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
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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”.
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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
