Airbnb

I took Tani's collar offer, so we don't have the same problem. That'll save us some time in post.

Welcome to Season 7, Episode 8, the season finale of 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 2020 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 $3.5 billion and initially valued at over $47 billion. The company is insanely impressive. They operate in 220 countries and 100,000 cities.

Last year, there were $38 billion of bookings made on the platform. There are over 50 million active guests who book nights to stay at over 7 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, while 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 2010, but actually as hosts too, starting in 2015 for David and 2017 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.

Jacqueline Hester and Lyndall 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, to sort of hone their thinking on that. But if you're a founder or an employee at a startup, I think understanding the incentives and strategy of your investors, big stakeholders in your company.

And your potential future investors, it's just insanely valuable. So really awesome to have them on. Fun to be diving so deep on 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 acquired.fm slash LP and all new listeners get a seven day free trial. You hear that, David? That is the Sentry merch that just arrived at my house. Are you saying Sentry or Century?

Yeah, good point. This is audio. Sentry, S-E-N-T-R-Y, like someone standing guard. And at some point, listeners here, we will tell you what they actually do. But first, We've got to say, this is the best merch of any company we've ever worked with. This stuff is so great. I never knew I needed a board game about fixing bugs before.

And I love this shirt that says webmaster. I don't know if listeners know this. I was the webmaster for my high school back in the day, so it feels appropriate. Of course you were. Very opinionated design style and ethos at this company. Okay, so, doing this for real. What does Century actually do? Sentry helps developers debug errors, latency issues, pretty much any software problem and fix them before users get mad

As their homepage puts it, it's considered not bad by over 4 million software developers. Over 130,000 organizations use Sentry from indie hobbyists to... probably at this point, most of the biggest companies in the world, to find and fix broken code fast. Yes, and one very fun streaming service that uses them is Disney+. We did our Disney Plus episode years ago and talked about everything that went into getting the service live when Disney added tens of millions of users all at once.

And obviously way more than that now. Well, it turns out that Century was actually a big part of how Disney Plus maintains high quality service and keeps their massive subscriber base happy. If something isn't working, Sentry tells them what's wrong and how to fix it before the angry emails start coming in. I like that they have no gatekeepers or requirements to talk to salespeople or anything like that. They just want to help developers figure out what's broken and solve it as fast as possible.

In most cases, getting started with Sentry only requires a few lines of code, and you can even set up an account and sign up directly from your terminal, which is just awesome. They have an incredible customer list, including Anthropic, Cursor, Vercel, Linear, and more. We'll be sharing all the interesting ways that those companies use Sentry to monitor and fix their applications fast in the coming months.

You can check out sentry.io slash acquired to learn more, and they're offering two free months to all acquired listeners. That's S-E-N-T-R-Y dot I-O slash acquired, and just tell them that Ben and David sent you. All right, David. Air B&B. Take us in. It's time. is it every time this company is 13 years old come on well it's like a teenager we thought it was going to be time for a while now and uh you know here on the bar mitzvah of airbnb yeah it goes public

That's all right. One quick disclaimer before we get going. In this case with Airbnb, I actually know and have worked with several people who are involved in this story in my past history of my previous. venture capital firm. 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. But just so everyone knows, I don't own any Airbnb stock or any stock in any of its competitors.

And I'm not planning to buy any. Yeah, as always, this show is not investment advice, but we thought it was sort of extra important for us to highlight that neither of us are shareholders going into recording. Indeed, indeed. We do have a very big thank you to shout out, though, again, as so often on this show, Brad Stone and his wonderful book, The Upstarts, where he chronicled much of this history that we're going to borrow from.

Brad is a wonderful past guest here of us on Acquired. So with that...

Let's dive in. Let's do it. Okay, so Ben, stop me if you've heard this one before. Wait, the story of Airbnb's founding? 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 kind of design and adventurous background. start a company in the early 2000s with a mission to connect people and facilitate interesting experiences.

And they're going to accomplish that mission by having people stay in other people on the site's homes. Yada, yada, yada, RISD, Design Conference, South by Southwest. I think I know where this is going. So they do this. Yep, yep. They build trust on the site with reviews. You can review each other. They discover that photos are really important of the listings. They add photos. They figure out how to authenticate real identities. It starts to take off.

people start using it like going through this way faster than i would have expected i know i know we're like we got to 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 Hoffer, 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 fam. Wow. Couch surfing had that many similarities with Airbnb.

They had a lot of similarities, but there was one thing that was missing, and it turns out that that was one of the key things that made couch surfing roughly the equivalent 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, the Homobiles story. I think Uber. Good question. I don't know. I think it was Uber where we did Homemobiles, which of course pioneered ride sharing.

Couchsurfing didn't have a way to pay money. It was you just stayed in other people's... Oh, they didn't facilitate the payments? 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 you paid essentially like a verification fee.

to have your identity verified. And I think the way they did that was they took a credit card payment. and then matched your name with the name on the credit card. And that was the only way they made money, I think. And actually, the similarities to homeobiles don't end there. Couchsurfing was, for a long time, actually a registered 501c3. nonprofit, and then they had to convert from a nonprofit into a C-Corp when they raised money. It was a whole mess. Oh, wow.

I mean, it makes sense it was a non-profit because 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 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

Yeah, which I think was how couchsurfing. started i think uh i think casey was a college student and going on a trip did you ever use 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 kind of crazy to stay on a stranger's couch. uh the really crazy part and this is getting ahead of ourselves but

Turns out Brian and Joe actually had dinner with Casey and Daniel right before they applied to YC and talked to them about what they were doing. Which was after, of course, they had already started and were working on Airbnb. Yeah, of course. And they talked about the two sites. Anyway, okay.

On to the real story of Airbnb. So the year is 2000. We are back in New England. specifically in Providence, Rhode Island, where a scrappy freshman from Georgia named Joe Shows up at the famous Rhode Island School of Design, RISD. Wonderful place. I didn't realize I actually was in Providence last year. RISD and Brown are basically co-located. Providence is a very small town. So Brown and RISD, all the buildings are kind of interspersed. It's actually a very pretty, very cute little place.

So Joe shows up as a freshman and he meets and befriends a sophomore there. Now Joe's kind of like a scrappy, he's like a, you know. I don't know if skinny is the right way. He's not like a... 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 i he would go around and compete in bodybuilding competitions

sophomore from upstate New York. Of course, we're talking about the one and only Brian Chesky here. So they're both at RISD, but... I don't know, other than my one visit to Providence, I haven't spent a ton of time at RISD or with people from RISD, 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 RISD. They become fast friends and get into all sorts of hijinks. They're always talking about doing different projects, starting businesses together, and they must have stood out because They became super popular. Joe actually becomes student body president of RISD. He's a year behind Brian. And Brian, at graduation, is elected by the class to give the graduation speech. when they graduate. So the story goes when Brian is graduating after this speech.

Joe, still there, he has another year at RISD, he takes Brian out to dinner before he leaves and says, hey, we've got this thing. One day, I predict that we're going to start a company together, you and me, and somebody's going to 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 2004, he moves to the West Coast, he moves to Los Angeles, and he gets a job working for a design consultancy there called 3DID. But it's kind of not the fit for him. Isn't he like designing chairs or something? Yeah, he's designed chairs and medical products and like, you know, they're like a product design consultancy and he's a junior designer there. It's not a...

Not very glamorous, and he doesn't think this is the life for him. At the same time, so this is going into 2005, 2006. uh youtube uh get started i remember i was in college when youtube got started and like on 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 that becomes obsessed like oh this

great, that's what I want my life to be like. Meanwhile, Joe, the next year in 2005, he graduates from RISD. He's not sure what he wants to do with his life either. He hangs around and he actually starts a company. I guess you could call it a company. It still exists today. It's called CritBunds. And Joe's talked about this a lot. If you listen, we went back and listened to How I Built This 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 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 be more comfortable during critiques, hence crit buttons. Amazing. And this is still up, right? Still up. Yep. You can go to, I don't have it written down with the website. We'll link to it in the show notes. You can go online and order a crit bun. It's critbuns.com.

And it is in its full Web 1.5 glory. In fact, I think it was on the front page of the USA Today, and they have a big area of their site dedicated to letting you know that. Obviously, of course, by they, we mean Joe. Joe, yeah. Because it's not really a company, per se. Joe goes around Providence and tries to get the bookstore in town to carry them. I don't know if he actually succeeds, but if he does, he's not moving a lot of product. Let's put it that way. So in 2006,

He finally gives in and he moves out to San Francisco. Apparently he always wanted to move to San Francisco. He could get an internship 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 with a couple of roommates.

rents an apartment in the then, this is crazy to remember now, 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 I remember at the time I had friends out here in San Francisco and my wife Jenny was from here and I'd come out and visit.

You didn't go to Soma. It was a real sketchy place. It's still kind of a sketchy place, but has transformed incredibly since then, of which Airbnb is a big part of. Joe's not living in San Francisco. Brian's in LA. Remember, he's not super. happy. They're still in really good touch. One day in 2007, Joe sends Brian a package down to LA with an object in it, with a message behind it. And Brian opens up the package.

There's a crip bun in the package. And as the story goes, at least as told to Brad, the point of the crip bun, other than I'm sure just to be hijinky 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 Crippon to visit and stay with Joe.

And when he's there, it turns out one of Joe's roommates, 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 Batik and doesn't really seem to be going anywhere. Nate's moving out of the apartment. And so Joe's like, hey, we need another roommate. Why don't you just leave your job down in LA, come up here and move in with us?

And so Brian's up there visiting. He has a great time. He kind of 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 2007, When Nate finally moves out that month, Brian's like, okay, I'm going to do it. So he quits his job. He moves up to San Francisco. He moves into the apartment. But there's a problem. You've replaced Nate, this programmer who...

You don't have a job. You're just making money. But this guy, Brian, who's a designer who doesn't have a job. So our roommate is kind of only as good as they are for the rent money. And Brian and Joe need to make the rent.

So they're casting about, they're thinking about something to do. And it turns out the next month, one of the big international design conferences is happening in San Francisco, the World Design Congress. And anybody who's traveled to San Francisco for all the big conferences that happen nowadays, they're all tech conferences that happen at the Moscone Center. The hotel situation in this city is

nuts. It is completely awful. WWDC has since moved down to the South Bay and now online, but I remember looking at hotel rooms for the week of WWDC before it got announced because people were speculating on what week it would be and rates were still like 5x what you would expect them to be because people were pre-anticipating that just clearly not enough hotel rooms.

And the thing that you figure out if you live here and, you know, have family and friends who want to visit is that that's not just WWDC. That's literally every week. Every week there is a big event going on at the Moscone Center or elsewhere in the city. And there just aren't enough hotels here for demand. And so hotel rates can be like $1,000 plus.

a night during the week because 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 he sends him a very famous email. They knew that we were going to be doing a podcast one day and they wanted to leave 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. I'm going to start ending my emails with that and see if that was the magic that made it all work.

I never really liked, you know, like, bastard cheers, like all the standard, you know. 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.airbedandbreakfast.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,

I don't know where the mats came from. Maybe like yoga mats or something in the department. I mean, I knew air beds, right? Like Airbnb. Well, they called it air bed and breakfast. Yeah, so do they mean air beds or do they mean mats? I assume maybe they meant, as they were working on the idea and came up with airbed and breakfast, maybe they went out and got some airbeds.

So they mail us out in the surprise. People are like, oh, this is cool. What a novel idea. And they write about it. And they get a few takers. So they have either two or three. I can't recall how many guests stay with them that weekend. But one in particular, a young recent Arizona State grad from India named Amal Surveb rents one of these.

airbeds and or mats for $80 a night comes and stays with them 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 at the end of this day, Amal is staying for an extra day after the conference, and he really wants to go down and see the famous d.school at Stanford.

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 design circles. There's this famous tie between the dSchool and IDEO. the design agency. So they all drive down together to Stanford and they attend a lecture by Bill Mogridge, who is one of the IDEO founders. And it's this cool experience. And then afterwards, Brian goes up to Bill and just starts

pitching him on, hey, got a mall here. He's standing with more designers. You know, we have airbedandbreakfast.com. And, you know, it's really hard for young, you know, starving designers to go to conferences. Do you think, I think Bill might've 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 Bill's reaction was, but air bed and breakfast did not become the... official accommodations provider. I love it. Always pitching, always selling. 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 going to do. No, they're like, oh, well, that was a good way to make some money during the conference. What else? What are we actually going to do? So they start brainstorming some ideas.

They rope Nate, who they were still friends with, even though he'd left the apartment, back in to start working with them on this since he's actually a developer. He's left Batik at this point. He's freelancing. He's working on side projects, thinking about what... His next gig is going to be, they start brainstorming ideas. One thing that they think about is roommate matching because they're like maybe inspired by your 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 Airband and Breakfast like a website that they stood up for their apartment? Or was it like a platform for any designer with an apartment to have other designers stay with them? That's a good question. I think it was only for their apartment.

I'm not 100% sure on that. If it was others too, there were no other hosts during that design conference. It was a platform of one. So Nate, we've talked about Nate 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 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. He started writing AOL bots and programs and communication stuff, and first he was selling them as shareware, and he kind of stumbles into this nascent field. This is in the 90s.

of 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 Brad Stone, 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 CanSpam Act was not passed until 2003, it turns out, at which point then I think sophomore at Harvard in 18,

closed his consultancy business for reasons that have never been discussed. But before that, yeah, he made about a million dollars and put himself through Harvard and much more. Pretty amazing. So in other words, not only... Is he a Harvard-trained computer scientist who knows how to code and develop and can stand up internet products all on his own? He also knows how to market online, so 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 roommates.com already exists. A couple months go by. It's January 2008. They're out of other ideas. So Joe and Brian decide, eh, maybe we'll dust off this air bed and breakfast thing. 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 number 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 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 By or Austin knows, once when these festivals happen, whether it's Austin State Limits or South By, you can't get a hotel room. It's a thousand bucks. $2,000 a night. In fact, I think the first time I went in 2010, I couldn't get a hotel room and I booked an Airbnb. Yeah, I think every time I've gone, I've done an Airbnb. I've never stayed in a hotel for South by.

So like, okay, great. This is where we're going to launch. It's going to be big. They go on Craigslist and say, okay, like who's hosting rooms and who's in the looking section, looking for rooms. They start.

pitching everybody on using airbedandbreakfast.com. They get a huge success they get two actual bookings like two like one more than one for the festival and 200 growth rate over their previous attempt yeah exactly i guess a 100 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

Amazing. We talk on the show about how the internet back in the day was like 12 people. Well, it turns out in the mid-2000s, it was still only like 12 people. 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. Just a little guy named Michael Seibel. No way. Yeah. Guy named Michael Seibel, of course, of Justin.TV fame, which would become Twitch.

CEO of Twitch and then would currently become and is currently the CEO of Y Combinator. So at the time, they were running JustinTV. They've raised some money. They're a known startup in the Valley, which we've covered on our Twitch episode. as crazy a story as a similarly crazy story as here at Airbnb. And Seibel says,

Hey, I can help you, Brian. He takes a liking to these guys, and he knows Joe. They used to be roommates. I can help you find some angel investors to make this thing. I had no idea Michael's involvement here. Yeah, apparently never... held any equity in the company it was never you know an equity advisor or anything just uh Helped them out. And he did indeed help them out. So Brian gets back. He's all pumped up. This hot startup and their founders are going to help us raise money.

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 move back to Boston, and nothing's really happening with this site, so I'm going to move back to Boston. 50% of the people who are using it are the founders.

So he moves back, and once again, nothing really kind of happens with the site for the next few months. But meanwhile, Seibel did make good on his introduction, and he and Justin Khan 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 later about this, about all the rejections that they faced, of which there were many. So they go back to Seibel and Justin Kahn, and they're like, well... If you can't raise money, maybe you should just go do Y Combinator. We did it. It's great. PG's great. It's still pretty early at this point in YC. But maybe you'll be able to raise money afterwards. Three, three and a half years into it. Yeah, I think it's 2006. Maybe Dropbox has happened.

oh it's 2006 one and one or two years into it yeah the uh it was um this is now 2008 but i

YC started in 2006 or was it 2005? Something like that. Dropbox and Reddit effectively have gone through, but there haven't been any other high followers yet. And JustinTV. And JustinTV. Nobody really knows outside of the Valley about them yet. So they go check out YC and YC was actually, I think this was the first, startup school that YC put on in kind of an effort to evangelize and bring in more applicants as they move to the West Coast.

so brian and joe go down to startup school and this is amazing so this is april i think 2008 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. I mean, you get so wrapped up in the Jeff Bezos of the last five to eight years that you kind of forget.

how much more approachable he was. And a lot of these guys, Zuckerberg, they would all do the little startup speaker circuit because their companies weren't that valuable yet. totally won and here's Bezos are who? It doesn't look like Terminator Bezos. He's like full on still nerd nerd Bezos mode. And he's pitching at YC for all these rinky-dink little startups because he's like, I got to get people to use AWS. And so these little startups are going to use it. Which ended up being genius.

Totally genius. I mean, same deal as Stripe. Anyway, stories for another day. The other person who makes a big impression on Brian and Joe speaking at startup school is Sequoia partner, Greg McAdoo, who's speaking there. And of course, yeah, great. Sequoia and there's a long history of Sequoia partners, you know, speaking at YC in 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. Wasn't widely known yet. So Brian and Joe, they're taken. I think YC is great. They're going to apply. The winter batch for YC is the next application. So they're going to gear up for that. In the meantime, they got to 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. do the same thing. 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 100 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's and the captain mccain's and i so i 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 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 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 when the story ran out, then they resold them. I didn't realize they...

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 the actual story was Uh, they didn't. have any money they're still trying to basically make their rent uh on the royal 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 sell them as a limited edition. It's totally amazing.

heads, I win, tails, you lose situation because you have food no matter what. It's kind of like being the casino. You don't care which side wins because you get food either way. You get food either way. It's true. The stakes are a little bit lower. And I think, you know, so the story, like they make, they end up making somewhere between $20,000 and $30,000 in profit from selling these things online. And that kind of keeps them alive until they start Y Combinator.

It's also kind of good when you take out super, super far step back though. You're like, this is an amazing story of entrepreneurial grit. You're also like, you're selling, this has nothing to do with the business. And this might be a theme that'll come back up as we progress through the story.

Yeah, I mean, 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, you know, it can kind of go either way. Yeah, I think that is. It's an awesome entrepreneurial endeavor and a great show of scrappiness.

It's a little bit of a double-edged sword. It's also a great way to use their actual talents. 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 you don't have to pay the labor so it's 100% 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 Obama O's and Captain McCain story is it's actually what gets them into YC. So, characteristically for... Brian and Joe, as you can imagine, as the story goes along here, they miss the deadline to apply. And Seibel has to lobby PG and say like, hey, these guys missed the deadline, but can you like...

Just give them an interview anyway. Like I vouch for them. They're good. So they convince, Brian and Joe convinced Nate to fly back from Boston and pretend that he's still part of the team to drive down to Mountain View and have the YC 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, cereal? Come on. And so they go, they do the interview, and... PG doesn't get it. He's like, 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 so 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 these? Joe tells him the story of how they've stayed alive. And of course, what is one thing that PG values above all else? It's survivorship and grit and default alive being a cockroach as he would come to call them he says wow okay you guys are you guys are going to stay default alive I don't know about this whole thing, but you're in. So they get into YC. They start in the winter 2009 patch.

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 like hey so okay where's where's stuff happening right now well 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. And during YC, they changed their name to Airbnb from Airbed 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 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 because it was a cashless experience. I mean, one of the many reasons, but. Exactly, exactly. So things start to work. Now, meanwhile, McAdoo, remember, is Sequoia's liaison with YC, an investor in YC. He's at YC one day and he's talking with PG. And they're talking about this idea of grit and how being default alive.

And scrapping through things is really, you know, at Sequoia, they believe that that's one of the most important characteristics of entrepreneurship as well. And so McAdoo asks PG, well, hey, who in this batch? is most like this. And PG says, 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 kind of crazy. I mean, Sequoia had just done, if you remember back to this time, this is beginning of 2009, the RIP Good Times. sequoia memo 2008 the leaked memo had just happened a couple months before like the world is

is falling apart. And 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 airbeds and couches it's out there yeah 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 HomeAway and VRBO and the 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 RIP 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 paying their rent, paying 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. You could go to a conference in San Francisco for 80 bucks, 100 bucks a night instead of being priced out of the market. Yeah, it's so interesting. Timing plays so much of a role in the success of these companies.

There was so much innovation here and all the different ways that we'll get into around payments and reviews and trusts and all that, that it could have succeeded at any time. But boy, did they have the wind at their back from the secular trends going on to... 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.

And I think all those things are true, but, you know, 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 buildup to the financial crisis during the go-go years, like nobody was that interested in. cheap travel. So... despite getting a lot of pushback from the rest of the Sequoia partnership.

McAdoo does end up convincing Sequoia to invest. And rather than doing it as a Series A, they say like, hey, I'm not sure about a lot of money here. I'm not sure about this being a full traditional investment. We need to conserve our cash and triage our portfolio. Let's do a small seed check. So they say, will lead a seed round. Sequoia will invest just under $600,000 in this company, $585,000.

We'll bring in some other folks. Also, like, that's nothing. Nothing. I mean, like, it's nothing, nothing, nothing for Sequoia today. That's still pretty much nothing for them at the time. I think the current, the fund that they're investing out of, I believe, was a $500 million fund. So what's that 0.1% of the fund? Yeah.

And the funniest thing is that that actually returned that fund. Oh, so many times over. When you're thinking as a venture capitalist and you're like, I can't possibly make a little bet. You know, that's just 0.1% of my fund because like that can't possibly contribute to returning the fund. 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 585k. They bring in some angel investors alongside the angel investing collective of Keith Raboy, Kevin Hartz, and Jawad Karim, one of the YouTube founders we talked with. Kevin about this on the Eventbrite episode. They get a small, they were in angel investing together. They get a small angel allocation of $30,000 between the three of them in the round.

The valuation though, so that's the dollar size. The structure though, this is very much a traditional venture round. The round is over 25% of the company. So the post money valuation on the round for the total round is $615,000. $2.4 million post-money valuation. Whoa, no way. Sequoia gets 24 and three-eighths of a percent in ownership of the company. And the angel collective of Keith Jawad and Kevin get one and a quarter percent of the company for their $30,000.

And that, I think, is the last big dilutive round the company would ever do. Is that right? Yes. Everything from here on out, it was shockingly diluted. The Series A was $7.2 million, I think, at a... 60-ish, a 60 or $70 million valuation, so roughly 10-ish percent dilution. And the percentage of the company sold only went down from there, despite the fact that the dollars got very, very large.

That is accurate. So they finally have, back to the seed round, they finally have a little bit of money. 2.4 million posts, David, I can't believe it. Even back then, and it was a different era. Like I said, it was a different situation. That Sequoia Capital sure knows how to get their ownership. They do. They do. 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. Nate basically goes to work. And this is his time to shine. So, first... the thing that they do, which doesn't require any money. People have probably heard about the Craigslist hacking. So I didn't realize, you know, the thing that I always thought that Airbnb did with Craigslist hacking.

was going to listings on the site and saying, hey, why don't you come list these listings on Craigslist and emailing them, 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, 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 putting your own, you're encouraging your own supply. But if the 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, it's 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?

You can go hand-to-hand combat, convince people to put listings on the site, but how do you get them bookings? Wow. You put it on Craigslist, get the bookings through there, and then you capture those bookings and you don't let them go back to Craigslist and you say, hey, you did this thing. You had this great trip. Why don't you book your next trip with Airbnb?

Right. I mean, 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 going to be the way to capture it. So that was Craigslist. And then the other thing they do and that Nate does is, 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 2009, 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

Brad talks about this in the book. 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 supply to sign up on the platform. And then, of course, the people that they would send, no guarantees that they like wine or yoga, but it worked pretty well. Now, to be fair, these are some pretty great growth hacks.

It wasn't just that Airbnb growth hacked their way to success, as we talked about. there were a bunch of trends that were at their back here. Financial crisis, people needing to pay their rent, people wanting to travel cost effectively.

And I think the, we talked a little bit about the supply constraint nature of hotels and markets when there's big spikes in demand. 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 in the ensuing 10 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. 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. Yep. So 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 these are five generations ago of marketing tactics. Yeah, good luck doing those innovative Facebook things today. You're going to pay through the nose for it.

So we're now in 2010. And things are really starting to work. And they have, by midway through 2010, they have 700,000 nights booked on the platform. Wow. for something that seemed like a crazy idea nobody would do. Even the founders thought we need to do permanent roommates, not temporary roommates.

Totally taking off. So they raised, as we said, a $7.2 million Series A from Greylock. Which, by the way, why did Sequoia not pile on again? Isn't that kind of 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. They also figured they own 24% of it. They already own 24%. Yep. And they're trying to 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, Reid Hoffman leads the Series A. And supposedly, I think this is actually true. We'll talk about Airbnb's business model in a minute. 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 never hear about this happening. They raised such a small amount of money. But then they did so well that they made more money in profits. Famed profitable company Airbnb. Indeed, indeed.

So... By early 2011, the next year, they hit a million nights booked. This company has always been great at PR and publicity, probably the legacy of Brian and Joe. They hit a million nights booked. It becomes big national news, and this is when Fred Wilson publishes that blog post about how it was a huge mistake.

to pass on the company. And XPG had actually introduced them to Fred Wilson and wanted Fred to lead. While they were in New York doing things like meeting the hosts and hiring photographers and all that.

Yep. So that summer, we talked about fundraising, they raise $112 million Series B from Andreessen Horowitz. at over a billion dollar valuation. This is summer 2011. That's a big Series B today. Well, we were talking yesterday on the DoorDash episode about their $40 million Series B in 2020. 14 or 15, I think it was, being... a huge series b it is ludicrous to call this a series b for that era you know yeah Ashton Kutcher comes into the round.

Ashton actually doesn't quite come into the round. He comes in at a different time and gets, I think, preferential share price or maybe it's just preferential share allocation. But because he sort of has this value prop at the time that he's talking with many companies about. which is, I'm going to help you get publicity 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. Yeah. So they raised all this money. 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 Samoa brothers and rocket internet in Germany.

would take all these new post-Web 2.0 tech businesses from Silicon Valley, clone them, and roll them out in Europe. So they did this with Airbnb, with a company called Wimdo. And this was like... existential because whether whether they realized it or not early on unlike doordash food delivery ride sharing where it's about winning each local market in hand-to-hand combat Airbnb is a global network of facts. 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, 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 market.

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 American's a big international player at this point, but basically these, you know, one world alliances. But you still have room for these regional players because the product that's necessary for those regional jets is a whole different set of infrastructure.

That's just not true with Airbnb. Whoever was going to capture this short-term rentals market in a global way was also going to win in a local way. Yep, 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 all over the world. They'd come back to their own city and say, hey, I'd like to make some extra money on my place. And then they would list on Airbnb. So that whole strategy, that whole venture capital playbook that we talked about on the DoorDash episode of 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 Samoa brothers in Europe, and they end up winning. And it's really interesting to think about why they end up winning. So they do a couple things. They acquire a few companies, smaller competitors in Europe. They open up a bunch of offices. And what the Samuars are doing, they basically start a sweatshop in Berlin.

people uh young kids out of college and out of mckinsey and 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 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.

How are you going to trust that it's actually going to be a good experience, that these are crazy people? Even to put crazy people aside, just that it's actually going to be nice. while reviews are super important. And so when you're doing something like creating a listings farm, whether this was Airbnb doing it or Wimdu doing it, you're just going to end up with a lot of listings with no reviews and it's going to be dead. There's going to be...

no life happening. So Airbnb, because they've been operating globally from the get-go, they had listings with reviews already in Europe. And I think once you start to get that... then it's really hard to compete with that. It's a real flywheel going. So they end up winning Wimdu. I don't know if it's still around, but 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 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.

But Airbnb doesn't give that money to the hosts until after the check-in happens. So you could have up to six plus months in advance where Airbnb, they have the ultimate negative cash flow cycle. They're getting the money in. They're holding the money, some portion of which, roughly 12-15% of which is their fees, their revenue.

They get that, they hold that up front, and then they don't have to, plus the other rest of the booking fee that they're going to give to the host, they hold that, and then they give that out months later. So they win, they raise all this venture capital. They probably didn't even really need it that much because 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 Pinduoduo episode to understand it sort of more at a deeper level. But you're so right here. And I think 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 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. If Hilton was like, actually, we're going to start charging when you start making a reservation, 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.

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 plow it into 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 you're shrinking. We're definitely going to talk about that. Yeah, this is all predicated on... growth but you know i keep talking about how crazy non-dilutive all these rounds of financing were for Airbnb. This is one dynamic. Their growth actually financed the future growth of the company without needing the investor dollars to do it.

So smart. This is actually something like SaaS companies face the opposite of that, where you're selling deals. But those deals, you might sell a deal for a million dollars in ARR. Well, it's just going to be paid to you month over month. Enjoy your $100K or $80K a month check. Exactly. Okay, so things are working. They're winning in Europe. January 2012, they hit a cumulative 5 million nights booked on the platform. Six months later, in June 2012, they hit 10 million.

Knight's books on the platform. This flywheel is starting to spin so fast. There's your product market fit right there. Yeah, exactly. Now there's some bumps 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 the woman's apartment in San Francisco got trashed and they had to implement the insurance guarantee, that was

terrible. There were people that had accidents on the platform. There were crimes. 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. This is not allowed. All that said, as difficult as those things were, the flywheel is spinning this confident. Nothing is going to stop this growth.

So October 2013, they raised $200 million from Founders Fund at a $3 billion valuation. So here we are selling, what is that, 8% of the company? Yeah, 7-8% for $200 million. Then the next year, in 2014, they raised $500 million from TPG at a $10 billion valuation. And along the way, in between there, especially once it's in front of the show, and it'll come back up in a minute. Greg McAdoo leaves Sequoia, and Alfred Lin joins the board. Alfred Lin from Southwest, of course.

board member of DoorDash, as we discussed yesterday. Pretty big week for Alfred? Yeah, crazy, crazy stat on Alfred. Been at Sequoia for 10 years. Yesterday was his first portfolio company to IPO, and today is his second. Yeah, and they're both some pretty big IPOs, I would say.

So, okay, we're now in 2014. 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 Samoa 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...

existential requirement to fly low to the ground or operate at the lowest level of detail, shall we say. In fact, 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. You just cannot need to be as finely tuned as, say, a performance marketing machine. And there's lots of different areas around the business 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... Sure, lots of people are showing up to the office every day and doing important work and moving the company forward. But 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 it 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. I mean, look, this is the dream of a business is to have a business like this. Not only is there nothing wrong with that,

That's amazing. On the other hand, though, 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 totally true, too. So let's go through it. In 2014, the company moves into a new headquarters building at 888 Brannon 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.

Gold-plated would be an understatement. There's a five-story atrium in the lobby with a living wall that goes up the whole side of one of the sides of the atrium. I mean, it's amazing. There's a 24-7. Kitchen is no longer 24-7, but at the time when they opened it, that operates there's three meals a day, seven days a week. All free for employees? Yeah, all free for employees. I can't imagine that... there was too much demand for like breakfast on a Saturday or, but, uh,

Who knows? They wanted to create the environment that they thought would enable people to do their best work, to be creative, to create this sort of culture that they wanted among hosts. I get it, but it is absolutely emblematic of the fact that

The flywheel was spinning and it was spinning off cash. Yep. They, uh, babysit 2014. It's now just become normal, but they unveiled the Baylo, the design mark of Airbnb, the logo. I know, the Baylo. And depending on 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 for sure script

Then, also in 2014, they started doing an annual conference for hosts called Airbnb Open. They had brought on in 2013 as, I think, head of hospitality, a guy named Chip Conley. who Chip was the founder and proprietor of the Joie de Vivre hotel chain, which are these super high-end boutique hotels all around the world. Chip's an amazing kind of guru type guy. So at the conference, he says,

This is in the book. He's quoted as saying that he's predicting that Airbnb could win the Nobel Peace Prize within the decade. And you're like, wow. Okay. Okay, man. All right. Never heard of a startup winning a Nobel Peace Prize, but okay. Alfred's going to resent us for this. but he has a great quote about all this in the Upstarts to Brad. He says, well, growth covers a lot of sins.

And the growth of this company was spectacular. David, I think you summed it up so well, though, in saying this is exactly as

an entrepreneur, as an investor, as an operator. 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. Or at least maybe don't say you're going to win the Nobel Peace Prize. I don't know. Yeah. Anyway.

So in 2015, Expedia buys HomeAway, the only really viable. product-wise competitor out there in the market for just under $4 billion. And, you know, there's some headlines about like, oh, Expedia, oh boy, they're going to compete with Airbnb. No, like this is surrender. This is basically admitting that there's no viable competitor out there.

In 2015, the company Airbnb does almost a billion dollars in net revenue on $8 billion in bookings. 2015 is the first year in the S1 where we have this data they raised. By the way, $8 billion in bookings, that's equivalent to the $8 billion that DoorDash did last year in their gross order volume. So the amount of cash that moved through Airbnb. in 2015 as equivalent to the cash that moved through DoorDash last year. It's sort of interesting to think about, I think, these companies.

Mostly because Airbnb has a much higher price tag per order, much lower orders per year. But of course, thinking about the growth from when they both had that level of money flowing through the system after that is going to be interesting to think about too. Indeed. In 2016... on top of that base, they grow 80%. And And they do $14 billion in bookings in 2016, $1.65 billion in net revenue.

They had raised in 2015 a billion and a half dollars at a $25 billion valuation. And then in 2016, they raised another billion and a half across two rounds. Again, not that they really need the cash, but probably They're going to get on super favorable terms. They can think of lots of things to do with it. Investors are desperate to get shares of this company. I do want to take a quick comparison here and say, okay, so the $8 billion and then they grew 80%.

Last year, DoorDash had $8 billion in gross order volume and then grew over 200% the next year. So there's an interesting, you know. Oh, yeah. We'll keep talking about the growth rate as we go along here. I imagine.

One of the things that they raised the money for in 2015-2016 was at the 2016 Airbnb Open in the conference in Los Angeles. They have some big announcements and Ben and I went back and we watched this video on YouTube. It's something. Thank you for the internet. It is just miraculous that this thing is still on YouTube. Every single product they introduce Except for one. Has it been a complete failure? They... You know, again, I mean, I...

It's like you do have to admire the ambition of they wanted to add more products and had a big vision for Airbnb to be more than just what it was. All that is good. So at this conference, they launched, 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 going to launch that day. They'll launch experiences, places, and Of course, Homes, their current Airbnb product, and a meta product above it all called Trips that it's all going to be a part of.

So experiences, people probably know experiences are still around today, although nowhere in the S1 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... phenomenally tiny percentage of the overall revenue. Yep. Places was part of the Airbnb app, and the idea was it was going to be like,

a super, like Meituan, like a super app aggregator for all the things you would want to do. So it's like Yelp, it's OpenTable, 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 experience. So that was, places. And then all of it lived altogether in trips. And so within trips, you had aggregated your stays,

your experiences and your places, all the stuff you did. And they didn't launch, but they talked about adding car rentals to trips. They talked about adding grocery delivery to trips. They talked about adding flights and maybe even an airline someday too. 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, like all these were maybe not bad ideas, but I'm not sure they made a ton of sense within Airbnb. And I think that the disconnect is, as, you know, looking back for me watching that video was, I think Brian and the company really believed that like Airbnb was about, they talk about it so much at this conference about belonging, about feeling home when you're traveling and about the connections in the community between hosts and guests.

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, particularly 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 I just think that that disconnect becomes more and more apparent over time. Yeah. And if you go back to 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 100 bucks a night or 80 bucks a night not a thousand bucks a night it is interesting around the 20th

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 probably the same price maybe more expensive hard to tell i can access neighborhoods i otherwise never would have been able to access i have a unique and cooler experience staying in this house and i i remember

This moment in time, it's shifting from a price-based value proposition to an experience-based value proposition. Yep. Same deal for me. And what's interesting is, I actually didn't go back and look, I should have. But anecdotally, I think 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. We weren't staying in any hotels.

And then during that 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 hotels. Sometimes we'd go, I was living in Seattle at the time, Jenny and I were living in Seattle, we'd come down to the Bay Area, maybe we'd go up to see our family, maybe we'd go up to Sonoma or Napa. Sometimes we'd stay in an Airbnb, sometimes we'd stay in a hotel.

But then, yes, the prices started equalizing. We were like, you know, hotels aren't that great. There's some really nice hotels. Maybe we're just going to stay in a hotel. That sort of becomes true as people consider Airbnb one of their... Yep, totally. Not that we stopped doing it at all. And for group trips, getting a family together, going to a place where there isn't great hotel inventory. Fantastic use case.

But you fast forward to today, we've talked about experiences. Places is gone. The trips concept is gone. It's now refocused much more on stays. So the next year in 2017, the company tells investors that they're planning to IPO within 12 months. But then, at the beginning of 2018, they had hired... Back in 2015, a big-name CFO, Lawrence Tossey, 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. Brian publishes a blog post when he leaves saying that Airbnb has an infinite time horizon and is focused on being a 22nd century company. Oh, that is like some interesting shade. Yeah, I'm not sure what it means to be a 22nd century company, but it definitely means they're not going public anytime soon, which I think was the message. And it sounds like Brian likely didn't appreciate any of the...

pushback or guidance he was getting around, I don't know, IPO readiness or whatever the opinions were of the CFO and other finance leaders who would come in afterwards. Yeah, indeed. That starts off a whole cycle of speculation in the press internally, externally about when is Airbnb going public.

Will they go public? At what valuation? What is happening? Because, of course, they had raised all this money from Sequoia and others. And 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 going to 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 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 this kind of like three acts like there are in so many of our stories here. You know, there was the first act here of Airbnb, this crazy thing almost didn't happen, but it was a great idea. It gets into YC, 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 2017

The growth no longer keeps going, which we've alluded to in our own views and usage of the platform here over the last couple of years. So 2017. Bookings growth slows to 50% from over 70% the year before. Still really good. I mean, you're at a huge base growing 50% year over year. That's great. You can totally IPO. 10-year-old company growing at 70% on that kind of base. Nothing to be ashamed of at all. Absolutely. You can go public with that. 2018, Bucking's growth slows to 40%.

Okay, but still, you know, whole company, large base, growing 40% annually. Great. If they had gone public after five years, we wouldn't be... naysaying this at all we wouldn't be like yeah totally they've been public for years makes sense that they're you know into this 40-ish percent growth rate per year yeah The next year, in 2019, the last full year we have data for before COVID, Brookings growth slows to less than 30%. So I believe it was like 28 and a half, 29% last year.

And at this point, this is, I think, to me at least, what's most concerning. The growth is linear. So they added $8.5 billion in bookings in 2018. That was two years ago growth. They also added $8.5 billion in bookings in 2019.

so like the growth the base is growing but the amount that you're adding every year is now constant and of course then we'll get into what happens in 2020 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 2019 total expenses grew. 46% even though bookings grew 28-29%. Variable costs in 2019 grew 41% and fixed costs grew 60%. So if anything, as you grow, and especially on this huge base, you should start getting way more leverage on your fixed costs. And they're actually getting less here. That's concerning. Concerning. Indeed.

So then 2020 happens. Well, before 2020 happens, in September of 2019, they announced that they will go public in 2020. This has been reported elsewhere, but the company now, by September 19, is close to 12 years old, the early employee options are going to start expiring. So 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 10 year life cycle and then you have two, one year extensions. I don't know actually if employee option contracts mirror that. But also at a minimum, you know, think back to Sequoia, like their fund that they invested in must have been a... And Airbnb must have been a 2006-2007 vintage fund. You're now over 10 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 have some form of expiring options or at the very least, if you try and restructure that, then there's tax implications. Yeah. And also, everybody would just like some liquidity, I would assume here, not to mention. They announced they're going to go public.

And then COVID happens in March of 2020. And overnight, the business evaporates. And not just evaporates, we talked about the huge benefit of Airbnbs 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 2020 Airbnb's gross booking values turned negative. They were paying out more in refunds for future bookings than they were taking in in bookings. So they actually had like...

i've never thought of like seeing this before not not even like negative revenue they have negative bookings you're actually paying people more than you are getting brutal which of course it's a global pandemic so of course it's totally Totally brutal. So in March, and I wondered, I didn't quite realize this until digging into the S1, In March, as people probably know, Airbnb raised $2 billion in capital from Silver Lake and Sixth Street partners in a combination of equity and debt.

The debt piece was at an 11.5%. There are two pieces, two tranches at an 11.5% interest rate and a 9% interest rate. The equity piece was at an $18 billion valuation. And that was a billion in each, right? A billion of equity and a billion in debt. I think that's right. I think-ish. And I sort of wondered at the time, like, why would this, you know, these are pretty onerous terms, like on both sides, you know, massive haircut and valuation.

It's basically a 50% haircut in valuation. And then the debt side, interest rates are zero out there. This is like major distressed debt. You're pricing a trunch at 11.5% 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've just desperately needed the cash at this point in time. Yeah. The way to think, at least the way.

I am not first and foremost a finance person, but the bucket in my head that I sort of put cash flow dynamic into is kind of a form of leverage. When you're going well, 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. But the thing about leverage is

it levers whatever direction you're going. And so when you start shrinking, you're in big trouble quickly. Very similar to another thing that was going on with Airbnb and with all tech companies is operating leverage. like airbnb has a really really really high set of fixed costs but Their variable costs are obviously much higher than a SaaS company because it's a marketplace and they've got to pay the host.

But they make a lot of money on every transaction. And so the whole ballgame for tech companies is build the best freaking product you can and especially recently spend a ton of money on sales and marketing to go capture a winner 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 revenue- At least your R&D costs are. Yes. And then hopefully your profit margins on a unit basis help you outrun all those fixed costs or high operating leverage. When you're shrinking or when your revenue is low, then that hurts you in the exact same way that it helps you as you're growing, because now you've got all these mouths to feed, but very few customers to feed them with.

So Airbnb, of course, realizes this. And in May of this year, shortly after, the start of COVID and after raising this emergency capital, they have layoffs. They lay off 25% of the company, which is, that's a significant reduction in force. They cut $800 million in marketing expenses. So there you go. Addressing each of those two points you just made, Ben. Except that they didn't actually let go a lot of the R&D. They kept mostly R&D people and laid off mostly.

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. They jettison all of the other stuff that they were working on. Experiences are still around, and they moved to online experiences. No places, no trips, no... We didn't talk about it. The company had started a movie studio at some point along the way there called Ross Street Films.

They also had a lot of stuff going on. It's all gone. I got the magazine for a while. Yep. All gone. The magazine. I don't hate on the magazine. The magazine makes sense to me. You're a travel company. Airlines have magazines. That makes sense to me. You're promoting travel. um that's like average that's marketing so The business goes to zero, basically, less than zero. But, by cues 3...

Things do start to recover. We've both traveled this summer for long-term stays. I actually pulled together a great stat. 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. But then there's the second one, which is as people, as we knew more about

COVID-19 and understood how it spreads and, you know, 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 Airbnb's bookings were down something like 50%, but hotels were down 90%.

And I don't exactly remember which month this is, but I think that narrative is definitely one that played out during the pandemic and for me personally. I have stayed in only one hotel since March. It was the only option, and it was in the middle of nowhere, and I sort of had to book the hotel, much to my chagrin, but I've stayed in six Airbnbs. And I think that is illustrative of act two of the pandemic for this company. Totally. Same. We're, we've been less active than you since, uh,

Jenny's more tied to San Francisco than you guys are. More of those came from a bike trip. Different place every night. But yeah, we've stayed in two Airbnbs and one hotel because we had to leave there. We had to check out of the Airbnb before we were ready to go home. And the hotel was... Kind of a weird experience. Who wants to walk through the lobby right now? Yeah. Yeah, it was...

I mean, I feel for hotels these days. So the business starts to recover. So we should say for all of 2020 so far, the first nine months of 2020 versus the first nine months of 2019. Gross bookings are down 39% in aggregate. So the growth, as makes sense, because the pandemic growth has gone from slowing to literally shrinking. Things are recovering in August of this year. Month over month, August bookings were only down by 14% versus the year before.

In September, they were down 17% versus 2019, but things are... Stabilizing. Right. It would seem reasonable to think that they'll get to parity either before a good chunk of the population is vaccinated or shortly after. Or shortly after, yep. So they basically effectively lost a year of growth. Yeah. Wow. Except that they also shrunk. Right. Well, I think that's the question that we'll talk about in a second in our analysis sections is

What is going to be the growth rate going forward, like post-pandemic, post-vaccines? That, I think, is the key question for this company. So on November 16th, 2020... Airbnb does file its S1 in a surprising move they make good on their promise to go public in 2020, even though there's a pandemic, even though the business gross bookings are down 39%. So unlike DoorDash yesterday, where, what did we say, that for the first nine months, they're up 300%, I think? Close to it.

for the year. Airbnb is down in growth 39%. They filed their S1 and then last night on December 9th, 2020, they priced the IPO at 68%.

dollars a share end up raising three and a half billion dollars at a 47 billion dollar market cap so big man like that makes uh that silver like investment at 18 billion just what six eight months ago looked like a genius move Indeed. And so let's see, what did we say? We said they priced at $68 a share. Got Yahoo Finance pulled up here. It is currently trading. I see it in the acquired Slack. People are buzzing about it. You want the live reaction.

Oh my god. Opens at $146 a share, at $159 a share now. What? Yeah. Over 100%. I was expecting some kind of pop. So now they're valued at over 100 billion dollars. So, yeah, that would imply they're valued at over $100 billion. Wow. This company's hovered at like 30-ish billion for a while. Like they were constantly- And then the pandemic. And growth was slowing and then the pandemic. I mean, I'm thinking to myself when they dropped this in November, like,

This company really had to go out this year because otherwise, why on earth would you go into this market right now? Or I guess the market's doing fine, so the IPO window's open, but with their numbers you would think like can't you wait until they 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

Okay, well, we'll get into it, but that... Even with 2019 growth rates, so, okay, 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, which I think is a reasonable comp because it's also a marketplace business. It was also at global scale. It had also been a long time. what, 10 years between founding an IPO in 2018, it was growing at 42% when they IPO.

So that's probably, you know, that's much faster than the 28, 29%. 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 100% growth. That was coming out of Delete Uber. Yep. DoorDash, obviously, over 200%. Pinduoduo, who we covered to open this season, at 246% year over year. Again, China Tech, different in every way. When you gaze over into SaaS land...

The numbers are also looking pretty good. Slack, which was a product-led growth company, primarily at that point, 81% year over year. Square was 55%. Shopify was actually more than doubling at 110%. The laggard of the bunch, which ended up not becoming a good stock, was Dropbox at 31%, still a few percentage faster than Airbnb pre-pandemic. So 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 2020, the new Zoom, they were going at, I believe, close to a 200% growth rate at going public. What is going on here? This company is shrinking. Yeah, this company had slowed growth and is now shrinking. I think an important thing to realize here too, the thing that scares me the most is 91 so again it's a sword that cuts both ways 91% of V. Traffic.

to airbnb is direct it's organic it's it's stuff they're not paying for now they're loosely paying in brand ads etc But again, that's the dream. That's what you want. But anytime that they've tried to lean really heavily into performance marketing like DoorDash, they have not been able to do that well. And so what...

I'm a little bit scared of is if they do want to turn on the growth engine and they do want to grow a lot faster than 30% year over year, are they going to be able to do that with precision and profitability? It's not the muscle they've trained. 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 I want to, so we sort of talked about the growth. I do want to round out history and facts here with a couple. A couple IPO nuggets. So the first is the cap table. At IPO, the founders owned 31% of the company, comparing that to the, what is it, 13%, 14% that founders of. of DoorDash owned. Very impressive. Story of two different dilution methodologies. Story of two different capital intensive, two different degrees of capital intensity in your business. Yeah, great point.

Great point. So Brian Chesky owned 11% going into the IPO. I was all prepared to talk about how he now has more than $4 billion to his name. I think now this means he has $10-plus billion to his name on paper in Airbnb stock. Joe and Nate also both have 10%. I think they sold 100 million collectively going into the IPO just to get a little bit of liquidity. I'm curious if there were other selling shareholders or if...

all of the investors held at the IPO and if they'll all be subject to the same lockup. Do you know anything about the lockup on this one, David? I don't. I'm sure it's in the S1, but I assume it's kind of a standard six months. So Sequoia, again, all my numbers here that I had prepared are just nonsensical now with this crazy, crazy leap in where the stock is trading.

Sequoia would have made about 5 billion. I think now they've made somewhere between 11 and 12, maybe closer to 13 billion. Not bad for 0.1% of your fund that you put into a company. That's crazy. And I think total, they put $260 million into the company over 11 years. And I assume that has to be over multiple funds. Yeah, for sure.

Founders Fund invested across a couple of different funds, and this information is from the information, which we'll link to in our, that's confusing to say that, but capital T, capital I, the information, and we'll link to that in our sources. I think they came up... with about $3 billion after investing about $150 million. So it's just like winners all around here. YC owned 2%. Greylock obviously won big. Andreessen Horowitz invested $60 million.

when they valued Airbnb at about a billion dollars. So I think they probably have three-ish billion coming out of this. So lots of winners in the venture world. You also look around, you mentioned Keith Raboy, Kevin Hart, Jawad Kareem personally. You've got Ron Conway, DST. Jeremy Stoppelman from Yelp was an investor. Obviously Bezos personally.

ended up investing. This is like an Academy Awards speech. It's crazy. You got Jared Leto, you got Ashton Kutcher, and then by proxy Demi Moore. 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? So should we move on to narratives? Let's see. One thing to know before they IPO'd is they had... 2.7 billion of cash in the bank and then they had another 1.8 billion in marketable securities so When they were going to double that cash because they were going to raise 2.4, they ended up raising 3.5. So they now have 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 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 as high as where it is right now. Well, I'm just so confused. You would think that.

I'm just so confused. Maybe we should discuss the narratives. David, whatever could you be confused about? Let's go into narratives. Oh, great. Okay, well, should we discuss the bold 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 coming in. You know, the biggest, for me, the biggest ball 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 mode. They have 91% direct traffic. 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. 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 Airbnb type supply too. But that's the biggest bulking. I think maybe there are two other dimensions as well. I think that's probably the biggest piece. But one being that coronavirus and COVID has perhaps permanently changed some behaviors just like

The part of the DoorDash bull case perhaps permanently changed 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 small part of this. And then I think the second piece is also, we've talked a little bit about Tam along the way.

Yesterday with DoorDash, that was one of the 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? You know, I think for... Airbnb, what has always been true here is that there are no questions on TAM. Travel is big, and although it has taken a big hit this year, it's going to come back.

Yeah, they cite a $3.4 trillion number on their TAM. And I think that the way they break that down is that $1.8 trillion of it is short-term stays. And then only $210 billion of it is long-term stays. So the long-term stay market, which is longer than 28 days stays, is actually smaller than the food delivery market, which I think is sort of an interesting... an interesting comp and tells you why they're not

sprinting that aggressively toward long-term stays, but rather they believe there's a $1.4 trillion opportunity for experiences, which explains why they're beating the experiences drum so hard. But let's just focus on that $1.8 trillion market of short-term stays I think we can throw out the rest of it. Yeah. Yeah, a lot of room to run there. So I think that's the book. I think if you believe all of those things, And one more stat on the unique supply, great brand, direct traffic thing.

The comp there is Expedia and Booking spend about $11 billion a year on Google Ads, which I think makes them Google's top customers or top handful of customers. And so classically, the online travel agent market 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's why this direct traffic thing is such a big deal is 91% direct traffic to Airbnb is such a big deal because other players have not been able to

acquire a customer once 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 contextualizes why people are so excited. Yep, totally. That is a...

massive benefit to the company and 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 $11 billion. Totally.

Totally. Okay, well, I would say, should we paint the bear? I don't know that there are any bears out there right now to make a bear case. We should look at the short ratios and see. Yeah, and see. Okay, so, well, bare case,

I think, to me, the biggest piece of the bear case is what we spent the last part of history and facts talking about, which is the growth is slowing. Everything... may be true about the product and the unique supply and whatnot but like If you want to believe that you're going to access a very, very large chunk of that $1.8 billion short-term stays TAM, or $1.8 trillion short-term stay TAM,

You need to still be running fast growing into that. And what did they do last year? $38 billion in gross bookings, I think. Airbnb did. Yeah, that's like a lot of billions, but that's not a lot compared to 1.8 trillion. And for the growth to be slowing significantly...

then you wonder how much of this TAM are you really going to access. Right. So what does that mean? Does it mean that their TAM isn't actually the 1.8 trillion for the short-term stays and it's actually much smaller, like the addressable part of that? Or is it that somehow they're just failing to market to the vast majority of people who are living their life in this way and paying for things in this way? Well, I think it's interesting. I think it's probably both, right? At least think about it.

My use case and it sounds like yours is the same use case with Airbnb over the last couple of years. In the early days, when it was just much cheaper than hotels, it was almost all of my travel. But then the prices went up and equalized more. 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 100% of the time. It was a mix.

Right. And I don't necessarily see any path where prices are going to go down again on Airbnb and you're going to have that kind of dislocation in the market, the arbitrage between Airbnbs versus hotels as a traveler. So I think it is going to get segmented out. Now, maybe back to the bear, it gets it back to the bull case, if you believe that post-coronavirus is just a preference for hotels.

is going to go down a lot, then maybe this is going to be a big accelerant to Airbnb. Yeah, I think that's the right way to think about it. Yeah, man, the bear cases kind of keep going for me. So there's this potential market saturation thing 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. VRBO is starting to see a lot of the formally only Airbnb listings show up there. Booking is trying like hell to be able to... have these sort of unique experiences, the Airbnb type of listing in addition to hotels on their platform. So everyone is skating toward a more homogenous set of supply than has existed in the last 10 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 maybe a good... case to talk about our own experiences as hosts too. Because I think probably an argument against that and 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 don't know, how are we feeling at least as hosts? I'll tell you, I mean, I'm someone that this year has put my Airbnb also on VRBO. It was a huge pain to actually do that because VRBO's product is like, imagine... taking Airbnb's product and then just like making it like 30 to 50% worse in every way. And that is the product experience of being a host on VRBO. But once you have it up, like it's up.

Sure, you have to figure out how you're going to block nights on different calendars, but I was never someone that multi-homed, and I am now, and I know lots of other people who are the same way. It's an opportunity to maximize revenue, minimize vacancy. 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 but if we were 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 are biased to fill rates versus maximizing revenue. 100%. I was going to save this for later in the show, but 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. It's smart pricing for Airbnb. Airbnb wants to maximize exactly what you're saying, nights booked and total revenue. But I, as a host, do not want to maximize total revenue at the expense. Like I wouldn't want to take a $30 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 smart pricing couldn't care less exactly well and so this is the point i was going to make is that like

I care about price. I want to maximize my revenue as a host. There are these other viable platforms out there. No, they're not as nice to use as Airbnb, VRBO, HomeAway, and Booking.com. On the other hand, they do have They do have gas. I mostly trust them. I have no reason not to trust them. I think they're viable. They're not some fly-by-night competitor that's going to send crappy guests my way. Anytime...

And 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 a round as a company or you're a host of a apartment 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 lists. 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.

But, you know, unfortunately, because we perceive you violated this policy, your listing is banned. Or, like, we're blocking a week. Or, like, you know, for people who are using this as their livelihood, like, Imagine if you only listed 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.

I think now that this market is maturing, we're going to see more and more people not willing to take the single provider risk. And 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, you can pretty frictionlessly as a host

have your property listed across all these platforms and not worry about keeping it in sync and having costs associated with that. Yeah. I do think like one credit we should give to Airbnb and like, 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. There's other things I'm negative about, but the sum total of innovation they've created is unfreaking believable. They're one of the few companies that actually did create an ecosystem around them. There's obviously the ecosystem that has yet to be proven with the sort of like professionally managed

Airbnbs or the people that own big blocks of Airbnbs. Yeah, that sort of thing. But something that's totally been proven as sort of a successful smaller business is all these different software plays. 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.

You got to credit them for enabling an innovation ecosystem. One more bear case. I had one too. I don't know if it's going to be the same. So yesterday on the DoorDash episode, we mentioned that with their stock pop, they're seriously butting up against the edges of 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 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, 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 first real year of the company.

that they've done well. And I just don't think the company is a master executor outside of that initial opportunity. 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-designed tiny homes. Even Plus. I don't know. Were you on Plus Airbnb? Totally. But it became meaningless. It was a terrible experience. It's a bad experience and it got totally diluted, much like Superhost. Like, what does that even mean anymore? Nothing.

So it just feels to me like the personality of the company is one where they're really proud of their ideas and they want to 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? The only thing I can think of, I was thinking about what you said, the only thing I can think of that was... 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...

innovated on Instant Book. 100%, 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 enabled this product to provide tons of value on both sides. But it's all, but really Instant Book, that's part of the initial product. Like that's not.

that's not a subsequent thing. So I agree. I think the other, I debated whether to talk about this in power, but I think, I think it makes more sense in narrative, maybe leading into power for a bear case on the company is, uh, as we talked about in the book, you've got to believe that they're going to keep

penetrating a huge part of this huge TAM. And you probably also have to believe at these prices that coronavirus has shifted the winds in Airbnb's favor. 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.

Airbnb is not Amazon. They are much, much, much more like eBay. And eBay has been on a similar path, enormous TAM, global network effect. torrid growth for many years, but then has slowed and has, you know, now it's

I don't know what their growth is, but it's fine. They're still a decent-sized company and whatnot. We don't talk about them as part of the fang. We don't talk about them as part of the fang. 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 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. There are a bunch of them out there. Like you name a niche.

interest of buying and selling something, there is a verticalized marketplace out there that 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. Now, how much this will happen and how deep Airbnb's mocos and how big their core market... I think it's still a question, but HipCamp is out there. Hipcamp is in the process of offloading camping-type experiences from Airbnb.

It's not hard to get to the tiny green homes or detached ADUs or anything from there. You can see how they start. Outdoorsy out there is doing the same thing for RVs. You can book an RV on Airbnb or you can book an RV on Outdoorsy with dedicated feature-specific stuff that people care about. uh 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 going to stay on Airbnb versus how much of that is going to go to some of these other new platforms or even new ones that are in their infancy or yet to be built yet. That's a great point. And you think about 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 all the other third-party seller tools that...

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 going to carve off, it was just never interesting enough as a seller because they couldn't get to this 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

Cleaning's a big one. 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 Airbnb 13 years in hasn't built. host services for, you can imagine those things being game-changing for their lock-in and for 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.

Eh, same thing. I trust it. It's got the Airbnb, the Amazon stamp of approval on it. Yep. Alright, so we move into power. Yeah, let's do it. The way that for folks who are new to the show.

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. 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 one thing that after reading Seven Powers always stuck with me was Hamilton makes the point that, look, the markets are not short-term focused. Everybody who's accusing Wall Street of valuing a company based on last quarter's results, that's not at all what they're doing. They're using that as a bellwether for the next 30 years of results.

And sure, they may swing too far in one direction. But really, the way that 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 discounted to today. And so as you think about 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 $100 billion market cap company today, To what power do you attribute Like, why do you believe that they're able to do that? And so, David, with that preamble aside, I'm curious, what types of power do you think show up in Airbnb? Yeah, I think it's, well, okay.

Totally obvious one, just like scale economies were the totally obvious one for DoorDash. 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 in a business rivaling. You know, I think generally... If you think about network effects, like network, single-sided 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 hosting guests You know, like you would have an eBay or Amazon or here. in Airbnb tend to just generally be a little weaker because you're bifurcating the types of participants in the platform. This is amongst the most powerful of the dual-sided network effects I've ever seen because it's global, it's not local. and you really care. The way you measure network facts is you ask,

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 Instagram, it's like, no, no, I really care that my friends are there. Like having more people on there, I actually really care about that. That's the whole point. For eBay, do I really care about the 16,000th seller of the latest iPhone? Yeah, I mean, maybe it 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 another way to frame that is for things like iMessage, where I really only iMessage with like 10 or 15 people. as long as the 10 or 15 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 that I want when I get there and that is like a truly amazing network effect where, 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 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 there are a thousand people on Facebook I care about.

uh on instagram that 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. Yeah.

Yeah. Okay. So I think that's a big one. I do think there's another one though. that is becoming, this power is weakening for Airbnb over time. But in the beginning was big. Counterpositioning? Yes! Yeah, that's exactly what I had to. I was like, is counterpositioning one? Well, less than it used to be. yeah i think that in the early days totally 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. So basically the operator of a hotel and brand at Marriott and take on the lease. Management company. Yeah. I guess they don't take on the lease. They sign a contract to be the management company with the... owner of that building. But 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 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. Yeah, I think this was, well, A, it was just market dislocation, but... 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 house in San Francisco on the platform.

i'll make incremental money my cars cost aren't that big cool i'll list it for 300 bucks a night whereas a hotel you're like well 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 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 become uncornered and go list on multiple of these systems. And I think that's going to 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 blessed on homo it's fine

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 and what take rates you can command with each one. And I've heard it described where something like Uber is Marketplace Assign versus something like Airbnb is Marketplace Assist, where in Marketplace Assign,

Because all of the supply is completely homogenous, it's 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 business can command a higher take rate they get to control more of the economic

For something like Airbnb, I browse and they assist me to browse, but I pick the specific house and 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 kind of you know they obviously have fees on both sides they charge the

guest more than the host. But they have fees on both sides. They're trying desperately to get more and more of the take rate but ultimately they're never going to get to that 30 plus percent 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, I agree. 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.

Alright, 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 did an IPO, I think we should run a counterfactual that compares Airbnb to booking.

which is a very different business. You know, booking doesn't have this sort of... What did we say? Our number five acquisition of all time? Yeah. I mean, my gosh. I forgot they were called Priceline at one point. Priceline buying booking was... Just an unbelievable acquisition. And yeah, if you're curious, we did a whole episode on that. It was booking in Amsterdam and what was the London company? They bought two companies.

Took the booking name, but the other one was in London. I can't recall. Anyway. Yeah. But while these are two very different businesses, one, 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 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 income statement of both companies. So let's look at 2019 before the effect of the pandemic. We've talked about Airbnb had $38 billion flow through their system from people staying in Airbnbs to hosts. and to Airbnb and to taxes over the course of the year. Of that, they took $5.3 billion of that in revenue.

For any of the knocks that we've had on Airbnb so far, this is a $5 billion a year revenue company pre-pandemic. It's a big freaking company. So the effective take rate on that is 13.9%. 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 take the gross divided by the, or the revenue divided by the gross to come up with that ineffective take rate. Their net income when you go all the way to the bottom line, is that they lost $700 million.

so all that that 5.3 billion in revenue 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, 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.

And I think it's something like the average person books like 36 days or something like that out ahead of time. I think it's shorter now in COVID. It's something like 24 days, but maybe they have on average a month. of free cash flow there or you can think of it as like net 30 effectively on the payment okay so booking about two and a half times bigger 96 billion dollars in

in gross travel bookings, $15 billion in total revenue. So about three times bigger in revenue. That's an effective take rate of 15.7%. So they get to actually own a little bit more of that transaction than Airbnb does. This is where they're very different. Booking turned that into $5 billion of pure, raw net income.

Profit that's owned by the business and its shareholders. Also having to spend a lot more performance marketing than Airbnb. Totally, right? They're cutting... six, seven, $8 billion check to Google every year, and they're still able to generate $5 billion in net income. Very different businesses. I think actually, I don't know for sure that this booking number factors out flights. It may include flights in there. But the point to make here is like...

And flights are kind of a silly thing to include because they don't really generate any real revenue on all the revenues made on flights. 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. 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 increasing their expenses faster than they're increasing their gross profit scale. Yeah. Yep.

All right, playbook. Playback. All right, so playbook is if you wanted to...

start Airbnb what playbook would you run to do it and of course no one can do that because no one can teleport to 2008 and have a unique and original idea but if you want to draw parallels 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 going to happen to you. Some people can only go on vacations that they otherwise couldn't afford as a host. 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 enabled.

millions and millions of people to do around the world. There's people that can weather job losses, negative life events. I can't say enough about... how much value they created and how much that makes people want to root for your company and put up with a lot over the years. And obviously it comes with a lot of responsibility as people become dependent on you, but I'll sort of hold on that for now 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 efficient frontier is like price and quality. So like if you think of a little graph of like 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 an efficient frontier along that of a curve. 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, I get more quality for less money. Right. For any given price, I get more quality all the way across the spectrum. Exactly. Or even maybe it's only for a portion of that curve. But, like...

For some area of the graph, you have exceeded the current market. If you can do that in any market, you will be successful. And Airbnb did this. incredibly well across pretty much the whole graph.

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 talked sufficiently about that one. One we haven't talked about is addressing Europe. 43% of nights are booked in Europe on Airbnb. This is not a US-centric company. Paris is the biggest city.

Wow. Historically, it always was. Yeah, only 29% of bookings are in North America. Interestingly, revenue is about even between the two, which means people are spending more money to stay in North American Airbnbs than European ones. Until diving into this research, I don't think I would have guessed that 43% of its business is done or bookings are done in Europe. 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, Uber's... But they're not US-based. Yeah, well, but they're not US. I mean, they're technically US-based, but yeah. Uber's large in Europe, but I think probably larger in the US. Yeah. Do you have more? I do, yeah. Free cash flow is one that I think, I don't think I have anything new to say.

here. I think, uh, that's my last sort of like positive playbook one i do have some more this is kind of our barren 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 i'll turn it over to you first in case you're Well, then let me actually maybe expand a little bit on what I was going to say on the free cash flow point, which is, I think part of the reason that Airbnb 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 the market operates And they set the terms that you pay us up front and then we pay out the host when you book. Now that's different from hotels like on booking.com and others. Usually like you make the booking on booking.com, but you don't pay until you check in at the front desk.

And Airbnb, just 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 interesting to know, 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. Yeah.

Dave, I'm raising a round. It's not a seed round. It's a new form of investment. Well, like on our LP show, you know, Ron will talk about... his fundraising philosophy and all that. Like he kind of, he did that in a lot of ways with, with 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 been able to harness is a gift and a curse. And we talked a lot about 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 compared to your competitors who are, you know, laser focused on it. I get worried. especially when you combine that with the fact that their guest cohort retention drops like a rock after the first year and never really comes back. anywhere close to the first year of spend. It's a very leaky bucket funnel.

And there's very reasonable rationale for this where You know, most people go on one vacation a year. So unless Airbnb is getting 100% of your spend, you're not going to be able to do that. But you look at DoorDash, which we covered yesterday, where every cohort spends 50% more than the year before as time goes on. Net of churn, the revenue of that cohort goes up 50%. Airbnb in year two drops to 30-something percent.

hopefully they are able to get back up to 50%, but they, at least so far from what the data we've seen, 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 grow when that's the case.

My last one, I don't know if it's the last one. My next one is about reviews. So 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. But they still have a crazy amount of host consistency and quality issues. I think it's a thing that's holding the marketplace back is that you have to hunt through a listing like crazy. There's several listings to find somewhere decent.

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'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.

which I think is kind of like the Airbnb equivalent of winning the participation award. Like, yay, you're a super host. You held two people that didn't give you terrible reviews. Congratulations. So I just think that the company... relied heavily on reviews will save us for everything, but it hasn't been a silver bullet in making it easy and enjoyable. Yeah, most reviews are meaningless. Yeah.

There are some that are helpful. And it hasn't been the hammer that's solved every nail of giving you confidence when you're looking for a place to book to book. One thing that I wanted to call out that wasn't in the S1 that I think could be pretty damning and I really would like to know the numbers is host churn. They talk about revenue for hosts, but... I really do think it's getting worse and worse to become a host over time as the company does.

is subsidizing less and less things with investment dollars, is thinking less and less like a startup, is trying to be more profitable. And I think that that's going to 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 mine along there, too.

All right, value creation and value capture. So this section has two components. The first is literally the name of the section. Are they Craigslist at capturing the value they create in the world or are they Google? who does a very good job of creating the value or capturing the value they create. And then lastly, how do you compare the value they created for the world? to any value destruction that they've had.

And I don't think Airbnb is 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. There's a good Harvard Business Review article that basically says, I think this is a quote, this means that in aggregate, the growth in home sharing through Airbnb contributes to about one fifth of the average annual increase in U.S. rent.

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 the short-term rental market. And Airbnb has this, I have no ability to sort of rule on this. I'm not here to arbit whether this is 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 netting the negative impacts against the positive impacts. So you're saying you're not putting in a betting market placement on Nobel Peace Prize happening anytime soon? I don't know how that's decided, so I shouldn't bet on it. I think it's worth making the point that Uber is condemned as this massively evil company and yet created a way for millions of people to earn a living.

Airbnb is this sort of like wonderful brand that had all of its hosts around or many hosts around the world ring a bell and create a nice video to open the IPO this morning. And that's largely consistent with their brand. And yet, there's a lot of potential value. 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 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 the ads. Like, hey, they're living there. They would live there anyway. This is 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 the question is, what is the percentage of each of those use cases of supply on the platform? I don't know. I've seen estimates as high as over 50% is more the hotel use case removing housing stock. But this is one where like everybody who's got a Everybody who's waving a data sheet has an opinion here and has a horse in a race.

Other than the Harvard Business Review article, I found that there's two sources that have very detailed reports on this. One is Airbnb, and the other is an extremely liberal, sort of like labor-focused, funded think tank. And you're like, okay, well, you're, who else has, you know, who else has like one, you know, New York City has fought on this for a long time against Airbnb. And so like the New York City has lots of housing commission has lots of data on this.

I don't know that just that either. Point is, there's no doubt that a large portion of the supply on the platform is property managers. How much that is, I don't know. Now is a great time to thank good friend of the show, ServiceNow. We have talked to listeners about ServiceNow's amazing origin story and how they've been one of the best performing companies the last decade. But we've gotten some questions from listeners about what ServiceNow actually does.

So today, we are going to answer that question. Well, to start, a phrase that has been used often here recently in the press is that ServiceNow is the quote-unquote AI operating system for the enterprise. But to make that more concrete, ServiceNow started 22 years ago focused simply on automation. They turned physical paperwork into software workflows, initially for the IT department within enterprises. That was it.

And over time, they built on this platform going to more powerful and complex tasks. They were expanding from serving just IT to other departments like HR, finance, customer service, field operations, and more. And in the process, over the last two decades, ServiceNow has laid all the tedious groundwork necessary to connect every corner of the enterprise and enable automation to happen. So when AI arrived,

Well, AI kind of just by definition is massively sophisticated task automation. And who had already built the platform and the connective tissue within enterprises to enable that automation? ServiceNow. So to answer the question, what does ServiceNow do today? We mean it when they say they connect and power every department.

IT and HR use it to manage people, devices, software licenses across the company. Customer service uses service now for things like detecting payment failures and routing to the right team or process internally to solve it. Or the supply chain org uses it for capacity planning, integrating with data and plans from other departments to ensure that everybody's on the same page. No more swivel chairing between apps to enter the same data multiple times in different places.

And just recently, ServiceNow launched AI agents so that anyone working in any job can spin up an AI agent to handle the tedious stuff freeing up humans for bigger picture work. ServiceNow was named to Fortune's World's Most Admired Companies list last year and Fast Company's Best Workplace for Innovators last year, and it's because of this vision.

If you want to take advantage of the scale and speed of ServiceNow in every corner of your business, go to servicenow.com slash acquired and just tell them that Ben and David sent you. Thanks, ServiceNow. David Grading.

How do we decide we want to grade this one? Do we want to do the same as DoorDash yesterday of use of capital? Collectively, how good of a use of capital was it for the company and the investors to go after this business opportunity in this way?

There's nothing to say here. This is like the greatest use of capital of all time. It's 100% A+. How could you not say that investing $585,000 in the seed, having this company build this product and thing with such amazing cash flow and business dynamics that then they're like generating cash And...

have that be worth, you know, whatever Sequoia is going to make today. And then all the other capital that went in along the way too. Yeah, what did they raise to be before the Silver Lake round? Ooh, let's see, before the Silver Lake round, I believe it was around... $3 billion, $2.5 to $3 billion that they had raised. So comparable to sort of DoorDash, but 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 and just think about that total $3 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 slowing growth, around increasing competition. certainly around valuing this company at $100 billion 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 exists an end state where that is, they can be a very profitable business. even with a reasonable amount of competition in the market.

I think there exists a steady state for this business where they don't need to spend as much on R&D, they don't need to spend as much on sales and marketing, and they're able to.

spinoff 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 me doing the research and thinking about this and talking to people it's just so clear this is ebay here that's that's what this is that there's the same type of network effect same dynamics same cash flow dynamic like this is ebay a capital light business

So, yes, I agree. But I think that's a good point to be an A, not an A+. An A+, would be... yes and they're already because 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 sized cost structure right now like doing things like you know the film studio and

places and experiences and the airline 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 efficient operations would already have been generating hundreds and hundreds of millions of for 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 CFO now there for almost a couple of years who's had great, I think.

CFO was the CFO of Amazon's worldwide consumer retail. They've really buffed up the management team with capital allocators. Depending on how they all work together, I think there's real potential here to lean out the business while still growing and realize the great you know, profitable dynamics it could have. Yep.

Man, what 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. We have some highlights. Pinduoduo and Virgin Galactic in there. SpaceX, was that in this one? No, that was last season. Epic though, our epic episode was what? Epic. The NBA. NBA was so much fun. Yeah. I loved DoorDash yesterday. That was fun too.

Unlike DoorDash's, I will only have one carve-out this time, and it's much lighter weight. So it's a Spotify playlist that I actually have no idea who made it, but it's Star Wars Lo-Fi Hip Hop. And it's covers of all Star Wars music in a lo-fi hip-hop style. And it's just phenomenal work and research music. Oh, that's awesome. 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 links for Carbouts and Sources so I can start listening to that one.

You got it. My carve-out, 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 here in San Francisco, which is... 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 you know consists of

packing auditoriums full of 3,000 to 4,000 people and having world-class artists perform in front of them while touching each other as part of the art form. So that's been a roller coaster. And SFB 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. So it's a recording of the Nutcracker, but it's like, I mean, I've seen SFB's Nutcracker. dozens of times probably at this point but it's it's a different experience to watch it online because you know the camera zooms in and like

It's a different experience and they have a cool digital, like a virtual opera house tour and experience around it. So we'll link to it in the show notes. Recommend if you need some holiday, virtual holiday cheer, check it out. It's very cool. Well, for folks who don't know, as we start to wind down here, we have been codifying the playbook section from each episode in some written bullet points.

And we email those out now after posting each episode. So if this is something you want, you can sign up to receive those playbooks. at acquired.fm. And if you join the acquired community Slack at acquired.fm slash Slack, you'll also automatically be signed up for those. It's a great way to kind of have something a little bit more shareable and tangible and referenceable 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, which actually the last three, we've talked to the author for each one, and hopefully we'll have a fun one to announce early in the new year as our next one.

You can become an LP, seven days for free trial. You can exit out of that at any time if you want. So it's risk-free at acquired.fm slash LP. LP subscriptions make great gifts. for the acquired fan in your life. So you can sort of figure that out on your own. It's a little tricky to kind of go through. So feel free to drop us a note, acquiredfm at gmail.com if you want instructions for how to gift the LP subscription.

And on that note, you know, we said this yesterday, we want to say it again. We feel very strongly that financial hardship should never keep anyone from being an LP. And we want as diverse a group as possible and people of every life stage and every life experience.

So please shoot us a note, acquiredfm at gmail.com, and just introduce yourself, and we're happy to help you out if finances are a constraint. Lastly, if you weren't subscribed and you like what you hear, you should. And if you liked this episode,

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... Any type of farm animal. You've been looking to get your parents into Airbnb 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 will understand. So consider this your opportunity to share the gift of acquired. This holiday season. I can't even get through it without laughing. We have some holiday joy happening here. No kidding. Everyone, have a wonderful Christmas, Hanukkah, New Year's, whatever it is that you celebrate.

time with or without family or perhaps with folks on Zoom. And we will see you next year. Yeah, I'll know. We're going to have a little special. We have a special. A special little holiday present for you coming next year. We're going to be coming out next year, next week. Yeah, let's not announce it. It's outside the bounds of...

of our official season here, but we're excited to get this one in your hands before the end of the year, too. Some holiday fun. Yep. All right. On that note, thanks so much, everyone. We'll see you soon. We'll see you soon.