Every company has a story. Learn the playbooks that built the world’s greatest companies — and how you can apply them as a founder, operator, or investor.



Fri, 11 Dec 2020 06:14

Over 13 years after its founding, one of the defining startup companies of the past decade finally makes its public debut — and boy was it a big one. But for all the hype (and all the legitimately great things Airbnb has accomplished), this is a company that looks very different today than in the past. Even before COVID, Airbnb's once-exponential bookings growth had declined to linear levels while the company's costs continued to balloon at accelerating rates. What’s going on here? Are public investors smart to bet on a permanent shift in travel behavior coming out of the pandemic? Or is this a case of unrealistic expectations? As always, we dive in.

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Playbook Themes from this Episode:

(also available on our website at )

1. If you can create value for all sides in a market ("expand the efficient frontier"), you really can’t help but be successful.

  • Born out of the 2008 financial crisis, Airbnb was able to fundamentally change the nature of the travel market and provide guests with more quality for less money, while also enabling hosts to earn meaningful extra income during a very difficult economic period. This led to incredible market adoption of the service, at times almost despite the company's own actions and activities.

2. When you create a market, you have an opportunity to set the terms.

  • By virtue of creating a whole new class of supply that had never participated in the travel market before, Airbnb was able to enact much more platform-favorable payment terms versus the hotel industry. Unlike and the OTAs, guests pay Airbnb at the time of booking, and Airbnb keeps that cash (including fees) until after check-in — which could occur weeks or even months later.
  • This created an enormously beneficial cashflow dynamic for Airbnb that allowed them to grow while burning much less cash than otherwise would have been required.

3. When you don't fly low to the ground, you aren't forced to operate at the lowest level of detail.

  • Unlike DoorDash which needed to create an enormously efficient operational machine just in order to survive, Airbnb's capital-light business model, low operational intensity and favorable cashflow dynamics meant they've never had to operate in a particularly cost-disciplined or product-focused manner. While the core business has been insulated from competition due to its global network effects, the company has missed or poorly executed on Amazon-like opportunities to expand into adjacent markets and services that could have continued to drive new growth.

4. Relying solely direct/organic traffic is both a gift and a curse.

  • Undeniably, direct/organic customer acquisition is a wonderful goal for any business to strive for. Who wouldn't want to acquire customers without paying for them? However, if you don't also build the muscle for profitable and reliable growth through paid channels, you can be left vulnerable vulnerable when organic growth slows, as it inevitably will.

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I took Tannies' collar off her, so that- Oh, awesome. We don't have the same problem. That'll save us some time in post. [♪ OUTRO MUSIC PLAYING [♪ Welcome to season 7, episode 8, the season finale. Of acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert and I'm the co-founder of Pioneer Square Labs, a startup studio and venture capital firm in Seattle. And I'm David Rosenthal and I am an angel investor and startup advisor based in San Francisco. And we are your hosts. Today, we cover the hottest and most anticipated company to IPO in 2020, and oddly, in a year marred by the global pandemic and just this month, an all-time high number of stay-at-home orders. This hot IPO is a travel company. Airbnb, originally known as AirBed and Breakfast Incorporated, is going public today raising over $3.5 billion and initially valued at over $47 billion. The company is insanely impressive. They operate in 220 countries and 100,000 cities. Last year, there were $38 billion of bookings made on the platform that 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. Did 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 Lindel Ekman from Foundry Group joined us for part four of our VC fundamental series, where we went seriously deep on the topic of portfolio construction for a venture capitalist. Sure, this is a useful thing for aspiring VC's, current VC's to hone their thinking on that. But if you're a founder or an employee at a startup, I think understanding the incentives and strategy of your investors, big stakeholders in your company and your potential future investors, it's just insanely valuable. So really awesome to have them on, fun to be diving so deep on this topic and sharing a lot of these conversations with so many of you. If you aren't already an acquired limited partner, you can click the link in the show notes or go to slash LP and all new listeners get a seven day free trial. Our presenting sponsor for this episode is not a sponsor but another podcast that we love and want to recommend called the Founders podcast. We have seen dozens of tweets that say something like my favorite podcast is acquired and founder. So we knew there's a natural fit. We know the host of founders well, David Senra, hi David. Hey, Ben. Hey, David. Thank you for joining us. Thank you for having me. I like how they group us together and then they say it's like the best curriculum for founders and executives. It really is. We use your show for research a lot. I listened to your episode of the story of Akyo Marita before we did our Sony episodes this incredible primer. You know, he's actually a good example of why people listen to founders until acquired because all of his huge greatest entrepreneurs and investors, they had deep historical knowledge about the work that came before them. So like the founder of Sony, who did he influence? Steve Jobs talked about him over and over again if you do the research to him. But I think this is one of the reasons why people love both of our shows and there's such good compliments. It's not acquired. We focus on company histories. You tell the histories of the individual people. You're the people version of acquired and where the company version of founders. Listeners, the other fun thing to note is, David will hit a topic from a bunch of different angles. So I just listened to an episode on Edwin Land from a biography that David did. David, it was the third, fourth time you've done Polaroid. I've read five biographies of Edwin Land and I think I've made eight episodes of them because in my opinion, the greatest such printer to ever do it, my favorite entrepreneur personally is Steve Jobs. And if you go back and listen to like a 20 year old Steve Jobs, he's talking about Edwin Land's My Hero. So the reason I did that is because I want to find out like I have My Hero's, who were their heroes? And the beauty of this is the people may die, but the ideas never do. And so Edwin Land had passed away way before the apex of Apple, but Steve was still able to use those ideas. And now he's gone and we can use those ideas. And so I think what Akkwari's doing, what a founder is trying to do as well, is find the best ideas in history and push them down to generations. Make sure they're not lost history. I love that. Well, listeners, go check out the founders podcast after this episode. You can search for it in any podcast player. Lots of companies that David covers that we have yet to dive into here on acquired. So for more indulgence on companies and founders, go check it out. All right, David. Air, B and B, take us in. It's time. It's a never time. This company is 13 years old. Come on, it looks like a teenager. We thought it was gonna be time for a while now. And 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 of my previous venture capital firm, I haven't talked to any of them about the IPO or about this episode. They're all great. I'm sure they're very, very happy today. But just so everyone knows, I don't know any Airbnb stock or any stock in any of its competitors. And I'm not planning to buy any. Yeah, as always, this show is not investment advice, but we thought it was sort of extra important for us to highlight that neither of us are shareholders going into recording. Indeed, indeed. We do have a very big thank you to shout out though. Again, has so often on this show, Bradstown and his wonderful book, The Upstarts, where he chronicled much of this history that we're gonna borrow from. And Brad is wonderful past guest here of us on acquired. So with that, let's dive in. Let's do it. Okay, so Ben, stop me if you've heard this one before. Wait, the story of Airbnb is founding? I never heard of it. Well, okay. So a group of friends from New England, one of whom is from Harvard. And the other two with a kind of design and adventurous background, start a company in the early 2000s with a mission to connect people and facilitate interesting experiences. And they're gonna accomplish that mission by having people stay in other people on the site's homes. Yeah, yeah, yeah, yeah, yeah, a RISD design conference out by Southwest. I think I know where this is going. So they do this, yep, yep, they build trust on the site with reviews. You can review each other. You have, they discover that photos are really important of the listings they had photos. They figure out how to authenticate real identities. It starts to take off. People start using it and going through this way faster than I would have expected. I know, I know, we're gonna get through a lot here. 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 And the venture firm that I'm talking about is benchmark. And the partner who led that deal was Matt Kohler of little companies like Facebook and Instagram fame. That was a... couchserving had that many similarities with Airbnb. They had a lot of similarities, but there was one thing that was missing and it turns out that that was one of the key things that made couchserving roughly the equivalent for those who have listened to our Uber episode of the, I can't remember if it was Uber or Lyft or both. I think it was Uber of the homeobile story. Ooh, I think Uber, good question, I don't know. I think it was Uber where we did home mobiles, which of course pioneered ridesharing. couchserving didn't have a way to pay money. It was, you just stayed in other people's... Oh, you just still take the payments? They didn't facilitate the payments. And the idea was everybody was just gonna 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 couchserving was you paid essentially like a verification fee to have your identity verified. I think the way they did that was they took a credit card payment and then matched your name with the name on the credit card. And that was the only way they made money I think. And actually the similarities to home mobiles don't end there. couchserving was for a long time actually a registered 501C3 nonprofit. And then they had to convert from a nonprofit into a C-Corp when they raised money. It was a whole mess. Oh, wow. I mean, it makes sense it was a nonprofit because my head the way I always thought about couchserving and I think when I first heard about Airbnb, I sort of equated it with the same thing of like literally a stranger who just lets you crash while you're, I don't know, at this time I was like a college student. So I was like, oh, I see it's for like other college students or interns or whatever who don't have money. And like you can just stay on some stranger's couch. Yep, which I think was how couchserving started. I think KC was college student and going on a trip. Did you ever use it? I've never used it. I've 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 it, strangers couch. The really crazy part, this is getting ahead of ourselves but turns out Brian and Joe actually had dinner with KC and Daniel right before they applied to IC and talked to them about what they were doing. After of course they had already started and we're working on Airbnb. Yeah, of course. And they talked about the two sites and anyway, okay, onto the real story of Airbnb. So the year is 2000, we are back in New England, specifically in Providence, Rhode Island, where a scrappy freshman from Georgia named Joe shows up at the famous Rhode Island School of Design, RISD, a wonderful place. I didn't realize actually it was in Providence last year. RISD and Brown are basically co-located. Providence is a very small town. So Brown and RISD, all the buildings are kind of interspersed and it's actually a very, very, very, very cute little place. So Joe shows up as freshmen and he meets and befriends a sophomore there. A, now Joe's kind of like a scrappy, he's like a, you know, skinnies the Rayway, 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 I think at this, I don't know if it was this, at this time or after college, aspiring bodybuilder at a, he would go around and compete in bodybuilding competitions. Sophomore from upstate New York, of course, we're talking about the one and only Brian Chesky here. So they're both at RISD, but I don't know other than my one visit to Providence, I haven't spent a ton of time at RISD or with people from RISD, but my impression is it's like a very artsy kind of place. Whether that was the case or not, that certainly was not the mold that Joe and Brian fit at RISD. They become fast friends and get into all sorts of high jinks. They're always talking about, you know, doing different projects, starting businesses together and they must have stood out because they became super popular. Joe actually becomes student body president of RISD. He's a year behind Brian and Brian, a graduation is elected by the class to give the graduation speech when they graduate. So the story goes when Brian is graduating after this speech. Joe still there 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 gonna start a company together, you and me and somebody's gonna 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 two 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 3DID, but it's kind of not the fit for him. He's much more... Is it like designing chairs or something? Yeah, he's designing chairs and medical products and they're like a product design consultancy and he's a junior designer there. It's not very glamorous and he doesn't think this is the life for him at the same time. So this is going into 2005, 2006, YouTube get started. I remember I was in college when YouTube got started and 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 researching them and becomes obsessed. This is great. That's what I want my life to be like. Meanwhile, Joe, the next year in 2005, he graduates from RISD. He's not sure what he wants to do with his life either. He rangs around and he actually starts a company. I guess you could call it a company. It still exists today. It's called a crit buns. And Joe's talked about this a lot. If you'll let's see, we were vagueless know 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, I'll critique and you sit around. And I guess he's going 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 on a bench or whatever. And then be more comfortable during critiques hence crit buttons. Amazing. And this is still up, right? Still up. Yep, you can go to, I don't ever run down with the website. We'll link to it in the show notes. You can go online and an order of crit button. It's And it is in a full like web 1.5 glory. Yes. I think it was on the front page of the USA Today and they have a big area of their site dedicated to letting you know that. Obviously, of course by day we mean Joe. Joe, yeah. Because it's not really a company per se. Joe goes around Providence and tries to get the bookstore in town to carry them. I don't know if he actually succeeds, but if he does like this is not, he's not moving a lot of product. Let's put it that way. So in 2006, he finally gives in and he moves out to San Francisco. Apparently he always wanted to move to San Francisco. He gets an internship and then a full time job at Chronicle Books, the book publisher. Famous book publisher here in San Francisco. And he's working, he's designing book packaging and marketing materials for them. And he with a couple roommates rents a apartment in the then this is crazy to remember now. Up and sort of up and coming, but mostly still incredibly sketchy area in the south of market neighborhood in San Francisco. Better known today as Zoma. And I remember at the time, head friends out here in San Francisco and my wife Jenny was from here and I come out and visit and you know, you didn't go to Zoma. It was a real sketchy place. It's still kind of a sketchy place, but has transformed incredibly since then of which Airbnb is a big part of. Joe's not living in San Francisco. Brian's in LA, remember he's not super happy. There's still a really good touch. One day in 2007, Joe sends Brian a package down to LA with an object in it, with a message behind it. And Brian opens up the package. There's a crypt button in the package. And as the story goes, at least as Doldoprad, the point of the crypt button, 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 crypt button to visit and stay with Joe. And when he's there, it turns out one of Joe's roommates is this tall programmer guy named Nate, who went to Harvard, but he's working at this kind of like really weird language tutoring company at the time called Batik and doesn't really seem to be going anywhere. Nate's moving out of the apartment. And so it's like, hey, we need another roommate. Why don't you just leave your job down in LA, come up here and move in with us. And so Brian's up there, visiting is a good time. He kind of wants to do it. He's not sure. So he goes back to LA, thinks about it for a while. And then finally in the beginning of September in 2007, when Nate finally moves out that month, Brian's like, okay, I'm gonna do it. So he quits his job. He moves up to San Francisco. He moves into the apartment, but there's a problem. You know, you've replaced Nate, this programmer who had a job who's making money with this guy, Brian, who's designer who doesn't have a job. So a roommate is kind of only as good as they are for the rent money. And Brian and Joe need to make the rent. So they're casting about, they're thinking about something to do. And it turns out the next month, one of the big design international design conferences is happening in San Francisco, the world design congress. And anybody who's traveled to San Francisco for all the big conferences that happen nowadays, they're all tech conferences that happen at the Moscone Center. The hotel situation in the 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 for the week of WWDC before it got announced, because people were speculating on what week it would be and rates were still like 5X, what you would expect them to be, because people were pre-inticipating that just clearly not enough hotel rooms. And the thing that you figure out if you live here and you don't have family and friends you wanna visit is that that's not just WWDC. That's literally every week. Every week there is a big event going on with Moscone Center or elsewhere in the city. And there just aren't enough hotels here for a demand. And so hotel rates can be like $1,000 plus a night during the week, because there's always a big conference going on with some type. So they start cooking up an idea. And Joe sends Brian an email. Why he sent this over email when they're living together? I don't know, but he sends him a very famous email. They knew that we were gonna be doing a podcast one day and they wanted to leave a paper trail. Well, they were thinking about an author writing the book, so there we go. So the subject of the email is subletter. And it reads Brian, I thought of a way to make a few bucks, turning our place into a designer's bed and breakfast, offering young designers who come into town a place to crash during the four day event, complete with wireless internet, a small desk space, sleeping mat, and breakfast each morning. Ha, Joe. Ha, ha, ha indeed. I'm gonna start editing my emails with that and see if that's gonna magic that made it all work. You know, I never really liked, you know, like, best of each year. So like all the standard, you know. Oh, yeah, I'm just ending with Ha. I like that. Ha, exclamation point. Great. Well, it was a pretty good Ha. So they take three days, they put together on WordPress. Then they email out a bunch of design blogs to get some publicity and say, like, hey, you know, all the people they read your site are 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, I don't know where the mats came from, maybe like yoga mats or something in the, in the department. I mean, I mean, I knew air beds, right? Like Airbnb, but like, Well, they called it air bed and breakfast. So yeah, so what's it? Do they mean air beds or do they mean mats? I assume maybe they, they meant as they were working on the idea and came up with air bed and breakfast, maybe they went out and got some air beds. So they mail us out and they surprise, they, you know, people are like, oh, this is cool. What a novel idea. And they write about it and they get a few takers. So they have either two or three, I can't recall how many guests stay with them that weekend, but one in particular, a young recent Arizona state grad from India named a mall survey, rents one of these air beds and or mats for $80 a night, comes and stays with them. And they become friends like they tend the conference together, they hang out, Joe gives him a tour of the city. It's really a great experience. And at the end of this day, a mall is staying for an extra day after the conference and he really wants to go down and see the famous D-School at Stanford. Now, not yet famous for having helped produce Dordash as we talked about in our episode yesterday, but still pretty famous nonetheless, especially in the design circles. And there's this famous tie between the D-School and I-D-O, the design agency. So they all drive down together to Stanford and they attend a lecture by Bill Moggage who is one of the I-D-O founders and it's a cool experience. And then afterwards, Brian goes up to Bill and just starts pitching him, okay, I got him all here. He's staying with the word designers. You know, we have and it's really hard for young, starving designers to go to conferences. Do you think, I think Bill might have been like on the board of the Industrial Designer Society of America or something like this. Do you think we could become the official accommodation provider for the industry association? Unclear what Bill's reaction was but airbed and breakfast did not become the official accommodations provider. Hey, I love it. Always pitching, always selling. It's good to see you on the air. Always be hustling. Yeah, indeed. So this happens. The conference ends and you know, they have this amazing experience and so you think, right, like, oh, okay, great. Like, this is the thing. This is what we're gonna do. Now they don't, they're like, oh, well, that was a good way to make some money during the conference. What else are we, what are we actually gonna do? So they start brainstorming some ideas. They rope Nate who, you know, they were still friends with even though he left the apartment back into start working with them on this since he's actually, you know, a developer. He's left Bateek at this point and he's freelancing. He's working on side projects thinking about what his next gig is gonna be. They start brainstorming ideas. One thing that they think about is roommate matching because they like, maybe inspired by air bed and breakfast. Like this was so cool. Well, obviously temporary roommates. That's not very big. Maybe permanent roommates. That's what we need. And to be totally clear, was air bed and breakfast like a website that they stood up for their apartment? Or was it like a platform for any designer with an apartment to have other designers stay with them? Ah, that's a good question. I think it was only for their apartment. I'm not 100% sure on that. If it was others to, there were no other hosts during that design conference. Got it. It was a platform of one. So Nate, we've talked about Nate a little bit. Turns out he has a pretty interesting and very relevant background too. So he had made it in computer science at Harvard right around the same time as Brian and Joe were at RISD. But that wasn't really all that he was bringing to the table or even really probably the most important thing that he was bringing to the table. So in high school, turns out Nate had not only taught himself to code, but he put the code that he was writing to, so he's a highly profitable commercial use. So he started writing. Finance? No. He started writing AOL bots and programs and communication stuff. And first he was selling them a shareware and he kind of stumbles into this nascent field. This is in the 90s of email marketing. And perhaps the unregulated parts of the email marketing industry where he operates as a consultant during high school and even through college. He ends up making, he would tell Bradstown, 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 canned spam act was not passed until 2003. It turns out at which point then I think sophomore had Harvard and Nate closed his consultancy business for reasons that have never been discussed. But before that, yeah, he made about a million dollars and put himself through Harvard and much more. Pretty amazing. So in other words, not only is he a Harvard trained computer scientist who knows how to code and develop and can stand up internet products all on his own, he also knows how to market online. So this is a pretty potent combination here. They were smart to rope him back in. So they're jamming on these ideas. They're thinking about the roommate thing. It turns out already exists. Couple of months go by. It's January, 2008. They're out at other ideas. So Joe and Brian decide, yeah, maybe we'll dust off this air bed and breakfast thing. Give it another go. So they pitch it to Nate. They actually hadn't pitched Nate until January on working with them on this. It was just this side project thing. So this is like attempt number two at starting Airbnb? Attempt number two, yeah. And so the idea is South by Southwest is coming up in March. And people are starting to make their bookings for going to Austin and lots of people from San Francisco go to go to Austin still. Well, not this year. We were supposed to go do a live show there this year, but maybe next year. And as anybody who's been to South by our Austin knows, once when these festivals happen, whether it's Austin City Limits or South by, you can't get a hotel room. Like it's 1,000 bucks, 2,000 bucks a night. It's crazy. First time I went in 2010, I couldn't get a hotel room and I booked an Airbnb. Yeah, I think every time I've gone, I've done an Airbnb, I've never stayed in a hotel for South by. So like, okay, great. This is where we're gonna launch. It's gonna be big. They go on Craigslist and say, okay, who's hosting rooms and who's in the looking section looking for rooms, they start pitching everybody on using They get a huge success, they get two actual bookings, like two, like one more than one for the festival. And 200% growth rate over there, a previous attempt to get the company. 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 this is just amazing. Like, you know, we talk about the show about how the internet back in the day was like 12 people. Well, it turns out in the mid 2000s, it was still only like 12 people. Exhumed 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 guy named Michael Cybel. No way. Yeah, guy named Michael Cybel, of course, of fame, which would become Twitch, 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 They've raised some money there, you know what? No one's start up in the valley, which we've covered on our Twitch episode. As crazy a story is, similarly crazy story is here in Airbnb. And Cybel says, hey, I can help you, Brian. Like, he takes a liking to these guys and he knows Joe, these three roommates. I can help you find some angel investors to make this thing. Oh, 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 helped him out and he did indeed help them out. So Brian gets back, he's all pumped up, you know, this hot start up and their founders are going to help us raise money, say shows back up and dates like, hey guys, I've got some news. So my girlfriend from Harvard, Elizabeth, who's now his wife, she was I think in mid-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 I'm gonna move back to Boston. 50% of the people who are using it are the founders. So yeah. So he moves back and once again, nothing really kind of happens with the site for the next few months. But meanwhile, Cybal 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 angels. So like, you're doing what? And how many people are using this? No, thank you. So Brian actually would write a blog post later about this about all the rejections that they faced of which there were many. So they go back to Cybal and Justin Khan and they're like, well, if you can't raise money, maybe you should just go do a Y-combinator. 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 money afterwards. So it's like three, three and a half years into it. Yeah, I think 2006. Maybe the box has happened. Oh, it's 2001 or two years into it. Yeah, it was, this is now 2008, but YC started in 2006. Oh, it was in 2005. It's something like that. Yeah, it's something like that. So it's all pretty early. Dropbox and Reddit effectively have gone through, but there haven't been any other high-flowers yet. And Justin TV. And Justin TV. Nobody really knows outside of the value about them yet. So they go check out YC and YC was actually, I think this was the first startup school that YC put on in kind of an effort to evangelize and bring in more applicants as they move to the West Coast. So Brian and Joe go down to startup school. And this is amazing. So this is April, I think, 2000. This is where Bezos comes in, talks at startup school and uses, I think, for the first time, the electricity metaphor for AWS. Whoa, I forgot Bezos spoke at startup school. You get so wrapped up in the Jeff Bezos of the last five to eight years that you kind of forget how much more approachable he was. And a lot of these guys in Zuckerberg, they would all do the little startup speaker circuit because their companies weren't that valuable yet. Totally. And here's Bezos who doesn't look like Terminator Bezos. So he's full on still nerd Bezos mode. And he's pitching at YC for all these drinking inked little startups because he's like, I gotta get people to use AWS. And so these little startups are gonna use it. Which ended up being genius. Totally genius. I mean, same deal as Stripe. And anyway, the story is for another day. The other person who makes a big impression on Brian and Joe speaking at startup school is Sequoia Partner Greg McAdieu, who's speaking there. And of course, great. Sequoia, there's a long history of Sequoia partners speaking at YC in startup school. Why is Greg speaking there? Well, turns out Greg is speaking there because Sequoia had actually invested in YCominator and Greg was the person who led the investment for the non-the board. It wasn't widely known yet. It wasn't widely known yet. So Brian and Joe, they're taken, I think YC is great. They're gonna apply. The winter batch for YC is the next application. So they're gonna gear up for that. In the meantime, they gotta 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. I think the Democratic convention is in Denver. I forget where the Republican one was. They email local press outlets. They get some bookings. They actually get about 100 bookings that summer, which is great, but they're now making that much money. So they're about out of money. And this is when the famous serial story happens. The Obama's and the Captain McCain's. And I, so 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 as I went back and read the email exchange between Fred Wilson and Paul Graham. And then I read Fred Wilson's blog post talking about how they passed. I actually realized I had the story wrong. I didn't realize that the Airbnb guys made up Obama 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 story was 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, they didn't have any money. They're still trying to basically make their rent on the Rouse Street apartment in Soma. And so they had this, you know, middle of the night crazy idea of, let's go make some boxes, poor Cheerios into them and sell them. That's limited edition. It's a totally amazing heads. I win till you lose situation because you have food no matter what. It's kind of like being the casino. Like you don't care which side wins because you get food either way. You get food either way. Oh, it's true. Sticks are a little bit lower, but. And I think, you know, so the story is like, they make, they end up making somewhere between $20,000 and $30,000 in profit from selling these things online. And that kind of keeps them alive until, until they start white 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. Like, this might be a theme that'll come back up as we progress through the story. Yeah, I mean, it, 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 think that's like a good lesson for entrepreneurs in general is what is the thing that you yourself can do and not pay yourself anything and generate, you know, you don't have to pay the labor. So it's 100% profitable. And like, you know, for our business here at acquired, like we podcast and we don't have to pay for any podcasters. Okay, so there is though the other reason I decided to include the Obama, I was in Captain McCain's story is it's actually what gets them into IC. So characteristically for Brian and Joe, as you can imagine, is the story goes along here. They miss the deadline to apply. And Sival has to lobby PG and say like, hey, these guys miss the deadline, but can you like just give them an interview anyway? Like I vouch for them, they're good. So they convince Brian and Joe convinced Nate to fly back from Boston, pretend that he's still part of the team to drive down to Mountain View and have the IC interview. He shows up, they're getting ready to drive down. And the story goes as they're leaving Joe grabs a box of Obama's and a box of Captain McCain's to give to Paul Graham. And apparently Nate is like, what do you do it man? Like you look ridiculous like serial come on. And so they go, they do the interview and PG doesn't get it. He's like, people actually are doing this, staying on each other's couches. They're like, well yeah, people are doing it, but not that many people. And so it doesn't go super well. And after they leave the interview, Joe realizes he's forgotten to give Paul the serial boxes. So he runs back in and gives Paul the serial boxes. This is how the story goes as Chronicle then the upstarts and gives Paul the serial boxes and Paul's like, what are these? Joe tells him the story of how they've stayed alive. And of course, what is one thing that PG values above all else? It's survivorship and grit and default alive, default alive, being a cockroach as he would come to call them. He says, wow, okay, you guys are going to stay default alive. I don't know about this whole thing, but you're in. So they get into I.C. They start in the winter 2009 batch. And as Paul spends more time with them, he comes to really like these guys. And so he gives them advice famously, he gives them advice, he says, okay, so where is stuff happening right now? Well, we've got some bookings in New York and he says, okay, well, go to New York and he famously sends the, he starts calling them the Airbnb's. And during YC, they change the name to Airbnb from Airbnb breakfast. They go to New York, they figure out the photos are important. They figure out that having a smooth payment experience is important because you know, bring in 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, Makadu 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 scrapping through things is really, you know, it's Sequoia. They believe that that's one of the most important characteristics of entrepreneurship as well. And so Makadu asks, PG, well, hey, who in this batch is most like this? And PG says, well, that's easy. That's the Airbnb's over there. Love it. Love it. So Makadu 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 of months before. Like the world is falling apart. And this 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 Homo and 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, or you could go to a conference in San Francisco for 80 bucks, 100 bucks a night, instead of being priced out of the market. Yeah, it's so interesting. Like, timing plays so much of a role in the success of these companies. And 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 it could have succeeded in any time. But boy, did they have the wind at their back from the secular trends going on to make it a no-brainer for a lot of people and really accelerate their ability to find product market fit? It was absolutely the right time. And I think all those things are true, but, you know, and couch surfing, as we talked about a little bit, definitely didn't have the right model. Definitely messed things up. But they also were launching and starting to build in the build up 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, McAdu does end up convincing Sequoia to invest and rather than doing it as a series A, they say, like, hey, I'm not sure about a lot of money here. I'm not sure about this being a full traditional investment. We need to conserve our cash and triage our portfolio. Let's do a small seed check. So they say, 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. So that's nothing. I mean, it's nothing, nothing, nothing for Sequoia today. That's still pretty much nothing for them at the time. Think the current, the fund that they're investing out of, I believe, was a $500 million fund. So what's that point? One percent. Right. Of the fund. Yes. And the funniest thing is that that actually returned to that fund. Oh, so many times over. When you're thinking of as a venture capitalist and you're like, I can't possibly make a little bet. That's just 0.1% of my fund. Because like that can't possibly contribute to returning the fund. It's just not. I didn't play enough of the funds capital to ever have a multiple big enough to get there. And here we are. And here we are. So they do $585K. They bring in some angel investors alongside the angel investing collective of Keith Roboi, Kevin Hartz, and Jawahead Currie, one of the YouTube founders. And we talked with Kevin about this on the Eventbride episode. They get a small, they were in the angel investing together. They get a small angel allocation of $30,000 between the three of them in the round. The valuation though, so that's the dollar size. The structure, though, this is very much a traditional venture round. The round is over 25% of the company. So the post money valuation on the round for the total round is $615,000, $2.4 million post money valuation. Whoa, no way. So Sequoia gets 24 and 3.8% of a percent in ownership and company. And the angel collective of Keith Jawahead and Kevin get 1.25% of the company for their $30,000. And that, I think, is the last big dilutive round the company would ever do. Is that right? Yes. Like everything from here on out, it was shocking. The Series A was $7.2 million, I think, at a $60 or $70 million valuation, so roughly 10-ish percent dilution. And the percentage of the company sold only went down from there, despite the fact that the dollar has got very, very large. That is accurate. So they finally have, back to the seed round, they finally have a little bit of money. So this is where. 2.4 million post, David, I can't believe it. Could you believe it? Even back then, and it was a different era. Like I said, it was a different situation. That's a queer capital. Sure knows how to get their ownership. They do. They do. They're writing much larger checks these days to get that ownership. So even with this small amount of money, though, remember Nate's background. Nate basically goes to work. And this is his time to shine. So first, the thing that they do, which doesn't require any money, people have probably heard about the Craigslist hacking. So I didn't realize the thing that I always thought that Airbnb did with Craigslist hacking was going to listings on the site and saying, hey, why don't you come list these on Craigslist and emailing them, getting around Craigslist, email, 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 creating listings on Airbnb, they actually also auto published, encouraged them to auto publish those listings back to Craigslist. And so you think, well, why would you want to do that? You're taking your own supply and you're putting your own. You're encouraging your own supply and supply. But if the transaction happens through them, that's a way to go get more demand. Exactly. It was getting more traffic yet. Exactly. And I think this was, I mean, probably both of these were key, but that second piece was especially key because yeah, how do you get the demand? How do you get traffic? I can go, you can go hand-to-hand combat, convince people to put listings on the site, but how do you get them bookings? Well, you put it on Craigslist, get the bookings through there, and then you capture those bookings, and you don't let them go back to Craigslist and you say, hey, you did this thing, you had this great trip, why don't you book your next trip with Airbnb? Right, I mean, yes, Craigslist captures very little of the value that they create. So effectively, what they did here is say, there's value being created on Craigslist, we're gonna be the way to capture it. So that was Craigslist. And then the other thing they do, and that Nate does, is especially given his history that you know as well, is Google and Facebook ads. And this was early days of Facebook ads, so we're talking 2009, the platform existed, you could do it, but you could target by interest. So what they do is when they wanna go demand, they run Google AdWords for place to stay in San Francisco, place to stay in Paris, place to stay in New York. Okay, that seems like a great way to get to man, but how do you get supply these Facebook? And so what they do is they go on Facebook, you can target by geography, hey, we need some more supply in New York. Okay, we're gonna target in New York, and we're gonna run Facebook ads, we're gonna target by interest. And you say, oh, Brad talks about this in the book, we see this person likes wine, rent your place to a wine lover. We see this person is interested in yoga, rent your apartment while you're gone to someone who loves yoga. And so then that's how they would get supply to sign up on the platform. And then of course the people that they would send, no guarantees that they like wine or yoga, but it worked pretty well. Now to be fair, 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, people needing to pay their rent, people wanted to travel cost effectively. And I think we talked a little bit about the supply constrain nature of hotels in markets when there's big spikes in demand. And I think the other thing too, that took a while for people to realize, but has probably become the most sustainable part of Airbnb in the ensuing 10 plus years is you don't always wanna hotel experience, right? Like almost anybody who's traveling, sometimes you wanna hotel experience, but sometimes you actually wanna stay in a place, especially if you have a family or you're traveling as a group. It just makes, it's such a much better and totally new and different experience to travel like this. Yep, that's a great point. And before we move on from the growth hacks too, I think it's also important to identify that the door is closed on doing all of those tactics today and not completely closed, obviously, you can still use Facebook and Google Ads, but the value has largely been arbitraged away where you can't do it like a wide open fire hose the way that they were doing it in a cost effective way then. Yep, totally. 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 five generations ago of marketing tactics. Yeah, good luck doing that. There's innovative Facebook things today. You're gonna pay through the nose for it. So we're now in 2010 and things are really starting to work and they have by midway through 2010, they have 700,000 nights booked on the platform. Wow. 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 raise, as we said, a $7.2 million series a day 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. They probably also figured they own 24% of it. They own 24%. Yep. And they're trying to stretch out the dollars in their fund. It's not like we're out of the financial crisis at this point. Right. So they go to Greylock, Read Hoffman leads the series A. Now, the supposedly, 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. Aimed profitable company Airbnb. Indeed, indeed. So by early 2011, the next year, they hit a million nights book. And they have a bunch of this company has always been great at PR and publicity, probably the legacy of Brian and Joe. They hit a million nights book. It becomes big national news. And this is when Fred Wilson publishes that blog post about how huge it was a huge mistake to pass on the company. And because PG had actually introduced them to Fred Wilson, wanted Fred to lead. Well, they were in New York doing it while they were meeting the hosts and hiring photographers and all that. Yep. So that summer, we talked about fundraising, they raised $112 million series B from Andries and Horowitz at over $1 billion valuation. This is summer 2011. That's a big series B today. Well, we were talking yesterday on the door dash episode about their $40 million series B in 2014 or 15. I think it was being a huge series B. It is ludicrous to call this a series B for that era. Yeah. Ashton Kutcher comes into the round. So 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 a 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 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 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 Sam War brothers and Rocket Internet in Germany would take all these new post-web 2.0 tech businesses from Silicon Valley, clone them, and roll them out in Europe. So they did this where they're being beat, what the company called a Wim do. And this was like existential, because whether they realized that they're not early on, unlike DoorDash, food delivery, ride sharing, where it's about winning each local market in the Indian-to-Hand Combat, Airbnb is a global network of facts. You can't fragment the market. There is going to be one winner globally, because when people travel, they travel globally, and especially Europeans and North Americans travel back and forth between Europe and North America, you need to just have one platform. You can't 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. It's actually different than the airline industry, which also has a great cross-geography network effect, where you have these united and American airlines. I guess Americans are a big international player at this point, but basically 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 whole different set of infrastructure, that's just not true with Airbnb. Like whoever was going to capture this short-term Reynolds 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 Dordash episode of, it's truly a winner-take-all-market, flood the money in, make sure you're the winner. That was inarguably true for Airbnb. Inarguably. So they go fight hard against the Sam War brothers in Europe. And they end up winning. And it's really interesting to think about why they end up winning. So they do a couple things. They go, they acquire a few companies, smaller competitors in Europe. They open up a bunch of offices, and what the Sam Wars 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 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 where you're letting a stranger stay in your house. How are you gonna trust that it's actually gonna be a good experience, that these are crazy people? Even if they play crazy people aside, just that like it's actually gonna 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 a Wim do doing it, you're just gonna end up with a lot of listings with no reviews, and it's gonna be dead. There's gonna 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 Wim do, 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 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 host until after the check-in happens. So you could have up to six plus months in advance where Airbnb, they have the ultimate negative cash flow cycle. They're getting the money in. They're holding the money, some portion of which, roughly 12 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 the other rest of the booking fee that they're going to give to the host, they hold that, and then they give that out months later. So they win, they 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 Pinduo duo 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 with 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 if you're shrinking. We're definitely going to talk about that. Yeah, this is all predicated on growth. But I keep talking about how crazy non-dilutive all these rounds of financing were for Airbnb. 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, you might sell a deal for a million dollars in an ARR. Well, this is going to be paid to you month over month. It's a joy or a hundred K, a month or 80 K, a month check. Exactly. Okay, so things are working. They're winning in Europe. January 2012, they hit a cumulative five million nights booked on the platform. Six months later, in June 2012, they hit ten million nights books on the platform. This flywheel is starting to spin. There's your product must 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. The BJ incident, which when the woman's apartment in San Francisco got trashed and they had to implement the insurance guarantee, that was terrible. People had accidents on the platform. There were crimes. There was stuff going on. Not to mention the regulatory piece, which we'll probably talk about at the end of the episode, New York and San Francisco in particular, like, hey, you guys are running a hotel. This is not allowed. All that said, as difficult as those things were, the flywheel is spinning. This company, nothing is going to stop this growth. So October 2013, they raise $200 million from Founders Fund at a $3 billion valuation. So here we are selling, what is that? Eight percent of the company? Yeah, 78 percent for $200 million. Then the next year in 2014, they raised $500 million from TPG at a $10 billion valuation. Along the way in between there, especially, I was for the show, and it'll come back up in a minute. Greg McAdoo leaves Sequoia and Alfred Lynn joins the board. Alfred Lynn from San Francisco. Of course, board member of Door to Ash, as we discussed yesterday, pretty big week for Alfred. Yeah, crazy, crazy stat on Alfred Bennett Sequoia for 10 years. Yesterday was his first portfolio company to IPO, and today is his second. Yeah, and there are both some pretty big IPO's, 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 San wear brothers can't take their own them. The thing though about when you have this sort of like beautiful capital-like business model and a global network effect, in contrast to a company like Door to Ash, you don't really have the existential requirement to fly low to the ground or operate at the lowest level of detail, shall we say. In fact, you can fly pretty high, you might say. You might be able to fly very high. Yeah, and this shows up in two ways. One, operationally, you can just be sloppier. You just cannot need to be as finely tuned as, say, a performance marketing machine. And there's lots of different areas around the business where that shows up. But also, it means you don't have to be as considerate about what you're building and why, because you have this flywheel that's just spinning and profitable, and like, sure, lots of people are showing up to the office every day and doing important work and moving the company forward. But 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 it would probably still be fine. And at some point in their journey, they really did hit that where it was just going whether they touched it or not. And I mean, look, this is the dream right of like a business is to have a business like this. Like there is not only is there nothing wrong with that, but 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, Vennart, are totally true too. So let's go through it. In 2014, the company moves into a new headquarters building at 888 Brandon 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 wood. It would be an understatement. There's a five-story atrium in the lobby with a living wall that goes up the whole side of one of the sides of the atrium. I mean, it's amazing. There's a 24-7 kitchen. It is not no longer 24-7, but at the time when they opened it that operates, there's three meals a day, seven days a week. All three from please? Yeah, all three from please. I can't imagine that there was too much demand for like breakfast on a Saturday or but, you know, they wanted to create the environment that they thought would enable people to do their best work, to be creative, to create this sort of culture that they wanted among hosts. Like, you know, I get it, but it is absolutely emblematic of the fact that the flywheel was spinning and it was spitting off cash. Yeah, the famously in 2014. It's now just become normal that they unveiled the BALO, the design mark of Airbnb logo. I know the BALO, depending on your version of the Boros Act test, it looks like, may or may not look like some genitalia, but anyway, it's now the Airbnb mark. Yeah, which is funny. I love the old Airbnb logo. I know. It was so good. The cursive script. Then also in 2014, they started doing an annual conference for hosts called Airbnb Open. They had brought on in 2013 as I think head of hospitality, a guy named Chip Conley, who Chip was the founder and proprietor of the Jwata Vee hotel chain, which are these like super high-end boutique hotels all around the world. And the chips are basically 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 he's 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, in the Upstarts to Braddie says, well, growth covers a lot of sins. And the growth of this company was spectacular. So also the next... David, I think you summed it up so well, though, in saying this is exactly as an entrepreneur, as an investor, as an opera. 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 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 home away the only really viable product-wise competitor out there in the market for just under $4 billion. And you know, there's some headlines about like, oh, Expedia, home away, are they going to compete with Airbnb? No, like this is surrender. This is basically admitting that there's no viable competitor out there. In 2015, the company Airbnb does almost a billion dollars in net revenue on $8 billion in bookings. 2015 is the first year in the S1 where we have this data. They raise the other- By the way, the $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 order orders per year. But of course, like thinking about the growth from when they both had that level of money flowing through the system after that is going to be interesting to think about too. Indeed. In 2016, on top of that base, they grow 80% and they do 14 billion in bookings in 2016. 1.65 billion in net revenue. They had raised in 2015 a billion and a half dollars of a $25 billion valuation. And then in 2016, they raised another billion and a half across two rounds. Again, that's what they really need the cash, but probably, you know, more chest. They're looking at super favorable terms. They have lots of things to do with it. Investors are desperate to get shares of this company. I do want to take a quick comparison here and say, okay, so the 8 billion and then they grew 80%. Last year, DoorDash had $8 billion in gross order volume and then grew over 200% the next year. So there's an interesting, you know. Oh, yeah, we're going to, we'll keep talking about the growth rate as we go along here. I imagine one of the things that they raised the money for in 2015, 2016 was at the 2016 Airbnb Open in the conference in Los Angeles. They have some big announcements. And Ben and I went back and we watched this video on YouTube. It's something. It's just, thank you for the internet. 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. They, and you know what I mean? It's like you do have to admire the ambition of they wanted to add more products and had a big vision for Airbnb to be more than just what it was. All that is good. So at this conference, they launched, Brian says it's the most significant development in Airbnb's history and that the goal is to do for travel what Apple did to the iPhone with all the things that they were going to launch that day. They launch experiences, places, and of course, homes, their current Airbnb product, and a meta product above it all called trips that it's all going to be a part of. So experiences, people probably know experiences are still around today. Although nowhere in the S1 is it broken out the performance of experiences or how many bookings they have of experiences versus stays? Yeah, the assumption that everyone's making is experiences are a phenomenally tiny percentage of the overall revenue. Yeah, places is part of the was part of the Airbnb app. And the idea was it was going to be like super, like, mate, one, 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 experience. So that was places. And then all of it lived all together in trips. And so within trips you had aggregated your stays, your experiences, and your places, all the stuff you did. And they didn't launch, but they talked about adding car rentals to trips. They talked about adding grocery delivery to trips. They talked about adding flights and maybe even an airline someday to trips. They even had a flight booking product in the works until March of this year. Oh, wow. I didn't know that. Yeah, that was one of the canceled things with coronavirus. Interesting. So yeah, I mean, I think the thing was like, like, all these were maybe not bad ideas, but I'm not sure they made a ton of sense within Airbnb. And I think that the disconnect as, you know, looking back for me watching that video was, I think Brian and the company really believed that like Airbnb was about, they talked about it so much in this conference about belonging, about feeling home when you're traveling, and about the connections in the community between hosts and guests. And I think that undoubtedly there are people that use Airbnb that love meeting strangers on the platform. I'm not sure that it's most of the people who use Airbnb though. Yeah, I think there's a recurring theme that seems to happen kind of from this point forward in the business, which is Brian and management feeling very aspirational. About why people want to use Airbnb, particularly around community, particularly around belonging, and people, again, generalizing, use it in a much more transactional way than that. They are logically weighing this option to stay here versus other options. And like, I just think that that disconnect becomes more and more apparent over time. Yeah. And if you go back to like, what was one of the original, you know, probably the biggest wine house that made Airbnb work, it was the financial crisis. Like, yeah, yeah, you know, it's a nice to stay in an apartment or 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 time frame. I remember my narrative of why I loved using Airbnb shifting, where I used to tell people, it's great. I can stay cheaper. And then I was like, actually, it's not really cheaper anymore. But like, gosh, hotels are so sterile. And staying in an Airbnb, well, it's probably the same price, 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. Yeah. I have the same deal for me. And what's interesting is, I actually think I can 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 were staying in any hotels. And then during that period of time, you're talking about, it was like, well, you know, when we would go for like a weekend, like it would depend on the trip, whether we would do Airbnb or hotels. Like, sometimes we'd go as living in Seattle at the time. We were living in Jenny and I were living in Seattle. We'd come down to the Bay Area, maybe we'd go up to, to see our family, maybe we'd go up to Snowmire and Napa. Sometimes we'd stay in an Airbnb, sometimes we'd stay in a hotel. But then, yes, the prices started equalizing. We were like, you know, a lot of Airbnb's aren't that great. 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 could consider Airbnb one of their options. Yep. Totally. Not that we stopped doing it at all. And for group trips, you get in a family together, going to a place where there isn't great hotel inventory. Fantastic use case. But you fast forward to today, you know, we've talked about, we've talked about experiences, places is gone. The trip's 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 Tossi, who had been the CFO of Blackstone and the COO of Merrill Lynch before coming out. San Francisco and joining Airbnb. He leaves the company. So that puts the IPO in jeopardy. And Brian publishes blog post when he leaves, saying that Airbnb has an infinite time horizon and is focused on being a 22nd century company. Oh, that is like some interesting shade. Yeah, I'm not sure what it means to be a 22nd century company, but it definitely means they're not going public anytime soon, which I think was the message behind all that. And it sounds like Brian likely didn't appreciate any of the pushback or guidance he was getting around, I don't know, IPO readiness or whatever the opinions were of this CFO and other finance leaders who would come in afterwards. Yeah, 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? What valuation? What is happening? Because of course, they had raised all this money from SCOIA 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 you want to see it. 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 that we've talked about, like three acts, like there are so many of our stories here. There was the first act here of Airbnb, this crazy thing almost didn't happen. But was it great idea? It gets into IC, 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 years. So 2017, Bucking's Growth slows to 50% from over 70% the year before. Still really good. I mean, you're at a huge base growing 50% year over year. That's great. You can totally IPO. It's a 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, Bucking's 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 nacing 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. Yeah. The next year in 2019, the last full year we have data for before. Before COVID, Bucking's Growth slows to less than 30%. So I believe it was like 20, half 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 eight and a half billion dollars in bookings in 2018. That was two years ago growth. They also added eight and a half billion dollars in bookings in 2019. So like, the growth, the base is growing, but the amount that you're adding every year is now constant. And of course, then we'll get into what happens in 2020. 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. And they're actually getting less here. 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. 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. How does that work? I don't know exactly. I don't know if it mirrors, like I think about like a venture capital fund life cycle. Usually it's a 10 year life cycle, and then you have to one year extensions. I don't know actually if employee option contracts mirror that. But also at a minimum, think back to Sequoia, like their fund that they invested in must have been a, in Airbnb must have been a 2006, 2007 vintage fund. You're now over 10 years into that fund. So you've definitely got shareholders looking for liquidity on the investor side, but you also have these employees that have some form of expiring options, or at the very least if you try and restructure that, then there's tax implications. And also like everybody would just 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. Actually, this is crazy in March and April of 2020. Airbnb's gross booking values turned negative. They were paying out more in refunds for future bookings than they were taking in in bookings. So they actually had like, I've never thought of it. Like you've seen this before, not even like negative revenue. Negative bookings, you're actually paying people more than you are getting. Brutal. Which of course, it's a global pandemic. So of course it's totally, totally brutal. So in March and I wondered, I didn't quite realize this, still digging into the S1. In March, as people probably know, Airbnb raised $2 billion in capital from Silver Lake and Sixth Street partners, in a combination of equity and debt, the debt piece was at an 11.5, there are two pieces, two tranches at an 11.5% interest rate, and a 9% interest rate, the equity piece was at an $18 billion valuation, which was down. 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 owners terms, like on post sides, you know, massive haircut and valuation. That's like 50% haircut and valuation. And then the debt side interest rates are zero out there. This is like, this is like major distress debt. Like you're pricing a trance at 11.5% interest rate. I think this is what was going on was not only to the business evaporate, but like they're paying out refunds, and they probably, they must have 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, when you're going well, it's a way to, 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, you start shrinking, you know, you're a big trouble quickly. Very similar to another thing that was going on sort of with Airbnb and with all tech companies is operating leverage. Like Airbnb has a really, really, really high set of fixed costs, but their variable costs are, you know, obviously much higher than a SaaS company, because it's a marketplace and they got to pay the, the hosts, but like they make a lot of money on every transaction. And so the whole ballgame for tech companies is build the best freaking product you can. And especially recently spent a ton of money on sales and marketing to, to go capture a winner, take most or all market. So your sales and marketing costs are high, your R&D costs are high, but those are relatively fixed. And then hopefully your, yes. And then hopefully your, your, 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 you, you know, 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 got all these mouths to feed, but very few customers to feed them with. So Airbnb of course realizes this and in May of this year, shortly after the start of COVID and after raising this emergency capital, they have layoffs, they layoff 25% of the company, which is, that's a significant reduction in force. They cut $800 million in marketing expenses. So there you go, addressing each of those two points you just made, Ben. Except that they didn't actually let go a lot of the R&D, like they kept, 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 second. 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 the company. It started at movie studio at some point along the way there called street films. They had a lot of stuff going on. I got a magazine for a while. Yeah, I'll go. The magazine, I don't hate on the magazine, the magazine makes sense to me. Here at 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. Pull together a great stat. Even though I think there's been basically two areas of the pandemic for Airbnb. There's the initial era where everything froze up and they had to do this super-onorous deal. But then there's the second one, which is as people, as we knew more about COVID-19, and understood the how it spreads and it's through the air rather than on surfaces and all these things, people started making their own informed decisions around how can I live my life safely. And it turns out Airbnb was actually a great option to live your life safely more so than hotels. I remember a moment where 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 sugar and but I've stayed in six Airbnb's. And I think that is illustrative of act two of the pandemic for this company. I'm totally same where we've been less active than you since Jenny's more tied to San Francisco than you guys. More of those came from a bike trip. But yeah, we've stayed into Airbnb's and one hotel 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. And you were right now. Yeah, it was, I mean, I feel for hotels these days. So the business starts to recover. So we should say for all of 2020 so far the first nine months of 2020 versus the first nine months of 2019. Gross bookings are down 39% in aggregate. So the growth as makes sense because the pandemic growth has gone from slowing to 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 stable. I think it would seem reasonable to think that they'll get to Perry. Either before a good chunk of the population is vaccinated or shortly after or shortly after. So they basically effectively lost a year of growth. Yeah, well, they accepted they also shrunk. Right. Well, I think that's the question that we'll talk about in a second in our analysis sections is what is going to be the growth rate going forward. Like post pandemic post vaccines. That I think is the key question for this company. So on November 16th, 2020, Airbnb does file its S1 in a surprising move. They make good on their promise to go public in 2020, even though there's a pandemic, even though the business gross bookings are down 39%. So unlike door to ash yesterday, where what did we say that for the first nine months there up 300% I think close to it for the year. Airbnb is is down in growth 39% they filed their S1 and then last night on December 9th, 2020, they priced the IPO at $68 a share and up raising $3.5 billion at a $47 billion market cap. So big man like that makes that silver like investment at 18 billion just what six, eight months ago look like a genius move indeed. And so let's see what did we say we said they priced at $68 a share got you finance pulled up here is currently trading. So 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, I was expecting some kind of pop but so now they're valued at over a hundred billion dollars. So yeah, that would imply they're valued at over a hundred billion dollars. Wow. This company's hovered at like 30 billion for a while like they were constantly and growth was slowing in the pandemic. I mean, I'm thinking to myself when they drop this in November like this company really had to go out this year because otherwise why would you do this? And then you go into this market right now or I guess the market's doing fine so the IPO windows open but with their numbers you would think like you wait until they stabilize. 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. Okay, well, we'll get into it. But that. Even with 2019 growth rates. So okay, I put together some numbers to try and contextualize why David and I are talking about growth rates the way that we are. So Uber was 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 and in 2018. It was growing at 42% when they IPO'd so that's probably you know there that's much faster than the 28 29% we wouldn't have called Uber's growth linear at that point. Lift was feeling themselves they were growing you know doubling year over year at 100% growth. That was coming out of delete Uber. Yep, door dash obviously over 200% Pinto duo who we covered to open this season at 246% year over year again trying to tech different. When you gaze over in to Sass land, the numbers are also looking pretty good slack which 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 was drop box 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 the the the new zoom they were going at I believe close to a 200% and I think that's the thing that's going on here this company is shrinking yeah this company was had slowed growth and is now shrinking you know I think an important thing to realize here to the thing that scares me the most is 91 so again it's it's a sort that cuts both ways 91% of the traffic to Airbnb is direct its organic it's stuff they're not paying for now they're loosely paying in brand ads etc. And again that's the dream that's what you want but anytime that they've tried to lean really heavily into performance marketing like door dash 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 like it's trained you have to imagine it's not like they haven't been trying to it's not like they don't have to do that. It's not like they don't know with it there growth rate was slowing. All right David so I want to so we sort of talked about the growth I do want to round out history in facts here with a couple couple IPO nuggets so the first is the cap table at IPO the founders owned 31% of the company comparing that to the what is it 13 14% that founders of of door dash owned. Very impressive story of two different delusion methodologies story of two different capital intensive two different degrees of capital intensity in your business yeah great point great point so Brian Chesky owned 11% going into the IPO I was all prepared to talk about how he 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. And it's a show and a Nate also both have 10% I think they sold a hundred 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 I see it's kind of a standard standard six months so Sequoia again all my numbers here that I had prepared are just nonsensical now with this crazy crazy leap in and where the stock is trading Sequoia would have made about five billion I think now they've made somewhere between 11 and 12 maybe maybe closer to 13 billion. Not bad for point one percent of your fun to put into a company. That's crazy and that I think total they put 260 million into the company over 11 years so and I assume that that has to be over multiple funds yeah yeah for sure. Founders fund invested across a couple of different funds and this information from the information which will link to in our in our that's confusing to say that but capital T capital I the information and we'll link to that in the in our sources I think they came up with about three billion dollars after investing about 150 million so it's just like winners all around here YC owned two percent gray lock obviously one big injuries and Horowitz invested 60 million. When when they valued are being beat about a billion dollars so I think they probably have three ish billion coming out of this so lots of winners in the in the venture world. You also look around you mentioned Keith Roboi Kevin Hartz Joad Kareem personally you've got Ron Conway DST Jeremy Jeremy stop them in from Yelp was an investor obviously Bezos personally ended up investing. This is like an Academy of words speech to think that you got Jared leto you got Ashen Kutcher and then by proxy to me more like lots and lots and lots of people are feeling very good today. Wow wow wow in addition of course to the thousands of employees absolutely wow. Any other nuggets I should be move on to narratives. Let's see one thing to know before they IPO does they had 2.7 billion of cash in the bank and then they had another 1.8 billion in marketable securities so when they they were going to double that cash because they were going to raise 2.4 they end up raising 3.5 so they had now have a sort of cash chest of seven ish billion dollars. So the company will continue to be able to weather storms for a while it looks like and I'm curious what they'll start sort of reinvesting in now that they're through this period and obviously have to show a really good quarter and next quarter after that in order to keep the investor excitement as high as high as where it is right now. Well I'm just so confused you would do that. I'm just so confused but maybe we should discuss the narratives. Whatever could you be confused about let's let's go into nerves. 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 in 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 had a lot of money. So the big thing is that they have the most unique supply of anyone in the industry that they spent a decade creating they have this brand mode they have 91% direct traffic that is largely a result of the fact that they did build that unique supply in a unique way to build their brand. So now it's just about harnessing all of these unfair advantages 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 air being be type supply to but that 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 to ash bull case perhaps permanently change some more. So it's a little bit more permanently change some more behaviors to be more favorable for air being be 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 door dash that was one of the big big question marks for door dash I think is like how big is the tam how many do they have to get into a Jason C's etc. 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 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 that 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 and 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 dollar opportunity for experiences which explains why they're beating the experiences drum so hard but let's just focus on that 1.8 trillion dollar market of short term stays. I think we can throw out the rest of it yeah yeah lot of room to run there so I think that's I think that's the book I think if you believe all of those things and one more stat on like the you know unique supply great brand direct traffic thing like the comp there is expedient and booking spend about $11 billion a year on Google ads which I think make them Google's top customers or top hand full of customers. And so that the 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 re acquire them every single time they travel and so this that that's why this direct traffic thing is such a big deal is 91% direct traffic to every and be such a big deal because other players have not been able to acquire customer wants 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's 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 got on and is there any bears out there right now to make a bear case I don't I 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 the growth is slowing like everything maybe true about the product and the unique supply. And what not but like if you want to believe that you're going to access a very very large chunk of that 1.8 billion dollar short term stays true I'm or 1.8 trillion dollar short term stay tam. You need to still be running fast growing into that and what did they do last year 38 billion dollars in gross bookings I think yeah you did you know yeah that's like 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 really 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 address a ball 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 art or if sounds like yours is the same use case with Airbnb over the last couple years 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 equalize 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 hotel 100% of the time it was a mix right and I don't I don't necessarily see any path where prices are gonna go down again on Airbnb and you're going to have that kind of dislocation in the market the arbitrage between Airbnb's versus hotels as a traveler so I think it is going to get segmented out now maybe back to the bear to back to the bullcase 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 case is kind of keep going for me. So there's this like potential market saturation thing and then this low growth. There's a growing belief I think that they will have recurring acquisition costs the same way that booking an expedient due because these people are starting to multi-home more than ever like VRBO is starting to see a lot of the formally only Airbnb list. So there's only Airbnb listing show up there booking is trying like hell to be able to have these sort of unique experiences that the Airbnb type of listing in addition to hotels on that their platform so everyone is skating toward a more homogenous set of supply than has existed in the last 10 years and with that being the case will that brand affinity keep up or will people start comparing their options or in fact being willing to book an Airbnb like listing from booking. Well, and this is this is maybe a good case to talk about our own experiences as hosts to because I think probably of yeah 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 how are we feeling at least as host well tell you I mean I'm I'm someone that this year has put my Airbnb also on VRBO is 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 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 home and I am now and I know lots of other people who are the same way it's you know an opportunity to maximize maximize revenue minimize vacancy and their ways to manage it. Yep well and you know for me we haven't multi home 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 the market. So I'm going to buy us to fill rates versus maximizing revenue I was going to save this for later in the show but I I've got a diatribe ready about like I don't need to fully go on it but the incentives are misaligned between Airbnb and their host 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 exp 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 host are willing to take on the sort of cost and risk associated with that and Airbnb's smart pricing couldn't care less. Exactly well and so this the point I was going to make is that like I 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 via bio home way and and booking dot com on the other hand they do have traffic they do have 100% yes I mostly trust them I've no reason not to trust them I think they're viable do not some fly by night competitor it's going to send like crappy guests my way. Anytime at that you're you know all markets are supply and demand so if you want to maximize your price anything whether you're raising around as a company or you're a host at 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 as you can. So if you're a host of the platforms as it was and it carries risk to only single list like yeah if Airbnb decides hey something fell under this policy oh sorry you can't actually talk to anyone because we're trying to limit the number of people you can interact with but you know unfortunately because we perceive you violated this policy your listing is banned or like you were blocking a week or like you know for for people who are using this is the livelihood like it's you know it's imagine if you only listed on the app store and you didn't all this on Google play and then Apple found something they didn't like about your app and then you're up a creek you know I think now that this market is maturing we're going to see more and more people not willing to take the sort of single provider risk and one thing that I think has changed over the last year. So I think that's just over the past couple years is there now are viable good third party software tools to do this whether it's beyond or guestly you can pretty frictionlessly as a host have your property listed across all these platforms and not worry about keeping it in sync and having a cost associated with that. I do think like one credit we should give to Airbnb and like we need to caveat every time we're negative with like I'm negative on this being currently valued at a hundred billion dollars and and there's other reasons there's other things I'm negative about but like the some total of innovation they've created is unfriaking believable and there are 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 a professional professional managed Airbnb's or the people that are the big lots of their bees yeah that sort of thing but there's something that's totally been proven as sort of a successful smaller business is all these different software plays that can help you be a more effective host. Now is it a little silly that Airbnb hasn't done any of that themselves and relies on you to go find it on your own yeah massively dropping the ball but you got a credit for enabling an innovation ecosystem. Yeah. Okay one one more bear case. I would want to I don't know if it's going to be the same. So yesterday on the door dash episode we mentioned that you know with their stock pop they're seriously putting up against the edges of the total address market for take out in the United States in order to value them the way the market is currently valuing him. You have to believe they can expand into a Jason season 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 there 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 on to 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 it's almost like the anti Amazon who's really active 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 design tiny homes like even plus I don't where you were you on plus free plus air being totally listing but it became a terrible experience it's a bad experience that got totally deleted much like super host like what does that even mean anymore nothing. So I it just feels to me like the personality the company is one where they're really proud of their ideas and they want to like make something their way and their first idea worked really really really really well. And I don't think any of these other ideas are sort of being tested with rigor or I think I can think of I was thinking about he said the only thing I can think of that was a non original idea although it was also pretty early in the company's life that I think they executed on incredibly well was instant book. I think that was I think that was over a year into the company that they innovated on instant book 100% and they deserve all the credit for that I mean I think the innovations of instant book payment through the platform messaging through the platform and their review system is like that is together they create the symphony that enabled this product to provide. And I think that's a lot of value on both sides but it's all but really instant book that that's part of the initial product like that's not that's not a subsequent thing so I think the other I debated whether talk about this in power but I think I think makes more sense in narrative maybe leading into power for a bear case on the company is. And you got to believe that they're going to keep penetrating huge part of this huge tam and you probably also have to believe these prices that coronavirus has shifted the wins in air B and B's favor yeah into 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 everybody 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 as slowed and has you know now it's I don't know what their growth is but like it's fine they're still a good decent size company and whatnot but we don't talk about it as part of the thing we don't talk about it as part of the thing but what is 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 is not captured that what happened is you've had specialized vertical verticalized marketplaces that have come in and taken away what eBay was doing and then grow on 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 market place out there that is either either has or is in the process of offloading that market from eBay. Now with Airbnb you're actually starting to see the same thing happen now how much this will happen and how deep Airbnb's mocos and how big their core market is I think it's still a question but hipcamp is out there. Hipcamp is in the process of offloading camping type experiences from Airbnb. You've got not hard to get to like the tiny green homes or detached ad use or anything from there you can see how they start out dorsi out there is doing the same thing for RV's you know you can book an RV on Airbnb or you can 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 rate 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 bill yet. And you think about like what it 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 the all the other third party seller tools that make it way way harder to do that yourself and they were able to aggregate so much consumer attention that way that anybody who owns the market. And 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 brain or to work exclusively with them I mean like it's a big one that there's a thing that everybody has to go fend for themselves and figure out their own cleaner check in as 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 and and for for a guest satisfaction like once you know that something is done the Airbnb way in the same way that like oh this thing isn't sold by Amazon but it's on prime. Yeah same thing I trust it it's got the Airbnb the Amazon stamp of approval on it yeah. All right to be moving to power yeah let's do it the way that for folks who are new to the show the way that power works is it's a Hamilton Helmer framework and I use the author 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 results results that's not all what they're doing they're using that as a bell weather for the next 30 years of results. And sure they may swing to farm one direction but really the way that you know 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 well 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 hundred billion dollar market cap company today what to what power do you attribute that like why do you believe that they're able to do that and so David I'm with that preamble aside I'm curious what 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 where the totally obvious one for door dash the totally obvious one for Airbnb is never work economies yep this is a two sided network effect it is global in nature it is as powerful as I have ever seen in a business rivaling you know I think generally if you think about network effects like network single sided network 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 in another class buyers and sellers host and guess you don't like you would have an eBay or Amazon or or here in Airbnb tend to just generally be a little weaker because you've got you're by for dating the types of participants in the platform this is like amongst the most powerful of the buy of the dual sided network effects I've ever seen because it's it's global it's not local and you really care the way you measure network effects is you 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 I or Instagram it's like no I really care that my friends are there like having more people on there I actually really care about that that's the whole point for eBay you like do I really care about the 16 thousandth seller of the latest iPhone yeah I mean maybe you drive the price down low but I don't care that much for Airbnb I care quite a bit because I really like having variety of listings yeah another way to frame that is for things like i message where I really only i message with like 10 or 15 people as long as the 10 or 15 of us are on the same thing it's okay 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 out of 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 that's actually a really good point I thought about this but this is probably why Instagram is long run I didn't even know even now bigger more valuable than Facebook because on Facebook you know I care about my friends my loose circles maybe maybe there a thousand people on Facebook I care about on Instagram that 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 there this power is weakening for Airbnb over time but in the beginning was big counter positioning yes yeah that's exactly what I had to I was like is counter positioning one well less than it used to be yeah I think the 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 company yeah I guess they don't take on the lease they sign a contract to be the management company with the owner of that building but somebody's you know that economic cost is in the system somebody's paying 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 there's marketing expenses to bring that person onto the platform but like it's so much lower so they were wildly counter position against the hotel chains because Airbnb could be way cheaper than them and their cost structure just allowed them to without being in the red yeah I think this was well it was just market dislocation but what in the early days when Airbnb's were so much cheaper than hotels part of it was market dislocation but I think part of it was this too like oh yeah I could put a I could put up you know my house in San Francisco on the platform like I'll make incremental money my car costs aren't that big cool I'll list it for 300 bucks a night whereas a hotel you're like well I gotta get it I gotta run this hotel like yeah and I think the ones that they notably don't have our cornered resource or switching costs like for consumers very easy to switch as long as there's another economy and this is related to cornered resource you would think their host would be the cornered resource but for a host it's actually very easy to become uncornered and go list on multiple of these systems and I think that's going to be a thing that we see increase more and more over time I think to some extent the rating and review history is some lock in there but less not that much and less than it used to be like in the early days when this was a new concept and people are like do 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 less on how more it's fine yeah well one thing that I want to do here and it's not exactly power but it's sort of like a business model feature that I want to talk about is the different types of marketplaces like and 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 marketplace assign because all of the supply is completely homogenous it's a 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 eyebrows 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 yeah agree no I don't have an opinion on whether that's good or bad or anything but I just think it's interesting to as we do more of these marketplaces to sort of understand why they can each command different take rates yeah all right well let's move on to what would have happened otherwise and because I don't think it's that interesting to guess what would have happened otherwise if Airbnb didn't IPO I think we should run a counterfactual that compares Airbnb to booking which is a very different business you know booking doesn't have this sort of what we say our number five acquisition of all time yeah I mean my gosh I forgot they were called price line at one point price line buying booking was just an unbelievable acquisition and yeah if you're can't be we did a whole one 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 they went in forge 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 Airbnb's to hosts and to Airbnb and to taxes over the course of the year of that they took 5.3 billion dollars of that in revenue so like for all any of the knocks that we've had an Airbnb so far like this is a $5 billion a year revenue company pre pandemic the big free company so the effective take rate on that is 13.9% there's ways in which you should believe the tire 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 revenue divided by the gross to come up with that effective take rate there net income when you go all the way to the bottom line is that they lost $700 million so all that that 5.3 billion in revenue they couldn't they couldn't generate any profit at the end of the day from that because they had to pay so much to headcount sales and marketing leases everything that goes into running the fixed cost of a business now they were cash flow positive in large part because of the cash flow dynamic we talked about earlier where they're getting the cash up front and then paying it out later yep yep and I think it's something like the average person books like 36 days or something like that out of how to time any shorter now in COVID it's something like 24 days but but they they have on average a month of free cash flow there or you could think of as like net 30 effectively on the payment okay so booking about two and a half times bigger ninety six billion dollars in in gross travel bookings fifteen billion dollars in total revenue so about three times bigger in in revenue that's a effective take rate of 15.7% so they get to actually own a little bit more of that transaction than than Airbnb does this is where they're very different booking turn that into five billion dollars of pure raw net income profit that's owned by the business and its shareholders and you know but also having to spend a lot more performance marketing than Airbnb totally right like they're they're they're cutting a you know six seven eight billion dollar check to Google every year and they're still able to generate five billion dollars 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 it may include flights in there but you know the the point to make here is like and flights are kind of a silly thing to include in 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 to very different businesses one that that lost to the better part of a billion a one that made five billion and the one that made five billion you know took two and a half X the scale to do that and so it'll be very interesting to see with Airbnb as they get to a bookings type scale are they also able to generate the sort of profit that booking does well I think that's what 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 playbook 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 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 and 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 and put up with a lot over the years and obviously it comes with a lot of responsibility as people become dependent on on you but also to hold on that for now and just leave it at like create value for people and amazing things happen 100% the way I like to think about this I think this is kind of the same idea is like can you expand the efficient frontier of a market the efficient frontier is like pricing quality so like if you think of a little a little graph of like a 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 for any given price I get more more quality all the way around the spectrum exactly or even maybe it's only for us a portion of that curve but like for some area of the graph you have you have exceeded the current market if you can do that in any market you will be successful and and Airbnb did this incredibly well across pretty much the whole graph it's like the economist view of why is this company valuable yeah exactly the next big one I had was around create unique supply but I think we've we've talked sufficiently about that one one we haven't talked about is addressing Europe 43% of nights are are booked in Europe on Airbnb this is not a US cent yes this is the biggest city historically it always was yeah only 29% of bookings are in North America interestingly revenues about even between the two which means people are spend more money to stay in North American Airbnb's than European ones but until diving to this research I don't think I would a guess that 43% of of its businesses done or a bookings are done in Europe like that that is I don't think there's a single other US based company that we've covered on this show that you could say that about yeah I mean I mean you're not you are but they're not US I mean they're technically US based but yeah Ubers large in Europe but I think probably larger in the US yeah do you have more I do yeah free cash flow is one that I think I don't think I have anything new to say here I think that's my last sort of like positive playbook one I do have some more this is kind of our bear in both 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 other well then let me actually maybe expand a little bit on what I was going to say on on dear if we catch a point which is I think part of the reason that every bee had such has such amazing free cash flow dynamics is whether intentional or not they started this new market new idea when you do that you have an opportunity to set the terms of how the market operates and they set the terms that you pay us up front and then we pay out the host when you book now that's different from hotels like on booking dot com and others usually like you make the booking on booking dot com but you don't pay until you check in at the front desk and Airbnb just by by virtue of being something new yeah they could set different terms and they did in 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 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 I'm raising around it's not a seed round it's a new form of investment well like on our L.P. show you don't write we'll talk about his fundraising philosophy and all the like kind of he did that in a lot of ways with the way the interstitial rounds and like some innovations you know he's positioning the rounds that he's raising relative to the next rounds yeah I have one it's a mix of two here so it's a little bit of like a playbook that's been run that I think will ultimately have pretty negative outcomes for the company that all that direct traffic that they've been able to harness is a gift in a curse and we talked a lot about the gift the gift the curses that they don't develop the performance marketing muscle and when you have always sort of experimented and had questionable return on direct marketing spend compared to your competitors who are you know laser focused on it I get worried especially when you combine that with the fact that their guest cohort retention drops like a rock after the first year and never really comes back anywhere close to the first year of spend it's a very leaky bucket funnel and there's very reasonable rationale for this where you know most people go on one vacation a year so unless Airbnb is getting 100% of your spend you're not going to be able to do that but you know you look at door to ash which recovered 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 there be an beast in year two drops to 30 something percent and then you know hopefully they are able to get back up to 50% but they at least so far from what the data we've seen it's their cohorts do not get more valuable over time so it makes it so that you have a lot less of a cushion when you decide to deploy performance marketing dollars to grow when that's the case my last one of it's the last one my next one is about reviews so they've gotten very far like we've we've extolled the system over and over again to build this sort of trust based network but they still have a crazy amount of host consistency and quality issues 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 it's there's several listings to find somewhere decent and you've 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 super host which I think is kind of like the Airbnb equivalent of winning the participation award like yay you're a super host you book you held you know two people that didn't give you terrible reviews congratulations so I just think that the company relied heavily on like reviews will save us for everything but it hasn't been a silver bullet in making it easy and enjoyable yeah most reviews are meaningless yeah there are some that are helpful and it hasn't been the hammer that's salt that's solved every nail of giving you confidence when you're looking for a new product 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 don't read they talk about revenue for for hosts but I really do think it's getting worse and worse to become a host over time as the company does is subsidizing less and less things with investment dollars is thinking less and less than thinking less and less like a startup is trying to be more profitable. And I think that that's going to be an issue for them long term too. Yeah, I'd be curious on that too. So that's it for my playbook. Great. Thank you, covered. All mine all in there too. All right, value creation and value capture. So this section has two components. The first is literally the name of the section. Are they Craigslist at capturing the value they create in the world? Or are they Google who does a very good job of creating the value? Or capturing the value they create? And then lastly, how do you compare the value they created for the world to any value destruction that they've had? And I don't think the 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 wave. Sometimes it's a hot topic. Sometimes it's not. And the 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 an aggregate the growth in home sharing through Airbnb contributes to about one fifth of the average annual increase in US rents. And they actually found this to be a causal relationship. And they say that because of Airbnb, absentee landlords are moving their properties out of the long term rental and for sale markets and into the short term rental market. And Airbnb has this, I have no ability to sort of rule on this. It's not, I'm not here to orbit whether this is more value destructive than it is creative. I think there's lots of think tanks doing lots of work on that. But I will say this is a company who's brand potentially may have meaningfully outrun its net global impact in terms of sort of netting the negative impacts against the positive impacts. I think the like, seriously. You're not putting in a betting market placement on Nobel Peace Prize. Nobel Peace Prize. I don't know how that's decided. So I shouldn't go on it. But yeah, I think it's worth making the point that Uber is condemned as this massively evil company and yet created a way for millions of people to earn a living. Airbnb is installed as this sort of like wonderful brand that had all of its hosts around the, or many hosts around the world, Ring of Bell and create a nice video to open the IPO this morning. And that's largely consistent with their brand. And yet there's a lot of potential value. Well, really what this comes down to, and I don't know the data I've seen various parts of it, but it really comes down to like, who's this fly on the platform? Like I think for people that own their homes, that live in the homes that are renting them out, either renting out rooms while they live there to help with income or renting them out while they're on vacation, it's hard to see much value destruction from the ads. Like, hey, they're living there. They would live there anyway. This is like, 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. 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. Other than the Harvard Business Review article, I found that one was a, there was two sources that have very detailed reports on this. One is Airbnb. And the other is a extremely liberal sort of like labor-focused funded think-take. And you're like, okay, well, who else has owned? Who else has owned? Well, 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 it is. Anyway, point is there's, it is 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. David Grading. Whew, Grading. All right, so how do we decide we want to grade this one? We want to do the same as DoorDash yesterday of use of capital. Collectively, how good of a use of capital was it for the company and the investors to go after this business opportunity in this way? There's nothing to say here. This is like the greatest use of capital of all time. It's 100% A plus. 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's going to make today. And then all the other capital that went in along the way too. What did they restate before the silver lake round? Ooh, let's see. Before the silver ground, I believe it was around $3 billion to 1 1 2 1 2 3 billion dollars 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 that's gone in. Let's play it out long term. Does the business at some point generate, 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 growing, around slowing growth, around increasing competition, certainly around valuing this company at $100 billion right now, unlike DoorDash who's flying so close to the radar, I don't feel like the end state is sort of a boomer bust. I feel like there exists an end state where that is, they can be a profit, 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'm going to do it 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. The same type of network effect, same dynamics, same cash flow dynamic, like this is eBay, a capital-late business. So yes, agree. And but I think that's a good point to be an A9 and A plus would be yes and there already, because let's be honest, there's no excuse that this company hasn't already been printing, generating tons of cash. Like this company does not have the right size cost structure right now, like doing things like the film studio and places and experiences and the airline, like building units and people's backyard. Like it's just not so 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 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 as 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 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 well still growing and realize the great profitable dynamics it can have. Yeah, 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 a great season by the way. Dude, it has a couple of highlights. Pin d'Ode, Wo, and Epic James. Epic James. Can you connect it in their SpaceX? Was that in this one? No, that was last season. And the last season. Epic though, or Epic episode was epic. The NBA, NBA was so much fun. Yeah, I like that. I love DoorDash yesterday. That was fun too. My unlike DoorDash's, I will only have one carve out this time. And it's much lighter weight. So it's a Spotify playlist that I actually have no idea who made it. But it's Star Wars, Low-Fi Hip Hop. And it covers all Star Wars music in a Low-Fi Hip Hop style. And it is just phenomenal work and research music. So that's awesome. Hopefully with that in the show notes, and anybody who wants to chill and jam, Ken. I can't wait for you to send me your links for carve outs and sources so I can start listening to that one. You got it. My carve out, let's see, I mentioned earlier that we've been more tied to San Francisco because it's Jenny's job. People may know, I think I'm set on the show. My wife Jenny works for San Francisco Ballet here in San Francisco, which is one of the premier world-class, best ballet companies in the whole world. And it has been a very interesting year for the live performing arts when your business is consists of packing auditoriums full of three to 4,000 people and having world-class artists perform in front of them while touching each other as part of the art form. So that's been a roller coaster. And SFP is doing great, thankfully, of wonderful donors, wonderful audience. But what they did, the Nutcracker, is the big part of the ballet season every year. And it's the holidays and Christmas. And so what they did is they've created a digital Nutcracker experience. It was actually written up in the New York Times. It's really cool. So it's a recording of the Nutcracker. But I've seen SFP's Nutcracker dozens of times probably at this point. But it's a different experience to watch it online because the camera seems in. And it's a different experience. And they have a cool digital virtual opera house tour and experience around it. So I'm rolling to it in the show. No, it's recommended. If you need some holiday virtual holidays here, check it out. It's very cool. Well, for folks who don't know, as we start to wind down here, we have been codifying the playbook section from each episode in some written bullet points. And we email those out now after posting each episode. So if this is something you want, you can sign up to receive those playbooks at And if you join the acquired community Slack at Slack, you'll also automatically be signed up for those. It's a great way to kind of have something a little bit more shareable and tangible and referenceable if you're thinking about applying any of those playbook themes. As always, if you love acquired and you want to hone your craft of company building, you should join the community of LPs. You'll get the LP show where we dive deeper into the fundamentals of company building and investing in addition to our monthly LP calls, where we talk with so many of you directly, including Book Club, which actually the last three, we've talked to the author for each one. And hopefully, we'll have a fun one to announce early in the new year as our next one. So you can become an LP seven days for free trial. You can exit out of that anytime if you want. So it's risk free at LP. LP 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 kind of go through. So feel free to drop us a note at if you want instructions for how to gift the LP subscription. And on that note, we said this yesterday, we want to say it again, we feel very strongly that financial hardship should never keep anyone from being an LP. And we want as diverse a group as possible in people of every life stage and every life experience. So please shoot us a note at and just introduce yourself and we're happy to help you out if finances are a constraint. Lastly, if you weren't subscribed and you like what you hear, you should. And if you liked this episode and you have a friend that you want to send it to, perhaps an Airbnb host or guest or fan of the company or bear or bull or. Any type of an farm animal. You've been looking to get your parents into Airbnb or into acquired and you're like, oh, what episode could I send my parents that really would get them into it? This is a great one. The Oprah one was great for me to share with my grandma. This is another great one that I think a lot of people will understand. So consider this your opportunity to share the gift of acquired this holiday season. I can even get through it with that one. All right. We have some holiday joy happening here. No kidding. No kidding. Everyone have a wonderful Christmas, Hanukkah, New Years, whatever it is that you celebrate. Time with or without family or perhaps with folks on Zoom. And we will see you next year. Yeah, although we're going to have a little special. Yeah, the special, a special holiday present for you coming next year. Let's go to come next year next week. Yeah, let's not announce it. It's outside the bounds of our official season here. But we're excited to get this one in your hands for the end of the year too. Some holiday fun. Yep. All right. On that note, thanks so much everyone. We will see you soon. We'll see you soon. MUSIC