Airbnb

I took Tani's collar off her so that we don't have the same problem. That'll save us some time in post. Welcome to Season 7, Episode 8, the season finale of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I'm the co-founder of Pioneer Square Labs, a startup studio and venture capital firm in Seattle. And I'm David Rosenthal, and I am an angel investor and startup advisor based in San Francisco.

And we are your hosts. Today, we cover the hottest and most anticipated company to IPO in 2020. And oddly, in a year marred by the global pandemic and just this month, an all-time high number of stay-at-home orders, this hot IPO is a travel company. Airbnb, originally known as Air, Bed & Breakfast, Incorporated, is going public today, raising over $3.5 billion and initially valued at over $47 billion. The company is insanely impressive. They operate in 220 countries and 100,000 cities.

Last year, there were $38 billion of bookings made on the platform. There are over 50 million active guests who book nights to stay at over 7 million listings. And unlike other companies that we've covered recently, well, yesterday, like DoorDash, this is truly a global company with 86% of hosts outside of the United States. And yet, while this company has changed the world, and how a meaningful fraction of the human race travels, their growth has been slowing more severely than any of the other unicorn IPOs we've covered.

And that's before even looking at the effects of the global pandemic. Now, of course, David and I did our usual deep homework on the company. But this is one where we've been doing our research for years, not just as guests on the platform since 2010, but actually as hosts too, starting in 2015 for David and 2017 for me. So does Airbnb see its market saturation on the horizon? Or is this a global community movement that's still getting started?

Today, we dive in. Indeed we do. Well, as always, if you love Acquired and you want to hone your own craft of company building, you should join the community of Acquired Limited Partners. On our LP show last week, David and I did a first for us and had our own actual limited partners, investors in our current and former funds on the show. Jacqueline Hester and Lyndall Eckman from Foundry Group joined us for part four of our VC Fundamentals series, where we went seriously deep on the topic of portfolio construction for a venture capitalist.

Sure, this is a useful thing for aspiring VCs, current VCs, you know, 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, you know, big stakeholders in your company and your potential future investors, it's just insanely valuable. So really awesome to have them on. Fun to be diving so deep on this topic and sharing a lot of these conversations with so many of you.

If you aren't already an Acquired Limited partner, you can click the link in the show notes or go to acquired.fm slash LP and all new listeners get a seven day free trial. All right, listeners, now is a great time to talk about a new partner of ours here on Acquired, Lagora, the agentic operating system that is redefining how the world's best legal teams work. Yep. It's sort of obvious that AI is going to completely change the legal industry.

I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Lagora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with.

Lagora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time. And they recently launched Lagora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

And Lagora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Lagora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Lagora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months. Truly insane numbers. And that is the real test.

Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at lagora.com slash acquired and just tell them that Ben and David sent you. All right, David. Airbnb. Take us in.

It's time. Is it ever 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. Uh, but just so everyone knows, I don't own any Airbnb stock or any stock in any of its competitors. Um, and I'm not planning to buy any. Yeah. As, as always, this show is not investment advice, but we thought it was a sort of extra important for us to highlight that, uh, neither of us are our shareholders going into recording.

Indeed. Indeed. We do have a very big thank you, uh, to shout out though, again, has so often on this show, Brad stone and his wonderful book, the upstarts where he chronicled much of the history that we're going to borrow from and Brad is wonderful past guests here of us on acquired. Uh, 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.

Uh, 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, uh, adventurous background, uh, start a company in the early two thousands 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 sites, 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 have, they discover that photos are really important of the listings. They add photos. They figure out how to authenticate real identities. Um, it starts to take off. People start using it. Like going through this way faster than I would have expected. I know. I know. We're like, we got to get through a lot here.

And, and it seems totally crazy at the time to everyone, including Silicon Valley. They raise money from one of the very best venture capital firms, storied venture capital firm in Silicon Valley. Of course, I'm not talking about Airbnb. I am talking about Casey Fenton, Daniel Hoffer, and the crew at couchsurfing.com. And the venture firm that I'm talking about is Benchmark. And the partner who led that deal was Matt Kohler of, you know, little companies like Facebook and Instagram fam.

Wow. Couchsurfing had that many similarities with Airbnb? They had a lot of similarities, but there was, uh, there was one thing that was missing. And it turns out that that was one of the key things that made couchsurfing, uh, roughly the equivalent, uh, 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 of the home mobiles story. Ooh, I think Uber.

Good question. I don't know. I think it was Uber where we did, where we did home mobiles, which of course pioneered ride sharing. Couchsurfing 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 couchsurfing was, um, you paid essentially like a verification fee, uh, to have your identity verified.

And I think the way they did that was they took a credit card payment and then matched your, your name with the name on the credit card. And that was the only way they made money, I think. Uh, and actually the similarities to home mobiles don't end there. Couchsurfing was for a long time, actually a registered 501 C3. Nonprofit. And then they had to convert from a nonprofit into a C corp when they raised money. It was a whole mess.

Oh, wow. I mean, it makes sense. It was a nonprofit because in my head, the way I always thought about couchsurfing. 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 my, at this time I was like a college student. So I was like, oh, I see. It's for like other college students or interns or whatever who don't have money.

And like, you can just stay on some stranger's couch. Yep. Which I think was how couchsurfing started. I think, uh, I think Casey was a college student and going on a trip. Did you ever use it? I know. 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, uh, this is getting ahead of ourselves, but it turns out Brian and Joe actually had dinner with Casey and Daniel right before they applied to YC and talked to them about what they were doing. After, of course, they'd already started and were working on Airbnb. Yeah, of course. Uh, and they talked about the two sites and anyway. Okay. On to the real story of Airbnb. So the year is 2000. We are back in new England, uh, 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 I actually was in Providence last year. RISD and Brown are basically like co-located like Providence is a very small town. Uh, so Brown and RISD, like all the buildings are kind of interspersed and, um, it's actually very, very pretty, very, very cute little place. Uh, so Joe shows up as freshmen and he meets and befriends a sophomore there. A, uh, 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, he's not like a, he's slight of frame. Let's put it that way. His friend who he meets is a beefy hockey player. And, uh, I think at this, I don't know if it was this at this time or after college, aspiring bodybuilder at a, he would, uh, 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, you know, doing different projects, starting businesses together. And, uh, and they must've stood out because they became super popular. Uh, Joe actually becomes student body president of RISD. He's a year behind Brian and Brian, uh, at graduation is elected by the class to give the graduation speech, uh, when they graduate. So the story goes when Brian is graduating after this speech, Joe still there is another year at RISD.

He takes Brian out to dinner before he leaves and says, Hey, we've got this thing. One day I predict that we're going to start a company together. You and me, and somebody 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 after Brian graduates in 2004, he moves to the West coast, he moves to Los Angeles and he gets a job working for a design consultancy.

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 designed chairs and medical products and like, you know, they're like a, uh, 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, oh, 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 really 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. Uh, 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.

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. Um, and it is full like web 1.5 glory. Yeah. In fact, I think it was on the front page of the USA today and they have a big, uh, area of their site dedicated to letting you know that.

Obviously. And of course by they, we mean Joe, Joe. Yeah. Cause it's not really a company per se. Joe, um, goes around Providence and, uh, tries to get the, uh, the bookstore in town to carry them. Uh, I don't know if he actually succeeds, but if he does like, this is not, uh, he's not moving a lot of product. Let's put it that way. Uh, 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, um, with a couple of roommates rents a, uh, uh, apartment in the, then this is crazy to remember now, uh, 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 a, uh, with an object in it, with a message behind it. And Brian opens up the package and there's a crit button in the package. And, uh, as the story goes, at least as told to Brad, the point of the crit bun, other than I'm sure just to be high jinky 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 crit button to visit and stay with Joe. And, uh, when he's there, it turns out one of Joe's roommates, uh, 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.

Uh, Nate's, Nate's moving out of the apartment. And so it does like, Hey, we need another roommate. Why don't you just, why don't you just leave your job down in LA, come up here and, and move in with us. And so Brian's up there visiting. He has a great time. He kind of wants to do it, but he's not sure. So he goes back to LA, thinks about it for a while. And then finally, in the beginning of September in 2007, when Nate finally moves out that month, Brian's like, okay, I'm going to do it.

So he quits his job. He moves up to San Francisco. He moves into the apartment, but there's a problem. You 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 a designer who doesn't have a job. So our roommate is, 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, 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, uh, anybody who's traveled to San Francisco for all the big conferences that happen nowadays, they're all tech conferences, uh, that happened at the Moscone 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 remember looking at hotel rooms, uh, for the week of WWDC 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, uh, if you live here and you know, have family and friends who want to visit is that that's not just WWDC. That's literally every week, every week, there is a big event going on at the Moscone center or elsewhere in the city. And there just aren't enough hotels here for demand.

And so, you know, hotel rates can be like a thousand dollars plus a night during the week. Cause 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, uh, he sends him a very famous email. They knew that we were going to be doing a podcast one day and, uh, 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 going to start ending my emails with that and see if, uh, see if that is 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. Let me 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're coming to 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, 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, well, 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 email us 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, uh, one in particular, a young recent Arizona state grad from India named a mall survey rents. One of these airbeds and or mats for $80 a night comes and stays with them.

Uh, and they become friends. Like they attend the conference together. They hang out. Joe gives them a tour of the city. It's really a great experience. And, uh, 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, 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, uh, in the design circles, there's this famous tie between the D school and IDEO, the design agency. So they all drive down together to Stanford and, uh, they attend a lecture by Bill Mogridge, who was one of the IDEO founders. And, uh, it's this cool experience. And then afterwards, Brian goes up to Bill and just starts pitching him on, Hey, got a mall here. He stayed with the word designers. Um, you know, uh, we have airbed and breakfast.com and you know, it's, it's really hard for young, you know, starving designers to go to conferences.

Do you think, I think Bill might've been like on the board of the industrial designer society of America or something like this. Do you think we could become the official accommodation provider for the industry association? Unclear what, what Bill's reaction was, but, um, airbed and breakfast did not become the official accommodations provider. Hey, I love it. 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'd think, right? Like, Oh, okay, great. Like, this is the thing. This is what we're going to do. No, they don't, uh, they're like, Oh, well, that was a good way to make some money during the conference. What else? What are we actually going to do? So they start brainstorming some ideas. They rope Nate, who, you know, they were still friends with, even though he'd left the apartment back into, uh, start working with them on this since he's actually, you know, 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 a roommate matching. Cause they're like maybe inspired by airbed and breakfast. Like this was so cool. Well, obviously temporary roommates. That's not very big, maybe permanent roommates. That's what we need. Hmm. And to be totally clear, was airbed and breakfast, like a website that they stood up for their apartment or was it like a platform for any, will any designer with an apartment to have other designers stay with them?

Ah, that's a good question. I think it was only for their apartment. I'm not a hundred percent 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. Uh, so Nate, we've talked about Nate, uh, a little bit. Turns out he has a pretty interesting and very relevant background too. So he had majored in computer science at Harvard right around the same time as, uh, 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, uh, he started writing AOL bots and programs and, uh, communication stuff. And first he was selling them as shareware and he kind of stumbles into this nascent field. This is in the nineties of, um, 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, uh, the can spam act was not passed until 2003. It turns out at which point then I think sophomore at Harvard, Nate, uh, closed his consultancy business for reasons that, uh, have never been discussed. But before that, yeah, he made about a million dollars and, um, put himself through Harvard and, 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, uh, 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. It turns out roommates.com already exists. A couple of 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 air bed and breakfast thing. Give it another, give it another go. So they pitch it to Nate. They actually hadn't pitched Nate until January on working with them on this. It was, it was just this side project thing. So this is like attempt number two at starting Airbnb. Attempt number two. Yeah. And so the idea is South by Southwest is coming up in March and people are starting to, make their bookings for going to Austin and lots of people from San Francisco go, 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 that when these festivals happen, whether it's Austin city limits or South by, you can't get a hotel room. Like it's thousand bucks, 2000 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. 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 going to launch. It's going to 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 airbed and breakfast.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. It's 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 two thousands, it was, it was still only like 12 people.

Uh, so 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, uh, Michael Seibel. No way. Yeah. Guy named Michael Seibel, of course, of Justin.tv fame, which would become Twitch, uh, CEO of Twitch. And then we just 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 of these guys and he knows Joe, they used to be roommates. Um, I can help you find some angel investors to make this thing. I have no idea Michael's involvement here. Yeah. Apparently never held any equity in the company.

He was never, you know, an 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. Uh, 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. 50% of the people who are using it are the founders. So, yeah. Yeah. So he moves back and once again, nothing really kind of happens with the site for the next few months. Um, but meanwhile, Seibel did make good on his introduction and he and Justin Khan introduced Brian and Joe to a bunch of angels.

They go and do these meetings with angels and the angels are like, you're doing what? And how many people are using this? Uh, no, thank you. So Brian actually would write a blog post, uh, later about this, about all the rejections that they, that they faced, uh, of which there were many. So they go back to Seibel and, uh, and Justin Khan and they're like, well, like 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, but maybe you'll be able to raise some money afterwards. Three, three, three and a half years into it. Yeah. I think, uh, it's 2006. Dropbox has happened. Oh, it's 2006. So it's one and one or two years into it. Yeah. The, uh, or no, it was, um, this is now 2008, but I, YC started in 2006 or was it 2005?

Something like that. 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 flares 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 it kind of an effort to evangelize and bring in more applicants, uh, as they move to the West coast.

So Brian and Joe go down to startup school. And this is amazing. So this is April, I think, 2008. This is where Bezos comes in, talks at startup school and uses, I think for the first time, the electricity metaphor for AWS. Whoa. 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, like they, they, they would all do the like little startup speaker circuit. Cause you know, their companies weren't that valuable yet. Totally. Well, and, and here's Bezos, uh, who doesn't look like Terminator Bezos at this. He's like full on still nerd, nerd Bezos mode. And he's pitching at YC for all these rinky dink little startups. Cause 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. And anyway, uh, stories for another day. The other person who makes a big impression on Brian and Joe speaking at a startup school is Sequoia partner, Greg McAdoo, who's speaking there. And of course, you know, great Sequoia. And there's a long history of Sequoia partners, you know, speaking at YC and 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.

Widely known yet. It wasn't widely known yet. So Brian and Joe, they're, 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 conventions.

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, which is great, but they're not making that much money. So they're about out of money. And this is when the famous serial story happens. The Obama owes and the captain McCain's. And I, so I, David, I texted you, Hey, let's not like go too much into this story because everybody already knows it.

And there's so much more to talk about in recent Airbnb history. And I, as I went back and read the email exchange between Fred Wilson and Paul Graham, and then I read Fred Wilson's blog post talking about how they, they passed. I actually realized I had the story wrong. I didn't realize that the Airbnb guys made up Obama owes 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 and 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 Rouse street apartment in Soma. Um, and so they had this, you know, middle of the night, crazy idea of let's go make some boxes, pour Cheerios into them and, and sell them as limited edition.

It's a totally amazing heads. I win tails, you lose situation. Cause you have food no matter what. It's kind of like being the casino. Like you don't care which side wins cause you get food either way. You get food either way. Oh, it's true. It's a little bit lower, but. And I think, you know, so the story is like, they make, they end up making somewhere between 20 and $30,000 in profit from selling these things online.

And that, that kind of keeps them alive until, until they start Y Combinator. It is. 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 work and the only profit they ever made was from selling their furniture. So like, you know, it can kind of go either way. Yeah. I think there's, it's, it's an awesome entrepreneurial endeavor and a great show of scrappiness, but 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, you know, art for the boxes.

So therefore there was more margin available for them. I always think that's like a good lesson for entrepreneurs in general is what is the thing that you yourself can do and not pay yourself anything and generate, you know, you don't have to pay the labor. So it's a, it's a hundred percent 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 owes and Captain McCain story is it's actually what gets them into YC.

So characteristically for, um, Brian and Joe, as you can imagine, as the story goes along here, they missed the deadline to apply and Seibel has to, has to lobby PG and say like, Hey, these guys missed the deadline, but can you like, just give them an interview anyway? Like I, I vouch for them. They're good. So they convince 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 owes and a box of Captain McCain's to give to Paul Graham. And apparently Nate is like, what are you doing, man? Like you look ridiculous, like cereal. Come on. And so they go, they do the, they do the interview and PG doesn't get it. He's like, people, people actually are doing this, staying on each other's couches.

And they're like, well, yeah, people are doing it, but not that many people. And, uh, and so there, it doesn't go super well. And after they leave the interview, Joe realizes he's forgotten to give Paul the cereal boxes. So he runs back in and gives Paul the cereal boxes. This is how the story goes as chronicled in the upstarts and gives Paul the cereal boxes. And Paul's like, what are, 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, uh, 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. Uh, 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. Uh, and during YC, they changed their name to Airbnb from air bed 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 and 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, at Sequoia, they believe that that's one of the most important characteristics of entrepreneurship as well.

And so McAdoo asks PG, well, hey, who in this batch is, is most like this? And PG says, oh, well, that's easy. That's the Airbnbs over there. Love it. Love it. So McAdoo goes over, he starts talking to them and he's smitten as well. And this is, 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, 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 air beds 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, um, VRBO and the vacation rental space before.

And he says 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, a hundred 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, uh, 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 mess things up, but they also were launching and starting to build in the buildup to the financial crisis during the go-go years. Like nobody was that interested in cheap travel. So despite getting a lot of pushback from the rest of the Sequoia partnership, McAdoo does end up convincing Sequoia to invest.

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 full traditional investment. We need to conserve our cash and triage our portfolio. Um, 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 like that's nothing.

Like, I mean, like it's nothing, nothing, nothing for Sequoia today. That's still pretty much nothing for them at the time. I think the current, uh, the fund that they're investing out of, I believe was a $500 million fund. Um, so what's that 0.1% right? Like the fund. Yes. And the funniest thing is that that actually returned to that fund. Like you never, when you're so many times over when you're thinking as a venture capitalist and you're like, ah, 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, 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 585 K. They bring in some angel investors alongside, uh, the angel investing collective of Keith Raboy, Kevin Hartz and Jawad Kareem, one of the YouTube founders. And we talked with Kevin about this on the event pride episode.

Uh, 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, the dollar size, the structure though. This is very much a traditional venture round. The round is, uh, over 25% of the company. So the post money valuation on the round for the, the total round is $615,000, $2.4 million post money valuation. Whoa, no way.

So Sequoia gets 24 and three eighths of a percent in ownership in the company. And, uh, the angel collective of Keith Jawad and Kevin get one and a quarter percent of the company for their $30,000. And that I think is the last big dilutive round the company would ever do. Is that right? Like everything from here on out, it was shocking. The series, the series a, uh, was 7.2 million. I think at a 60 ish, a 60 or $70 million valuation.

So roughly 10 ish percent dilution. And, and, and the percentage of the company sold only went down from there, despite the fact that the dollars got very, very large. That's, that is, that is accurate. So they finally have back to the seed round. They finally have a little bit of money. So this is where 4 million posts, David. I can't believe it. Could you believe, I mean, even back then, and it was a different era. Like I said, it was a, it was, it was a different situation.

That Sequoia Capital sure knows how to get their ownership. They do. They do. Um, 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, uh, Nate basically goes to work and, uh, this is, this is his time to shine. So first the thing that they do, which doesn't require any money, um, people have probably heard about the Craigslist hacking. Uh, so I didn't realize, you know, the, the thing that I always thought that Airbnb did with Craigslist hacking was, uh, going to listings on the site, uh, and, and saying, Hey, uh, 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, encourage 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, you're putting your own, you're encouraging your own supply.

But if the transaction happens through them, that's a way to go get more demand. Exactly. And for a site without traffic yet. Exactly. And I think this was, I mean, it's probably both of these were key, but that second piece was especially key because yeah. How do you get the demand? How do you get traffic? 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, you capture those bookings and you don't let them go back to Craigslist and you say, Hey, you got the, you did this thing. You had this great trip. Why don't you book your next trip with Airbnb? Right. I mean, yeah, yes. Craigslist captures very little of the value that they create. So, you know, effectively what they did here is say there's value being created on Craigslist.

We're going to be the way to capture it. So, 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.

Uh, okay. That seems like a great way to get demand, but how do you get supply? They use Facebook. And so what they do is they go on Facebook. You can target by geography. Hey, we need some more supply in New York. Okay. We're 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, uh, you, Brad talks about this in the book. Uh, 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 know, 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, like there were a bunch of trends that were at their back here, financial crisis, needing to people needing to pay their rent. People want to travel cost effectively. Um, and I think the, we, we talked a little bit about the supply constraint nature of hotels in markets when there's big spikes in demand. Um, 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, uh, 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. Um, 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. Yep. So the notion of like new marketing channels, particularly new digital channels is always a, who found the next hill, go exploit it before all the value gets arbitraged away, then go look for the next hill. And like, these are, you know, five generations ago of marketing tactics. Good luck doing that. Uh, uh, those innovative Facebook things today, you're going to pay through the nose for it.

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So you can get $1,000 off Vanta at vanta.com slash acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off. And just tell them that Ben and David sent you. So we're now in 2010, and things are really starting to work. And they have, by midway through 2010, they have 700,000 nights booked on the platform. Wow. 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 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. I mean, they also figured they own 24% of it. They already own 24%. Yep. 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 million nights book. And they may have a bunch of this company has always been great at PR and publicity. Probably the legacy of Brian and Joe. So they had a million nights booked. It becomes big national news. And this is when Fred Wilson publishes that blog post about how it was a huge mistake to pass on the company.

And because PG had actually introduced them to Fred Wilson, wanted Fred to lead. While they were in New York doing the famous, like meeting the hosts and hiring photographers and all that. Yep. So that summer, we talked about fundraising. They raised $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 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 raised all this money. Why did they raise all this money? There's actually a very specific reason they did, which was, if folks remember back to this time, the Samwar 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 Wimdu. 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. It's such a great point. And whoever wins that global market is also going to trickle down win local markets. Like it's actually different than the airline industry, which also has a great cross geography network effect where you have these, you know, United and American Airlines. I guess America is a big international player at this point. But basically these, you know, the one world alliances.

But you still have room for these regional players because the product that's necessary for those regional jets is a you know, it's a whole different set of infrastructure. That's just not true with 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 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 and 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 of things. They go, they acquire a few companies, smaller competitors in Europe. They open up a bunch of offices. And what the Samwars are doing, they basically start a sweatshop in Berlin of people, 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. 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.

How are you going to trust that it's actually going to be a good experience, that these are crazy people? Even put crazy people aside, just that like it's actually going to be nice. 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 Wimdu doing it, you're just going to end up with a lot of listings with no reviews and it's going to be dead.

There's going to be no life happening. So Airbnb, because they've been operating globally from the get go, they had listings with reviews already in Europe. And I think once you start to get that, then it's really hard to compete with that. It's a real flywheel going. So they end up winning Wimdu. I don't know if it's still around, but it never takes off. The other amazing thing, even though Airbnb went out and raised all this money, it turns out they have a killer part of their business model and how the operations work, which is, you know, when 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 cash flow cycle. They're getting the money in. They're holding the money, some portion of which roughly 12 to 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 Pinduoduo episode to understand it sort of more at a deeper level. But you're so right here. And I think the most interesting thing to me is how typically in hotels you would pay when you got to the front desk. And this was a different enough category, like a different enough mindset for people that they were willing to pay when they booked up front.

And that felt like the right thing to do. Like if you were going to, if Hilton was like, actually, we're going to start charging when you start making a reservation, like 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, you know, I keep talking about how crazy non-dilutive all these rounds of financing were for Airbnb. Like this is one dynamic. Like 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 know, 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. And 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 5 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, you know, people that had accidents on the platform.

There were crimes. There was stuff going on. Not to mention the regulatory piece, which we'll probably talk about at the end of the episode. New York and San Francisco in particular, like, hey, you guys are running a hotel. This is not allowed. All that said, as difficult as those things were, the flywheel is spinning. 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 printed the show and it'll come back up in a minute. Greg McAdoo leaves Sequoia and Alfred Lynn joins the board. Alfred Lynn 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 Samware 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, you know, say a performance marketing machine. And there's lots of different areas around the business where that shows up. But also, it means you don't have to be as considerate about what you're building and why because you have this flywheel that's just spinning and profitable.

And like, sure, lots of people are showing up to the office every day and doing important work and moving the company forward. But like if they didn't, other than maybe customer support and success, like the business would probably still grow and would probably still be profitable and 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.

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.

It's gold-plated would be an understatement. And there's a five-story atrium in the lobby with a living wall that goes up the whole side of one of the sides of the atrium. I mean, it's amazing. There's a 24-7 kitchen. It is no longer 24-7, but at the time when they opened it, that operates, there's three meals a day, seven days a week. All free for employees? Yeah, all free for employees. I can't imagine that there was too much demand for 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 the sort of culture that they wanted among hosts. I get it, but it is absolutely emblematic of the fact that the flywheel was spinning and it was spitting off cash. Yeah, they famously in 2014, it's now just become normal, but they unveiled the Baylo, the design mark of Airbnb, the logo. I love that it has a name.

I know, the Baylo. And depending on your version of the Rorschach test, it may or may not look like some genitalia. But anyway, it's now the Airbnb mark. Yeah, which is funny. I loved the old Airbnb logo. 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. So at the conference, he says, this is in the book, he says, he's quoted as saying that he's predicting that Airbnb could win the Nobel Peace Prize within the decade. And you're like, wow. Okay. Okay, man. All right. Never heard of a startup winning a Nobel Peace Prize, but okay. Alfred's going to resent us for this, but he has a great quote about all this in the upstarts to Brad.

He says, well, growth covers a lot of sins. And the growth of this company was spectacular. So also the next... I think you summed it up so well, though, in saying this is exactly as an entrepreneur, as an investor, as an operator, 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. Or at least maybe don't say you're going to win the Nobel Peace Prize. I don't know. Yeah. Anyway, so in 2015, Expedia buys HomeAway, the only really viable product-wise competitor out there in the market for just under $4 billion. And, you know, there's some headlines about like, oh, Expedia, 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 $1 billion 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. 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 $1.5 billion at a $25 billion valuation.

And then in 2016, they raised another $1.5 billion across two rounds. Again, not that they really need the cash, but probably, you know, war chest. They're going to get on super favorable terms. They can think of lots of things to do with it. Investors are desperate to get shares of this company. I do want to take a quick comparison here and say, okay, so the $8 billion and then they grew 80%. Last year, DoorDash had $8 billion in gross order volume and then grew over 200% the next year.

So there's an interesting, you know. Oh, yeah. We'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, it's something. It's, it's just, thank you for the internet. Like it is just miraculous that this thing is still on YouTube because it is every single product they introduced, except for one, has been a complete failure.

Sure. They, and you know, again, I mean, I, it's like, you do have to admire the ambition of they wanted to add more products and, and had a big vision for Airbnb to be more than just what it was. All that is good. So at this conference, they launched, Brian says it's the most significant development in Airbnb's history. And that the goal is to do for travel what Apple did to the iPhone with all the things that they were going to launch that day.

Uh, they launch experiences, places, and, uh, of course homes there, there, uh, the current Airbnb product and, and, uh, 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 me to on, like a super app aggregator for all the things you would want to do. So it's like Yelp, it's open table, 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, uh, experience. Uh, so that was places and, uh, and then all of it lived all together in trips.

And so within trips, you had aggregated your, 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. Uh, 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, were maybe not bad ideas, but I'm not sure they made a ton of sense within. And Airbnb, uh, and I think that the disconnect is, as, you know, looking back for me watching that video was, um, 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.

Um, 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 like, I just think that that disconnect becomes more and more apparent over time. Yeah. Yeah. And if you go back to like, what was one of the original, you know, probably the biggest why now that made Airbnb work, it was the financial crisis. Like it was, yeah, yeah. You know, it's nice to stay in an apartment and whatnot, but like, I really want to go to San Francisco for a hundred bucks a night or 80 bucks a night, not a thousand 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. And then during 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, I was living in Seattle at the time. We were living, 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, hotels are easy. Hotels are easy. 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 experiences. Places is gone. The trips concept is gone. It's now refocused much more on stays.

So the next year in 2017, the company tells investors that they're planning to IPO within 12 months. And but then at the beginning of 2018, they had hired back in 2015, a big name CFO, Lawrence Tossey, who had been the CFO of Blackstone and the COO of Merrill Lynch before coming out to San Francisco and joining Airbnb. He leaves the company. So that puts the IPO in jeopardy. 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 sure what it means to be a 22nd century company, but it definitely means they're not going public anytime soon, which I think was the message. And it sounds like Brian likely didn't appreciate any of the pushback or guidance he was getting around, I don't know, IPO readiness or whatever, whatever the opinions were of the CFO and other 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 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. I heard this story before.

We've heard it before. We've heard it before. But they actually do. So we'll get into like the story of this happening and why it's happening now. So the reality, you know, we've talked about this kind of like three acts like there are in so many of our stories here. You know, there was the first act here of Airbnb, this crazy thing almost didn't happen, but it was a great idea. It gets into YC, grows and grows and grows.

Then, you know, we've now gone through the second act of like the growth is still happening, but some puzzling decisions are happening. But like, okay, the thing is, though, after all this, starting in 2017, the growth no longer keeps going. And which we've alluded to in our own, you know, views and usage of the platform here over the last couple of years. So 2017, Bookings growth slows to 50% from over 70% the year before. Still really good.

I mean, you're at a huge base growing 50% year over year. That's great. It's a 10-year-old company too, like 10-year-old company growing 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%. 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 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, Bookings growth slows to less than 30%. So I believe it was like 28.5%, 29% 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 $8.5 billion in bookings in 2018.

That was two years ago growth. They also added $8.5 billion in bookings in 2019. So like the growth, the base is growing, but the amount that you're adding every year is now constant. And of course, then we'll get into what happens in 2020. And do you chalk that up to IPO readiness? Like, they shifted their mentality from a grow-at-all-cost company to a, we-should-start-thinking-about-profitability company? I don't think so. Because the costs keep growing. And this is maybe, as if not more alarming, the company's cost structure keeps growing as if it were a growth company.

So in 2019, total expenses grew 46%, even though bookings grew 28, 29%. Variable costs in 2019 grew 41%, and fixed costs grew 60%. So 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. Right. And they're actually getting less here. Hmm. Well, that's concerning. Concerning. Indeed. So then 2020 happens. Well, before 2020 happens, in September of 2019, they announced that they will go public in 2020.

And this has been reported elsewhere, but the company now, by September 19, is close to 12 years old. The early employee options are going to start expiring. Yeah. So how does that work? I don't know exactly. I think, I don't know if it mirrors, like, as I think about like a venture capital fund lifecycle. Usually it's a 10-year lifecycle, and then you have two one-year extensions. I don't know, actually, if employee option contracts mirror that. But also, at a minimum, you know, think back to Sequoia.

Like, their fund that they invested in must have been a, in Airbnb, must have been a 2006, 2007 vintage fund. Yep. 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. Yep. And also, like, you know, everybody would just would like some liquidity, I would assume here, not to mention.

So they announced they're going to go public, and then COVID happens in March of 2020. And overnight, the business evaporates. And not just evaporates, we talked about the huge benefit of 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. Is that because of refunds? 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, seen this before. Not even, like, negative revenue. You have negative bookings. Because you're actually paying people more than you are getting. Brutal. Which, of course, it's a global pandemic. So, of course, it's getting brutal. Totally. Totally brutal. So in March, and I wondered, I didn't quite realize this until digging into the S1. In March, as people probably know, Airbnb raised $2 billion in capital from Silver Lake and Sixth Street partners in a combination of equity and debt.

The debt piece was at an 11 and a half. There are two pieces, two tranches at an 11.5% interest rate and a 9% interest rate. The equity piece was at an $18 billion valuation. And that was a billion in each, right? A billion of equity and a billion in debt. I think that's right. I think ish. And I sort of wondered at the time, like, why would this, you know, these are pretty onerous terms. Like, on both sides, you know, massive haircut in valuation.

Basically a 50% haircut in valuation. And then the debt side, interest rates are zero out there. Where this is like, this is like major distressed debt. Like, you're pricing a tranche at 11.5% interest rate. I think this is what was going on. Was not only did the business evaporate, but like 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, you know, my, I am not first and foremost a finance person.

But the way, the bucket in my head that I sort of put this cash flow dynamic into is kind of a form of leverage. Like, 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 it, you know, 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.

Right. 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 SaaS company because it's a marketplace and they got to pay the hosts. But, like, they make a lot of money on every transaction. And so the whole ballgame for tech companies is build the best freaking product you can.

And especially recently, spend a ton of money on sales and marketing to go capture a win or take most or all market. So your sales and marketing costs are high. Your R&D costs are high. But those are relatively fixed. And then hopefully your revenue over time. At least your R&D costs are. Yes. And then hopefully your profit margins on a unit basis help you outrun all those fixed costs or high operating leverage. Now, 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. Like they kept mostly R&D people and laid off mostly the people in the customer success service organization. Yeah. Yeah. We might want to get into that in a sec. Brian describes it at the time as a quote unquote second founding of Airbnb as a business. They jettison all of the other stuff that they were working on. Experiences are still around. And they moved to online experiences.

But no places, no trips, no. We didn't talk about it. The company had started a movie studio at some point along the way there called Rouse Street Films. They also had a lot of stuff going on. It's all gone. I got the magazine for a while. Yep. All gone. The magazine. I don't hate on the magazine. The magazine makes sense to me. You're a travel company. Like airlines have magazines. That makes sense to me. You're promoting travel.

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. We've both traveled this summer for long term stays. Pulled together a great stat. Even though I think there's been basically two eras of the pandemic for Airbnb. There's the initial era where everything froze up and they had to do this super onerous deal. But then there's the second one, which is as people, as we knew more about COVID-19 and understood how it spreads and, you know, it's through the air rather than on surfaces and all these things, people started making their own informed decisions around how can I live my life safely.

And it turns out Airbnb was actually a great option to live your life safely, more so than hotels. Like I remember a moment where Airbnb's bookings were down something like 50%, but hotels were down 90%. And I don't exactly remember which month this is, but I think that narrative is definitely one that played out during the pandemic. And for me personally, I have stayed in only one hotel since March. It was the only option and it was in the middle of nowhere.

And I sort of had to book the hotel, much to my chagrin. But I've stayed in six Airbnbs. And I think that is illustrative of act two of the pandemic for this company. Totally. Same. And we're, we're, we've been less active than you since, uh, Jenny's more tied to San Francisco than, uh, uh, you guys are. More of those, 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, Who wants to walk through a lobby right now? Yeah. Yeah. It was, uh, it was, I mean, I feel for hotels these days. Yeah. 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 the growth as makes sense because the pandemic, uh, growth has gone from slowing to, 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, 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, of growth. Yeah. Well, except that they also shrunk. Right. Well, and I think that's the, the question that we'll talk about in a second in our analysis sections is what, what, 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 S one, uh, 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 door dash yesterday, where, uh, what did we say that for the first nine months, they're up 300%, I think. Close to it. For the year, Airbnb is, is down in growth. 39%. Uh, they filed their S one. And then last night on December 9th, 2020, they priced the IPO at $68 a share and up raising three and a half billion dollars at a $47 billion market cap.

So big man, like that makes a, 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. Okay. Yahoo finance pulled up here. It is currently trading. Oh, 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.

Yeah. What? Yeah. I mean, after door dash 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. Wow. This company's hovered at like 30-ish billion for a while. Like they were constantly- And then the pandemic. And growth was slowing and then the pandemic. I mean, I'm thinking to myself when they dropped this in November, like this company really had to go out this year because otherwise, why on earth would you go into this market right now?

Or I guess the market's doing fine. And 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 door dash, you're like, okay, yeah, it makes sense why they're going now. Like this is the biggest accelerant to the business in history. Wow. Wow. Wow. Wow. Okay. Well, we'll get into it. But that- 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 was, which I think is a reasonable comp because it's also a marketplace business. It was also at global scale. It had also been a long time, what, 10 years between founding an IPO in 2018. It was growing at 42% when they IPO'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 growing, you know, doubling year over year at 100% growth. That was coming out of Delete Uber. Yep. DoorDash, obviously, over 200%. Pinduoduo, who we covered to open this season, at 246% year over year. Again, China Tech, different in every way. When you gaze over into SaaS land, the numbers are also looking pretty good. Slack, which was a product-led growth company, primarily at that point, 81% year over year.

Square was 55%. Shopify was actually more than doubling at 110%. The laggard of the bunch, which ended up not becoming a good stock, was Dropbox at 31%, still a few percentage faster than Airbnb pre-pandemic. So, you know, that's sort of contextualizing why we're not super excited about Airbnb as a growth company at this point. And what I'm looking at, I don't have the numbers right at hand, but for Snowflake, which before this week had been the darling IPO of 2020, the new Zoom, they were growing at, I believe, close to a 200% growth rate at Goin Public.

So, what is going on here? This company is shrinking. Yeah, this company 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 91... So, 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, like, 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. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is no longer the hard part. Yeah. The hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making.

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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 over the years. 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 is now has more than $4 billion to his name. I think now this means he has 10 plus billion dollars 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. 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, for sure. Founders Fund invested across a couple of different funds. And this information is from The Information, which we'll link to in our – that's confusing to say that, but capital T, capital I, The Information. And we'll link to that in our sources. I think they came up with about $3 billion after investing about $150 million.

So it's just like winners all around here. YC owned 2%. Greylock obviously won big. And Dries and Horowitz invested $60 million when they valued Airbnb at about $1 billion. So I think they probably have $3-ish billion coming out of this. So lots of winners in the venture world. You also look around. And you mentioned Keith Raboy, Kevin Hartz, Jawad Kareem personally. You've got Ron Conway, DST. Jeremy Stoppelman from Yelp was an investor. Obviously, Bezos personally ended up investing.

This is like an Academy Awards speech. It's crazy. I like to thank that. Yeah. You got Jared Leto. You got Ashton Kutcher. And then by proxy, Demi Moore. Like 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 $7-ish billion. 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 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 narrative. David, whatever could you be confused about? Let's go into narratives. Oh, great. Okay. Well, should we discuss the bull 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. And so now it's just about harnessing all of these unfair advantages like that.

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 door dash 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 big, and although it has taken a big hit this year, it's going to come back. Yeah, they cite a $3.4 trillion number on their TAM. And I think that the way they break that down is that 1.8 trillion of it is short-term stays. And then only $210 billion of it is long-term stays. So the long-term stay market, which is longer than 28 days stays, is actually smaller than the food delivery market, which I think is sort of an interesting 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. I think we could throw out the rest of it. For sure to saturate that. Yeah. Yeah. Yeah. A lot of room to run there. So I think that's the book. I think if you believe all of those things. And one more stat on 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. Yeah. 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 feed 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. But, like, if you want to believe that you're going to access a very, very large chunk of that $1.8 billion short-term stays TAM.

Or $1.8 trillion short-term stay TAM. You need to still be running fast growing into that. And what did they do last year? $38 billion in gross bookings, I think, Airbnb did. You know, yeah, that's like a lot of billions. But that's not a lot compared to $1.8 trillion. And for the growth to be slowing significantly, then you wonder how much of this TAM are you really going to access. Right. So what does that mean? Does it mean that their TAM isn't actually the $1.8 trillion for the short-term stays and it's actually much smaller, like the addressable part of that?

Or is it that, like, 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. It's, 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. And then when it was, in the early days, when it was just much cheaper than hotels, it was almost all of my travel.

Like, but then the prices went up and equalized more. And then it really became a question of, like, do I want an Airbnb or do I want a hotel? And I certainly didn't want an Airbnb or a hotel 100% of the time. It was a mix. Right. And I don't necessarily see any path where prices are going to go down again on Airbnb and you're going to have that kind of dislocation in the market, the arbitrage between Airbnbs versus hotels as a traveler.

So I think it is going to get segmented out. Now, maybe back to the bear, 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. I mean, the bear cases kind of keep going for me. So there's this, like, potential market saturation thing and the slowing growth.

There's a growing belief, I think, that they will have recurring acquisition costs the same way that Booking and Expedia do because these people are starting to multi-home more than ever. Like, VRBO is starting to see a lot of the formerly only Airbnb listings show up there. Booking is trying like hell to be able to have these sort of unique experiences, the Airbnb type of listing in addition to hotels on their platform. So everyone is skating toward a more homogenous set of supply than has existed in the last 10 years.

And with that being the case, will that brand affinity keep up or will people start comparing their options or, in fact, being willing to book an Airbnb-like listing from Booking? Well, and this is maybe a good case to talk about our own experiences as hosts, too. Because I think probably an argument against that 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 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. And that is the product experience of being a host on VRBO.

But once you have it up, like it's up. And 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 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.

But if we were and we're traveling more, I think we absolutely would. And the biggest reasons for me are, well, there's what you said. But I think 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 it'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 expense. Like I wouldn't want to take a $30 booking one night. But Airbnb would be like, great. You know, this is like there's higher liquidity. There's more supply on the platform with more nights available.

We got some revenue out of that transaction. But if you basically factored into a labor cost, there's a price at which the people aren't willing. The hosts aren't willing to take on the sort of cost and risk associated with that. And Airbnb's smart pricing couldn't care less. Exactly. Well, and so the point I was going to make is that like, you know, I care about price. I want to maximize my revenue as a host. There are these other viable platforms out there.

Now, they're not as nice to use as Airbnb, VRBO, HomeAway 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. Any time 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 apartment listing, then you want to maximize the amount of demand for your listing.

So why it would be dumb not to be on multiple platforms. Yeah. And especially as Airbnb tries to be more scalable and more capital efficient, it's not as enjoyable to be a host on the platform as it once was. And it carries risk to only single list. Like, if Airbnb decides, hey, something fell under this policy. Oh, sorry, you can't actually talk to anyone because we're trying to limit the number of people you can interact with.

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, 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, um, one thing that I think has changed over the past couple of years is there now are viable, good third party software tools to do this. Whether it's beyond or guestly, um, you can pretty frictionless Lee as a host, have your property listed across all of these platforms and not worry about keeping it in sync and having a cost associated with that. Yeah. I do think like one credit we should give to Airbnb and like, we, we need to caveat every time we're negative with like, I'm negative on this being currently valued at a hundred billion dollars.

And, and there's other reasons, there's other things I'm negative about, but 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, uh, professionally managed, um, Airbnbs or the people that own big blocks of Airbnbs. Yeah, that, that sort of thing. Um, but something that's totally been proven as sort of a successful smaller business is all these different software plays, um, that, 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. Um, but you got to credit them for enabling an innovation ecosystem. Yep. Okay. One, one more bear case. Um, great. Oh, I had one too. I don't know if it's going to be the same. All right. So, so yesterday on the DoorDash episode, we mentioned that, you know, 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 just don't, I don't think the company is a master executor outside of that initial opportunity. Like it's almost like the anti-Amazon who's really effective at testing new adjacencies to expand into and killing the ones that don't and then leaning hard into the ones that do. Like they tried luxury, they tried building a hotel, they tried experiences, they've tried dining, they tried booking air travel, they tried custom designed tiny homes. Even Plus, I don't know, were you on Plus, Airbnb Plus for your listing?

Totally, but it became meaningless. It was a terrible experience. It's a bad experience and it got totally diluted, much like Superhost. Like what does that even mean anymore? Nothing. So it just feels to me like the personality, the company is one where they're really proud of their ideas and they want to like make something. Their first idea worked 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. Oh, yeah. 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 of Instant Book, payment through the platform, messaging through the platform, and their review system is like that is together they create the symphony that enabled this product to provide tons of value on both sides.

But really, Instant Book, that's part of the initial product. Like that's not a subsequent thing. So I agree. I think the other – I debated whether to talk about this in Power, but I think it makes more sense in narrative maybe leading into Power for a bear case on the company is – as we talked about in the bull case, you've got to believe that they're going to keep penetrating a huge part of this huge TAM.

And you probably also have to believe at these prices that coronavirus has shifted the winds in Airbnb's favor. 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. They are much, much, much more like eBay. And eBay has been on a similar path, enormous TAM, global network effect, torrid growth for many years, but then has slowed and has – 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 them as part of the fang. But we do 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 has 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 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, is still a question.

But Hip Camp is out there. Hip Camp 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, so much lock-in there?

They built all the services around purely selling your goods. So, of course, they brought you the traffic. But then they also did fulfillment by Amazon. They also did, you know, 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, 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. It'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 can imagine those things being game-changing for their lock-in and for guest satisfaction.

Like, once you know that something is done the Airbnb way in the same way that, like, oh, this thing isn't sold by Amazon, but it's on Prime. Eh, same thing. I trust it. It's got the Airbnb, the Amazon stamp of approval on it. Yep. All right. Should 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 front of the show. And it is the 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, you know, 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, you know, 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, you know, 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? Like, why do you believe that they're able to do that? And so, David, with that preamble aside, I'm curious, what types of power do you think show up in Airbnb?

Yeah, I think it's, well, okay, the totally obvious one, just like scale economies were the totally obvious one for DoorDash. The totally obvious one for Airbnb is network economies. Yep. This is a two-sided network effect. It is global in nature. It is as powerful as I have ever seen in a business. Yeah. It's rivaling, you know, I think generally, if you think about network effects, like network, single-sided network 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 Airbnb, 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 dual-sided network effects I've ever seen because it's global, it's not local, and you really care. The way you measure network 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. Yeah. 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 iMessage, where I really only iMessage with like 10 or 15 people, as long as the 10 or 15 of us are on the same thing, it's okay. So, it's like a reasonably, it's not that strong of a network effect because you don't need to interface with lots and lots of nodes in the system. Whereas with Airbnb, I don't care who owns the place that I'm staying at.

I just want the most choice with the most interesting options such that there is sufficient density where I want to go in the sort of like price tier that I want when I get there. And that is like a truly amazing network effect where exactly to your point, every node that's added to the system has meaningful additional value rather than this concentration where my friends around me provide value, but everyone else that's on the network provides me none.

That's actually a really good point. I hadn't thought about this, but this is probably why Instagram is long run and even now bigger and more valuable than Facebook because on Facebook, you know, I care about, you know, my friends, my loose circles. Maybe there are a thousand people on Facebook I care about. On Instagram, though, there's brands and there's influencers. So, like, I actually, you know, I don't care about the randos on there, but I do care about the millions of people making interesting content.

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. 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 and brand at Marriott and take on the lease. Management company? Yeah. Yeah. I guess they don't take on the lease. They sign a contract to be the management company with the owner of that building. But somebody's, you know, that economic cost is in the system. Somebody's paying the cost to the lease. Exactly. Exactly. And Airbnb doesn't need to pay a dollar to bring that new house of supply onto their system.

I mean, there's marketing expenses to bring that person onto the platform, but, like, it's so much lower. So, they were wildly counter-positioned against the hotel chains because Airbnb could be way cheaper than them and their cost structure just allowed them to without being in the red. Yeah. Totally. And 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, you know, my house in San Francisco on the platform. Like, I'll make incremental money. My costs aren't that big. Cool. I'll list it for 300 bucks a night. Whereas a hotel, you're like, well, I gotta run this hotel. Yeah. And I think the ones that they notably don't have are cornered resource or switching costs. Like, for consumers, it's very easy to switch as long as there's another economy.

And this is related to cornered resource. You would think their hosts would be the cornered resource. But for a host, it's actually very easy to become uncornered and go list on multiple of these systems. And I think that's going to be a thing that we see increase more and more over time. I think to some extent, the rating and review history is some lock in there, but less, not that much and less than it used to be.

Like, in the early days when this was a new concept and people were 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 HomeAway. It's 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 and what take rates you can command with each one.

And I've heard it described where something like Uber is Marketplace Assign versus something like Airbnb is Marketplace Assist. Where in Marketplace Assign, because all of the supply is completely homogenous, it's effectively the same experience, you don't care as the demand which one gets assigned to you. So you just want it to be close, and as long as it meets that criteria, great. And when that is the case, the business can command a higher take rate. They get to control more of the economics.

For something like Airbnb, I browse and I, you know, they assist me to browse, but I pick the specific house and, you know, boom, I've booked it. And in the mind of the consumer, the real merchant, when I'm getting an Uber, feels like it's Uber. But the merchant, when you're on Airbnb, feels like it's the host. And then Airbnb is just helping me with that transaction. And they kind of, you know, they obviously have fees on both sides.

They charge the guest more than the host. But, you know, they have fees on both sides. They're trying desperately to get more and more of the take rate. But ultimately, they're never going to get to that 30 plus percent that you see in, like, ride sharing where there's, you know, people feel like they're buying from the company when really they're just facilitating you to buy from the provider. Yep. Agree. I don't have an opinion on whether that's good or bad or anything, but I just think it's interesting to, as we do more and more of these marketplaces, to sort of understand why they can each command different take rates.

Yep. 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 did an IPO, I think we should run a counterfactual that compares Airbnb to booking, which is a very different business. You know, booking doesn't have this sort of... What do we say? Our number five acquisition of all time? Yeah. I mean, my gosh. I forgot they were called Priceline at one point.

Priceline buying booking was just an unbelievable acquisition. And yeah, if you're curious on... And the... We did a whole episode on that. It was booking in Amsterdam. And what was the London company? 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 while these are two very different businesses, one... To oversimplify, booking helps you find a hotel or flights. And Airbnb helps you find an Airbnb, which I think even in the nomenclature there, you can kind of see the difference where booking doesn't really...

They didn't invent their supply. They didn't sort of cultivate that supply. They went and forged the right types of deals in order to get them to list on their platform. But it's actually very interesting, I think, just to look at a simplified income statement of both companies. So let's look at 2019, before the effect of the pandemic. We've talked about Airbnb had $38 billion flow through their system from people staying in Airbnbs to hosts and to Airbnb and to taxes over the course of the year.

Of that, they took $5.3 billion of that in revenue. So for any of the knocks that we've had on Airbnb so far, this is a $5 billion a year revenue company pre-pandemic. It's a big freaking company. So the effective take rate on that is 13.9%. There's ways in which you should believe it's higher. There's ways in which you should believe it's lower. But it's always interesting to me just to look at an annual income statement and take the gross divided by the...

Or the revenue divided by the gross to come up with 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 $5.3 billion in revenue, they couldn't generate any profit at the end of the day from that because they had to pay so much to headcount, sales and marketing, leases, everything that goes into running the fixed cost of a business. Now, they were cash flow positive in large part because of the cash flow dynamic we talked about earlier where they're getting the cash up front and then paying it out later.

Yep. 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. Also having to spend a lot more performance marketing than Airbnb. Totally. Right. Like they're cutting a, you know, $6, $7, $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, you know, the point to make here is like, oh, and flights are kind of a silly thing to include. And 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, you know, took two and a half X the scale to do that. And so it'll be very interesting to see with Airbnb as they get to a bookings type scale. Are they also able to generate the sort of profit that booking 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. Like create no brainer value for everyone in the ecosystem and really good things are going to happen to you. I think that some people can only go on vacations that they otherwise couldn't afford as a host. Some people can make their rent or mortgage that they couldn't afford. These are like big, meaningful, life-changing things that this company's existence enabled millions and millions of people to do around the world.

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.

A hundred percent. 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 graph of like price and quality. So like as price goes up on the y-axis, quality goes up on the x-axis. And in any given market, there's, 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 quality all the way across the spectrum. Exactly. Or even maybe it's only for a portion of that curve. But like for some area of the graph, you have exceeded the current market.

If you can do that in any market, you will be successful. And Airbnb did this incredibly well across pretty much the whole graph. It's like the economist view of why is this company valuable? Yeah, exactly. The next big one I had was around create unique supply. But I think we've talked sufficiently about that one. One we haven't talked about is addressing Europe. 43% of nights are booked in Europe on Airbnb. This is not a U.S. Centric company.

Paris is the biggest city. Wow. Historically, it always was. Yeah. Only 29% of bookings are in North America. Interestingly, revenue is about even between the two, which means people are spending more money to stay in North American Airbnbs than European ones. 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. Like that, that is, I don't think there's a single other U.S.-based company that we've covered on this show that you could say that about.

Yeah. I mean, Ubers. But they're not U.S.-based. Well, book, but they're not U.S. I mean, they're technically U.S.-based, but yeah. Uber is large in Europe, but I think probably larger in the U.S. Yeah. Do you have more? All right. I do. Yeah. Free cash flow is one that I think, I don't think I have anything new to say here. I think 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 I'll turn it over to you first in case you wonder. Well, I'd actually maybe expand a little bit on what I was going to say on the free cash flow point, which is, I think part of the reason that Airbnb has such amazing free cash flow dynamics is, whether intentional or not, they started this new market, new idea. When you do that, you have an opportunity to set the terms of how the market operates and they set the terms that you pay us up front and then we pay out the hosts when you book.

Now, that's different from hotels like on booking.com and others. Usually like you make the booking on booking.com, but you don't pay until you check in at the front desk. Like, 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 worth, it's interesting to know, like 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. I'm raising a round. It's not a seed round. It's a new form of investment. But. Amazing. Well, like on our LP show, you know, Raul talked about his fundraising philosophy and all that. Like, you know, kind of, he did that in a lot of ways with, with interstitial rounds and like some innovations.

Yeah, 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 little bit of like a playbook that's been run that I think will ultimately have pretty negative outcomes for the company. That all that direct traffic that they've been able to harness is a gift and a curse. And we talked a lot about the gift. The curse is that they don't develop the performance marketing muscle.

And when you have always sort of experimented and had questionable return on direct marketing spend compared to your competitors who are, you know, laser focused on it. And 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, Airbnb 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, 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 this 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. Like, 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, 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, you know, two people that didn't give you terrible reviews.

Congratulations. 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. Yeah, most reviews are meaningless. Yeah. There are some that are helpful. And it hasn't been the hammer that's solved every nail of giving you confidence when you're looking for a place to book to book 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.

Like, 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 this section has two components. The first is literally the name of the section. Are they Craigslist at capturing the value they create in the world, or are they Google, who does a very good job of creating the value or capturing the value they create? And then lastly, you know, how do you compare the value they created for the world to any value destruction that they've had? And I don't think Airbnb is that interesting to discuss, like, do they effectively capture the value they create?

I think so. I think the more interesting one to focus on here is negatives for the world versus positives for the world. And we spend a lot of time on the positives for the world. The thing that I think goes a little bit less discussed about Airbnb, and it comes in waves. Sometimes it's a hot topic. Sometimes it's not. And this dovetails into the regulatory issue, is the impact on housing supply and housing prices. Because housing prices, especially at the low end of the curve, are extremely sensitive to small changes in supply.

And so I was digging into this. There's a good Harvard Business Review article that basically says, I think this is a quote, this means that in aggregate, the growth in home sharing through Airbnb contributes to about one-fifth of the average annual increase in U.S. 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. It's not, I'm not here to arbit whether this is, you know, 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. I think the like general...

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 the...

Or many hosts around the world ring a bell and create a nice video to open the IPO this morning. And that's largely consistent with their brand and yet there's a lot of potential value destruction. Well, really what this comes down to, and I don't know the data, I've seen various parts of it, but it really comes down to like what... Who's the supply on the platform? Like I think for people that own their homes, that live in the homes, that are renting them out either...

Are they renting out rooms while they live there to help with income or renting them out while they're on vacation? It's hard to see much value destruction from that. That's like, hey, they're living there. They would live there anyway. This is like helping them make money. Where this gets really different and gray is property managers and people taking housing stock off the platform purely to become hotels, essentially. Yep, well put. And the question is like, what is the percentage of each of those use cases of supply on the platform?

I don't know. I've seen estimates as high as over 50% is more the hotel use case removing housing stock. Hmm. But this is one where like everybody who's got a... Everybody who's waving a data sheet has an opinion here and has a horse in the race. So like it's hard to know. Other than the Harvard Business Review article, I found the two... One was a... There was two sources that have very detailed reports on this. One is Airbnb.

Yeah. And the other is a extremely liberal sort of like labor focused funded think tank. And you're like, okay, well, you're... Who else has... You know, who else has... Like, well, you know, New York City has fought on this for a long time against Airbnb. And so like the New York City has lots of... Housing Commission has lots of data on this. And it's like, I don't know that just that either. Like, you know, so... Anyway, 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. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig. Yes, long time acquired partner. There is a reason why the best product teams at companies like OpenAI and Notion, Atlassian, Figma, Rippling, Brex, and more rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

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They're measuring what actually moved engagement, retention, and ultimately revenue. And as more teams build with AI, that learning loop becomes even more important. Building with LLMs introduces non-determinism into your product experience. The same input doesn't always produce the same output. And behavior can shift in subtle ways in real-world use. So doing offline evals will give you part of the picture, but you can really only understand the impact once your product is live with real users, and then you can measure how their behavior actually changes.

It's very different than the way that you would ship features in a pre-AI world where you knew exactly what the software was going to do in production. Yeah, exactly. So this is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved. The result is a tighter feedback loop and learning that compounds over time so you don't just ship more, you ship better.

So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started. David, grading. Ooh, grading. All right, so how did we decide we want to grade this one? Do we want to do the same as DoorDash yesterday of use of capital along the way? Collectively, how good of a use of capital was it for the company and the investors to go after this business opportunity in this way?

There's nothing to say here. This is like the greatest use of capital of all time. It's 100% A+. How could you not say that investing $585,000 in the seed, having this company build this product and thing with such amazing cash flow and business dynamics that then they're generating cash and have that be worth whatever Sequoia is going to make today. And then all the other capital that went in along the way too. So what did they raise to be before the Silver Lake round?

Ooh, let's see. Before the Silver Lake round, I believe it was around $3 billion, $2.5 to $3 billion that they had raised. Comparable to sort of DoorDash, but only a third of what Uber had raised. Yep, exactly. Yeah, no, this is like the capitalism dream here. Yeah, I mean, the question that I sort of have similar to my DoorDash one yesterday is let's ignore current valuations and current share prices and just think about that total $3 billion-ish that's gone in.

Let's play it out long term. Does the business at some point generate, you know, have enough power that it generates persistent differential returns? And is this business a cash generating machine that in the long term will return lots of cash to the business and its shareholders? And I think so. Like, I have reasonable confidence that despite a lot of my reservations around slowing growth, around increasing competition, certainly around valuing this company at $100 billion right now, So 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. Like, 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. This is eBay here. That's what this is. That's the same type of network effect, same dynamics, same cash flow dynamic. Like, this is eBay. Capital light business. So, yes, agree. 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 at.

Because, like, let's be honest. There's no excuse that this company hasn't already been printing, generating tons of cash. Like, there's just, like, this company does not have the right sized cost structure right now. Like, doing things like, you know, the film studio and places and experiences and the airline. Like, you know, building units in people's backyard. Like, it's nuts. Like, 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, you know, a CFO now there for almost a couple of years who's had great, I think CFO was the CFO of Amazon's consumer, worldwide consumer retail. Like, they've really buffed up the management team with, you know, capital allocators. And depending on how they all sort of work together, I think there's real potential here to sort of lean out the business while still growing and realize the great, you know, profitable dynamics it could have.

Yep. Woo. Man. What a season. All right. What a season. 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. 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, what's epic? The NBA. NBA was so much fun.

Yeah. I like it. I loved DoorDash yesterday. That was fun, too. My, unlike DoorDash's, 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 actually have no idea who made it. Um, but it's, uh, Star Wars Lo-Fi Hip Hop. And it's covers of all Star Wars music in a Lo-Fi Hip Hop style. And, like, it is just phenomenal work and research music. So, uh.

Oh, 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 Carveouts 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 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, uh, a rollercoaster and SFB is doing great, thankfully of wonderful donors, wonderful audience. But what they did, you know, the Nutcracker is like the big part of the ballet season every year and it's the holidays and Christmas.

And so what they've did is they've created a digital Nutcracker experience. It was actually written up in the New York times. It's really cool. Uh, it's a, so it's a, it's a recording of the Nutcracker, but it's, it's like, I mean, I've seen SFB's Nutcracker dozens of times probably at this point, but it's, it's a different experience to watch it online because you, you know, the camera zooms in and like, it's, it's a different experience and they have a cool digital, like a virtual, opera house tour and experience around it.

So, um, 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, um, for folks who don't know, as we start to wind down here, uh, we have been codifying the playbook section from each episode in some written bullet points. And, uh, we, we email those out now after posting each episode. So if this is something you want, you can sign up to receive those playbooks, uh, 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, um, kind of have something a little bit more, uh, more shareable and tangible and referenceable. Uh, 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, uh, which actually the last three, we've talked to the author, uh, for, for each one. And hopefully, um, we'll have a fun one to announce, uh, 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, uh, subscriptions make great gifts for the acquired fan in your life. So you can sort of figure that out on your own as a little tricky to, to kind of go through. So feel free to drop us a note acquiredfm at gmail.com. If you want instructions for how to gift the LP subscription. And on that note, you know, we said this yesterday, we want to say it again.

We feel very strongly that financial hardship should never keep anyone from being an LP. And we want as diverse a group as possible and people of every life stage and every life experience. Um, so please shoot us a note acquiredfm at gmail.com and just introduce yourself and we're happy to help you out if, uh, 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, uh, 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, um, any type of farm animal.

You've been looking to get your parents into Airbnb, um, 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, uh, will, uh, will understand. So, um, consider this your opportunity to share the gift of acquired this holiday season.

I can't even get through it. Uh, we have some holiday joy happening here. No kidding. No kidding. Everyone, uh, have a wonderful Christmas, Hanukkah, New Year's, uh, whatever it is that you celebrate, uh, time with or without family or perhaps with, with folks on zoom and we will see you next year. Yeah. Although we're going to have a little special, we have a special, a special little holiday present for you coming next year. We're going to come not next year, next week.

Yeah. Let's, let's not announce it. It's outside the bounds of, uh, of, uh, 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. Keep seeing you soon. Thank you.