| NEW TRICKS FOR AN OLD UNI­CORN

Forbes - - CONTENTS - By Biz car­son

A decade ago Airbnb rein­vented hos­pi­tal­ity, mak­ing ac­com­mo­da­tions less ex­pen­sive and more ap­peal­ing. Now it needs to quickly ex­pand to sup­port its $31 bil­lion val­u­a­tion be­fore an ex­pected IPO—all while be­ing run by a CEO who isn’t sure he should put in­vestors first.

A decade ago Airbnb rein­vented hos­pi­tal­ity, mak­ing ac­com­mo­da­tions less ex­pen­sive and more ap­peal­ing. Now it needs to quickly ex­pand to sup­port its $31 bil­lion val­u­a­tion be­fore an ex­pected IPO—all while be­ing run by a CEO who isn’t sure he should put in­vestors first.

Airbnb hAs joined the rAr­efied group of com­pA­nies—google, XeroX, uber—whose nAmes hAve be­come verbs.

Fa full 32 se­conds, the no­to­ri­ously fid­gety Brian Chesky sits still. Planted un­der a fake tree in a be­spoke con­fer­ence room at Airbnb’s head­quar­ters in San Fran­cisco, the 37-year-old CEO is in­tently fo­cused on the iPhone in his hands. It’s play­ing a mar­ket­ing video show­ing goats min­gling with guests dur­ing an Airbnb Ex­pe­ri­ence at a North­ern Cal­i­for­nia an­i­mal sanc­tu­ary, of­fered as part of the com­pany’s two-year old tour guide busi­ness. A sheltie named Osso (short for Os­sobuco) sits un­der the con­fer­ence table lick­ing the bil­lion­aire’s black sneak­ers. As the sound of the last bleat fades, Chesky seems moved. “Wow,” he says to the eight em­ploy­ees closely watch­ing his re­ac­tion. He re­leases a deep breath. “I feel some­thing.”

Maybe this is progress, a re­turn to the mag­i­cal feel­ing Chesky wants Airbnb guests to feel. Airbnb be­came great by of­fer­ing unique, af­ford­able ac­com­mo­da­tions in a cookie-cut­ter world. And in the decade since its found­ing, it has rid­den a gen­er­a­tional change in so­cial at­ti­tudes—with dig­i­tal na­tives sud­denly be­com­ing com­fort­able ac­cept­ing rides from strangers, swip­ing right for hookups and sleep­ing in spare bed­rooms—to a $31 bil­lion val­u­a­tion, rais­ing over $3 bil­lion in out­side money. Along the way Brian Chesky and his two co­founders, Joe Geb­bia and Nathan Blechar­czyk, have each ac­cu­mu­lated a $3.7 bil­lion for­tune from their Airbnb shares, and the startup they built has joined the rar­efied group of com­pa­nies—Google, Xerox, Uber—whose names have be­come verbs.

But with all that money comes a unique chal­lenge. Call it the curse of the uni­corn: How can Airbnb jus­tify a val­u­a­tion that is higher than Ex­pe­dia, Hilton or Amer­i­can Air­lines? Al­though Airbnb has a $3 bil­lion war chest, it earned just $100 mil­lion last year on a cash flow ba­sis from $2.6 bil­lion in rev­enues, or about 4%. (Its larger, pub­licly traded com­peti­tors have mar­gins of about 27%). How can Airbnb keep grow­ing—amid sharp­en­ing com­pe­ti­tion and in­creas­ing reg­u­la­tory scru­tiny—and de­liver the 10x re­turn their ven­ture cap­i­tal­ists de­mand? Mak­ing it all the more press­ing is the prospect of an IPO, said to be on track for as early as mid-2019.

It’s par­tic­u­larly dif­fi­cult for Airbnb, be­cause un­like, say Google, which has rev­o­lu­tion­ized ev­ery­thing from search to phones to cars, up to now Airbnb has largely been a onet­rick pony. It con­nects peo­ple who have va­cant homes and apart­ments with peo­ple want­ing to rent them. That’s it. Hence Airbnb’s new­found in­ter­est in sell­ing guided tours with Ex­pe­ri­ences or help­ing with restau­rant reser­va­tions through its part­ner­ship with Resy.

Com­pound­ing mat­ters is a weak ex­ec­u­tive team that lacks a chief fi­nan­cial of­fi­cer and a chief mar­ket­ing of­fi­cer less than a year from its goal of be­ing IPO-ready. Then there’s Chesky, a CEO who—de­spite ac­cept­ing bil­lions from in­vestors—is not putting their in­ter­ests at the front of the line.

“The score­card for com­pa­nies has changed,” Chesky says. “Be­fore, it was re­ally about fi­nan­cial met­rics, and I think now com­pa­nies are re­al­iz­ing we have a greater re­spon­si­bil­ity to so­ci­ety to make sure life is great.”

The plan, such as it is: Draw­ing loosely on Ama­zon for in­spi­ra­tion, Chesky wants Airbnb to be an ev­ery­thing store, but for trav­el­ers. Chesky hopes a bil­lion peo­ple a year will use Airbnb by 2028, a gi­ant leap up from the to­tal of 400 mil­lion who have used the ser­vice dur­ing its first ten years (roughly 100 mil­lion peo­ple have stayed in an Airbnb so far this year). Fol­low­ing the Be­zos blue­print, he’s rewiring Airbnb’s tech­nol­ogy so that it can quickly scale up hun­dreds of busi­nesses and cat­e­gories faster than ever be­fore.

“At some point, the law of large num­bers means that you just need to plant more seeds,” Chesky says.

But Chesky also wor­ries that run­away growth could im­peril Airbnb’s unique­ness. As a re­sult, he is try­ing to po­si­tion Airbnb as what he likes to call a “21st Cen­tury Com­pany,” one that’s be­holden not only to fi­nan­cial re­sults but also to other stakeor

“When some­thing comes easy, you don’t have to build the mus­cle. and What came easy Was a lot of list­ings.”

like guests, hosts, em­ploy­ees and cities. Chesky views this not as touchy-feely cor­po­rate-cul­ture stuff but as sur­vival: De­ci­sion-mak­ing must be driven by what’s best for ev­ery­one in Airbnb’s com­mu­nity. Only then will his in­vestors thrive. “The pub­lic is not go­ing to put up with com­pa­nies in the next 50 years that are only kind of my­opi­cally, nar­rowly fo­cus­ing on the very short term or just a few par­ties,” Chesky says.

The re­sult is ten­sion between Airbnb’s need to scale rapidly and Chesky’s de­sire to take it slow and build some­thing that’s re­spon­si­ble and sus­tain­able. “The re­al­ity is that you’re not go­ing to be around long-term un­less you’re able to grow and gen­er­ate at­trac­tive eco­nom­ics,” says Kenneth Chenault, the for­mer Amer­i­can Ex­press CEO and an Airbnb board mem­ber. “You’re also not go­ing to be around long-term if your brand is not mean­ing­ful in peo­ple’s lives.”

KnocK twice on the booK­case and a holo­gram of Joe Geb­bia ap­pears. It’s a par­lor trick of the real Geb­bia, the 37-year-old Airbnb co­founder, as he set­tles into a con­fer­ence room that is a mock-up of his old apart­ment, half a mile north­west of the com­pany’s San Fran­cisco head­quar­ters. Be­hind him, the ghost ver­sion of Geb­bia drones on: “You’re stand­ing on the ex­act spot where we put the first three air beds . . .”

It’s a found­ing story that has achieved myth­i­cal sta­tus in Sil­i­con Val­ley and re­mains at the core of Airbnb’s iden­tity. Geb­bia and Chesky, grad­u­ates of the Rhode Is­land School of De­sign, were short on rent, so they charged peo­ple vis­it­ing San Fran­cisco for a de­sign con­fer­ence to sleep on an air mat­tress on their floor in 2007. They tapped a third friend, Nathan Blecharzyck, to help them build a web­site.

Orig­i­nally called Air Bed and Break­fast, the startup wasn’t an overnight suc­cess. Af­ter 12 months it was do­ing only 10 or 20 reser­va­tions a day. But the trio were al­ready look­ing for out­side money: In June 2018 they sought in­tro­duc­tions to seven an­gel in­vestors and were re­warded with five re­jec­tions and two ig­nored emails. The ask? $150,000 for 10% of the com­pany, a po­si­tion that, undi­luted, would be worth over $3 bil­lion to­day. Broke, the founders col­lected credit cards like base­ball cards, or­ga­niz­ing the maxed-out plas­tic in binders. The big­gest prob­lem: Lack of trust. Peo­ple weren’t com­fort­able invit­ing strangers they met on the in­ter­net to stay in their homes.

“It was a real bat­tle to fig­ure out how can you cross this bias that was work­ing against us, that strangers equal dan- ger,” Geb­bia says. “It’s some­thing that we’ve all been taught since we were kids.”

The founders couldn’t fix the prob­lem from their desks in San Fran­cisco. They be­gan stay­ing with Airbnb hosts to learn what needed to be done. They built out a peer re­view sys­tem so peo­ple could rate each other, added around-the­clock cus­tomer ser­vice and worked on the qual­ity of the pho­tos. The fi­nan­cial melt­down of 2008 also pushed trav­el­ers to tighten bud­gets, and cash-strapped hosts were more will­ing to brave “stranger dan­ger” in or­der to earn a lit­tle ex­tra in­come.

Early on, Airbnb dropped the re­quire­ment that guests had to sleep on air mat­tresses and be served break­fast, and ev­ery­thing from back­yard tree­houses to sin­gle bed­rooms in a shared apart­ment was soon listed on its web­site. By 2013, Airbnb had 500,000 list­ings. Now it counts over 5 mil­lion.

Those folks typ­i­cally learned about Airbnb by word of mouth—even to­day, the com­pany spends more than 90% of its ad­ver­tis­ing bud­get on at­tract­ing the guests, not the hosts. That strat­egy has worked so far. In 2008, roughly 100 peo­ple stayed with Airbnb on its peak night. In Au­gust 2018, nearly 10 years later, 3.5 mil­lion peo­ple stayed with Airbnb on its best night. (The av­er­age is around 2 mil­lion.)

Af­ter so many years of ef­fort­lessly sign­ing up hosts, Airbnb is fac­ing an un­ex­pected sup­ply prob­lem. The rea­son is twofold. First, its suc­cess has at­tracted deep pock­eted com­peti­tors. Book­ing Hold­ings—the $12.6 bil­lion (2017 rev­enue) owner of prop­er­ties like Price­line and OpenTable—and Ex­pe­dia (2017 rev­enue: $10 bil­lion) have started em­pha­siz­ing apart­ments and va­ca­tions rentals on their sites. This spring, Book­ing Hold­ings split “al­ter­na­tive ac­com­mo­da­tions” into their own cat­e­gory, re­port­ing for the first time that it has 5 mil­lion list­ings, the same num­ber Airbnb has.

Sec­ondly, lo­cal au­thor­i­ties are start­ing to crack down. The beefs range from charges that prop­erty own­ers are us­ing Airbnb to create un­reg­u­lated ho­tels to ac­cu­sa­tions that the com­pany is ex­ac­er­bat­ing hous­ing short­ages. Cities like Berlin, Santa Mon­ica and San Fran­cisco all saw monthly list­ings drop—in some cases by more than 30%— af­ter strict reg­u­la­tions were passed, ac­cord­ing to the Den­ver-based data anal­y­sis firm AirDNA. New York City and Paris have also tar­geted the com­pany. In Japan a change in the law in June forced Airbnb to can­cel thou­sands of book­ings and es­tab­lish a fund of $10 mil­lion for in­con­ve­nienced cus­tomers.

“When some­thing comes easy, you don’t have to build the mus­cle,” Chesky says. “And what came easy was a lot of list­ings.” So in Fe­bru­ary Airbnb ex­panded its fo­cus to be more wel­com­ing to es­tab­lished op­er­a­tors, from bed-and­break­fasts to va­ca­tion rentals and even bou­tique ho­tels, giv­ing each a cat­e­gory on its web­site. It’s an ob­vi­ous way to grow, even if it tends to un­der­mine what pur­port­edly makes Airbnb unique.

One ad­van­tage: Airbnb takes a smaller cut from hosts, only 3% com­pared with the tra­di­tional 15% an on­line travhold­ers

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