indeed help them out. So Brian gets back
He's all pumped up. You know, this this hot startup and the and their founders are gonna help us raise money. Uh so he shows back up and Nate's like
Hey guys, I've got some news.
So my girlfriend from Harvard, Elizabeth, who's now his wife, she was I think in med school in Boston at the time. She wants me to ba move back to Boston and like, Yeah, nothing's really happening with this site. So um
I'm gonna move back to Boston. Fifty percent of the people who are using it are the founder, so yeah.
So he moves back and once again nothing really kinda happens with the site for the next few months. Um but meanwhile Cybel did make good on his introduction and he and Justin Cahn introduced Brian and Joe to a bunch of angels. They go and do
These meetings with angels and the angels are like
You're doing what?
And how many people are using this? Uh
No thank you.
So Brian actually would write a blog post uh later about this about all the rejections that they that they faced, uh, of which there were many. So they go back to Cyball and uh and Justin Cain.
Well,
Like if you can't raise money, maybe you should just go do White Combinator. Like we did it.
It's great. P G's great. But it's still pretty early at this point in Y C. Right. But maybe you'll be able to raise some money afterwards.
Yeah, I think uh Dropbox has happened right oh it's two thousand so it's
one and one or two years into it. Yeah, the uh Oh no, it was um
This is now two thousand eight, but I
Y C started in two thousand six or was it two thousand five? Something like that. Yeah. Something like that. So it's all pretty good. Dropbox and Reddit effectively have gone through, but there haven't been any other high flowers yet.
And Justin TV, but Nobody really knows outside of the Valley about them yet. So they go check out Y C and Y C was actually I think this was the first
Startup school that Y C put on in kind of an effort to
evangelize and bring in more applicants uh as they move to the West Coast.
So Brian and Joe.
go down to start up school. And this is amazing. This so this is April, I think, two thousand eight.
This is where Bezos comes in.
talks at startup school and uses, I think for the first time, the electricity metaphor for AWS.
Whoa I forgot Bezos spoke at startup school.
But you get so wrapped up in the Jeff Bezos of the last f five to eight years that like you kinda forget
how much more approachable he was. And a lot of these guys, I mean Zuckerberg, uh like they they they would all do the like little startup speaker circuit because
Yeah.
their companies weren't that valuable yet.
Totally. Well and and here's
Bezos, uh who
It doesn't look like Terminator Bezos, so he's like full on still nerd nerd Bezos mode. And he's pitching it Y C for all these drinky dink little startups'cause he's like, I gotta get people to use AWS and so these little startups are are gonna use it. Which ended up being genius.
Totally genius. I mean same deal as Stripe and anyway. Uh stories for another day. The other person who makes a big impression on Brian and Joe speaking at uh startup school is Sequoia partner Greg McAdoo, who's speaking there and of course.
Great.
Sequoia and the there's a long history of Sequoia partners speaking at Y C and startup school. Why is Greg speaking there? Well it turns out Greg is speaking there because Sequoia had actually invested in Y Combinator and Greg was
The person who led the investment for them and on the board.
Wasn't widely known yet.
So Brian and Joe, they're they're taken. They think Y C is great.
They're gonna apply.
the winter batch for YC is the next application, so they're gonna gear up for that. In the meantime, they gotta do something over the summer. They're like, all right, what are the next events that are coming up? The presidential
campaigns are happening, the conventions are happening, maybe we can use Airbnb at the conventions, so
They
do the same thing. You know, I I think the democratic convention is in Denver. I forget where the Republican one was. They email local press outlets, they get some bookings. They actually get about a hundred bookings.
that summer. Um, which is great, but they're not making that much money. So they're about out of money. And this is when the famous
serial story happens. The Obama O's and the
Captain McCain's
And I so
I uh David, I texted you, hey, let's not like go too much into this story because everybody already knows it and there's so much more to talk about in recent Airbnb history. And I I uh as I went back and read
the email exchange between Fred Wilson and Paul Graham and then I read Fred Wilson's blog post talking about how they they passed. I actually realized I had the story wrong. I didn't realize that the Airbnb guys made up Obama O's and Captain McCain's. I thought what they did was they went out and bought a bunch of them and then like when the stores ran out then they like resold them. I didn't realize they like
They took Cheerios and just made their own cereals. Yeah. Yeah. It's pretty crazy. I mean, I think that's the thing. Everybody knows this happened, but
You know, the actual story was
Uh they didn't
have any money. They're still trying to basically make their rent, uh, on the Raleigh Street apartment in Soma. Um
And
So they had this
you know, middle of the night crazy idea of
Let's go make some boxes, pour Cheerios into them and
And sell them. It is a limited edition. It's a totally amazing heads, I win, tails you lose situation'cause you have food
No matter what. It's kind of like being the casino. Like
You don't care which side wins'cause y you get food either way. Uh it's true.
And I think you know so the story like they make they end up making
somewhere between twenty and thirty thousand dollars in profit from selling these things online.
And that that kinda keeps them alive until until they start Y Combinator.
It is it's also kind of c take a
Super, super far step back though. You're like
This is an amazing story of entrepreneurial grit.
Unbelievable.
You're selling s this has nothing to do with the business. And uh this might be a theme that'll come back up uh as we progress through the story.
Yeah.
It's only awesome because the company worked. Like I've been at companies that didn't work and the only profit they ever made was from selling their furniture. So like
Uh you know, it can it can kinda go either way.
It's it's an awesome entrepreneurial um
endeavor uh and a great show of scrafiness.
But uh
It's a little bit of a double edged sword. It's also a great way to use their actual talents. Like as designers, they didn't have to outsource the creation of the, you know, art for the boxes. So therefore there was more margin available for them. I always think that's like a good lesson for entrepreneurs in general is
What is the thing that you yourself can do and not pay yourself anything and generate, you know
d you don't have to pay the labor, so it's a it's a hundred percent profitable. And like
You know?
for our business here at Acquired, like we podcast and we don't have to pay for any podcasters. Okay. So
There is, though
The other reason I decided to include the um Obama O's in Captain McCain's story is it's actually what gets them into Y. C. So characteristically for um
Brian and Joe, as you can imagine, as the story goes along here. They miss the deadline to apply. And Cybell has to has to lobby PG and say, like, hey, these guys missed the deadline, but can you like
Just give'em an interview anyway. Like I I vouch for'em. They're good. So
They convince
Brian and Joe convinced Nate to fly back from Boston, pretend that he's still part of the team to drive down to Mountain View and have the Y C interview.
He shows up, they're getting ready to drive down.
And the story goes, as they're leaving, Joe grabs
A box of Obama's and a box of Captain McCain's to give to Paul Graham. And apparently Nate is like
What are you doing, man? Like you look ridiculous. Like serial, come on.
And so they go, they do the they do the interview and
P T doesn't get it.
People.
People actually are
Doing this? Staying on each other's couches? They're like, Well, yeah, people are doing it, but not that many people. And uh and so they're it doesn't go super well. And
After they leave the interview, Joe realizes he's forgotten to give
Paul.
The cereal boxes. So he runs back in and gives Paul the cereal boxes. This is how the story goes.
as chronicled in The Upstarts and gives Paul the cereal boxes and Paul's like what are what are these? Joe tells him the story of how they've stayed alive and of course
What is it
one thing that P G values above all else, it's
Survivorship and grit and default alive.
default alive, being a cockroach, as he would come to call them. He says, Wow, okay, you guys are
You guys are gonna stay default alive.
I don't know about this whole thing, but you're in.
Uh so they get into Y C.
They start in the winter two thousand nine batch.
And as
Paul spends more time with them, he comes to
Really?
Like these guys.
And um
And so he gives them advice, famously, he gives them advice. He says, Okay, so okay, where is where is stuff happening right now? Well, the we've got some bookings in New York, and he says, Okay, well
go to New York and he famously sends the he starts calling them the Airbnbs. Uh and
During Y C they change the name to Airbnb from Airbnb and Breakfast. They go to New York, they figure out that photos are important. They figure out that having a smooth payment experience is important, because you know, bringing a bunch of cash and giving it to your host is pretty awkward.
And the very reason why people stopped taking cabs and used Uber instead,'cause it was a cashless experience. I mean one of the many reasons, but
Exactly. Exactly. So things start to
Work. Now meanwhile.
Makado, remember.
Is
Sequoia's
Liaison with Y C, an investor in Y C. He's at Y C one day and he's talking with
PG.
And they're talking about this idea of
Great.
And how being default alive and scrap scrapping through things is really, you know, it's a QA. They believe that that's one of the most important
characteristics of entrepreneurship as well. And so McAdoo asks PT, Well, hey, who who in this batch
Is is most like this.
And P G says oh well.
That's easy. That's the Airbnbs.
Over there. Love it.
Love it. So McAdoo goes over. He starts talking to them and he's smitten as well. And this is this is kind of crazy. I mean, Sequoia had just done
If you remember back to this time, this is
Beginning of two thousand nine, the RAP good times.
Sequoia Memo two thousand eight.
the leaked memo had just happened a couple of months before. Like the world is
is falling apart. And uh
Yeah, the Sequoia Partnership and the rest of the valley is thinking about triaging their own portfolios like
The idea that you would give a bunch of money to some crazy kids who are
like building a platform for people to sleep on other people's air airbeds and couches.
It's out there.
Yeah, it it feels far removed from the reality of the moment.
Yep. So
To Greg's eternal credit, though, he sees the potential and he had looked at
home away and and um VRBO and the c vacation rental space before and he was like no I think these guys are doing something different
And of course we'll get into this a little bit more as we go.
But a consequence of the financial crisis and
R A P good times and everything that was going on in the world at this point in time was
Hey, it was also a housing crisis and
People were having a really hard time pay their rent, pay their mortgages, getting kicked out of their houses.
And this was potentially a way for
People to
make some extra money and prevent that from happening. Likewise, people still wanted to travel.
didn't have the same kind of disposable income to do it. And this was a way to do it much cheaper. You could go to South by Southwest for you could go to a a conference in San Francisco for eighty bucks, a hundred bucks a night instead of being priced out of the market.
Yeah, it's so interesting. Like t timing plays so much of a role in the success of these companies and you know
This there was so much innovation here th that and all the different ways that we'll get into around payments and reviews and trust and all that that like it could have succeeded in any time.
But boy did they have the wind at their back from the secular trends going on to um
You know, s sort of make it
a no brainer for a lot of people and really accelerate their ability to find product market fit.
It was
Absolutely the right time.
Uh and I think all those things are true, but
You know, and and couch surfing, as we talked about a little bit, definitely didn't have the right model. Definitely messed things up. But they also were launching and starting to build
in the build up to the financial crisis during the go go years, like nobody was that interested in
Cheap travel. Mm-hmm.
So
Despite getting a lot of pushback from the rest of the Sequoia Partnership
McAdoo does end up convincing Sequoia to invest. Uh and um rather than doing it
as a series A, they say, like, hey, I'm not sure about
A lot of money here.
Not sure about this being a
you know, full traditional investment. We need to conserve our cash and triage our portfolio. Um let's do a small seed check. So they say
We'll lead a seed round.
Sequoia will invest.
Just under six hundred thousand dollars in this company, five hundred and eighty five thousand dollars. We'll bring in some other folks. We'll bring in Also like that's nothing like I mean like it's nothing, nothing, nothing for Sequoia today.
That's still pretty much nothing for them at the time.

Uh the fund that they're investing out of, I believe was a five hundred million dollar fund.
Um
So what's that point?
One percent.
Right.
Like.
N and the funniest thing is that that actually returned that fund. Like you never when you Oh so many times over when you're thinking as a venture capitalist and you're like ah I can't possibly make a little bet, you know, that's just point one percent of my fund because like that
can't possibly contribute to returning the fund. It's it's just not I didn't deploy enough of the fund's capital to ever have a multiple big enough to get there.
And here we are. And here we are. So they do five hundred and eighty five K. They bring in some Angel Investors alongside uh the Angel Investing Collective of
Keith or Boy.
Kevin Hartz and Jawad Curry are one of the YouTube founders. We talked with Kevin about this on the Eventbrite episode. Uh, they get a
Small. They were in angel investing together. They get a small angel allocation of thirty thousand dollars between the three of them in the round. The valuation though, so that's the the dollar size. The structure though, this is very much a traditional venture round. The round is
Uh over twenty five percent of the company.
So the post money valuation on the round for the the total round is six hundred and fifteen thousand dollars.
Two point four million dollar post money.
Whoa, no way.
Sequoia gets twenty four and three eighths.
Of a percent.
in ownership and company.
And uh the Angel Collective of
Keith Jowa and Kevin Get.
One and a quarter.
percent of the company for their thirty thousand dollars.
And that
I think is the last big dilute round the company would ever do. Is that right? Like everything from here on out. It was shockingly deleted. The Series A uh was seven point two million, I think at a sixty ish, sixty or seventy million dollar valuation, so roughly ten ish.
Percent deletion and then the percentage of the company sold only went down from there, despite the fact that the dollars got very, very large. That's that is
That is accurate. So they finally have back to the seed round, they finally have a little bit of money. So this is point four million posts, David. I can't believe it. Could you bel I mean, even back then and it was a different era
Like I said, it w it was a it it was it was a a different situation. That Sequoia Capital sure knows how to get their ownership.
They do, they do. Um they're writing much larger checks these days to get that ownership.
So
Even with this small amount of money, though, remember Nate's background. Uh Nate basically goes to work.
And uh this is this is his time to shine. So first
the thing that they do, which doesn't require any money. Um
People have probably heard about the Craigslist hacking.
Uh so I didn't realise, you know, the the thing that I always thought
the Airbnb did.
With Craigslist hacking.
was uh going to
listings on the site.
uh and and saying, Hey, uh why don't you come list these on
listings on on Craigslist and emailing them.
Uh getting around.
Craigslist uh email uh blocking and saying why don't you come list these properties on Airbnb.
So
The other thing that they did was actually the reverse of
Which was for people who were
listing creating listings on Airbnb.
They actually also auto published, encouraged them to auto publish those listings back to Craigslist. And so you think like, Well, why would you want to do that? You're taking your own supply and you're you're putting your own you're encouraging your own supply. If a transaction happens through them, that's a way to go get more demand. Exactly. And for a site without traffic yet.
Exactly. And I think this was I mean, probably both of these were key, but that second piece was especially key because yeah, how do you get the demand? How do you get traffic? I I can go, you know, you can go
Hand to hand combat.
convince people to put listings on the site, but how do you get them bookings? Well
you put it on Craigslist, get the bookings through there, and then you
Native you capture those bookings and you don't let them go back to Craigslist and you say, Hey, you got the you did this thing, you had this great trip. Why don't you book your next trip with Airbnb?
Right. I mean i y yes, Craigslist captures very little of the value that they create. So, you know, effectively what they did here is say
There's value being created on Craigslist, we're gonna be the way to capture it.
So so that was Craig's list. And then the other thing they do, uh and that Nate does is
is uh especially given his history that you know as well.
Is
Google and Facebook ads.
And this was early days of Facebook ads. So we're talking two thousand nine. The platform existed. You could do it, but you could and you could target
by interest. So what they do is when they want to grow demand, they run Google AdWords for
Place to stay in San Francisco, place to stay in Paris, place to stay in, you know, New York. Uh okay, that seems like a great way to get demand, but how do you get supply?
They use Facebook. And so what they do is they go on Facebook, you can target by geography, hey, we need some more supply in New York. Okay. We're gonna target in New York, and we're gonna run Facebook ads, we're gonna target by interest. And you say, Oh, uh you Brad talks about this in the book. Uh we see this person likes wine.
Rent your place to a wine lover. We see this person is interested in yoga. Rent your apartment while you're gone to someone who loves yoga. And so then that's how they would get
uh supply to sign up on the platform. And then of course the people that they would send, you know, no guarantees that they like wine or yoga. But uh but it worked pretty well.
Now, to be fair, so these are some pretty great growth hacks.
It wasn't just that Airbnb growth hacked their way to success, as we talked about, like
There were a bunch of trends that were
At their back here.
financial crisis, needing to people needing to pay their rent, people want to travel cost effectively
Um and I think the we we talked a little bit about the supply constrain
nature of hotels in markets when there's big spikes in demand. Um and I think the other thing too that
Took a while for people to realize, but has
probably become the most sustainable part of
Airbnb.
uh in the ensuing ten plus years is
You don't always want a hotel experience, right? Like almost anybody who's traveling
Sometimes you want a hotel experience.
But sometimes you actually want to stay in a place, especially if you have a family or you're traveling as a group. Um, it just makes it it's such a much better and
Totally new and different experience.
To travel like this.
Yep, that's a great point.
And before we move on from the growth hacks too, I think it's also important to identify
That like
The door is closed on doing all of those tactics today. And not completely closed, obviously like you can still use Facebook and Google Ads, but the value
has largely been arbitraged away where you can't do it
You know, like a wide open fire hose the way that they were doing it in a cost effective way then.
Yeah.
So that the the notion of like new marketing channels, particularly new digital channels, is always a who found the next hill, go exploit it before all the value gets arbitraged away, then go look for the next hill. And like these are, you know, five generations ago of marketing tactics.
Yeah, good luck doing that, uh uh those innovative Facebook things today. You're gonna pay through the nose for it.
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That Ben and David sent you.
So we're now in
twenty ten.
And things are
really starting to work. And they have by by midway through twenty ten
They have seven hundred thousand nights booked on the platform. Wow. Which is
For something that seemed like a crazy idea, nobody would do. Even the founders thought, Yeah, we need to do permanent roommates, not temporary roommates.
It's
Totally taking off. So they raise, as we said, a seven point two million dollar series A from Greylock.
Which by the way, why did Sequoia not pile on again?
Like isn't
Isn't that kinda their strategy? Well, I think there were a bunch of questions about
How big is this? What's going on? There's crazy stuff happening. Uh
They probably all I mean they also figured they own twenty four percent of it. They already own twenty four percent. Yep and and they're trying to, you know, stretch out the dollars in their fund. It's not like we're out of the financial crisis at this point. Right.
So they go to Greylock, Reed Hoffman leads.
The series A. Now uh
The supposedly I think this is actually true. Uh we'll talk about Airbnb's business model in a minute.
By
Things are going so well. They have more money in the bank than all of the seed dollars that they raised when they raised the series A. Oh, wow. Like you like you never hear about this happening. They raised such a small amount of money, but then they did so well that they made
More money. Fame uh profitable company Airbnb. Indeed. Indeed. So uh
By
Early twenty eleven, the next year, they hit a million nights buck and then they made
to have a bunch of this company has always been great at PR and publicity, probably the the legacy of of Brian and Joe.
Um
They had a million nights booked.
it becomes big national news. And this is when Fred Wilson publishes that blog post about uh how he w it was a huge mistake.
To pass on.
The company.
Um and'cause PG had actually introduced them
To Fred Wilson, wanted Fred to lead this like uh meeting the hosts and hiring photographers and all that.
Yeah.
So
That summer we talked about fundraising.
They raise
A hundred and twelve million dollar series.
B from Andre Snarowitz.
at over a billion dollar
Valuation.
That's a big series B today.
Like we were talking yesterday on the DoorDash episode about their forty million dollar series B in twenty
Fourteen, fourteen or fifteen, I think it was, being
A huge series B. It's it is ludicrous to call this a series B uh for that era.
You know. Yeah. Uh Ashton Kutcher comes into the round. It's uh
Um Ashton actually doesn't quite come into the round. He he comes in at a different time
um and gets I think preferential share price or or maybe it's just preferential share allocation. Um but uh because he sort of has this value prop at the time that he's talking with many companies about uh which is I'm gonna help you get publicity in in uh you know if you're a consumer company.
Often he would actually come in after rounds, have them reopen it to let him in when the price should have gone up, but keep the price the same.
It's a great strategy.
Hey
Leverage your value value.
Yeah.
So they raise all this money. Wha why did they raise all this money? There's actually a very specific reason they did.
Which was
If folks remember back to this time, the Samwar Brothers and Rocket Internet
In Germany.
Would you
Take all these.
You know, new
We have post web two point zero
tech businesses from Silicon Valley clone them and roll them out in Europe.
So they did this with Airbnb.
With a company called Wim Do.
And
This was like
Existential because
Whether it
Whether they realized it or not early on.
Unlike
Door dash.
food delivery ride sharing where it's about winning each local market in hand to hand combat.
Air B and B is a global network effect. You can't fragment.
the market. There is going to be one winner globally because when people travel, they travel globally, and especially Europeans and North Americans travel back and forth between Europe and North America.
You need to just have
one platform. You can't you can't like give up on Europe.
It's such a great point. And whoever wins that global market
is also going to trickle down when local markets. Like the it's actually different than the airline industry, which also has a great cross geography network effect where you have these, you know, United and American Airlines, I guess it's Amer I the American's a big international player at this point, but basically these one world alliances, but you still have room for these regional players.
because the product that's necessary for those regional jets is a you know it's a whole different set of infrastructure.
That's just not true.
with with Airbnb. Like whoever was gonna capture this short term rentals market.
in a global way was also gonna win in a local way.
Yep. And and
For a whole bunch of reasons.
One of the reasons being like just like
You and me, I think, Ben, over time the biggest way that they ended up getting hosts on the platform was people would use the platform as travelers as guests. They would travel over the world. They come back to their own city and say, Hey, I'd like to make some extra money on my place. And then they would
Less on Airbnb.
So that whole strategy, that whole venture capital playbook that we talked about on the DoorDash episode of, you know
It's truly a winner take all market, flood the money in, make sure you're the winner that was
inarguably true for Airbnb.
Inarguably.
So they go fight.
hard against the Samwar brothers.
In Europe.
And
They end up winning.
I and it's really interesting to think about why they end up winning. So they do a couple things. They go, they acquire a few companies, uh smaller competitors in Europe, um, they open up a bunch of offices, and what the Samwars are doing, they basically start a sweatshop in Berlin of
People, uh, young kids out of college and out of McKinsey into like calling hosts and property managers, getting listings to put on.
their platform. Airbnb starts doing the same thing. The thing that's interesting though is like I don't
I don't think that's actually what
made the difference. Um, because if you think back and let's talk about the product for a minute.
The reviews
On the platform that
Couchsurfing had pioneered. Initially, of course, there are no reviews on on Craigslist, but couchsurfing had them. Reviews and trust.
are so important. Like you're doing this crazy thing. You're staying in a stranger's house or you're letting a stranger stay in your house.
Uh, how are you gonna trust that it's actually gonna be a good experience, that these aren't crazy people?
Um, even it would put crazy people aside, just that like
It's actually gonna be nice.
Uh well reviews are super
important. And so when you're doing something like creating a a listings farm, whether this was Airbnb doing it or or uh WimDU doing it,
You're just gonna end up with a lot of listings with no reviews and it's gonna be dead. There's gonna be
No life happening. So Airbnb, because they've been operating
Globally from
Yeah.
They had
listings with reviews already in Europe. And I think once you start to get that
Then it's really hard.
compete with that. It's a real flywheel going.
So
They end up.
Uh winning. Wim to you I I don't know if it's still around, but it it
It never takes off.
The other
amazing thing, even though Airbnb went out and raised all this money. It turns out
They have
a killer part of their business model.
And how the operations work, which is
you know, when when you go make a booking on Airbnb
To go stay in a place. You're usually planning your travel out.
At least weeks, if not.
months in advance. Well you as the guest
You pay that money in when you go make that booking. Uh
But Airbnb doesn't give that money to the hosts until after the check in happens.
So you could have, you know, up to you know six plus months in advance where Airbnb, they have like the ultimate negative cash flow cycle. They're getting the money in.
There are
holding the money, some portion of which, roughly twelve to fifteen percent of which is their fees, their revenue.
They get that, they hold that up front.
And then they don't have to plus they the other rest of the booking fee that they're gonna give to the host, they hold that and then they give that out months later.
So they went and they raised all this venture capital.
They probably didn't even really need it that much.'Cause as long as they're growing.
As long as the platform is growing.
There is more money coming into the bank account.
Right. Yeah, this negative cash conversion cycle is a really I mean we talked about it a lot on the Pin Duo Duo episode to understand it sort of more uh at a deeper level, but you're so right here
And I think the the the
the most interesting thing to me is how
Typically in hotels you would pay when you got to the front desk.
And this was a different enough category, like with a different enough mindset for people that they were willing to pay
when they booked up front and that felt like the right thing to do. Like if you were gonna if Hilton was like actually we're gonna start charging when you start making a reservation, like that wouldn't fly. They couldn't take advantage of this cash flow dynamic the way that Airbnb was able to by being different enough.
And
On top of that, what you said about growth is really interesting because sure, you can take that cash as long as you're growing and and plow it into y your growth because you know that more money is going to be there from the growth that you've achieved. This doesn't work if you're not growing and you can quickly get yourself into trouble with spending money you don't have if uh if you're shrinking.
We're definitely gonna talk about that. Yeah, this this is all predicated on
Growth. But you know, I keep talking about how crazy non dilutive uh all these rounds of financing were for for Airbnb. Like this is one dynamic. Like their their growth actually financed the future growth of the company without needing the investor dollars to do it.
It's it's
So um
Smart. This is actually something like SaaS companies face the
opposite of that where you're selling deals
But
There's
Deals are you you might sell a uh a deal for, you know, a million dollars in ARR.
Well it's just gonna be paid to you month over month. Exactly.
Okay.
So things are working.
They're winning in Europe.
January twenty twelve, they hit a cumulative five million nights booked on the platform. Six months later, in June 2012, they hit ten million.
Night's book's on the platform. This flywheel is starting to spin. There's your product rest to fit right there. Yeah, exactly. Now there's some bum along the way.
definite stuff that's been written about elsewhere that we don't have time to cover here, like the EJ incident, which when uh the woman's apartment in in San Francisco got trashed and they had to implement the insurance guarantee. That was
Terrible. There were you know people
had all accidents on the platform, there were crimes, there were there there was stuff going on. Not to mention the regulatory piece, which we'll probably talk about at the end of the episode.
New York and San Francisco in particular, like hey, you guys are running a hotel. Uh this is not uh this is not allowed.
All that said.
As difficult as those things were.
the flywheel is spinning, this company nothing is gonna stop.
This growth.
So October twenty thirteen, they raise
Two hundred million dollars from founders fund.
Had a
Three billion.
dollar valuation. So here we are selling what is that, eight percent of the company. Yeah, seven, eight percent for two hundred million dollars.
Then the next year in twenty fourteen, they raised five hundred million dollars from TPG at a ten
billion dollar valuation. Uh and along the way in between there, um, especially once it'd for the show and it'll it'll come back up in a minute. Greg McAdoo leaves Sequoia and Alfred Lynn uh joins the board. Alfred Lynn from Saperson, of course.

Pretty big week for
Alfred? Yeah, crazy, crazy stat on Alfred. Uh
Been at Sequoia for ten years.
Yesterday was his first portfolio company to IPO and today is his second. Yeah. And they're both some uh some pretty big IPOs, I would say.
So
Okay.
We're now
In twenty fourteen.
We've just spent all this time.
Enumerating.
all the amazing things about Airbnb's business model.
About their
growth model, their financing model, the product, why it's defensible, why even the Samware brothers can't dethrone them.
The thing though about when you have this sort of like beautiful capital light business model and a global network effect, in contrast to a company like DoorDash, you don't really have the um
existential requirement to fly low to the ground or operate at the uh
Yeah.
Uh in fact you can you can fly pretty high, you might say. You might be able to fly
Very high.
Yeah, and this shows up in two ways. One, operationally, you can just be sloppier. Like you just can not need to be as finely tuned as, you know, say a performance marketing machine. And there's lots of different areas around the business where, um where that shows up.
But also
It means you don't have to be as considerate about what you're building and why because you have this flywheel that's just spinning and profitable and like
Yeah.
Sure, lots of people are showing up to the office every day and doing important work and moving the company forward. But like if they didn't
Other than maybe customer support and success.
like the business would probably still grow and would probably still be profitable and would probably still be fine. And at some point in their journey they really did hit that.
Where it was just going, whether they
Touched it or not.
And
I mean look this is the dream, right, of like a business is to have a business like this. Like there is uh there is not only is there nothing wrong with that, uh
That's amazing.
On the other hand, though, it i that's why it's so interesting to contrast these two IPOs back to back with DoorDash and Airbnb. All those other things you said, Ben, are are totally true, too. So let's go through it.
In twenty fourteen, the company moves into a new headquarters building at eight eighty eight Brandon Street in San Francisco.
And for anyone who's ever seen it or if you haven't seen it, look up pictures of this place. It's um
Uh gold plated would it would be uh an understatement. There's a five story atrium in the lobby with a living wall that goes up the whole side of uh one of the sides of the atrium. I mean it's it's amazing. There's a 247 kitchen. Uh is not no longer 247, but at the time when they opened it,
uh that operates her three meals a day, seven days a week.
Uh all all three for employees. Yeah, all three for employees. I can't imagine that um
there was too much demand for like breakfast on a Saturday, or but uh
You know, they wanted to create the environment that they thought would enable people to do their best work, to be creative, to create the sort of culture that they wanted among hosts, like
You know, I I I get it.
But it is absolutely emblematic of the fact that
The flywheel was spinning and it was spitting off cash.
Yeah. They uh twenty fourteen. Uh it's now just become normal, but they unveil the Balo, the the the design mark of Airbnb, the logo. I know the Balo. Uh and uh you know, depending on like your your version of the Rorschach test, it looks like may or may not look like some genitalia, but
Anyway, it's now the Airbnb mark. Yeah. Which is funny. I love the old Airbnb logo. Like I know, it was so good. The cursive script. Then
Also in twenty fourteen, they start doing
an annual conference for a host called Airbnb Open. They had brought on in twenty thirteen as I think head of hospitality a guy named Chip Conley, who Chip was the founder and proprietor of the Joadviv uh hotel chain, which are these like super high end boutique hotels all around the world and
uh view tips of easy kinda guru type guy. Uh so at the uh at the conference he uh he says um
This is in the book. He says uh he's quoted as saying that uh he's predict that Airbnb could win the Nobel Priest Pri Peace Prize within the decade. Uh wow.
Oh, Okay. Okay, man. All right. Uh never heard of a startup winning a Nobel Peace Prize, but okay. Uh Alfred's gonna resent us for this, but uh but he has a great quote about all this in the uh in the upstarts uh to Braddy says, Well
Growth covers a lot of sins.
And the growth of this company was spectacular. Uh so uh also the next David, I think you you summed it up so well, though, in the in in saying this is exactly as
a an entrepreneur, as an investor, as an opera like it. 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, you know, pushing the rock uphill.
And once you have that, the lesson is do not rest on your laurels. Stay analytical. You have to keep figuring out what's next.
Um
Or at least maybe don't say you're gonna win the Nobel Peace Prize. I don't know. Yeah.
Uh anyway. So
In twenty fifteen.
Expedia buys Home Away, the only really
Viable.
product wise competitor out there in the market for just under four billion dollars. And you know, there's some headlines about like, oh, Expedia, Humbleway, they're gonna compete with Airbnb. No, like this is surrender. This is basically admitting that there's no viable competitor out there. In twenty fifteen,
The company Airbnb does almost a billion dollars in net revenue on eight billion dollars in bookings.
twenty fifteen is the first year in the S one where we have this data. They raise the way eight billion dollars in bookings, that's equivalent to the eight billion dollars that DoorDash did last year in their gross order volume. So the amount of cash that moved through Airbnb in
in twenty fifteen is equivalent to the cash that moved through DoorDash last year. It's sort of interesting to think about, I think these companies uh
Um
Mostly because Airbnb has a much higher price tag per order, much lower order um orders per year.
Um, but of course like thinking about the growth from when they both had
that level of money flowing through the system.
after that is gonna be interesting to think about too.
Indeed. In twenty sixteen
On top of that base they grow.
Eighty percent.
Uh and
And they do fourteen
billi in bookings in twenty sixteen. One point six five billion in
net revenue.
uh they had raised in twenty fifteen a billion and a half dollars at a twenty five billion dollar valuation. Uh and then in twenty sixteen they raised
Another billion and a half across two rounds.
Again, not that they really need the cash, but probably
You know, super favorable terms. They can think of lots of things to do with it. Um investors are desperate to get shares of this company. Um I do want to take a quick comparison here and say, okay, so the eight billion and then they grew eighty percent.
Last year DoorDash had eight
billions in gross order volume and then grew over two hundred percent the next year.
So there's an interesting
Yeah. Oh yeah. We're gonna uh we'll we'll keep talking about the growth rate as as we go along here.
I imagine.
One of the things that they raised the money for in twenty fifteen, twenty sixteen was
At the twenty sixteen Airbnb Open in uh the conference in Los Angeles.
Uh they have some big announcements. And Ben and I went back and we watched the this video on YouTube. It's
It's something.
It's it's just thank you for the internet. Like it is just miraculous that this thing is still on YouTube. Every single product they introduced
Except for one has it been a complete failure. They and you know again, I mean I

It's like you do have to
Admire the ambition if they wanted to add
More products and and
had a big vision for Airbnb to be more than just what it was. Uh all that is good.
So at this conference they launch uh Brian says it's the most significant development in Airbnb's history and that the goal is to do for travel what Apple did to the iPhone with all the things that they're gonna launch that day. Uh they launch experiences, places, and
of course homes, their their uh the their current Airbnb product and
And uh
meta product above it all called trips that it's all gonna be a part of. So experiences, people probably know experiences are still around today, although
Nowhere in the S one is it broken out.
the performance of experiences or how many bookings they have of experiences versus stays. Yeah, the assumption that everyone's making is experiences are a a phenomenally tiny percentage of the overall revenue.
Yep.
Places is part of uh the was part of the Airbnb app, and the idea was it was gonna be like
a super like Me Twine, like a super app aggregator for all the things you would want to do. So it's like Yelp, it's open table, it's meetup, everything you would want to do
in your city where you live or a city where you're visiting
All within the Airbnb uh experience. Uh so that was
Places.
And uh and then all of it lived all together in trips, and so within
trips you had aggregated your

your experiences and your places, all the stuff you did. And they didn't launch, but they talked about adding car rentals to trips, uh, they talked about adding grocery delivery to trips, they talked about adding flights and maybe even an airline someday to
Trips.
They even had a flight booking product in the works until March of this year.
Oh wow.
I didn't know that.
Yep, that was one of the canceled things with coronavirus.
Interesting. So yeah, I mean I think the thing was

Like look all these were were maybe not
Bad ideas, but I'm not sure they made a ton of sense with it in the
Airbnb.
B. Uh and I think that the disconnect is as
you know, looking back for me watching that video was um
I I think
Ryan and the company really believed that like Airbnb was about they talk about it so much at this in this conference, about belonging, about feeling home when you're travel and about the connections in the community between hosts and guests.
Um
And I think that undoubtedly there are people that use Airbnb that love
meeting strangers on the platform. I'm not sure that it's most of the people who use Airbnb though. Yeah, I think there's a recurring theme that seems to happen
kind of from this point forward in the business, which is
Brian and management feeling very aspirational about why people want to use Airbnb, particularly around
community.
particular around belonging and
People
again, generalizing, use it in a much more transactional way than that. They are logically weighing this option to stay here versus other options. And like I I just think that that disconnect becomes more and more apparent over time.
Yeah. And if you go back to like what was one of the original
You know, probably the biggest why now that made Airbnb work, it was the financial crisis. Like it was yeah, yeah, you know, it's nice to stay in an apartment and whatnot, but like I really want to go to San Francisco for a hundred bucks a night or eighty bucks a night and not a thousand bucks a night. It is interesting around the twenty th
14 ish time frame. I remember my narrative of why I loved using Airbnb shifting, where I used to tell people, it's great, I can stay cheaper. And then I was like, actually it's not really cheaper anymore. But like, gosh, hotels are so sterile. And staying in an Airbnb, while it's
It probably the same price, maybe more expensive, hard to tell. I can access neighborhoods I otherwise never would have been able to access. Uh I have a unique and cooler experience staying in this house and I I remember
This
Moment in time.
It's shifting from a
val of a price based value proposition to an experience based value proposition.
Yeah.
Uh same deal for me. And what's interesting is
I actually didn't go back and look I should I should have.
But
Anecdotally, I think for for us in our travel
There was a period of time
Certainly when we were younger and more price sensitive where
All of our travel was on Airbnb. Like we weren't staying in any hotels. Um and then during that
the period of time you're talking about, it was like, Well, you know, when we would go
for like a weekend. Like it would depend on the trip whether we would do Airbnb
Or
hotels. Like sometimes we'd go I was living in Seattle at the time. We were we were living Jenny and I were living in Seattle. We'd come down to the Bay Area, maybe we'd go up to to see our family, maybe we'd go up to Snow Mire Napa. Sometimes we'd stay in an Airbnb, sometimes we'd stay in a hotel. But then yeah, as the prices started equalizing, we were like
You know
There's some really nice hotels. Maybe we're just gonna stay in a hotel.
Right. And I think the thing that's
that sort of becomes true is people cons consider Airbnb one of their options.
Yep. Totally. Not that we stopped doing it at all and for
Group trips, you to get in a family together, going to a place where there isn't great hotel inventory.
Fantastic use case.
But you fast forward to today, you know, we've talked about
We've talked about experiences.
Places is gone.
The trips concept is gone.
It's now refocused much more on
Yeah.
Uh so the next year in twenty seventeen.
The company tells investors that they're planning to IPO within twelve months.
Uh
And
But then at the beginning of twenty eighteen, they had hired
back in twenty fifteen, a big name CFO, uh Lawrence Tossi, who had been the CFO of Blackstone and the COO of Merrill Lynch before
coming out to San Francisco and joining Airbnb.
He leaves.
the company. So that puts the IPO in jeopardy.
And uh
Brian.
publishes uh blog post uh when when he leaves saying that Airbnb has an infinite
Time horizon uh and is focused on being a twenty second century company. Uh that is like some interesting shade. Yeah, I'm not uh I'm not sure what it means to be a twenty second century company, but uh definitely means they're not going public anytime soon, which I think was
Yeah, it sounds like Brian likely didn't appreciate any of the
pushback or guidance he was getting around uh I don't know, IPO readiness or the whatever whatever the opinions were of the CFO and other uh
finance leaders who would come in afterwards.
Yeah.
Indeed. So you know, that starts off a whole cycle of
Speculation in the press internally, externally, about when is Airbnb going public.
Will they go public? What valuation? What is happening?
Um because of course they had raised all this money.
And uh
It's hard to have an infinite time horizon when you have investors with fund life cycles.
I texted David like a month and a half ago. I was like, dude, I think Airbnb is gonna IPO before the end of the year and you were like, Okay, I'll believe it when I see it. Heard this story before. We've heard it before. We've heard it before, but they they actually do.
So we'll get into like the story of
this happening and why it's happening now. Um
So the reality you know we've talked about.
There's kinda like three acts, like there are in so many of our stories here. You know, there's the be the first act here of
Airbnb this
Crazy thing, almost didn't happen, but was a great idea. Gets into Y C grows and grows and grows.
Then you know, we've now gone through the second act of like the growth is still happening, but
Some puzzling decisions are happening, but like okay.
The thing is though
After all this starting in twenty seventeen
The growth no longer keeps going. And uh
Which we've alluded to in our own, you know, views and usage of the platform here over the last couple of years. So twenty seventeen
Booking's growth slows to fifty percent from over seventy percent the year before.
Still really good. I mean you're at a huge base, you're growing fifty percent year over year. That's great. You can totally company too. Like ten year old company growing at at seventy percent on that kind of base, like
Nothing to be ashamed of at all. Absolutely, you can go public with that. Twenty eighteen bookings growth slows to forty percent.
I think
Okay, but still, you know, whole company, large base, growing forty percent annually.
Great.
If they had gone public after five years, we wouldn't be
Nay saying this at all. We would be like, Yeah, totally. They've been public for years. Makes sense that they're, you know, into this forty ish percent growth rate per year.
Yeah.
The next year in twenty nineteen
The last full year we have data for before.
Covid.
Brookings growth slows to less than thirty percent.
Uh so I believe it was like twenty eight and a half, twenty nine percent.
Last year.
And at this point, this is I think what to me at least what's what's most concerning, like the the growth is linear. So they added
eight and a half billion dollars in bookings in twenty eighteen. Uh that was two years ago growth.
They also added eight and a half billion dollars in bookings in twenty nineteen.
So like the growth the the base is growing, but the amount that you're adding every year is
Now
Constant.
Of course, then we'll get into what happens in twenty twenty, but like And do you chalk that up to IPO readiness? Like they shifted their mentality from a grow at all cost company to a
We should start thinking about
Profitability company.
I don't think so, because the costs uh keep growing and this is maybe
As if not more alarming.
The company's cost structure keeps growing, as if it were
a growth company. So in twenty nineteen
Total expenses grew.
Forty six percent.
Even though bookings grew.
Twenty-eight, twenty-nine percent. Um variable costs in twenty nineteen grew forty-one percent, and fixed costs grew sixty percent.
So like if anything, as you grow and especially on this huge base, you should be start getting like
way more leverage on your
Fixed costs.
And they're actually getting less here.
Hm.
That's concerning.
Concerning.
Indeed. So then twenty twenty happens, uh well, before twenty twenty happens, in September of twenty nineteen.
they announced that they will go public in twenty twenty. And this has been reported elsewhere, but um the company now by September nineteenth is is uh
close to twelve years old. Um
the uh early employee options are gonna start expiring. Uh how does that work? I don't know exactly. I think
I don't know if it mirrors like as I think about like a like a venture capital fund life cycle, usually it's a ten year life cycle and then you have two one year extensions. I I don't know actually if employee option contracts mirror that. Um
But also at a minimum, you know, think back to
Sequoia, like they're
Fund that they invested in must have been a
An Airbnb must have been a two thousand six, two thousand seven vintage fund. Yep. You're now over ten years into that fund. Right.
So you've definitely got shareholders looking for liquidity.
on the investor side, but you also have these employees that um have some form of, you know, expiring options, or um at the very least, if you try and restructure that, then there's tax implications.
Yep.
And also like you know.
Everybody would just would like some liquidity, I would assume here, not to mention. Um
So
They now go public.
And then COVID happens in March of twenty twenty.
Uh
And overnight the business
Evaporates. Um
Uh and not just evaporates. We talked about
the huge benefit of Airbnb's
Cash flow cycle.
When you're growing.
Well when you're shrinking that like
really hits you. So actually this is crazy. In March and April of twenty twenty.
Airbnb's gross
Booking.
values turned negative.
They were paying out refunds. They were paying out more in refunds for future bookings than they were taking in in
Booking. So
Um the they actually had like
I've never thought it like I've seen this before. Not not even like negative revenue. Do you have negative
Bookings. Um you're actually paying people more.
Than you are getting.
Brutal.
Which of course it's a global pandemic, so of course it's gonna be
Totally brutal.
So in March and I I wondered, I I didn't quite realize that still digging into the S one. In March as people probably know.
Airbnb raised two billion dollars.
in capital from
Silver Lake and Sixth Street partners
And a combination of equity equity and debt.
The debt piece was at
An eleven and a half there are two pieces, Tutrance is at an eleven and a half percent interest rate and a nine percent interest rate. The equity piece was at an eighteen billion dollar valuation, which is a billion in each, right? A billion of equity and a billion in debt. I think that's right. I think ish. Um
And I sort of wondered at the time, like why would the you know
These are pretty onerous terms, like on both sides, you know, massive haircut and valuation.
fifty percent haircut and valuation.
And then the debt side, interest rates are zero out there. Uh this is like
This is like major distressed debt. Like you're you're pricing a pricing at Tron at eleven and a half percent interest rate. I think this is what was going on was
Not only did the business evaporate, but like they're paying out refunds and they probably they must have
Just desperately needed the cash at this point in time. Yeah, the way to think uh at least the way
And you know, my
I am not first and foremost a finance person, but the way the bucket in my head that I sort of put
This
cash flow dynamic into is is kind of a form of leverage.
Like when you're when you're going well, it's a way to uh it's a way to basically make sure that
you like we said earlier, you are able to use that cash to grow without raising new equity. Um, but it uh you know, the thing about leverage is it levers whatever direction you're going. And so when you you start shrinking, um, you know, you're in big trouble quickly. Very similar to another thing that was going on sort of
But with Airbnb and with all tech companies is operating leverage. Like Airbnb has uh a really, really, really high set of fixed costs.
But
Their variable costs are
You know, um obviously much higher than a SaaS company'cause it's a marketplace and they gotta pay the um the hosts.
But like they make a lot of money on every transaction. And so the whole ball game for tech companies is build the best freaking product you can and uh especially recently spend a ton of money on sales and marketing to to go capture a win or take most or all market. So your sales and marketing costs are high, your R D costs are high, but those are relatively fixed.
And then hopefully your RT costs are. Yes. Uh and then hopefully your your uh your profit margins on our unit basis help you outrun all those fixed costs or high operating leverage. Now
when you're shrinking or when you're you know, when your revenue is is low.
then that hurts you in the exact same way that it helps you as you're growing, because now you got all these mouths to feed, but very few customers to feed them with.
So um
Airbnb, of course, realizes this.
And in May.
uh of this year shortly after.
the start of Covid and and after raising this emergency capital.
Uh, they have layoffs. They lay off twenty five percent of the company, which is that's a significant
Projection in force.
They cut.
eight hundred million dollars in marketing expenses. So
There you go. Addressing each of those two.
Points you just made, Ben.
Uh, except that they didn't actually let go a lot of the R and D. Like they kept they kept more mostly R and D people and laid off mostly
the the people in the customer success service organization.
Yeah. Yeah. We might want to get into that in a sec.
Brian describes it at the time as a quote unquote second founding of Airbnb as a business. Uh they jettison
Uh
all of the other stuff that they were working on experiences are still around and they move to online experiences, but
No places, no trips, no um the We didn't talk about the company had started a movie studio uh at some point along the way there called Round Street Films. Uh they also they had a lot of stuff going on.
Yep. Uh all gone. The magazine I I don't hate on the magazine. The magazine makes sense to me. You're a travel company, like airlines have magazines. That makes sense to me. You're promoting travel. Um that's like aver that's marketing. So
The business goes to zero.
Basically less than zero.
But by Q three
Things do start to recover. Uh we've we've both traveled
This summer for long term stays.
pull together a great stat. Uh
even though I think there's been basically two eras of the pandemic for Airbnb. There's the initial era where everything froze up and they had to do this super onerous deal and but then there's the second one, which is as people as we knew more about
COVID 19 and understood the how it spreads and um, you know, it's it's through the air rather than on surfaces and all these things, people started making their own informed decisions around.
How can I live my life safely? And it turns out Airbnb was actually a great option to live your life safely, more so than hotels. Like I remember a moment where
Um, Airbnb's bookings were down something like fifty percent, but hotels were down ninety percent. And I don't I don't exactly remember which month this is, but I think that that narrative is definitely one that played out during during the pandemic. And for me personally, uh I have stayed in only one hotel since March.
It was the only option and it was in the middle of nowhere and so I sort of had to book the hotel, much to my chagrin, but I stayed in six Airbnbs.
And I think that that is illustrative of act two of the pandemic for this company. Totally. Same we're we're we've been less active than you since uh Jenny's more tied to San Francisco than uh uh than you guys. More of those came from a bike trip. Um to a different place every night.
But yeah, we've stayed in two Airbnbs and one hotel.
Uh
on the because we had to leave the Airb we had to check out of the Airbnb before we were ready to go home.
And the hotel was
Kind of a weird experience. Uh
And um, we're gonna be right now.
Yeah.
Yeah, it was uh
It was I mean, I feel for hotels these days.
Yeah. Um
So the business starts to recover.
So
We should say for all of twenty twenty so far, the first nine months of twenty twenty versus the first nine months of twenty nineteen.
Gross bookings are down thir cent.
In aggregate. Um
So the growth as makes sense'cause the pandemic uh growth has gone from slowing to to
Literally shrinking. But
Things are recovering.
In
August of this year, month over month,
August bookings were only down by fourteen percent.
versus the year before.
In September they were down seventeen percent versus twenty nineteen, but things are
Stabilizing. Right. It would s it would seem reasonable to think that they'll get to parity, you know, either before a good chunk of the population is vaccinated or shortly after. Or shortly after, yep. So so they basically effectively lost a year of of growth.
Yeah.
Except that they also shrunk.
Right. Well and I think that's the the question that we'll talk about in a second in
our analysis sections is
W what it w
What is gonna be the growth rate going forward? Like
post pandemic, post vaccines.
That I think is the key question for this company. So on November sixteenth,
twenty twenty.
Airbnb does file its S one uh in
Uh
Surprising move. They make good on their promise to go public in twenty twenty. Even though there's a pandemic, even though the business gross bookings are down thirty nine percent.
So unlike DoorDash yesterday, where uh what did we say that for the first nine months they're up three hundred percent, I think.
Close to it.
for the year Airbnb is is down in growth thirty nine percent.
Uh they filed their S one and then last night
On December ninth.
twenty twenty.
They priced the IPO at sixty eight.
Dollars a share.
end up raising three and a half billion dollars at a forty seven
Billion dollar market cap. So
Big man. Like th that makes uh that Silver Lake investment at at eighteen billion just what six, eight months ago look like a genius move.
Indeed. And so let's see. What did we say? We said they priced
At sixty eight dollars a share.
Okay, yeah, who finance pulled up here.
Is currently trading.
Oh I I see it in the acquired Slack. People are buzzing about it.
You want the live reaction.
Oh my God. Opens at one forty six a share at one fifty nine a share now.
Yeah.
Up.
I was expecting some kinda pop, but
So now they're valued at over a hundred billion dollars.
So
Yeah.
That would imply they're valued at over a hundred billion.
Wow.
This company's hovered at like
thirty ish billion for a while. Like they were constantly. And then the pandemic. I mean I'm thinking to myself when they drop this in November, like
This company really had to go out this year because otherwise why would you do this? Would you go into this market right now? Or I guess the the the market's doing fine, so the IPO window is open, but
with their numbers you would think like can't you wait until things stabilize. Well it's funny, like with DoorDash, you're like, Okay, yeah, it makes sense why they're going now. Like this is the biggest accelerant to the business in history.
Wow. Wow. Wow. Wow.
Okay, well we'll get into it, but that's and even with twenty nineteen growth rates. So okay, th I I put together some numbers to try and contextualize why David and I are talking about growth rates the way that we are.
So Uber was was who which I think is a reasonable comp'cause it's also a marketplace business. It was also at global scale. It had also been a long time, what, ten years um between founding and IPO and in twenty eighteen. It was growing at forty two percent when they IPO'd.
So that's probably you know, they're that's much faster than the twenty eight, twenty nine percent. I we wouldn't have called Uber's growth linear at that point. Lyft was feeling themselves, they were growing, you know, doubling year over year at a hundred percent of growth. That was coming out of delete Uber.
Yep, DoorDash obviously over two hundred percent. Uh Pinto Duo, who we covered to open this season at two hundred and forty six percent year over year, again, trying to tech different
Um in every way. Uh when you gaze over into Sass Land
The numbers are also looking pretty good. Slack was a which was a product led growth company primarily at that point, eighty one percent year over year, Square was fifty five percent, Shopify was actually more than doubling at a hundred and ten percent, uh the laggard of the bunch, uh, which ended up
not becoming a good stock was uh was Dropbox at thirty one percent, still a few percentage faster than Airbnb pre-pandemic. So, you know, th that's sort of contextualizing why we're not
Super excited about
Airbnb as a growth company at this point.
And what I'm looking at I don't have the numbers
Right.
at hand, but for Snowflake, which before this week had been
the darling IPO of twenty twenty, the the the new Zoom, they were growing at I I believe close to a two hundred percent uh growth rate at going public. So what is going on here? This company is shrinking. Yeah, this company was had slowed growth and is now shrinking. You know, I I think
An important thing to realize here, too, the thing that scares me the most is ninety one so again, it's it's a sword that cuts both ways. Ninety one percent
Of
The
Traffic
To Airbnb.
is direct. It's organic. It's it's stuff they're not paying for. Now they're loosely p paying in brand ads, et cetera. But again, that's the dream. That's what you want. But any time that they've tried to lean really heavily into performance marketing like DoorDash, they
And so what
I'm
a little bit scared of is like if they do want to turn on the growth engine and they do want to grow a lot faster than thirty percent year over year.
Are they gonna be able to do that?
with precision and profitability.
Like it's not. You have to imagine. It's not like they haven't been trying.

It's not like they don't know that their growth rate was slowing.
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All right, David. So uh
I want to so we we sort of talked about the growth.
Um, I do wanna round out history and facts here with a couple of
couple IPO nuggets. So the first is the cap table.
At IPO, uh the founders owned thirty one percent of the company, comparing that to the what is it?
thirteen, fourteen percent that founders of
of uh Door Dash owned.
Um very impressive.
Story uh dilution methodologies uh over the story of two different
Capital intensive. Uh two different degrees of capital intensity in your business. Yeah, great point.
Great point. So uh Brian Chesky owned eleven percent going into the IPO. Uh I I was all prepared to talk about how he is now has more than four billion dollars to his name. I think now this means he has ten plus billion dollars to his name uh on paper in uh Airbnb stock.
Joe and uh and Nate also both have uh ten percent.
I think they sold a hundred million collectively going into the IPO just to get a little bit of liquidity. I'm curious if there were other selling shareholders, uh or if uh
all of the investors held at the IPO and if um they'll all be subject to the same lock up. I don't do you know anything about the the lock up on this one, David? I don't know
I'm sure it's in the S one, but I assume it's kind of a standard standard six months.
So Sequoia, uh again, all my numbers here that I had prepared are just nonsensical now with this uh crazy crazy leap in uh in where the stock is trading.
Sequoia would have made
About five billion I think now they've made somewhere between eleven and twelve
Maybe th maybe closer to thirteen billion.
Um not bad for point one percent of your fund you put into a company.
That's crazy. And that I think total they put two hundred and sixty million into the company over eleven years.
So uh and I I assume that that has to be over multiple funds.
Yeah, yeah, yeah, for sure.
uh founders fund uh invested um across a couple of different funds and this information's from uh the information which we'll link to in our uh
in our that that's confusing to say that, but capital T, capital I, the information, and we'll link to that in the in our sources.
I think they came up
With about three billion dollars.
uh after investing about 150 million. So it's just like winners all around here. Y C owned two percent.
Um Greylock obviously one big and Drees and Horowitz invested sixty million
Um
So I think they probably have
mm three ish billion coming out of this. So lots of winners in the in the venture world. Um you also look around, you mentioned Keith Reboy, Kevin Hart, uh Jawad Kareem personally, you've got Ron Conway, DST, Jeremy Jeremy Stoppelman from Yelp was an investor, obviously Bezos personally.
Um, ended up investing. This is like an academy of words speech. You got Jared Leto, you got Ashen Kutcher, and then by proxy Demi Moore. Like lots and lots and lots of people are feeling very good today.
Wow.
Wow, wow, wow.
In addition, of course, to the thousands of employees.
Absolutely.
Wow.
Any other nuggets or should we move on to narratives?
Let's see.
One thing to know before they IPO'd is they had
two point seven billion of cash in the bank and then they had another one point eight billion in marketable securities. So
when they they were going to double that cash because they were gonna raise two point four, they ended up raising three point five, so they had now have a a sort of cash chest of seven ish billion dollars. So the company will continue to be able to weather storms for a while.
it looks like and I'm curious what they'll start sort of reinvesting in, um, now that they're through this period, and obviously have to show a really good quarter and next quarter after that in order to keep the investor excitement as high, uh
As high as where it is right now.
Well, I'm just so confused.
You would think that.
I'm just so confused. But uh maybe we should discuss the narrative. Oh great. Okay. Well
Should we discuss the bull narrative first? Yeah, let's do it. And so for folks who are new to the show, narratives are where we talk about what the sort of media was saying when they had a bull case and a bear case for the company uh coming in.
And
You know, the biggest for me the biggest bull case that I've heard
is that they have the most unique supply of anyone in the industry that they spent a decade creating. They have this brand moat. They have ninety one percent direct traffic.
that that is largely a result of the fact that they did build that unique supply in a unique way to build their brand.
So now it's just about harnessing all of these unfair advantages.
Like that that to me is the big story here of why
they're kind of in their own lane of competition and they're not really competing with the bookings of the world who all sort of are fighting for the existing hotel supply, although they're trying to bring on the um Airbnb type supply too. But that that's the
Biggest ball case.
I think maybe there are two other dimensions as well. I think that's probably the biggest piece. But um one being that uh
coronavirus and Covid has
perhaps permanently changed some behaviors just like
the the part of the b the door dash bowl case perhaps permanently change some more behaviors to be more favorable for Airbnb for travel, not just in this period, but
Going forward.
I think that might be a a small part of this.
And then I think the
Second piece is also we've talked a little bit about TAM along the way and
Yesterday with DoorDash, that was one of the big big question marks for DoorDash, I think, is like how big is the TAM? How many do they have to get into adjacencies, et cetera.
Um
You know, I think for
Airbnb, what has always been true here is that like there are no questions on TAM. Um the travel is is
Big and although it has taken a big hit.
This year it's gonna come back.
Yeah, they they they cite a three point four trillion dollar number.
on their TAM. And I think that the way they break that down is that one point eight trillion of it is short term stays.
And then only two hundred and ten billion of it is long term stays. So that the long term stay market, which is longer than twenty eight days stays, is actually smaller than the food delivery market.
Which I think is sort of an interesting thing.
um an interesting comp and tells why they're not
sprinting that aggressively toward long term stays, but rather
they believe there's a one point four trillion dollar opportunity for experiences, which explains why they're beating the experiences drum so hard. But let's just focus on that one point eight trillion dollar market of short term stays.
I think we can throw out the rest of it. Yeah.
Yeah. Yeah. A lot of room.
To run there.
So I think that's I think that's the book. I think if you believe all of those things.
And one more stat on like the you know, unique supply, great brand, direct traffic thing
Like
The comp there is
Expedia and Booking spend about eleven billion a year on Google ads, which I think make them
Google's top customers or top handful of customers.
And so the the classically the online travel agent market uh has been one
where it's really difficult to acquire a customer and then keep them.
rather than needing to go reacquire them every single time they travel. And so this that that's why this direct traffic thing is such a big deal. This ninety one percent direct traffic to Airbnb is such a big deal because
Other play have not been able to um acquire customer ones and keep them. And booking is trying. They're ramping down their Google spend in an effort to form a sort of multi transaction relationship with a customer, but Airbnb is really the one who's proven they can do that. So I think that's that
Contextualizes why people are so excited.
Yeah.
Totally. That is a
massive benefit to the company.
An opportunity. Those two companies pay Google almost as much as Google pays Apple for all the iPhone search traffic. That's another way to contextualize that eleven billion dollar.
Totally.
Okay, well I would say should we feed the bear case I don't know that there are any bears out there right now to uh to make a bear case. I don't I we should look at the short ratios and see. Yeah, and see. Um
Okay, so uh well, bare case
I I I think d to me the b the biggest piece of the bear case is what we spent the last
Part of history and facts.
Talking about which is like
Hey the the growth is slowing. Like everything
maybe true about the product and the unique supply
And whatnot, but like
If you wanna believe that you're gonna access a very, very large chunk of that one point eight billion dollar short term stays Tam, or one point eight trillion dollar short term stay TAM.
You need to still be running fast growing into that. Uh and what did they do last year, thirty eight billion dollars in gross bookings, I think.
Uh Airbnb did. That's like a lot of billions, but
But that's
Not a lot compared to one point eight trillion.
And for the growth to be slowing significantly.
Then you wonder how much of this TAM are you really gonna access. Right. So what does that mean? Does it mean that their TAM isn't actually the one point eight trillion for the short term stays and it's actually much smaller, like the addressable part of that?
Or is it that like somehow they're just failing to market to the vast majority of people who are, you know, living their life in this way and paying for things in this way?
Well, I think it's interesting. It's um
I think it's probably both, right? Like if you th at least think about
my use case and our if it sounds like yours is the same use case of with Airbnb.
over the last couple years.
When it was in the early days.
When it was just much cheaper than hotels.
It was almost all of my travel.
Like
But then the prices went up and equalized more, and
And then it really became a question of like, do I want an Airbnb or do I want a hotel?
And I certainly didn't want an Airbnb.
Or a hotel a hundred percent of the time.
It was a mix.
Right.
And I don't I don't I don't necessarily see any path where prices are gonna
go down again on Airbnb and you're gonna have that kinda dislocation in the market.
uh the arbitrage between Airbnbs versus hotels as a traveller.
So I think it it is gonna get
segment it out. Now maybe back to the barricades and back to the bull case, if you believe that post coronavirus just the preference for hotels.
is gonna go down a lot, then maybe this is gonna be a big accelerant to Airbnb.
Yeah.
I think that's the right way to think about it.
Yeah, I mean the bear cases kinda keep going for me. The
So there's this like potential market saturation thing.
And then and the slowing growth.
There's a
growing belief I think that
they will have recurring acquisition costs the same way that booking and expedia do because these
People are starting to multi home more than ever. Like VRBO is starting to see a lot of the formally only Airbnb listing show up there. Um, booking is trying like hell to be able to um have these sort of unique experiences, the the Airbnb type of listing in addition to hotels on that plot their platform. So everyone is skating toward
a more homogenous set of supply than has existed in the last ten years. And with that being the case
Will that brand affinity keep up or will people start comparing their options or in fact being willing to book an Airbnb like listing from booking?
Well, and this is um
This is maybe a good
Case to talk about our own experiences as hosts too.
'Cause I think probably a a yeah uh argument against that in a big lock in would be
As a host
If you say, you know, I'm not willing to do that.
I get more value being on Airbnb. I'm not
Willing to multi home.
That would provide some lock in.
But I I don't know how are how are how are we feeling at least as hosts.
Well I'll tell you, I mean I'm I'm someone that uh this year has
put my Airbnb also on VRBO.
Um
Huge.
pain to actually do that'cause VRBO's product is like
Imagine
taking Airbnb's product and then just like making it like thirty to fifty percent worse in every way. And that is the product experience of being a host on VR BO. But once you have it up, like it's up.
And um sure you have to figure out how you're gonna block nights on different calendars, but like I was never someone that multi home and I am now, and I know lots of other people who are the same way. It's you know, an opportunity to maximize um maximize revenue, minimize vacancy and
There are ways to manage it.
Yep. Well and you know, for me
We haven't multi-homed yet, but the only reason we haven't is that we haven't listed our house.
really at all except for like one week this year. Um, but if we were, uh, and we're traveling more
I think we absolutely would. And the biggest
reasons for me are
Well there's
What you said, but I think is it also just a price.
uh aspect that I do think the pricing algorithms on Airbnb
Our bias to
Fill rates versus maximizing rate. I was gonna save this for later in the show, but I there I've got a diatribe ready about like and I don't need to fully go on it, but the incentives are misaligned between Airbnb and their hosts for features like smart pricing. Like it's smart pricing for Airbnb.
Airbnb wants to maximize exactly what you're saying, nights booked and total revenue. But like I as a host
do not want to maximize total revenue at the exp like I wouldn't want to take a thirty dollar booking one night, but Airbnb would be like, great, you know, this is like there's higher liquidity, there's more supply on the platform with more nights available. We got some revenue out of that transaction, but if you basically factored into a labor cost, there's a price at which the
people aren't willing the hosts aren't willing to take on the sort of cost and risk associated with that. And Airbnb's
Uh smart pricing.
Couldn't care less.
Exactly. Well, and so this the point I was gonna make is that like
Uh, you know, I care about price. I want to maximize my revenue.
uh as a host. Um there are these other viable platforms out there. Now they're not as nice to use as Airbnb, VRBO, Homeway, and and Booking.com. On the other hand, they do have
Traffic. They do have a
I mostly trust them, but
Yeah, I have no reason not to trust them. I think they're viable. They're not some flyby night competitor that's gonna send like crappy guests my way.
Any time.
Uh that you're you know, all markets are supply and demand. So if you want to maximize your price in anything, whether you're raising around as a company or you're a host uh you know of a of a apartment uh listing,
Then you want to maximize the amount of demand for your listing. So why it would be dumb not to be on multiple platforms. Yeah. And especially as Airbnb tries to be more scalable.
And more capital efficient.
It's not as enjoyable to be a host on the platform as it once was, and it carries risk to only single list. Like if Airbnb decides, hey, something fell under this policy, oh sorry, you can't actually talk to anyone because we're trying to limit the number of people you can interact with. Um but
you know, unfortunately because we perceive you violated this policy, uh y your listing is banned.
Or like you we're blocking a week. Or like, you know, for for
people who are using this as their livelihood like
It's
You know, it's uh imagine if you only list it on the app store and you didn't all this on Google Play and then Apple found something they didn't like about your app and then you're up a creek. You know, I think
Now that this market is maturing, we're gonna see more and more people not willing to take the sort of single provider risk.
And um
One thing that I think has
Changed.
over the past couple years
Is there now are viable, good third party software tools to do this? Whether it's Beyond or Guestly.
Um
You can pretty frictionless.
Lee as a host.
have your property listed across all these platforms.
And not worry about keeping it in sync and having
uh costs associated with that.
Yeah. I do think like one credit we should give to Airbnb and like
We we need to caveat every time we're negative with like
I'm negative on this being currently valued at a hundred billion dollars. And and
There's other reasons to there's other things I'm negative about, but like the sum total of innovation they've created is unfreaking believable. And they're one of the few companies that actually did create an ecosystem around them. There's like obviously the ecosystem that has yet to be proven with the sort of like uh professionally managed
um Airbnb or the people that own big blocks of Airbnbs. Yeah, that that sort of thing. Um
But
the something that's totally been proven as sort of a successful smaller business is all these different software plays um that that can help you be a more effective host. Now, is it a little silly that Airbnb hasn't done any of that themselves and relies on you to go find it on your own? Yeah, massively dropping the ball. Um, but it you gotta credit them for
in an enabling an innovation ecosystem.
Yeah.
Okay.
One one more bear case. Um I had one too. I don't know if it's gonna be the same.
Right.
So yesterday on the DoorDash episode, we mentioned that, you know, with their stock pop, they're seriously butting up against the edges of the the total addressable market for takeout in the United States. In order to value them the way the market is currently valuing them, you have to believe they can expand into adjacencies and be the local real time FedEx.
for Airbnb, they have demonstrated a pattern of trying this many times over the years and failing. So you have to
sort of value this company based on the market they're actually in, not what they possibly could succeed at in the future.
And I think like
as I think through this, uh I was trying to come up with one example where they've done something outside of their bread and butter, the thing they stumbled onto in the, you know, first real year of the company.
that they've done well. And and I d I just don't
I don't think the company
is a master executor.
outside initial opportunity.
Like it's it's almost like the anti Amazon, who's really effective at testing new adjacencies to expand into and killing the ones that don't, and then leaning hard into the ones that do. Like they tried luxury, they tried building a hotel, they tried experiences, they've tried dining, they tried booking air travel, they tried
Custom design tiny home um like even plus. I don't know, were you were you on plus for you um plus Airbnb plus being totally realistic? But it became meaningful. It's a bad experience and it got totally diluted, much like superhost. Like what does that even mean anymore? Nothing. So I I
It just feels to me like the personality the company
is one where they're really proud of their ideas and they wanna like
make something their way.
And their first idea worked really, really, really, really well.
And I don't think any of these other ideas
are sort of being
Tested with rigor.
I I was thinking about what you said. The only thing I can
think of that was a
non original idea, although it was also pretty early in the company's life that I think they executed on incredibly well was Instant Book. I think that was
I think that was over a year into the company that they
Uh innovated on Instant Book? Uh a hundred percent. And they deserve all the credit for that. I mean I think the innovations of instant book, payment through the platform, messaging through the platform,
And their review system.
is like that is
Together they create the symphony that enable this product to to provide
Tons of value on both sides of the But it's all but really instant book that that's part of the initial product. Like that's not
That's not a subsequent thing. So agree. I I think the other I debated whether to talk about this in power, but I I think I think makes more sense in narrative maybe leading into power.
for a bear case on the company is uh
We talked about the bull case, you gotta believe that they're gonna keep
penetrating a huge part of this huge dam.
And you probably also have to believe at these prices that coronavirus has shifted the winds in Airbnb's favor.
Yeah.
And to a certain extent I think it probably has.
But I think it's also exposed.
a structural weakness for the company, which is
If you think about like zooming out, you mentioned Amazon like an analogy here.
Air B is not Amazon. Um they
Are much, much, much more like eBay.
Uh and eBay has been on a similar path, enormous TAM.
global network effect.
torrid growth for many years, but then has slowed and has
Um
You know, now it's
I don't know what their growth is, but like it's fine. They're still like a decent sized company and whatnot. But we don't talk about'em as part of the fang. We don't talk about him as part of the Amazon.
But what has happened? It's not like e commerce and it's not like peer to peer e commerce has gone away.
And in fact it's continued to grow, but eBay's not captured that. What's happened is
You've had specialized vertical
verticalized marketplaces that have come in and taken away what eBay was doing and then grown those individual verticals. So I'm thinking about companies like Goat, I'm thinking about companies like Reverb and Music. Um, there are a bunch of them out there. Like you name a a niche
interest of buying and selling something.
There is a verticalized marketplace out there that is
either either has or is in the process of offloading that market from eBay.
Now.
With Airbnb.
you're actually starting to see the same thing happen. Uh now how much this'll happen and how
deep Airbnb's moes and how big their their core market
Is I think it's still a question, but
Hip camp is out there.
Hip camp is is in the process of offloading camping type experiences from Airbnb.
Um not hard to get to like the tiny green homes or d detached ADUs or anything from there. You can see how they start
outdoorsy out there is doing the same thing for R Vs. You know, you could book an R V on Airbnb.
Or you can book an RV on Outdoorsy and with dedicated, you know, feature specific stuff that people care about in a niche community. And so I think this is the big question, right? Like, okay, coronavirus has changed. Let's assume it has changed people's travel preferences.
how much of that is gonna stay on Airbnb versus how much of that is gonna go to some of these other new platforms or even new ones that have are in their infancy or yet to be built yet. That's a great point.
And you think about like what did Amazon do to create
like so much lock in there. They built all the services around purely selling your goods. So of course they brought you the traffic, but then they also did fulfillment by Amazon. They also did
You know, the all the other third party seller tools uh that m
make it way, way, way harder to do that yourself.
And they were able to aggregate so much consumer attention that way that
anybody who only had a subset of that because they were doing some niche thing they were gonna carve off. It was just never interesting enough as a seller because they couldn't get to the scale. And you think about all these things that Airbnb could do
to make it a no brainer to work exclusively with them. I mean like
Uh, cleaning's a big one. Th there's this thing that everybody has to go fend for themselves and figure out their own cleaner. Check in, that's a great one. It's these things that people rate you on that
you know, Airbnb thirteen years in hasn't built
host services for
you can imagine those things being game changing for their lock and and for for uh guest satisfaction. Like once you know that something is done the Airbnb way, in the same way that like, oh this thing isn't sold by Amazon but it's on Prime.
Yeah, same thing. I trust it. It's got the R B and B the the Amazon stamp of approval on it.
Yeah.
Alright, so we move into power.
Yeah, let's do it.
Um
The way that for folks who are new to the show, the way that power works is it's a Hamilton Helmer framework and uh he's the author of Seven Powers in Friend of the Show, and it is the technically defined as the way to achieve persistent differential returns, or put another way to become more profitable than their closest competitor and do that on a sustainable basis.
And I actually think
Before we sort of classify what types of power does Airbnb have here.
It's actually
very interesting to think about this relative to the stock price because uh one thing that after reading Seven Powers always stuck with me was Hamilton makes the point that look the the markets are not short term focused. Everybody who's accusing
Wall Street of
you know, valuing a company based on last quarter's results results, that's not at all what they're doing. They're using that as a bellwether for the next thirty years of results. And sure, they they may swing too far in one direction, but really the way that, you know, a market cap works is of course it's an
extrinsically defined market for the equity in the company, but intrinsically what it is is it's a representation of what people believe the sum of all future positive cash flows in the businesses will be relative uh uh discounted to today. And so, you know
as you think about the power and market cap are intrinsically
Linked because
Whatever you believe
the power that allows them to generate
persistent profit margins over all those future years are the way that you would calculate the market cap. So if you're someone who's excited about Airbnb as a hundred billion dollar market cap company today,
What to what power
Do you attribute?
That.
Like why do you believe that they're able to do that? And so David, I'm uh with that preamble aside, I'm curious, what what types of power do you think show up in Airbnb? Yeah, I think it's well, okay, the the
Totally obvious one, just like scale economies were the totally obvious one for DoorDash.
Uh the totally obvious one for Airbnb is network economies. Yep. This is a two-sided network effect. It is global in nature.
It is as powerful as I have ever seen.
uh in a business.
Rivaling you know, I think generally
If you think about network effects like network single sided network or single node network effects like a social network, like an Instagram or a Facebook, those tend to be the most powerful.
Dual sided network effects where you've got one class and another class, buyers and sellers, hosts and guests.
You don't like you would have an eBay or or Amazon or or here and
in Airbnb uh tend to just generally be a little weaker because you've got, you know, you're bifurcating the types of participants in the platform. This is like amongst the most powerful of the by of the dual sided network effects I've ever seen. Because it's it's global, it's not local, uh, and you really care. The way you measure network effects is you
You asked.
For
each participant in the system, how much do I actually care about the other nodes in the system being there? So like for Facebook, it's like or or Instagram. It's like no no I really care that my friends are there. Like having more people on there, I I actually really care about that. That's the whole point. Yeah.
For
eBay, you're like, do I really care about the sixteen
thousandth seller of the latest iPhone. Yeah, I mean maybe he drives the price down a little bit. I don't care that much.
For Airbnb I care quite a bit because I really like having a variety of listings.
Yeah.
way to frame that is
For things like
I message.
where I really only iMessage with like ten or fifteen people.
As long as the ten or fifteen of us are on the same thing, it's okay. So it's like a reasonably it's not that strong of a network effect because you don't need to interface with lots and lots of nodes in the system. Whereas with Airbnb
I don't care who owns the place that I'm staying at. I just want the most choice with the most interesting options such that there is sufficient density where I want to go in the sort of like
price tier w that I want when I get there. And that
is like a truly amazing network effect where it exactly to your point, every node that's added to the system
Has
meaningful additional value.
Rather than this concentration where my friends around me provide value, but everyone else that's on the network provides me none.
That's actually a really good point. I I hadn't thought about this, but this is probably why Instagram is
Long run. Even now.
Bigger and more valuable than Facebook.
because on Facebook, you know, I care about you know my friends, my loose circles, maybe maybe there are a thousand people on Facebook I care about. Uh
On Instagram though, there's brands and there's influencers. So like I I actually you know, I don't care about the randos on there, but I do care about the millions of
People making interesting content. Yep.
Yeah.
Okay, so I think that's a big one. I I do think there's another one though.
Uh that is
Becoming
their this power is weakening for Airbnb over time. But in the beginning was big.
Counter positioning? Yes. Yeah, that's exactly what I had too. I was like, Is counter positioning one? Well, less than it used to be.
Yeah, I think the the the But in the early days totally the the cost structure.
for Airbnb to bring on supply
was so much lower than it was for a Marriott to go and be the
Uh, I don't totally know how it works, but I know they don't own the real estate. So basically the operator of a hotel
Um and brand at Marriott and take on the Landscape. Yeah.
Uh, I guess they don't take on the lease. They sign a contract to be the management company with the
owner of that building. Um somebody's you know, that economic cost is in the system. Somebody's paying the cost of the lease.
And Airbnb doesn't need to pay a dollar to bring that new house of supply onto their system. I mean there's there's marketing expenses to bring that person onto the platform, but like
It's so much lower. So they were wildly counter positioned against the hotel chains because
Airbnb could be way cheaper than them and their cost structure just allowed them to without being in the red.
And I think this was well, A it was just market dislocation, but um
Well in the early days when Airbnbs were so much cheaper than hotels, part of it was market dislocation, but I think part of it was this too. Like, Oh yeah, I could put a I could put a you know a house in San Francisco on the platform. Like
I'll make incremental money, my car s costs aren't that big. Cool. I'll list it for three hundred bucks a night. Whereas a hotel, you're like, Well I gotta you know I gotta run this hotel. Like
Yeah.
And I think the ones that they notably don't have are cornered resource or switching costs. Like for consumers it's very easy to ha to to switch as long as there's another economy and this is related to cornered resource. You would think their hosts would be the cornered resource, but for a host it's actually very easy to
um become uncornered and go list on multiple of these systems. And I think that's gonna be a thing that we see increase more and more over time.
I think to some extent the
Rating and review history is some lock in there, but
less not that much and less than it used to be. Like in the early days when this was a new concept and people are like
I really need a lot of trust here to make this work. I think it was more powerful. But now, like yeah, I don't know.
List on Homeway, it's fine.
Yep. Well one thing that I want to do here, and it's not exactly power, but it's sort of like a business model feature that I want to talk about is the different types of marketplaces, like and and what c take rates you can command with each one.
And uh I've heard it described where uh something like Uber is Marketplace Assign versus something like Airbnb is marketplace assist. Where in marketplace assignment
Because all of the supply is completely homogenous, it's a effectively the same experience, you don't care as the demand.
which one gets assigned to you. So you just want it to be close and as long as it meets that criteria, great. And
when that is the case the
uh business can command a higher take rate. They g they get to control more of the economics.
For something like Airbnb
I brows and I
You know, they assist me to browse but I pick the specific
house and you know, boom, I've booked it. And in the mind of the consumer
the real merchant when I'm getting an Uber feels like it's Uber, but the merchant when you're on Airbnb feels like it's the host. And then Airbnb is just helping me with that transaction. And they they kind of
You know, they obviously have fees on both sides, they charge the
Yes, more than the host. Um, but you know, they have fees on both sides. They're they're trying desperately to get more and more of the the take rate, but ultimately they're never gonna get to that thirty plus percent um that you see in like ride sharing where there's you know people feel like they're buying from the company.
when really they're just facilitating you to buy from the provider.
Yeah.
Agree.
So I don't have an opinion on whether that's good or bad or anything, but I just think it's interesting to as we do more and more of these marketplaces to sort of understand why they can each command different take rates.
Yeah.
All right, well let's move on to what would have happened otherwise and uh
Because I don't think it's that interesting to guess what would have happened otherwise if Airbnb didn't IPO, um, I think we should run a counterfactual that compares Airbnb to booking, which is a very different business. Um, you know, booking doesn't have this sort of
What do we say our number five acquisition of all time? Yeah. I mean, my gosh, uh Pri I forgot they were called Priceline at one point. Priceline buying booking was
Just
an unbelievable acquisition.
And uh yeah, if if you're curious on the
We've did a whole episode.
It was booking in Amsterdam and what was the London company? Uh
Shoot, they book they bought two companies.
Took the booking name, but the other one was in London.
I can't recall anyway. Yeah.
But uh while these are two very different businesses, one
Uh to oversimplify booking helps you.
Find a hotel or flights and Airbnb helps you find
an Airbnb, which I think even in the nomenclature there, you can kind of see the difference where booking doesn't really they didn't invent their supply. They didn't sort of cultivate that supply. They they went and forged the right types of deals in order to get them to list on their platform. But it's actually very interesting, I think, just to look at a simplified uh income statement of both companies. So
Let's look at twenty nineteen before the effect of the pandemic. We've talked about Airbnb had thirty eight billion dollars flow through their system from people staying in Airbnbs to hosts uh and to Airbnb and to taxes. Um
over the course of the year.
Of that they took five point three
billions of that in revenue. So like
For all any of the
Knox that we've had on Airbnb so far. Like this is a billion uh this is a five billion dollar a year revenue company pre-pandemic. Like it's a big freaking company.
So the effective take rate on that is is thirteen point nine percent. There's
ways in which you should believe it's higher, there's ways in which you should believe it's lower, but it's always interesting to me just to look at an annual income statement and and take the gross divided by the or the revenue divided by the gross to come up with an effective take rate. Their net income
when you go all the way to the bottom line is that they lost seven hundred million dollars.
So all that that five point three.

They couldn't
they couldn't generate any profit at the end of the day from that because they had to pay so much to headcount, sales and marketing, leases, ever you know, everything that goes into running the fixed cost of a business.
Now they were cash flow positive in large part because of the cash flow dynamic we talked about earlier, where they're getting the cash up front and then paying it out later.
Yep.
Yep. And I think it's something like the average person books like thirty six days or something like that out ahead of time. I think it's shorter now in Covid. It's something like twenty four days, but but
Yeah.
uh of free cash flow there. Or you could think of it as like net thirty effectively on the the payment.
Okay, so booking. Um about two and a half times bigger, ninety six billion dollars in uh
in gross travel bookings, fifteen billion dollars in total revenue, so about three times bigger in in revenue. Um that's a effective take rate of fifteen point seven percent. So they get to actually own a little bit more of that transaction than uh than Airbnb does.
This is where they're very different. Booking turned that into five billion dollars of pure raw net income.
profit that's owned by the business and its shareholders. And uh
you know, but short booking. Also having to spend a lot more performance marketing than Airbnb. Totally, right? Like they're they're they're cutting uh
you know, six seven, eight billion dollar check to Google every year, and they're still able to generate five billion dollars in net income.
Uh very different businesses. I think actually
I don't know for sure that this booking number factors out flights. It may include
Um
It may include flights in there. But
Yeah, the the the the point to make here is like
Oh, and and flights are kind of a silly thing to include in in because they don't really generate any real revenue um on those. All the all the revenues made on
Um or all the commissions are made on hotels. Anyway, two very different businesses. One that that lost the better part of a billion and one that made five billion, and the one that made five billion, you know, took
two and a half X the scale to do that. And so it'll be very interesting to see with Airbnb as they get to a bookings type scale, are they also able to generate the sort of profit that booking does.
Well, I think that's what's so alarming about the past few years of financials for Airbnb is like
They're increasing their scale.
Even though that growth rate is slowing.
But they're not getting more, you know, they're they're increasing their expenses faster than they're increasing their gross profit scale.
Yeah.
Yep.
Alright, playbook?
Playback.
All right, so playbook is if you wanted to start Airbnb, what playbook would you run to do it? And of course, uh no one can do that because no one can teleport to two thousand eight and have a unique and original idea. But if you want to draw parallels uh and and and apply them in your business, what would the playbook be? My very first one is
the unbelievable, never skip over this fact that they have created an incredible amount of value for hosts and for guests over the years. Like create
no brainer value for everyone in the ecosystem and really good things are gonna happen to you.
I I think the some people can only go on vacations um that they otherwise couldn't afford, uh as a host. Uh some people can make their rent or mortgage that they couldn't afford. These are like big
meaningful, life changing things that this company's existence uh enabled
millions and millions of people to do around the world. I mean there's people that can weather job losses, negative life events.
I I I can't say enough about
how much value they created and how much that makes people want to root for your company and and put up with a lot over the years. And obviously it comes with a lot of responsibility as people become dependent on on you, but also to hold on that for now and and just leave it at like
create value for people and amazing things happen.
A hundred percent. The way I like to think about this, I think this is kind of the same idea, is like
Can you expand the efficient frontier of a market? And the the efficient frontier is like price and quality. So like if you think of a
You know, a little uh
whole little graph of like uh price and quality. So like as price goes up on the y axis, quality goes up on the x axis. And in any given market, there's, you know, an efficient frontier along that of like
that of a curve, like as I pay more money, I get
More quality and there's some curve to that.
And so if you can do something
That
expands out that curve so that like for I get more quality for less money. Right. For any given price I get more more quality all the way across the spectrum. Exactly. Or even maybe it's only for a cig a a s a portion of that uh curve. But like
For some area of the graph.
You have you have exceeded the current market. If you can do that in any market.
you will be successful. And and Airbnb did this
Incredibly well across pretty much the whole graph.
Oh, it's like the economist view of why is this company valuable.
Yeah, exactly.
The next big one I had was around create unique supply, but I think we've we've talked sufficiently about that one. One we haven't talked about is addressing Europe.
Forty three percent of nights are are booked in Europe on Airbnb. This is not a US century. Paris is the biggest city.
At least historically it always was. Yeah, I only twenty nine percent of bookings are are in North America. Interestingly, revenue's about even between the two, which means people are spending more money to stay in North American Airbnbs than European ones, but
Until diving to this research, I don't think I would have guessed that forty three percent of of its business is done, uh or of bookings are done in Europe.
Like that that isn't I don't think there's a single other US based
company that we've covered on this show that you could say that about?
Yeah, I mean but they're not US based. Yeah, well book but they're not US I mean, they're technically US based, but yeah. Um
Uber's large in Europe, but I think probably larger in
U S
Yeah.
Do you have more? All right. I do, yeah. Uh free cash flow is one that I think uh I don't think I have anything new to say. Um
Here, I think uh
That's my last sort of like positive playbook one. I do have some more this is kind of our bear and ball thing, but like I do have some playbook items that are the playbook that they ran that don't necessarily have positive outcomes, but uh I'll turn it over to you first in case you other Well then I'd actually maybe expand a little bit on what I was gonna say on on um
Dear if we cash low point, which is I think part of the reason that
Airbnb had such a
has such amazing free cash flow dynamics is
Whether intentional or not, they started this new market, new idea.
When you do that, you have an opportunity to set the terms of how
uh the market operates and they set the terms that you pay us up front.
And then we pay out the hosts when you book.
Now that's different from hotels like on Booking.com and others usually like
You make the booking.
On booking dot com, but you don't pay until you check in at the front desk.
And
Airbnb just by by virtue of being something new, they could set different terms. And they did, and nobody then questioned it. And so I think it's worth it's interesting to note. Like whenever you're doing something like this,
Think through like, okay, I have the opportunity right now to set the terms. Right.
Yeah, as long as I don't tell people I'm like an OTA, then they won't make me price like an OTA. Yep.
So
David, I'm I'm raising a round. It's not a seed round. It's a new form of investment.
Amazing. Well like on our L P show, you know, Rob will talk about uh
His fundraising philosophy and all the like kinda he did that in a lot of ways with with the interstitial rounds and like some innovations.
You know, he's positioning the rounds that he's raising relative to the next rounds.
Yeah.
I have one, it's a mix of two here. So it's a little bit of like a playbook that's been run that I think will ultimately have pretty negative outcomes for the company. That all that direct traffic that they've b been able to harness is a gift and a curse. And we talked a lot about the guest the gift
The curse is that they don't develop the performance marketing muscle.
And when you have
always sort of experimented and had questionable return on direct marketing spend uh compared to your competitors who are, you know, laser focused on it.
I I get worried.
uh especially when you combine that with the fact that their guest cohort retention drops like a rock after the first year and and never really comes back
anywhere close to the first year of spend. It's a very leaky bucket funnel. And uh there's very reasonable rationale for this where
you know, most people go on one vacation a year, so unless Airbnb is getting a hundred percent of your spend, you're not gonna be able to do that. But you know, you look at DoorDash, which we covered yesterday, where every cohort spends fifty percent more than the year before as time goes on, net of churn. Like the revenue of that cohort goes up fifty percent. You know, Airbnb's
in year two drops to thirty something percent and then
You know, hopefully they are able to get back up to fifty percent, but they
at least so far from the what the data we've seen, um, it's their cohorts do not get more valuable over time.
So
It makes it so that you have a lot less of a cushion when you decide to deploy performance marketing dollars to um to grow when that's the case.
My last one of I don't know if it's the last one, my next one is about reviews. So th they've gotten very far like we've
we've extolled the system over and over again to build this sort of trust based network. Um, but they still have a crazy amount of host consistency and quality issues. Like the I think it's a thing that's holding the marketplace back is that you have to hunt through a listing like crazy
to to you know through several listings to find somewhere
Decent.
Um and you have to scroll pretty deep into each listing to do it. Like I don't actually look forward to browsing Airbnb to find somewhere to stay because it it's becoming sort of more and more of a chore. And they've tried it with plus, but plus ended up being pretty meaningless, just like Superhost.
um which I think is kind of like the Airbnb equivalent of winning the participation award. Like, Yay, you're a super host. You book you held, you know, two people that didn't give you terrible reviews. Congratulations. So I I just think that the company
relied heavily on like reviews will save us for everything, but it hasn't been a silver bullet in making
Yeah.
easy and enjoyable. Most reviews are meaningless.
Yeah.
There are some that are helpful.
solved every nail of um
m giving you confidence when you're looking for a place to book to book it.
One thing that I wanted to call out that wasn't in the S one that I think is
Could be pretty damning and I really
would like to know the numbers is host churn.
Like they don't re they talk about revenue uh
For for hosts, but
I really do think it's getting worse and worse to become a host over time, um, as the company does uh
is subsidizing less and less things with um investment dollars, is uh thinking less and less like a startup is trying to be more profitable. Um and I think that that's gonna
Um that's gonna be an issue for them long term too.
Yeah, I'd be curious on that too.
So
That's it for my playbook.
Great. Thank you, Covered.
All my alling there too.
Alright, value creation and value capture. So uh this section has two components. The first is literally the name of the the section. Are they
Craigslist at create at capturing the value they create in the world, or are they Google, who does a very good job of creating the value, uh or capturing the value they create. Um and then lastly, you know, how do you compare the value they created for the world um
to any value destruction that they've had.
And I don't think the Airbnb's that interesting to discuss, like do they effectively capture the value they create? I think so. I think the more interesting one to focus on here is
negatives for the world versus positives for the world. And we spend a lot of time on the positives for the world.
The thing that I think goes a little bit less discussed about Airbnb, and it comes in waves, sometimes it's a hot topic, sometimes it's not, and this dovetails into the regulatory issue is the impact on housing supply and housing prices, because housing prices, especially at the low end of the curve, are extremely sensitive to small changes in supply.
And so I was digging into this, um, there's a good Harvard Business Review article that basically says, I think this is a quote, this means that in aggregate, the growth uh in home sharing through Airbnb contributes to about one fifth of the average annual increase in US rents. And they actually found this to be a causal relationship.
And they say that because of Airbnb, absentee landlords are moving their properties out of the long term rental and for sale markets and into into the short term rental market. And
Airbnb has this
I have no ability to sort of rule on this. It's not I'm not here to arbit whether this is, you know, more value destructive than it is creative. I think there's lots of think tanks doing lots of work on that.
But I will say
This is a company whose brand potentially may have meaningfully outrun its net global impact in terms of sort of like netting the negative impacts the positive impacts.
Nobel Peace Prize happening anytime soon.
I don't know how that's decided, so I should have bet on it, but uh
Yeah, I I think it's worth making the point that like Uber is condemned as this massively evil company and yet created a way for millions of people to earn a living.
Airbnb is extalled as this sort of like wonderful brand that
had all of its hosts around the or many hosts around the world ring a bell and create a nice video, uh uh that to open the IPO this morning.
Um and that's largely consistent with their brand and yet
Well really what this comes down to
And I don't.
I don't know the data. I've seen various parts of it, but it it really comes down to like what
Who's the supply on the platform? Like I think for people that own their homes, that live in the homes, that are renting them out either are they renting out rooms while they live there to help with income or renting them out while they're on vacation.
It's hard to see much value destruction from that. It's like, hey, they're living there. They would live there anyway. This is like pure like helping them make money.
Where this gets really
different and gray is property managers and people taking housing stock off the platform purely to become
Hotels, essentially.
Yep, well put.
And and the question is like what is the percentage of each of those use cases on of supply on the platform?
I don't know. I've seen estimates as high as over fifty percent is more the
hotel use case removing housing stock.
Mm. But this is one where like everybody who's got a
Everybody who's waving a uh a data sheet has an opinion here and has a horse in the race. So like

Other than the Harvard Business Review article I found the two one was a uh there there's two sources that have very detailed reports on this. One is Airbnb, and the other is a extremely liberal, sort of like labor focused funded think take.
And you're like okay, well
Yeah.
Like well in you know New York City.
uh has fought on this for a long time against Airbnb. And so like the New York City has lots of the Housing Commission has lots of data on this. It's like
I don't know that just that either. Like you know, so anyway, point is there's
It is very much.
There's no doubt that a large portion of the supply on the platform
He is property managers.
And
How much that is, I don't know.
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David Grading.
Who greeting. All right, so what do we how do we decide we want to grade this fund? Do we want to do the same as DoorDash yesterday of use of capital.
There's nothing to say here.
This is like the greatest use of capital of all time. It's a hundred percent A plus. Like how could you not say that investing five hundred and eighty-five thousand dollars in the seed

this company build this
Product and thing.
Uh with such amazing cash flow and business dynamics.
that then they're like generating cash.
And
Have that be worth, you know, whatever Sequoia's gonna make today. And then all the other capital that went in along the way too. Yeah, what did they receive before the Silver Lake round? Let's see, before the Silver Lake round, I believe it was around
Three billion dollars, two and a half to three billion dollars that they had raised. Comparable to sort of DoorDash, um, but you know, only a third of what Uber had raised.
Yep. Exactly. Uh yeah, no, this is like
The capitalism dream here.
Yeah, I mean
The question that I sort of have similar to my DoorDash one yesterday is
Let's ignore current
valuations and current share prices uh and just think about that total three billion ish that's gone in
Let's play it out long term.
Does the business at some point.
generate, you know, have enough power that it generates persistent differential returns. And is this business a cash generating machine that in the long term will return lots of cash to the business and its shareholders?
And
I think so. Like I have reasonable confidence that
Despite
a lot of my reservations around grow uh around slowing growth, around increasing competition, certainly around valuing this company at a hundred billion dollars right now.
Unlike
DoorDash who's flying so close to the radar, I don't feel like the end state is sort of a boom or bust. I feel like there it there exists an end state where it that is they can be
A prof a very profitable business.
even with a reasonable amount of competition in the market.
Like I I I think there exists a steady state for this business where they don't need to spend as much on R and D, they don't need to spend as much on sales and marketing, um, and they're able to
spit off cash for years and years and years. And so I'm not in a plus territory, but I am certainly in a territory when you think about it through that lens.
I I like that a lot. Yeah, I mean I think to to me
doing the research and thinking about this and talking to people. It's just so clear. Th this is eBay here. Same type of network effect, same dynamics, same cash flow dynamic like this is eBay. Capital late business business.
So yes, agree. And but I think yeah, that's a good point to be an A, not an A plus an A plus would be
Yes, and they're already'cause like, let's be honest, there's no excuse that this company hasn't already been printing, generating tons of cash. Like there's just like this company does not have the right size cost structure right now, like doing things like, you know, the film studio and places and experiences and
The airline of like, you know, building
units in people's backyard. Like it's just it's nuts. Like you strip out all that cost and
This
Company.
at an efficient operations would already have been generating hundreds and hundreds of millions of free cash flow. I will be very, very interested to see how that evolves with the changes that they've made to bring in more heavy hitters to their management team.
with a you know a CFO now there for almost a couple of years who's had great I think CFO was the CFO of Amazon's consumer worldwide consumer retail. Like um they they've really buffed up the management team with
You know.
capital allocators and and
depending on how they all sort of work together, um I I think there's real potential here to sort of
lean out the business uh while still growing and and realize the
Yeah.
Great.
you know, profitable dynamics it can have.
Yeah.
Ooh.
Man.
What a season. All right. Should we do a season. Should we do some lightweight carve outs here on the way out the door? Yeah, let's do it.
It's been a great season, by the way. Dude, it has.
Pindowo and um Game Virgin Galactic in there. Uh SpaceX, was that in this one? No, that was last season.
Um, epic though. Our epic episode was
What's
Epic is it. Uh the MBA. MBA was so much fun.
Yeah.
I like it.
That was fun too.
My I unlike Door Dashes, I will only have one carve out this time.
Um and it's it's much lighter weight. So uh it's a Spotify playlist that I d actually have no idea who made it. Um
But it's uh Star Wars Lo Fi Hip Hop.
And it's covers of nice uh all Star Wars music in a lo fi hip hop style. And like I it is just phenomenal work work and research music. So um that's awesome. We'll we'll put that in the show notes and anybody who wants to
To chill and jam, Ken.
I can't wait for you to send me your uh
Links for Carvats and Sources so I can start listening to that one.
You gotta
My car value, uh let's see, I mentioned earlier that we've been more tied to San Francisco because of Jenny's job. People may know I think I've said on the show, my wife Jenny works for San Francisco Ballet.
uh here in San Francisco, which is
Wor one of the premier world class best
ballet companies in the whole world.
And
It has been a very interesting year for the live performing arts when
Your business is uh you know consists of
packing auditoriums full of, you know, three to four thousand people and having uh
uh having world class artists perform in front of them while, you know, like touching each other, uh as part of the art form. Uh so that's been that's been uh a a roller coaster and SFP is doing great
Thankfully of wonderful donors, wonderful audience.
But what they did, you know, the Nutcracker is like the big part of the ballet season every year and it's the holidays and Christmas. And so what they've did is they've created a digital nutcracker experience. It was actually written up in the New York Times. It's really cool. Uh it's a so it's a it's a recording of the Nutcracker, but it's it's like I mean, I've seen SFP's Nutcracker.
Dozens of times probably at this point.
But it's it's it's a different experience to watch it online because you you know
The camera zooms in and like it's
It's a different experience and they have a cool digital like a virtual opera house tour and experience around it. So um we'll link to it in the show notes. Recommend if you need some holiday that's awesome virtual holiday cheer, check it out.
It's very cool.
Well, um, for folks who don't know, as we start to wind down here, uh, we have been codifying the playbook section from each episode in some written bullet points. And uh we we email those out now after posting each episode. So if this is something you want, you can sign up to receive those playbooks uh at acquire.fm and if you join the acquired
community Slack at acquire.fm slash slack, you'll also automatically be
signed up for those. It's a great way to um kind of have something a little bit more uh more shareable and tangible and referenceable uh if you're thinking about applying any of those playbook themes. As always, if you love acquired and you want to hone your craft of company building.
you should join the community of LPs. You'll get the LP show where we dive deeper into the fundamentals of company building and investing, in addition to our monthly LP calls, where we talk with so many of you directly, including Book Club.
uh which actually the last three we've talked to the author uh for for each one and hopefully um it'll have a fun one to announce uh early in the new year as our next one. So uh you can become an L P seven days for free trial. Um you can
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Lastly, if you aren't subscribed and you like what you hear.
You should.

uh and you have a friend that you want to send it to, perhaps an Airbnb host or guest or fan of the company, or bear, or bull, or um farm animal. You've been looking to get your parents into Airbnb um or into acquired and you're like, oh what episode could I send my parents that
really would get them into it. This is a great one. The Oprah one was great for me to share with my grandma. This is another great one that I think a lot of people uh will uh will understand. So um consider this your opportunity to share the gift of acquired.
This holiday season. I can't even get through it without some holiday joy happen here. No kidding. No kidding. Everyone, uh have a wonderful Christmas, Hanukkah, New Year's, uh whatever it is that you celebrate, uh, time with or without family or perhaps with with folks on Zoom.
And we will see you next year.
Yeah, although
We have a special a special little holiday present for you coming next year. Next week. Yeah, let's let's not announce it. It's outside the bounds of uh
of uh s of our s official season here, but we're yeah, excited to get this one in your hands before the end of the year. Some holiday fun.
Yeah.
All right.
On that note.
Thanks so much, everyone. We will uh we'll see you soon.
We'll see you soon.