Acquired - Airbnb

Episode Date: December 11, 2020

Over 13 years after its founding, one of the defining startup companies of the past decade finally makes its public debut — and boy was it a big one. But for all the hype (and all the legitimately great things Airbnb has accomplished), this is a company that looks very different today than in the past. Even before COVID, Airbnb's once-exponential bookings growth had declined to linear levels while the company's costs continued to balloon at accelerating rates. What’s going on here? Are public investors smart to bet on a permanent shift in travel behavior coming out of the pandemic? Or is this a case of unrealistic expectations? As always, we dive in. Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!Playbook Themes from this episode are available on our website at https://www.acquired.fm/episodes/airbnbCarve Outs:David — San Francisco Ballet's Nutcracker: https://www.sfballet.org/productions/nutcracker-online/Ben — Star Wars Lofi HipHop:  https://open.spotify.com/playlist/5iu1sp3UBb1rjf8KNKETtJ?si=WxPdJcRpSnelHN9qh0xYSw

I took Tani's collar off her, 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 Airbed 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 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 Ekman 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.lp and all new listeners get a seven-day free trial. Okay, listeners, now is a great time to tell you about longtime friend of the show, ServiceNow. Yes, as you know, ServiceNow is the AI platform for business transformation, and they have some new news to share. ServiceNow is introducing AI agents. So only the ServiceNow platform puts AI agents to work across every corner of your business. Yep. And as you know from listening to us all year, ServiceNow is pretty remarkable about embracing the latest

AI developments and building them into products for their customers. AI agents are the next phase of this. So what are AI agents? AI agents can think, learn, solve problems, and make decisions autonomously. They work on behalf of your teams, elevating their productivity and potential. And while you get incredible productivity enhancements, you also get to stay in full control. Yep. With ServiceNow, AI agents proactively solve challenges from IT to HR, customer service, software development, you name it. These agents collaborate, they learn from each other, and they continuously improve, handling the busy work across your business so that your teams can actually focus on what truly matters. Ultimately, ServiceNow and Agentic AI is the way to deploy AI across every corner of your enterprise.

They boost productivity for employees, enrich customer experiences, and make work better for everyone. Yep. So learn how you can put AI agents to work for your people by clicking the link in the show notes or going to servicenow.com slash AI dash agents. All right, David, Airbnb, take us in. It's time. I said 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, you know, here on the bar mitzvah of Airbnb, it goes public. That's 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 at 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 and Brad is 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, they build trust on the site with reviews. You can review each other. You, you 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. You're going through this way faster than I would have expected. I know. We've got to get through a lot here. And it seems totally crazy

at the time to everyone, including Silicon Valley. They raised 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 fame. 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 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 homemobiles 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. Couch surfing 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 have a way to pay money it was you just stayed in other people's 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 um 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 homemobiles don't end there. Couchsurfing was for a long time actually a registered 501c3 nonprofit. And then they had to convert from a non-profit 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 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 in 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 couch yep which i think was how couch surfing started i think uh i think casey was a college student and going on a trip did you ever use it i know i looked at it but i never used 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 which was about what they were doing after 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, a wonderful place. I didn't realize actually was in Providence last year. RISD and Brown are basically like co-located, like Providence is a very small town. So Brown and RISD, like all the buildings are kind of interspersed. And it's actually very, very pretty, very, 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 a slate of frame. Let's put it that way.

His friend who he meets is a beefy hockey player. And I think at this, I don't know if it was this at this time or after college aspiring bodybuilder and 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've stood out because they became super popular uh joe actually becomes student body president of risdy 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 risdy 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 is 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 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 they're called 3d id but uh it's kind of not the fit for him he's he's much more chairs or something yeah he's chairs and medical products and like you know they're like a a product design consultancy and he's a junior designer there um it's not uh not not very like glamorous and he doesn't think this is the life for him at the same time so this is what going into 2005 2006 uh youtube uh get started i remember i was in college when youtube got started and like 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 is like a

great idea that's what i want my life to be like um 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 a Crit Buns. And Joe's talked about this a lot. If you listen, we went back and listened to the 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 and then

be more comfortable during critiques hence crit buttons amazing and this is still up right still up yep you can go to uh i don't have it written down with the website we'll link to it in the show notes uh you can go online and uh and order a crit bun it's crit buns.com and it is in its full like web 1.5 glory yes in fact i think it was on the front page of the usa today and they have 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, like this is not, 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 gets 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. And he, with a couple of roommates, rents a 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, uh, you know, I remember at the time had friends out here in San Francisco and my wife, Jenny was from here and I come out and visit and, um, you know, you didn't go to Soma. It was, it was a real sketchy place. It's still kind of a sketchy place, but, uh, has transformed incredibly since then of which Airbnb is a big part of. Joe's now 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 grip on 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 gonna do it. So he quits his job, he moves up to San Francisco, he moves into the apartment. But there's a problem, you know, you've replaced, you know, Nate, this this programmer who, you know, had a job who's making money. But this guy, Brian, who's 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 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 design international design conferences is happening in San Francisco, the World Design Congress. And anybody who's traveled to Sanisco for all the big conferences that happen nowadays they're all tech conferences that happen at the mosconi center you know the 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 like i i remember looking at hotel rooms uh for the week of wwdDC before it got announced, because people were speculating on what week it would be and rates were still like five x 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 don't 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, you know, 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 sub letter 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 ha ha ha indeed i'm gonna start editing my emails with that and see if uh see if that's the magic that made it all work.

You know, yeah, I never really liked, you know, like best or 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 they come into town for the conference can't afford hotels especially you know young broke designers like us come stay with us on mats in the uh i don't know where the mats came from maybe like yoga mats or something in the uh in

this apartment i mean like i knew airbeds right like airbnb but like they called it airbed and breakfast so yeah so what's it do they mean airbeds or do they mean mats i assume maybe they they meant as 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 this out in the surprise they you know people are like oh this is cool uh 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 Surve, 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 him 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. Now, 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. And there's this famous tie between the d.school and IDEO, the design agency. So they all drive down together to Stanford, and they attend a lecture by Bill Moggridge, who is one of the IDEO, the design agency. So they all drive down together to Stanford and they attend a lecture by Bill Mogridge, who was 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, I've got them all here. He's staying with the board designers. We have airbedandbreakfast.com. And it's really hard for

young, starving designers to go to conferences. Do you think, I think Bill might have been 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 Airbed and Breakfast did not become the official accommodations provider. Hey, always pitching always selling it's good always be hustling yeah indeed so this happens the conference ends and you know they have this amazing experience and so you think right like oh okay great like this is the thing this is what we're gonna do no they don't uh they're like

oh well that was 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 and 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 maybe inspired by Airbed and Breakfast. 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 Airbed and Breakfast 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. Got it. 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, Nate 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, like, not only is he a Harvard trained computer scientist who, you know, knows how to code and develop and he can stand up, you know, internet products all on his own. He also knows how to market online. So this is a pretty potent combination here. Yep. 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 decided, eh, maybe we'll dust off this airbed and

breakfast thing give it another give it another go so they pitch it to me they actually hadn't pitched neat 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 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 City Limits or South by, you can't get a hotel room like it's a thousand bucks two thousand bucks a night it's crazy the first time i went in 2010 i couldn't get a hotel room

and i booked an airbnb yeah i think uh 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 uh this is this is where we're gonna launch it's gonna be big they go on craigslist and uh say okay like who's hosting rooms uh and who's 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 one of those 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 like you know we talk on this show about how the internet back in the day was like 12 people well it turns out in the mid-2000s it was it was still only like 12 people uh except 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. It's 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 it currently would become

and is currently the ceo of y combinator so at the time they're running justin tv they've raised some money they're you know a known startup in the valley which we've covered on our twitch episode as crazy a story as similarly crazy story as here in airbnb And Seibel says, Hey, I can, I can help you, Brian. Like he takes a liking to these guys and he knows Joe, they used to be roommates. Um, I can help you find some angel investors to make this thing. No idea Michael's involvement here. Yeah. Apparently never held any equity in the company. It was never, you know, equity advisor or anything just, uh, helped him out. And he did indeed help them out. So Brian gets back, he's all pumped up,

you know, this, this hot startup and the, 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 like, yeah, nothing's really happening with this site. So, um, I'm going to move back to Boston.oston 50 of the people who are using it are the founders so yeah so he moves back and once again nothing really kind of happens with the site for the next few months um but meanwhile sybil did make good on his introduction and he and justin khan introduced brian and joe to a bunch of. They go and do these meetings with angels and the angels are like,

you're doing what? And how many people are using this? 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 like we did it it's great pg's great and it's

still pretty early at this point in yc right but maybe you'll be able to raise some money afterwards three three and a half years into it yeah i think uh maybe dropbox has happened right oh it's 2006 one and one or two years into it yeah the. Oh, no, no. This is now 2008. But YC started in 2006 or was it 2005? Something like that, yeah. Yeah, something like that. So it's all pretty early. Dropbox and Reddit effectively have gone through,

but there haven't been any other high flyers yet. And Justin.TV. And Justin.TV. 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 moved 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 like you kind of forget how much more approachable he was. And a lot of these guys in Zuckerberg, they would all do the little startup speaker circuit because their companies weren't that valuable yet. Totally. And here's Bezos, who doesn't look like Terminator Bezos. He's full on still 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, great. Sequoia, there's a long history of Sequoia partners 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. So Brian and Joe, they're taken. They 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 convention. So they do the same thing. You know, 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 a hundred 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 Obamas and the Captain McKeans.

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 like when the stores ran out, then they like resold them. I didn't realize they like 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 you know, the actual story was, uh, they didn't have any money. They're still trying to basically make their rent, uh, on the rail street apartment in Soma. Um, and so they had this, you know, middle ofthe-night crazy idea of, let's go make some boxes, pour Cheerios into them, and sell them as limited edition. It's a 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. Stakes are a little bit lower, but. And I think, you know, so the story, like 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 a super, super far step back, though, you're like,

this is an amazing story of entrepreneurial grit. Unbelievable. 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't work and the only profit they ever made was from selling their furniture so like i you know it can kind of go either way yeah i think there's it's it's an awesome entrepreneurial um endeavor uh and a great show of scrappiness but uh it's a little bit of a double-edged sword it's also a great way to use their actual talents. Like as designers,

they didn't have to outsource the creation of the 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 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, um, Obama, I was in 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 just give them an interview anyway? I vouch for them. They're good. So Brian and Joe convinced Nate to fly back from Boston, 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 is in 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 ridiculous. Like, cereal? Come on. And so they go. They do the interview. And PG doesn't get it. He's like, people actually are doing this? Staying on each other's couches?

And 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,e 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 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, default alive being a cockroach as he would come to call them.

And 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 batch. 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, the, 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, you know, 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 scrap scrapping through things is really, you know, it's a Koya. They believe that that's one of the most important characteristics of entrepreneurship as well. And so McAdoo asks PG, well, Hey, who, who in this batch is, is most like this and pg says oh well that's easy that's the airbnbs over there love it love it so mackadu goes over he starts talking to them and he's smitten as well and this is 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 uh 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 home away and 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 for, 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. Like timing plays so much of a role in the success of these companies. And you know, this, there was so much innovation here, and all the different ways that

we'll get into around payments and reviews and trust and all that, that like it could have succeeded in any time. But boy, did they have the wind at their back from the secular trends going on to, um, you know, 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. Uh, and I think all those things are true, but you know, and, 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 build-up to the financial crisis during the go-go years. Nobody was that interested in cheap travel. So despite getting a lot of pushback from the rest of the sequoia partnership makadu does end up convincing sequoia to invest uh and um 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 you know

full traditional investment we need to conserve our cash and triage our portfolio. Let's do a small seed check. So they say, we'll lead a seed round. Sequoia will invest just under $600,000 in this company, $585,000. We'll bring in some other folks. We'll bring in- Also, that's nothing. Nothing. I mean, 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? Yes. And the funniest thing is that that actually returned that fund. Like you never, when you're... 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 Reboy, Kevin Hartz, and Jawad Karim, one of the YouTube founders. And we talked with Kevin about this on the Eventbrite episode.

They get a small, they were in the 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, $2.4 million post-money valuation. So Sequoia gets 24 and three-eighths of a percent

in ownership in the company. And the angel collective of Keith Jowett 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 dilution.

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. I mean, 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 on listings on, on Craigslist and emailing them, uh, 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, 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? I can go, you know, you can go hand-to-hand combat, convince people to put listings on the site, but how do you get them bookings? Well, 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 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, so that was Craigslist. And then the other thing they do, uh, and that Nate does is, uh, 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. 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 going to target in New York and we're going to run Facebook ads. We're going to 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 a supply to sign up on the platform. And then of course the people that they would send you to no guarantees that they like wine or yoga, but, uh, but it worked pretty well now to be fair. So 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 wanted to travel cost effectively. And I think we talked a little bit about the supply constraint nature of hotels in 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 just makes, 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. Yeah. 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 like, these are, you know, five generations ago of marketing tactics. Yeah, good luck doing that. 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, which is for something that seemed like a crazy idea nobody would do. Even the founders thought, we need to do permanent roommates, not temporary roommates. It's 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 like isn't 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 uh they probably i mean they also figured they own 24 of it they already own 24 yep and and they're trying to you know 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. Now, supposedly, and I think this is actually true,

we'll talk about Airbnb's business model in a minute, but 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. Famed profitable company, Airbnb. Indeed, indeed. So by early 2011, the next year, they hit a a million nights book and they may have a bunch of this company has always been great at pr and publicity probably the the legacy of brian and joe uh they hit a million nights booked it becomes big national news and this is when fred wilson publishes that blog post about how he was a it was a huge mistake to pass on the company. And cause PG had actually introduced them to Fred Wilson,

wanted Fred to lead while they were in New York, doing it while they're in New York, 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 2014, 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. It's Jeff Jordan. 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. And, you know, 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.

Yep. So they raise 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 samuar brothers and rocket internet in germany would take all these you know new wave 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 whim do 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 effect 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 you can't like give up on Europe. win local markets. It's actually different than the airline industry, which also has a great

cross-geography network effect where you have these United and American Airlines. I guess American's a big international player at this point, but basically these 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. Like 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 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, you know, 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 Samwar 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 go, they acquire a few companies, smaller competitors in europe um they open up a bunch of offices and what the samuels are doing they basically start a sweatshop in berlin of people

uh young kids out of college and out of mckinsey and the 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 couch surfing had pioneered initially, of course, there are no reviews on Craigslist, but couch surfing 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 uh how are you gonna trust that it's actually gonna be a good experience that these aren't crazy people um even put crazy people aside just that like it's actually gonna Uh, well, reviews are super important. And so when you're doing something like creating a listings farm, whether

this was Airbnb doing it or, or a 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, uh, winning Wimdu. I don't know if it's still around, but it, it, 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, 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, you know, up to, you know, six plus months in advance where Airbnb, they have like the ultimate negative cashflow cycle. They're getting the money in, they're holding the money, some portion of which, you know, 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 they, 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 went and they raised 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 pin duo duo episode to understand it sort of more at a deeper level but you're so right here and i think that the the 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. And 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 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. It's so smart. This is actually something like SaaS companies face the opposite of that, where you're selling deals, but those deals are, you might sell a deal for, you know, a million dollars in ARR. Well, it's just going to be paid to you month over month. Enjoy your 100K a month or 80K a month check. Exactly. Okay.

So things are working. They're winning in Europe. january 2012 they hit a cumulative five million nights booked on the platform six months later in june 2012 they hit 10 million nights books on the platform this flywheel is starting to spin 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 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 company, 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 part 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 Zappos, and 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 Samwar 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. Like you just can not 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 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, 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. And I mean, look, this is the dream, right? Of like a business is to have a business like this. Like there is, 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 it would be uh an understatement there's a five-story atrium in the lobby with a living wall that goes up the whole side of uh one of the sides of the atrium i mean it's it's amazing there's a 24-7 kitchen uh it is not 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, but hey, 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. Like, you know, I, I, I get it, but it is absolutely emblematic of the fact that the flywheel was spinning and it was spitting off cash. Yeah. They, uh, famously in 2014, uh, it's now just become normal, but they unveiled the Baylor, the, the, the design mark of Airbnb, the logo, the Baylor, uh, and. And, you know, depending on like 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 script. Then also in 2014, they start 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 like super high end boutique hotels all around the world. And Chip's an amazing kind of guru type guy uh so at the uh at the conference he uh he says uh this is in the book he says uh he's quoted as saying that uh he's predicting that airbnb could win the nobel priest peace prize within the decade uh you're like wow okay okay man all right uh 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. So also the next i think you you summed it up so well though in the in saying this is exactly as an entrepreneur as an investor as an opera like 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. Um, or at least maybe don't say you're going to win the Nobel peace prize. I don't know. Yeah. Uh, anyway, so in 2015, Expedia buys home away 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, HomeAway, 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 raise another... 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 is 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, like 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 grew 80%. 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 dollar valuation uh and then in 2016 they raise another billion and a half across two rounds again not that they really need the cash but probably you know they're going on super favorable terms they can think of lots of things to do with it investors are desperate to get shares of this company um i do want to take a quick comparison here and say okay so the eight billion and then 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're going to, 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. It's just, thank you for the internet. It is just miraculous that this thing is still on YouTube. It's something. It's just, thank you for the internet. It is just miraculous that this thing is still on YouTube. Every single product they introduced, except for one, has been a complete failure. 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, uh, 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 were going to launch that day. Uh, they launch experiences, places, and of course, homes, their, their, 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 a phenomenally tiny percentage of the overall revenue yep places is part of uh the was part of the airbnb app and the idea was it was going to be like a super it was 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 all together

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 to 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, look, 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 in this conference about belonging, about feeling home when you're travel 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, 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 1000 bucks a night. It is interesting around the 2014 ish timeframe. 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 remember this moment in time, it 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, like we weren't staying in any hotels. Um, and then during that, the 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 or hotels. Like sometimes we'd go as living in Seattle at the time we were, we were living in Jenny and I were living in Seattle. We'd come down to the Bay area. Maybe we'd go up to see her 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, a lot of these Airbnbs aren't that great. There's some really nice hotels. Maybe we're just going to know, a lot of these Airbnbs aren't that great. Hotels are nice. There's some really nice hotels. Maybe we're just going to stay in a hotel. Right.

And I think the thing that sort of becomes true is people consider Airbnb one of their options. 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 you know we've talked about we've talked about experiences places is gone the trips concept is gone it's now refocused much more on on stays

so the next year in 2017 the company tells investors that they're planning to IPO within 12 months. Uh, and, but then at the beginning of 2018, they had hired back in 2015, a big name CFO, uh, Lawrence Tossie, 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. And 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. Ooh, that is like some interesting shade. Yeah. I'm not, uh, 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, uh, I don't know, IPO readiness or whatever, whatever the opinions were of the CFO and other, uh, finance leaders who would come in afterwards. Yep. Indeed. So, you know, 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 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're like, okay, I'll believe it

when I see it. Heard this story before. We've heard this story before we've heard it before we've heard it before but they 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 there's kind of like three acts like there aren't so many of our stories here you know there's the be 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. And, uh, which we've alluded to in our own views and usage of

the platform here over the last couple of years. So 2017, Booking's growth slows to 50% from over 70% the year before. Still really good. I mean, you're at a huge base, you're growing 50% year over year. That's great. You can totally IPO. It's a 10-year-old company too. Like 10-year-old company growing at 70% on that kind of base's totally like 10 year old company growing at at 70 on that kind of base like nothing to be ashamed of at all absolutely you can go public with that 2018 bookings growth slows to 40 percent like 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 would be like yeah totally they've gone public after five years, we wouldn't be saying this at all. We would 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. Yep. 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 percent last year and at this point this is i think what to me at least what's most concerning like the growth is linear so they added eight and a half billion dollars in bookings in 2018 uh that was two years ago growth they also added eight and a half billion dollars 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 costs company to a we should start thinking about profitability company? I don't think so because the costs 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, percent um variable costs in 2019 grew 41 percent and fixed costs grew 60 so like if anything as you grow and especially on this huge base you should be start getting like way more leverage on your fixed costs and they're actually getting less here. Hmm. Well, that's concerning concerning indeed. So then 2020 happens, uh, well before 2020 happens in September of 2019, they announced that they will go public in 2020 and this has been reported elsewhere. But, um, the company now by September 19 is, is,, 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 don't know if it mirrors, as I think about 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, think back to Sequoia, like their fund that they invested in must have been a,

in 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, you know, expiring options or at the very least, if you try and restructure that, then there's tax implications. assume here not to mention um so they announced they're going to go public and then covet happens in march of 2020 uh and overnight the business evaporates um and not just evaporates we talked about the huge benefit of airbnb's 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- 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 it like I've seen this before. Not even like negative revenue. You 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 a global pandemic so of course it's totally totally brutal so in march and i wondered i didn't quite realize that still digging into the s1 in march as people probably know airbnb raised two billion dollars in capital from silver lake and six street partners and a combination of equity equity and debt the debt piece was at an eleven and a half there are two pieces two tranches at an eleven and a combination of equity and debt. The debt piece was at an 11 and a half,

there are two pieces, two tranches at an 11 and a half percent interest rate and a 9% interest rate. The equity piece was at an $18 billion valuation, which was down. And that was a billion in each, right? A billion of equity and a billion of debt. I think that's right.

I think ish. And I sort of wondered at the time, why would this, these are pretty onerous terms like on both sides you know massive haircut and valuation that's like 50 haircut and valuation and then the debt side interest rates are zero out there uh this is like this is like major distressed debt like you're you're pricing it pricing a tranche at 11 and a half percent interest rate i think this is what was going on, was not only did the business evaporate,

but they were paying out refunds and they probably, they must have 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 this cashflow 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 know, you're in big trouble quickly. Very similar to another thing that was going on sort of 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 you know obviously much higher than a sas company because it's a marketplace and they got to pay the

the hosts but like they make a lot of money on every transaction and so the whole ball game for tech companies is build the best freaking product you can and especially recently spend a ton of money on sales and marketing to 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 at least your r&d costs are yes uh and then hopefully your your uh your profit margins on our unit basis help you outrun all those fixed costs or high operating leverage now when you're shrinking or 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 of 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 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- second founding of airbnb as a business uh they jettison uh all of the other stuff that they were working on experiences are still around and they moved to online experiences but no places no trips no um we didn't talk about the company had started a movie studio uh at some point along the way they're called ralph street films uh they also well they had a lot of stuff going on it's all gone magazine for a while yep uh all gone the magazine i don't hate on the magazine the magazine makes sense to me you're a travel company like airlines have magazines that make sense to me you're promoting travel uh that's like average that's marketing so

the business goes to zero basically less than zero but by q3 things do start to recover uh we've we've both traveled this summer for long-term stays pulled together a great stat uh 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 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. I remember a moment where, um, Airbnb's bookings were down something like 50%, but hotels were down 90%. And I don't, I don't

exactly remember which month this is, but I think that that narrative is definitely one that played out during, during the pandemic. And for me personally, uh, 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 that is illustrative of act two of the pandemic for this company. Totally. Same where we've been less active than you since Jenny's more tied to San Francisco than you guys. More of those came from a bike trip um different place every night but yeah we've stayed in two airbnbs and one hotel uh on the 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 uh and um right now yeah yeah it was was, I mean, I feel for hotels these days. Um, 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. Um, so growth, as makes sense, because the pandemic growth has gone from slowing to literally shrinking, but 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, you know, 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. Yep.

Well, except that they also shrunk. Right. Well, and 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 a share, end up raising $3.5 billion at a $47 billion market cap. So big, man. That makes that Silver Lake investment at $18 billion just, what, six, eight months ago look 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. I mean, after DoorDash yesterday, I was expecting some kind of pop, but so now they're valued at over $100 billion? 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 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 is open. But with their numbers, you would think like, can't you wait until things stabilize a little bit? Well, it's funny. Like with DoorDash, you're like, okay, yeah, it makes sense why they're going now. This is the biggest accelerant to the business in history. Wow.

Wow, wow, wow. Okay, well, we'll get into it. And 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, 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 and IPO in 2018. It was growing at 42% when they IPO'd. 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 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 the new zoom of 2020 the new zoom they were going at i believe close to a 200 percent wow uh growth rate at going public so what is going on here this company is shrinking yeah this company was had slowed growth and is now shrinking you know i think an important thing to realize here, too, the thing that scares me the most is, again, it's a sword that cuts both ways. 91% of the traffic to Airbnb is direct. It's organic. 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? Like it's not the muscle they've trained. You have to imagine, it's not like they haven't been trying to,

it's not like they don't know that their growth rate was slowing. All right, listeners, our next sponsor is a new friend of the show, Huntress. Huntress is one of the fastest growing and most loved cybersecurity companies today. It's purpose built for small to mid-sized businesses and provides enterprise-grade security with the technology, services, and expertise needed to protect you.

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and they rave about it from the hilltops. They were voted by customers in the G2 rankings as the industry leader in endpoint detection and response for the eighth consecutive season and the industry leader in managed detection and response again this summer. Yep. So if you want cutting-edge cybersecurity solutions backed by a 24-7 team of experts who monitor, investigate, and respond to threats with unmatched precision, head on over to huntress.com slash acquired, or click the link in the show notes. Our huge thanks to Huntress. 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 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 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 haven't read it. 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 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, 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 one big. Andreessen Horowitz invested $60 million when they valued Airbnb at about $1 billion. So I think they probably 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 Karim 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 or 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. But maybe we should discuss the narratives. 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. And, you know, the biggest for me, the biggest bull 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 bull case. 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. And 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, etc. You know, I think for Airbnb, what has always been true here is that like, there are no questions on TAM. Travel is is big. And although it has taken a big hit this year, it's gonna come back. Yeah, they 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-day stays, is actually smaller than the food delivery market, which I think is sort of 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. You know, they got a lot of room

before they saturate that. Yeah, a lot of room to run there. So I think that can throw out the rest of it. Yeah. Yeah. Yeah. A lot of room to run there. So I think that's, I think that's the book. I think if you believe all of those things. And one more stat on like the, you know, unique supply,

great brand, direct traffic thing. Like 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 that's why this direct traffic thing is such a big deal. It's 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, bear 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 like, hey, the growth is slowing. Like everything may be true about the product and the unique supply and whatnot. you're going to access a very, very large chunk of that $1.8 billion short-term stay 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. You know, yeah, that's like a lot of billions but 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, you know, 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? Like, if you at least think about 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 gonna go down again on Airbnb and you're gonna have that kind of dislocation in the market, the arbitrage between Airbnbs versus hotels as a traveler. So I think it is gonna get segmented out now maybe back to

the bear it gets it back to the bull case if you believe that post coronavirus just the 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 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 that 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, a, a argument against that in 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, how are, how are we feeling at least as hosts? Well, 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.

Then that is the product experience of being a host on VRBO. But once you have it up, like it's up. And sure, sure you have to figure out how you're going to block nights on different calendars. But like 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, you know, an opportunity to maximize, um, maximize revenue, minimize vacancy, and 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. Um, but if we were, uh, 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 it's also just a price 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. Like's smart pricing for airbnb airbnb wants to maximize exactly what you're saying nights booked and total revenue but like i as a host do not want to maximize total revenue at the 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 the point I was going to make is that, like, you know, I care about price. I want to maximize my revenue, uh, as a host. Um, there are these other viable platforms out there. Now they're not as nice to use as Airbnb, VRBO, HomeAway and, and, and booking.com. On the other hand, they do have traffic. They do have guests. 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 like crappy guests my way anytime 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 around as a company or you're a host you know of a of a apartment uh 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 list like yeah 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 um but you know unfortunately because we perceive you violated this policy uh 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, it's, you know, it's imagine if you only listed on the App Store, and you didn't also list on Google Play, and then Apple found something they didn't like about your app, and then you're up a creek. You know, I think now that this market is maturing, we're going to see more and more people not willing to take the sort of 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 of 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 $100 billion. And there's other reasons, there's like, I'm negative on this being currently valued at a hundred billion dollars.

And there's other reasons, there's other things I'm negative about, but like the sum total of innovation they've created is unfreaking believable. And they're one of the few companies that actually did create an ecosystem around them. There's like, obviously the ecosystem that has yet to be proven

with the sort of like professionally managed Airbnb's or the people that own big blocks of Airbnb's. 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. But you got to credit them for enabling an innovation ecosystem.

Yep. Okay, one more bear case. Great. Oh, I had one too. I don't know if it's going to be the same. All right, 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 sort of 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 you know first real year of the company that they've done well. And I 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. They tried luxury they tried building a hotel they tried experiences they've tried dining they tried booking air travel they tried custom design tiny homes like even plus i don't know were you were you on plus free um plus airbnb totally listing but it became a terrible experience it's a bad experience and it got totally diluted much like super host like what does that even mean anymore nothing so i i it just feels to me like the personality 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 a 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 over a year into the company

that they innovated on Instant Book. A hundred percent. And they deserve all the credit for that. I mean, I think the innovations 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 of the marketplace. 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 i think i think makes more sense in narrative maybe leading into power for a bear case on the company is uh as we talked about the bull case

you 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 Corona virus has shifted the winds in Airbnb's favor. Yep. 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 um they are much much much more like ebay uh and ebay has been on a similar path enormous tam global network effect um torrid growth for many years but then it slowed and has um you know now it's i don't know what their growth is but like it's fine they're still like a decent sized company and whatnot but we don't talk about them as part of the fang we don't talk about it as part of amazon 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 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 is either 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 moat goes and how big their core market is, I think it's still a question, but HipCamp is out there. HipCamp is in the process of offloading camping type experiences from Airbnb. And not hard to get to like 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 know, you could book an RV on Airbnb

or you could book an RV on Outdoorsy and with dedicated, you know, feature specific stuff that people care about 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 like, what did Amazon do to create like 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 the 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, cleaning's a big one. There's this thing that everybody has to go fend for themselves and figure out their own cleaner. Check 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 you know airbnb 13 years in hasn't built host services for you could imagine those things being game-changing for their lock-in and for for uh 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 yeah same thing i trust it it's got the airbnb the amazon stamp of approval on it yep all right so we move into power yeah let's do it um 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 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 that? 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, it's well okay the totally obvious one just like scale economies where the totally obvious one for door dash 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 uh 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, hosts and guests, you know, like you would have an eBay or Amazon or here in in airbnb uh tend to just generally be a little weaker because you've got you know you're bifurcating the types of participants in the platform this is like

amongst the most powerful of the buy of the dual-sided network effects i've ever seen because it's it's global it's not local uh and you really care. The way you measure network effects 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, you're like, do i really care about the 16 000th seller

of the latest iphone yeah i mean maybe he 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 i message where i really only i message 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 and even even now bigger and more valuable than facebook because on facebook you know i care about you know my friends my loose circles maybe maybe there are a thousand people on facebook i care about uh

on instagram though there's brands and there's influencers. So I actually don't care about the randos on there, but I do care about the millions of people making interesting content. Yep. Yep. 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 too. I was like, is counterpositioning one? Well, less than it used to be. Yeah, I think the thing for- But in the early days, yeah.

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, um, and brand at Marriott and take on the management company. Yeah. Uh, I guess they don't take on the lease. They sign a contract to be the management company with the owner of that building. Um, 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, 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. I mean, 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, I could put a, you know my house in san francisco on the platform like i'll make incremental money my cars costs aren't that big cool i'll list it for 300 bucks a night whereas a hotel you're like well i

gotta i gotta run this hotel like yep and i think the ones that they notably don't have are cornered resource or switching costs like for consumers it's'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 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 list on homeboy it's fine yep well one thing that i want to do

here and it's not exactly power but it's sort of fine yep 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 like and and what take rates you can command with each one and uh 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 economics.

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 that Airbnb is just helping me with that transaction. And they, they kind of, you know, they obviously have fees on both sides. They charge the guest more than the host. Um, but you know, they have fees on both sides. They're, they're trying desperately to get

more and more of the, 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. Yep. Agree. No, 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.

All right, well, let's move on to what would have happened otherwise. And because I don't think it's that interesting to guess what would have happened otherwise if Airbnb didn't 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, uh, I forgot

they were in called Priceline at one point. Priceline buying booking was just an unbelievable acquisition. And, uh, yeah, if you're curious, we've did a whole episode on that. It was booking in Amsterdam and what was the London company? Uh, shoot. They booked, they bought two companies, took the booking name, but the other one was in London. I can't recall anyway. Yeah. But, uh, 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 Airbnbbnb had 38 billion dollars flow through their system from people staying in airbnbs to hosts uh and to airbnb and to taxes over the course of the year of that they took 5.3 billion dollars of that in revenue so like for all any of the knocks that we've had on air 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 an effective 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, 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. 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 they have on average a month of free cash flow there. Or you could think of it as like net 30, effectively, on the payment. Okay, so booking, about two and a half times bigger, $96 billion 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. And, you know, sure, booking is- Also having to spend a lot more performance marketing than Airbnb. Totally right. Like they're, they're, they're cutting a, you know, 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 those. All the revenues made on, or all the commissions are made on hotels. Anyway, two very different businesses. One that lost the better part of a billion and one that made 5 billion. And the one that made 5 billion took 2.5x 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 does? 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. Playbook. Let's do it. 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. 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 big, meaningful, life-changing things that this company's existence enabled

millions and millions of people to do around the world. I mean, 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. 100%. The way I like to think about this, and 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 you know a little uh a little graph of like uh 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 you know an efficient frontier along that of like that of a curve like 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 for i get more quality for less money right for any given price i get more more quality all the way exactly exactly or even maybe it's only for a portion of that uh curve but like for some area of the graph you have you have exceeded the current market if you can do that in any market you will be successful and and airbnb did this incredibly well across pretty much the whole graph it's like the economist view of why is this company valuable i like 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 central company. Yeah, I think Paris is the biggest city, or at least 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. But 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, maybe bookers, but they're not us-based book, but they're not us. I mean, they're technically us-based, but yeah.

Um, Uber's large in Europe, but I think probably larger in the U S yeah. Do you have more? All right. I do. Yeah. Free cashflow is one that I think i don't think i have anything new to say um here i think uh that's my last sort of like positive playbook one i do have some more this is kind of our bear and 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 uh i'll turn it over to you first in case you have other well then let, I'd actually maybe expand a little bit on what I was going to say on, on the free cashflow point, which is I think part of the reason that Airbnb had such has such amazing free cashflow 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 hosts when you book. Now, that's different from hotels, like on booking.com and others. Usually, 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 note, 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. So, all right, go for it. David, I'm raising a round. It's's not a seed round it's a new form of investment uh amazing well like on our lp show you know rahul talked about uh 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 that's a great point you know he's positioning the rounds that he's raising relative to the next rounds yep i have one it's a mix of two here so it's a great point. You know, he's positioning the rounds that he's raising relative to the next rounds. Yep. 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.

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 know, 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, like the revenue of that cohort goes up 50%. You know, Airbnbs in year two drops to 30 something percent. And then, you know, hopefully they are able to get back up to 50%. But they, at least so far from what the data we've seen, it's 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 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 to, you know, it's through 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 Superhost. You held two people that didn't give you terrible reviews. Congratulations. So I just think that the company relied heavily on like reviews will save us for everything but it hasn't been a silver bullet in making it easy and

enjoyable most reviews are meaningless yeah there are some that are helpful and it hasn't been the hammer that's solved that's solved every nail of um giving you confidence when you're looking for a place to book to book it. 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 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 i think you covered

all my annoying there too all right value creation and value capture so uh this section has two components the first is literally the name of the the section are they craigslist at create at capturing the value they create in the world or are they google who does a very good job of creating the value uh 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 US rents. 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 sort of like 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. But yeah, I think it's worth making the point that like Uber is condemned as this massively evil company and yet created a way for millions of people to earn a living. Airbnb is extolled as 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 uh to open the ipo this morning um and that's largely consistent with their brand and yet

there's there's a lot of potential value well really what this comes down to and i don't i don't know the date 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 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 that. It's like, Hey, they're living there. They would live there anyway. This is like pure, 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 and the question is like what is the percentage of each of those use cases on 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 uh a data sheet has an opinion here and has a horse in the race so like it's hard to know other than the harvard business review article i found the two one was a uh there was two sources that have very detailed reports on this one is airbnb and the other is a extremely liberal sort of like labor focused funded think take and you're like okay well you're who else has you know who else has like well you know new york city uh 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. And it's like, I don't know that just that either. Like, you know, so

point is, there's, it is very, very much. There's no doubt that a large portion of the supply on the platform is property managers. And how much that is, I don't know. We want to thank our longtime friend of the show vanta the leading trust management platform vanta of course automates your security reviews and compliance efforts so frameworks like sock 2 iso 27001 gdpr and hippocompliance and monitoring vanta takes care of these otherwise incredibly time and resource draining efforts for your organization and makes them fast and simple yep vanta is the perfect example of the quote that we talk about all the time here on Acquired. Jeff Bezos, his idea that a company should only focus on what actually makes your beer

taste better, i.e. spend your time and resources only on what's actually going to move the needle for your product and your customers and outsource everything else that doesn't. Every company needs compliance and trust with their vendors and customers. It plays a major role in enabling revenue because customers and partners demand it, but yet it adds zero flavor to your actual product. Vanta takes care of all of it for you. No more spreadsheets, no fragmented tools,

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Christina, Vanta's CEO, all acquired listeners get $1,000 of free credit. Vanta.com slash acquired. David grading. Whoo, grading. All right. So what do we, 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 plus like how could you not say that investing 585 000 in the seed having this company build this product and thing uh 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 this is like before the silver lake round oh let's see before the silver lake round i believe it was around three billion dollars two and it was around three billion dollars two and a half to three billion dollars that they had raised comparable to sort of door dash but you know 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

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 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. 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 spit off 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 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 that this is eBay here. That's what, that's what this is, that this is the same type of network effect, same dynamics, same cashflow dynamic. Like this is eBay, a capital late business business. So yes, agree. And, but I think that's a good

point to be an a, not an a plus an a plus would be yes. And they're already, cause 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 size cost structure right now. Like doing things like, you know, the film studio and places and experiences and the airline, building units in people's backyard. It's nuts. You strip out all that cost and this company at an efficient operations would already have been generating hundreds and hundreds of millions of free 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 years who's had great i think

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

Woo, man. What a season. All right. Should we do some lightweight carve outs here on the way out the door? Yeah, let's do it. All right.

It's been a great season, by the way. Dude, it has. We had some highlights. Opening with Pinduoduo and getting Virgin Galactic in there. SpaceX, was that in this one? No, that was last season, I think. End of last season. Epic, though.

Our Epic episode was epic. The NBA. NBA was so much fun. Yeah. I loved DoorDash yesterday. That was so much fun. Yeah. I like it. I love DoorDash yesterday. That was fun too. My, I,

unlike DoorDash is, I will only have one carve out this time. Um, and it's, it's much lighter weight. So, uh, it's a Spotify playlist that I don't actually have no idea who made it.

Um, but it's a star Wars, lo-fi hip hop and it's covers of, uh, all star Wars music in a lo-fi hip hop style. And like, it is just phenomenal work, work and research music. So, uh, that's awesome. We'll put that in the show notes and anybody who wants to, to chill and jam can, I can't wait for you to send me your, uh, links for carve outs and sources so I can start listening to that one. You got it.

My carve out, uh, 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, uh, here in San Francisco, which is well, 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, uh, you know, consists of packing auditoriums full of, you know, three to 4,000 people and having, uh, uh, having world-class artists perform in front of them while, you know, like touching each other, uh, as part of the art form. Uh, so that's been, that's been a rollercoaster and SFB is doing

great, thankfully of wonderful donors, wonderful audience. But what they did, you know, the nut cracker is like the big part of the Valley 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. Uh, it's, uh, so it's a, 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 a different experience to watch it online because the camera zooms in

and 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 so uh you can become an lp seven days for free trial um you can you can exit out at any time if you want so it's risk free at acquired.fm

slash lp um 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, 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. 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. Although we're going to have a little special, a special little holiday present for you coming next year. We're going to come not next year, next week. Yeah. Let's not announce it.

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