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Category : 2020

Home/Archive by Category "2020"
Airbnb

How the Founders of Airbnb went from renting three air mattresses to a $32 billion business

by CSS Partners LLPon 4 December 2020in 2020 No comment

With Airbnb set to IPO next week with a price range of between $44 and $50 per share, the company could raise as much as $2.5 billion with a target valuation of $32 billion. If the company can achieve the top end of its targeted valuation, it will once again underline the extent to which investors are clamouring for fast-growing technology companies as shares in sectors such as business software and cloud computing surge to new market highs.

It has certainly not been plain sailing for Airbnb this year as the business was hit hard by the global pandemic. The company’s response in the face of adversity will not surprise many as they have faced significant challenges from the very beginning. The founders’ story is typical of many entrepreneurs needing to demonstrate persistence, determination, resilience and most of all adaptation to market changes and customer needs. With next to no revenue and thousands of dollars of credit card debt, at one stage they had to resort to selling cereals to keep the company afloat. It took almost two years for the company to see any traction and attract external investment.

Let’s go back to the start

The year was 2007, and roommates Joe Gebbia and Brian Chesky couldn’t afford their San Francisco rent. The pair first met at the Rhode Island School of Design and knew a big design conference was coming to San Francisco, and it leading to a shortage of hotel rooms.

And so it all started with an email:

September 22 2007

“Brian I’ve thought of a way of making a few bucks- turning our place into a “designers’ bed and breakfast” – offering young designers a place to crash complete with wireless internet, a small desk space, sleeping mat and breakfast each morning…Joe”

 

Additionally the pair thought acting as tour guides would be a fun way to make money. They created a simple website with a blog and a map to their apartment. Three guests paid $80 to stay on blow-up mattresses in the loft space.

Collaborative Consumption

Gebbia and Chesky soon realised how big their idea could be. To them home sharing went way beyond solving a problem – it brought people together and turned strangers into friends. Without realising at the time, the pair had revolutionised collaborative consumption. They brought in their old roommate, Nathan Blecharczyk, to build the online platform for the business. However, it took a few years for the rest of the world to catch up and embrace their vision.

They actually initially tweaked the concept and worked on a roommate-matching service for four months until they realized Roommates.com already existed. Then they went back to working on Air Bed and Breakfast.

The company launched a second time and no one noticed. The third time was at South by Southwest, SXSW, an annual tech, music and film festival in 2008, but they only had two customers, and Chesky was one of them.

Build it and they will come

They had worked on the website for 12 months and no-one was using it. They were confronted with the catch 22 that no-one wanted to list a room as there were no travellers on the site and no travellers would visit the site as there were no rooms to rent.

The founders were faced with a challenge of gaining critical mass or network effect in key cities and were still working off credit card debt. They realised that outside investment was needed.

The Democrat National Convention was coming to Denver and Obama fever was leading to a shortage of hotel rooms. A marketing campaign was launched encouraging Obama supporters to open up their homes to other supporters planning to be in Denver for the convention.

At the same time, the founders were introduced to 20 angel investors and were offering 10% of the company for $100,000. 15 of the investors did not reply to the initial approach; of the five that did none invested. Brian Chesky recounted that in one meeting the site crashed as soon as the meeting started and he had no back-up powerpoint presentation to fall back on, in another the investor stood up half way through the meeting and simply walked out of the coffee shop, never to return.

The promotion of rooms in Denver was going well, it turned out that over 600 people stayed in rooms through the site. However, the team knew whatever revenue that came in would pay off some debts and the following week they would be back to zero.

Cereal Entrepreneurs

One night, Joe and Brian were discussing how they needed additional capital for a concerted city by city campaign. They came up with the idea of selling breakfast to the visitors of the convention, after all breakfast was 50% of what they offered and could be a way to make money and increase awareness of the business at the same time. Enter “Obama O’s – Hope in Every Bowl”, Cheerio’s rebranded. In the interest of fairness they also came up with “Cap’n McCains – a Maverick in Every Bite”.

Their problems were solved, they would licence their idea to major cereal companies and the royalties would roll-in. Unfortunately neither Kellogg’s nor General Mills responded. Some smaller cereal companies said they would turn the idea into reality once they had received a non-refundable $250k deposit. Their cunning plan seemed scuppered.

At this point, the fledgling business had a major break. They met a fellow alumni of Rhode Island School of Design at Berkeley. He was not involved in the cereal business but did own a print shop. In the spirit of helping out his fellow alumni, he agreed to print 1000 cereal boxes for free and if they sold them then they could pay him some sort of royalty.

Joe and Brian became “cereal entrepreneurs”. They were gluing together the boxes and buying the cereal from supermarkets in the worst neighbourhoods that sold $1 boxes of cereal. They were then selling the Obama O’s and Cap’n McCain cereal boxes for $40 – each box came with a limited edition number and information about the company. This bootstrapped marketing strategy netted them $30,000.

Y Combinator

Buoyed by having money in the bank, the team again started the search to find an investor. They managed to set up a meeting with well-known tech VC Paul Graham however the meeting started along a familiar theme with the first question being “Are people really letting strangers stay in their homes – what is wrong with them?” Once again the team were faced with a VC investor that was not seeing the business’ true potential. Joe pulled a box of Obama O’s from his bag and offered it as a parting gift. At this point Paul Graham agreed to invest $20,000 and invited the company to join his prestigious start-up accelerator, Y Combinator. He mused the change of heart was based on a hunch that if these two guys could convince people to pay $40 for the cereal and persuade others to let strangers into their homes then they were worth backing.

The first three months of 2009 were spent at the accelerator where the focus was on fine tuning their product. The founders reverted to their original concept of collaborative consumption. They used some of the $20,000 to fly to New York and meet the early adopters of Air Bed and Breakfast. They sat in their living rooms and chatted about their experiences as host and guests, asking what they particularly liked, what wasn’t working so well and what they would like to see more of. The idea of listening to customers is a key tenet of business today, not so much in 2009 and it was the founders’ passion for human connection that drove them to focus on building the business their customers wanted. They visited all of their hosts in New York, stayed as paying guests, wrote reviews and took professional photographs of all the places.

In March 2009, the company scrapped the Air Bed and Breakfast name and simplified it to Airbnb. A new website was launched and there was no more confusing association with air mattresses. Monthly revenue started to double and Airbnb finally picked up $600,000 of seed investment from Sequoia Capital.

Eat, sleep, panic, repeat

Looking back, Brian Chesky describes the first two years of the business as a kind of Groundhog Day that many entrepreneurs will relate to. Each morning he would wake-up in a blind panic- everyone thought they were crazy, no investors would support them, they had no money and it was the best weight loss program ever. Over the course of the day he would slowly convince himself that he had everything in hand and would go to bed feeling confident; only to wake up the next day in a blind panic.

The company raised a further $7.2m in 2010 followed by $112m in 2011 valuing the business at over $1billion. By 2011, Airbnb was in 89 countries and had hit 1 million nights booked on the platform. It also won the break-out mobile award at SXSW – a sweet success after their lukewarm launch at the same festival in 2008.

And as they say the rest is history….well not quite

After one host had their property trashed, the company had to introduce a “Host Guarantee” of up to $1 million. The company’s success also created regulatory issues with many City Halls not happy about the hotel taxes they were losing. New York threatened to ban short term rentals in 2014, fining any host. Other cities made it illegal to rent out a property without being present for less than 30 days.

The company set out to counter the resistance. They started collecting hotel taxes and remitting them to some cities and pledged to provide other cities some of its data as part of a “community compact”.

In July 2016, Senator Elizabeth Warren urged the Federal Trade Commission to look into how websites for short-term rentals, like Airbnb, were exacerbating housing shortages and inflating property prices.

IPO

In September 2019 Airbnb announced plans to go public in 2020 with a target valuation of $31 billion. Then the coronavirus pandemic hit and Airbnb faced possibly their biggest challenge to date. By April 2020 the company’s value had dropped to a reported $18 billion.

At the beginning of May, 25% of the workforce were laid off amounting to nearly 1,900 individuals. The company was struggling to keep up with cancellations and re-imbursements taking out $2 billion in loans and a $1 billion investment from private equity firms Silverlake and Sixth Street Partners. Even once the lock-downs were lifted while social distancing measures were in place, some local governments deemed short-term rentals as non-essential businesses, adding more stress to hosts who rely on Airbnb for income.

The goal of going public in 2020 was looking more and more distant with many speculating what Airbnb would look like post pandemic and even speculating whether the company would survive at all. The founders were reported to be considering investment form a SPAC at a knocked down valuation as an alternative to the planned IPO.

The IPO next week will be seen by many as a remarkable comeback by the company and further demonstration of the resilience of the business as well as its founders. The company plans to sell 50 million shares at a valuation of approximately $32 billion at the midpoint of its $44 to $50 per share range.

The co-founders, Brian Chesky, Joe Gebbia and Nathan Blecharczyk are selling an additional 1.9 million shares bringing the total IPO to 51.9 million shares. At $47 per share Sequoia will own a post-IPO stake of $3.85 billion and Founders Fund shares will be worth $1.25 billion.

There are no figures of how much the $20,000 investment by Y Combinator will be worth in a company they now describe as

“empowering people around the world to unlock and monetize their spaces, passions and talents to become hospitality entrepreneurs. Airbnb provides access to 6+ million unique places to stay in 100,000+ cities and 40,000+ unique experiences run by hosts.”

They and the rest of the world have learned to embrace “collaborative consumption”.

 

Since 2001, CSS Partners has raised over £175m for ambitious growth companies.  Over this time we feel we have developed a good understanding of what investors want.

CSSP backed companies will often offer EIS Shares so investors can use the significant tax breaks of the UK Enterprise Investment Scheme to help mitigate the risk of venture capital and maximise returns.

Investments offered by CSS Partners are not appropriate to all investors.  Our free client service aims to be of benefit to high net worth and sophisticated investors looking to achieve higher returns.

Important Note

The information in this website is provided by CSS Partners LLP. This website has been approved for the purposes of section 21 of the Financial Services and Markets Act by Charles Street Securities Europe LLP (CSSE), which is authorised and regulated by the Financial Conduct Authority. CSS Partners is an appointed representative of CSSE.

Any views or opinions expressed in this blog are those of the author alone, except where specifically stated that they are the views of CSS Partners LLP.

Success Stories: How The Founders of Airbnb Went Against All Odds  Renee Hwang 24 May 2017

How 3 guys turned renting air mattresses in their apartment into a $31 billion company, Airbnb Business Insider Rebecca Aydin 20 September 2019

The Airbnb Founder Story: From Selling Cereals To A $25B Company Jasper 08 August 2019

Airbnb targets $32B valuation in highly anticipated IPO Pitchbook News 02 December 2020

Airbnb looks to raise $2.5 bn in IPO Financial Times 01 December 2020

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COVID-19 Digital Transformation

The COVID-19 Crisis has accelerated the rise of the digital economy and the 4th Industrial Revolution

by CSS Partners LLPon 12 November 2020in 2020 No comment

The crisis has forced us to work in accordance with new procedures using new technologies. Business processes, such as alternative investment capital, were redesigned in an unplanned revolutionary manner and at unprecedented speed.

A positive effect of the pandemic has been the rocketing digital adoption with levels that previously took several years to achieve being arrived at within months (McKinsey Digital, 2020). When asked why their organisations didn’t implement these changes before the crisis, the majority have said that they weren’t a top business priority. The crisis removed that barrier.

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Technology investing

Tech-Driven Investment Outperforms Trusted Value Investment Models

by CSS Partners LLPon 23 October 2020in 2020 No comment

Warren Buffett and Charlie Munger of Berkshire Hathaway fame are widely heralded as the greatest investors of all time.  Their tried and tested investment strategy is centred on buying securities in typically well-established, non-tech companies identified through their investment model as under-priced.  Whilst Berkshire Hathaway has its own number crunching fundamental analysis to identify investment opportunities, “Value Investment” has been the standard investment strategy for the majority of institutional investors and major funds for the past century.

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The Curious Stock Market and Bitcoin Correlation

by CSS Partners LLPon 13 October 2020in 2020 No comment

Since the liquidity crisis in March, as the S&P has rallied to all- time highs this summer there has also been a strong correlation between the index and the price of Bitcoin. In our latest blog, we ask whether this statistical relationship suggests the fate of the world’s biggest cryptocurrency has become tied to the financial system it was built to challenge.

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European VC

European VC Ahead Despite COVID

by CSS Partners LLPon 29 September 2020in 2020 No comment

The COVID-19 pandemic has impacted all parts of the global economy. Venture Capital (VC) across Europe has remained surprisingly resilient with investment on target to exceed previous records set in 2019.  Below we look at the figures for the first six months of 2020 and what can be expected for the second half of the year.

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Traditional IPO Process

Are Direct Listings and SPACs Set to Transform the Tech IPO Market?

by CSS Partners LLPon 11 September 2020in 2020 No comment

The last week of August saw seven high profile US tech unicorns announce upcoming Initial Public Offerings (IPOs) with a combined valuation in the region of $44 billion.  Add into the mix Airbnb filing for its long-awaited public offering and these look like very exciting times for the US IPO market.  However, not all is rosy and change is afoot. A number of these unicorns have decided a Direct Listing is their preferred route to the public markets; even before the New York Stock Exchange (NYSE) announced SEC approval for companies to raise capital when going public through a Direct Listing.  Many feel this will prove game changing for Direct Listings and at the same time sound the death knell for traditional IPOs. Below we look at the advantages of Direct Listings as well as why there has been a recent frenzy of Special Purpose Acquisition Companies (SPACs) as another alternative to traditional IPOs.

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Growth Company

How Smaller Companies Can Thrive Post Pandemic

by CSS Partners LLPon 31 July 2020in 2020 No comment

Smaller companies will tend to be more vulnerable to the pandemic and its economic turbulence.  Most have little or no financial reserves and sell a limited range of products.  However, well-funded smaller companies have a major advantage over larger firms as they can change direction much quicker and this flexibility could prove vital as they grow their way out of the crisis.  Below we identify some essential characteristics the management teams of smaller growth companies will need to display in order to be successful and attractive to investors.

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Invest when others are fearful

Investing for Value Post COVID

by CSS Partners LLPon 17 July 2020in 2020 No comment

Previous downturns show that the investments made post downturn and in to the early stage of recovery can benefit from lower prices, less competition and a macroeconomic tailwind.  As a result these investments will normally significantly outperform those made at higher prices pre downturn.

Right now, the balance of power is favouring investors and this could be a once in a generation opportunity to invest in innovative SMEs – with lower valuations, greater opportunity for disruption and demand from large customers.

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Nowcasting1

Businesses adopt “Nowcasting” to thrive in Fast Changing Economy

by CSS Partners LLPon 8 July 2020in 2020 No comment

In a COVID-19 economy, it’s your job to adapt or be left behind

To stay competitive, businesses must diversify revenue streams, manage risk, access financing, and do everything in their power to maximize productivity. It is vital for companies to retain existing customers – many of whom will have different expectations in a new-normal world.

As the UK opens up extensive daily data will be key. Investment banks and consultancies have increasingly been “nowcasting”, as opposed to forecasting, to obtain the most up to date information available.

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Green Shoots

Green Shoots for the UK Economy?

by CSS Partners LLPon 25 June 2020in 2020 No comment

On 24 June PWC released their latest economic review providing updated UK economic data, including the results from the Office for National Statistics (ONS) Business Impact of Coronavirus Survey, and highlighting April’s GDP data, retail sales and the labour market. There is also a special focus on the impact of COVID-19 on UK trade and its prospects for 2020.

In our latest blog, CSS Partners highlights some of the areas of the UK economy seeing early signs of recovery as well as PWC projections for the rest of 2020 and into 2021.

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In Gold We Trust 2020 predicts gold at $4,800/oz by 2030

by CSS Partners LLPon 8 June 2020in 2020 No comment

In our latest blog, CSS Partners looks at the extensive In Gold We Trust report and also at the latest figures from the World Gold Council on investment levels into gold.

The In Gold We Trust analysis is an annual report on the gold market by Incrementum.  The full report runs to 350 pages and is a detailed analysis of macro and micro economic factors and other fundamentals that may have an influence on the gold price going forward.  The full report is available at www.ingoldwetrust.report

Below we try to summarise the key findings of the report and what we can learn from the recent strong performance of gold as an asset.

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Gold Rush – The Dawning of a Golden Decade?

by CSS Partners LLPon 29 May 2020in 2020 No comment

Gold is heading for $3,000, Bank of America says.  “The Fed can’t print Gold”

21 April 2020

Over the past twelve months, the gold price has increased by 34% to over $1,700 per ounce.  Many analysts are forecasting great things for gold with Eduardo Elsztain predicting “this level only express the start point of what might be the strongest rally of the metal as never before, at the same pace that fiat money is being printed worldwide”.

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