Summary Notes


In the season finale of Acquired, hosts Ben Gilbert and David Rosenthal reflect on Airbnb's remarkable journey from a scrappy startup renting airbeds during a design conference to a global travel powerhouse with a $47 billion valuation at IPO, despite a year marred by the pandemic. They discuss Airbnb's unique supply, brand strength, direct traffic, and the company's ability to create immense value for both hosts and guests. However, they also address concerns about Airbnb's slowing growth and potential saturation, as well as the company's struggles with expanding beyond its core offering. The episode also touches on the potential long-term impact of COVID-19 on travel preferences and the comparison between Airbnb and traditional online travel agents like Despite some bearish viewpoints, the hosts conclude that Airbnb's use of capital has been exemplary, earning an A-grade for its ability to harness network effects and counter-positioning to dominate the short-term rental market.

Summary Notes

Introduction to Acquired Podcast Season Finale

  • Joe Gebbia and David Rosenthal introduce themselves and their roles.
  • Ben Gilbert announces the topic of discussion: Airbnb's IPO.
  • The context of Airbnb's IPO is set against the backdrop of the 2020 global pandemic and stay-at-home orders.

"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 angel investor and startup advisor based in San Francisco."

These quotes introduce the hosts and their credentials, setting the stage for their expert analysis of Airbnb's IPO.

Airbnb's 2020 IPO Overview

  • Airbnb's impressive IPO during a pandemic year.
  • The company's global presence and significant financial figures.
  • Comparison with other unicorn IPOs and the unique position of Airbnb.

"This hot IPO is a travel company Airbnb, originally known as Air Bed and Breakfast Inc. Is going public today, raising over $3.5 billion and initially valued at over $47 billion."

This quote provides the key details of Airbnb's IPO, emphasizing the significance of its valuation and funds raised.

Acquired Hosts' Personal Experience with Airbnb

  • Hosts share their personal experiences with Airbnb as both guests and hosts.
  • Their long-term engagement with the platform provides additional insight into the company's operations.

"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."

The quote poses a critical question regarding Airbnb's future growth potential, framing the discussion to follow.

Acquired Limited Partners Community

  • Description of the Acquired Limited Partners show and its focus on venture capital fundamentals.
  • The value of understanding investor incentives and strategies for various stakeholders.

"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."

This quote highlights the hosts' commitment to providing deep insights into venture capital, which is relevant to the main topic of Airbnb's financial journey.

Pilot Partnership with Acquired

  • Pilot's role as a comprehensive financial service provider for startups.
  • The importance of outsourcing non-core functions like accounting to focus on product development.

"Pilot both sets up and operates your company's entire financial stack."

This quote explains Pilot's service offering, which is an example of the kind of support startups like Airbnb would have benefited from during their growth.

Airbnb's Founding Story

  • The meeting of Airbnb's founders at RISD and their early entrepreneurial spirit.
  • The initial concept of Airbnb as a solution for conference accommodation shortages.
  • The iterative process of developing the Airbnb platform and business model.

"I thought of a way to make a few bucks, turning our place into a designer's bed and breakfast."

This quote is the seminal idea that sparked the creation of Airbnb, showing the hosts' ingenuity in addressing a personal need that became a global business.

Early Challenges and Y Combinator

  • The founders' struggle to raise capital and gain traction.
  • The pivotal role of Y Combinator in shaping Airbnb's direction and growth.

"They raise money from one of the very best venture capital firms, storied venture capital firm in Silicon Valley."

The quote underscores the difficulty Airbnb faced in securing funding, a challenge many startups encounter.

Conclusion of Airbnb's Founding Narrative

  • The narrative concludes with Airbnb's participation in Y Combinator and the refinement of their business model.
  • The company's perseverance through early setbacks is highlighted as a key factor in their eventual success.

"You're doing what? And how many people are using this? No, thank you."

This quote reflects the skepticism Airbnb faced from potential investors, illustrating the challenges of innovating in a new market space.

Cashless Transactions and User Preference

  • The convenience of cashless transactions is a significant factor in the shift from traditional services to modern platforms like Uber.
  • Users prefer seamless experiences without the need to handle cash, which has influenced the adoption of services like Airbnb.

"And the very reason why people stopped taking cabs and used Uber instead, because it was a cashless experience."

The quote highlights the importance of cashless transactions as a driving factor for users choosing modern services like Uber and by extension, platforms like Airbnb, which offer similar conveniences.

Entrepreneurial Grit and Investment Interest

  • Greg McAdoo from Sequoia Capital recognized the potential in Airbnb despite the challenging economic climate of the 2008 financial crisis.
  • Airbnb's ability to help people make extra money during the housing crisis contributed to its appeal and growth.
  • The company's timing and innovation in payments, reviews, and trust accelerated their product-market fit.

"So to Greg's eternal credit, though, he sees the potential. And he had looked at home away and VRBO and the vacation rental space before, and he says, like, no, I think these guys are doing something different."

This quote underscores Greg McAdoo's ability to see Airbnb's potential and differentiate it from existing vacation rental services, leading to Sequoia's investment during a period of economic downturn.

Sequoia's Seed Investment in Airbnb

  • Sequoia led a seed round in Airbnb with an investment of just under $600,000.
  • The investment was a small fraction of Sequoia's fund but yielded significant returns.
  • The round valued Airbnb at $2.4 million post-money, with Sequoia acquiring over 24% ownership.

"Sequoia will invest just under $600,000 in this company, $585,000."

The quote details Sequoia's initial investment amount in Airbnb, which was modest relative to the size of their fund but strategically significant for both parties.

Growth Hacks and Demand Generation

  • Airbnb utilized Craigslist hacking to both attract listings and direct traffic to their platform.
  • The company effectively used Google and Facebook ads to grow supply and demand, leveraging interests to target potential hosts.
  • These growth hacks were instrumental at a time when such tactics were less saturated and more cost-effective.

"And then the other thing they do and that Nate does is, especially given his history that he knows well, is Google and Facebook ads."

This quote explains how Nate, one of Airbnb's founders, capitalized on his expertise in online advertising to fuel the platform's growth through targeted ads.

The Impact of Global Network Effects

  • Airbnb's success was partly due to the global network effects, where being the dominant platform internationally also led to dominance in local markets.
  • The company's international presence and established reputation with reviews made it difficult for competitors like Wimdu to gain traction.
  • Airbnb's funding rounds were used strategically to combat international competition and secure their market position.

"Airbnb is a global network effect. You can't fragment the market."

The quote emphasizes the importance of global market dominance for platforms like Airbnb, where international travelers seek a unified service across different regions.

Airbnb's Business Model and Cash Flow

  • Airbnb benefits from a negative cash flow cycle, collecting payments from guests in advance and paying hosts after check-in.
  • This model allowed Airbnb to finance its growth without relying heavily on venture capital.
  • The company's growth enabled it to use incoming funds to fuel further expansion effectively.

"They're getting the money in, they're holding the money, some portion of which, roughly 12% of which is their fees, their revenue."

The quote explains the financial mechanics of Airbnb's business model, where the company holds onto the funds from bookings, earning revenue before disbursing the remainder to hosts.

The Shift in Airbnb's Growth and Operational Focus

  • Airbnb's growth began to slow down, with bookings growth declining from over 70% to less than 30%.
  • The company's expansion became linear rather than exponential, raising concerns about its long-term growth trajectory.
  • Operational decisions and product launches, such as Airbnb Experiences, did not significantly contribute to the core business's revenue.

"But then as the prices started equalizing, we were like, you know, a lot of these Airbnb's aren't that great. There's some really nice hotels. Maybe we're just going to stay in a hotel."

The quote reflects a shift in user perception as Airbnb's price advantage lessened, leading some users to reconsider the value proposition of staying in an Airbnb versus a hotel.

Cost Structure and Profitability Concerns

  • Airbnb's expenses continued to grow significantly in 2019 despite slower bookings growth.
  • Variable costs and fixed costs both increased substantially, with fixed costs growing disproportionately.
  • The expectation would be for fixed costs to provide leverage on a large base, but the opposite occurred.

"So in 2019, total expenses grew 46%, even though bookings grew 28, 29%. Variable costs in 2019 grew 41% and fixed costs grew 60%."

This quote indicates that Airbnb's spending was increasing at a faster rate than its revenue growth, which raises concerns about the company's cost management and long-term profitability.

IPO Timing and Employee Options

  • Airbnb announced its intention to go public in 2020, twelve years after its founding.
  • Early employee stock options were approaching expiration, creating a need for liquidity.
  • Investor funds, like Sequoia's, were also over ten years old, increasing the pressure for a return on investment.

"The early employee options are going to start expiring."

The quote highlights the urgency for Airbnb to go public to provide liquidity for early employees and investors, as stock options were nearing expiration.

Impact of COVID-19 on Airbnb's Business

  • The pandemic led to a severe downturn in Airbnb's business, with gross booking values turning negative due to refunds.
  • Airbnb raised $2 billion in emergency capital with high-interest rates, indicating a desperate need for cash.
  • The pandemic exposed the risks associated with Airbnb's cash flow cycle, which benefits from growth but is detrimental during a downturn.

"In March and April of 2020, Airbnb's gross booking values turned negative."

This quote illustrates the dramatic impact of COVID-19 on Airbnb's finances, as they were forced to pay out more in refunds than they were receiving from new bookings.

Airbnb's Strategic Response to COVID-19

  • Airbnb laid off 25% of its workforce and cut $800 million in marketing expenses in May 2020.
  • The company refocused, ending various side projects and emphasizing its core lodging business.
  • Brian Chesky described the changes as a "second founding" of Airbnb.

"They lay off 25% of the company, which is, that's a significant, huge reduction in force."

The quote emphasizes the drastic measures Airbnb took to reduce costs during the pandemic, highlighting the severity of the business downturn.

Market Recovery and Airbnb's Growth

  • Airbnb's bookings began to recover in Q3 2020, with people preferring Airbnb over hotels for safety reasons.
  • Gross bookings were down 39% for the first nine months of 2020, but the decline was slowing.
  • The company's future growth rate post-pandemic is a key question for investors.

"Gross bookings are down 39% in aggregate."

This quote summarizes the significant decline in Airbnb's business during the pandemic, indicating a challenging road to recovery.

Airbnb's IPO and Market Valuation

  • Despite a downturn, Airbnb filed its S-1 and went public in 2020.
  • The IPO was priced at $68 a share, but the stock opened at $146, indicating a market valuation over $100 billion.
  • The market's response suggests high investor confidence, but questions remain about the company's growth potential.

"Last night on December 9, 2020, they priced the IPO at $68 a share, end up raising three and a half billion dollars at a $47 billion market cap."

The quote indicates the initial valuation at Airbnb's IPO, which was significantly exceeded by the market's response, reflecting investor enthusiasm.

Airbnb's Challenges in Expanding Market Share

  • Airbnb has attempted various expansions beyond its core lodging business, with limited success.
  • The company's ability to grow at high rates and expand into new markets is questioned.
  • There is a risk of Airbnb's unique supply becoming less differentiated as other platforms gain traction.

"They tried luxury, they tried building a hotel, they tried experiences, they've tried dining, they tried booking air travel..."

This quote lists various initiatives Airbnb has undertaken to expand its market, many of which have not been as successful as its core lodging business, suggesting challenges in diversifying revenue streams.

Airbnb's Potential Host Services

  • Airbnb lacks host services even after 13 years, which could be game-changing for guest satisfaction and host lock-in.
  • Services like cleaning and check-in could be standardized, similar to the trust instilled by Amazon's stamp of approval.

There's this thing that everybody has to go fend clean themselves and figure out their own cleaner check in. That's a great one. It's these things that people rate you on that Airbnb, 13 years in, hasn't built host services for.

The quote discusses the lack of standardized services for hosts on Airbnb, highlighting an opportunity for Airbnb to improve and standardize services like cleaning and check-in, which could enhance the platform's reliability and trustworthiness.

Hamilton Helmer’s Power Framework

  • The framework defines power as the ability to achieve persistent differential returns, leading to higher profitability than competitors on a sustainable basis.
  • Power and market cap are linked; the power a company has influences its ability to generate profits in the future, which is reflected in its market cap.

The way that power works is it's a Hamilton Helmer framework, and he's the author of Seven Powers in front of the show. And it is 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.

Ben Gilbert explains Hamilton Helmer's definition of power and its importance in achieving and maintaining profitability over competitors, which is a key factor in determining a company's market cap.

Airbnb's Network Economies

  • Airbnb's network effect is global and powerful, particularly because of its dual-sided nature (hosts and guests).
  • Unlike single-sided networks like social media, where user interest may be limited to personal connections, Airbnb's network effect benefits from the global interest in diverse listings.

This is a two-sided network effect. It is global in nature. It is as powerful as I have ever seen.

David Rosenthal emphasizes the strength of Airbnb's global two-sided network effect, which is considered powerful due to its ability to attract and benefit both hosts and guests worldwide.

Counter Positioning

  • In its early days, Airbnb's cost structure allowed it to offer cheaper accommodations than traditional hotels.
  • Airbnb did not have the same economic costs as hotels, which have to manage properties, leading to a competitive advantage.

The cost structure for Airbnb to bring on supply was so much lower than it was for a Marriott to go and be the, I don't totally know how it works, but I know they don't own the real estate.

Ben Gilbert highlights Airbnb's advantage in its initial phase due to its low cost of adding new supply compared to traditional hotels, which face higher costs in managing properties.

Lack of Switching Costs and Cornered Resources

  • Airbnb does not have significant switching costs or cornered resources, as hosts can easily list their properties on multiple platforms.
  • The rating and review history provide some lock-in, but its influence has decreased over time.

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 switch as long as there's another economy.

Ben Gilbert discusses the absence of strong switching costs or exclusive resources for Airbnb, pointing out the ease with which consumers and hosts can switch or use multiple platforms.

Marketplace Models and Take Rates

  • Marketplaces can be categorized as 'assign' or 'assist' types, with different take rates.
  • Airbnb operates as a 'marketplace assist,' where the host is seen as the merchant, leading to lower take rates compared to homogeneous services like ride-sharing.

Something like Uber is marketplace assign versus something like Airbnb is marketplace assist, where in marketplace assign, because all of the supply is completely homogeneous, it's effectively the same experience.

Ben Gilbert contrasts different marketplace models, explaining that Airbnb's model involves assisting users in selecting from diverse options, which affects the take rate the company can command.

Airbnb vs. Booking Financial Comparison

  • Airbnb and are different in scale and profitability, with being more profitable despite similar take rates.
  • Airbnb's expenses have grown faster than its gross profit, raising concerns about its financial efficiency.

Two very different businesses, one that lost the better part of a billion and one that made 5 billion and the one that made 5 billion took two and a half x the scale to do that.

Ben Gilbert compares the financials of Airbnb and, noting the significant difference in profitability and the concern that Airbnb's expenses are not scaling efficiently with its growth.

Playbook for Starting Airbnb

  • Airbnb created immense value for hosts and guests, enabling life-changing opportunities for many.
  • The company expanded the efficient frontier of the market, offering more quality at lower prices.
  • Europe represents a significant portion of Airbnb's bookings, indicating the global appeal of the platform.

Create no brainer value for everyone in the ecosystem, and really good things are going to happen to you.

Ben Gilbert emphasizes the importance of creating significant value for all participants in a marketplace, which has been a key factor in Airbnb's success.

Value Creation vs. Value Capture

  • Airbnb's impact on housing supply and prices is debated, with some research suggesting it contributes to rent increases.
  • The company's brand perception may not fully reflect its net global impact, which includes both positive and negative consequences.

This means that in aggregate, the growth in home sharing through Airbnb contributes to about one-fifth of the average annual increase in US rents.

Ben Gilbert cites a Harvard Business Review article indicating that Airbnb's growth has a notable effect on rent prices, highlighting the complex impact of the platform on the housing market.

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