Acquired - Airbnb

0:00I took Danny's collar off her. Oh, awesome. We don't have the same breath. That'll save us some time in post. Welcome to season seven, episode eight, 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.

0:36And 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.

1:01Airbnb, 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.

1:58Now, 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.

2:24Did 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.

2:54Sure, this is a useful thing for aspiring VCs, current VCs, 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.

3:12So really awesome to have them on fun to be diving so deep on this topic and sharing a lot of these conversations with so many of you. If you aren't already an acquired limited partner, you can click the link in the show notes or go to acquired.fm slash LP and all new listeners get a seven day free trial. All right, listeners. Now is a great time to talk about a new partner of ours here on acquired LaGora.

3:36the agentic operating system that is redefining how the world's best legal teams work. Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. LaGora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do, operate with obsessive customer focus.

4:05They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with.

4:24Lagora's bed here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work, and this means that the pie can grow even as each individual task takes less time.

4:38And they recently launched LaGora agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early LaGora numbers essentially speak for themselves when they have a head-to-head pilot with their top competitor they win 70% of the time. Legora now has over a hundred thousand lawyers on the platform from 1200 legal teams in 50 countries and crazily they went from one million to a hundred million in ARR in about 18 months. Truly insane numbers and that is the real test.

5:30Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm, or you're in-house at a company, you can learn more at logora.com slash acquired, and just tell them that Ben and David sent you. All right, David. Air, B, and B. Take us in.

5:56It's time. It's an every 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.

6:09one 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.

6:27They're all great and 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 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 our 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.

7:21from New England, one of whom is from Harvard, and the other two with a kind of design and adventurous background start a company in the early 2000s with a mission to connect people and facilitate interesting experiences. And they're going to accomplish that mission by having people stay in other people on the site's homes.

7:43Yada, yada, yada, RISD design confidence out of my Southwest. I think I know where this is going. So they build trust on the site with reviews. You can review each other. They discover that photos are really important of the listings. They add photos. They figure out how to authenticate real identities. It starts to take off. People start using it and going through this way faster than I would have expected. I know. We're going to get through a lot here. And it seems totally crazy at the time to everyone, including Silicon Valley, they raised money from one of the very best venture capital firms, storied venture capital firm in Silicon Valley. Of course, I'm not talking about Airbnb, I am talking about Casey Fenton, Daniel Hoffer, and the crew at couchserving.com. And the venture firm that I'm talking about is Benchmark, and the partner who led that deal was Matt Kohler of, you know, little company like Facebook and

8:39Instagram fam. That was a couch surfing had that many similarities with Airbnb they had a lot of similarities but there was there was one thing that was missing and it turns out that that was one of the key things that made couch surfing roughly the equivalent for those who have listened to our uber episode of the I can't remember if it was uber or lived or both I think it was uber of the home mobile story I think uber good question I don't know I think it was either where we did home mobiles, which of course pioneered ridesharing. Couch surfing didn't have a way to pay money. It was, you just stayed in other people's homes. They didn't facilitate the payments. And the idea was everybody was just going to do this out of the goodness of their heart for their community. And I think for a long time, the only monetization that happened on couch surfing was

9:30you paid essentially a verification fee to have your identity verified. And I think the way they did that was they took a credit card payment and then matched your name with the name on the credit card. And that was the only way they made money, I think. And actually, the similarities to homobiles don't end there. Couch surfing was for a long time actually a registered 501 C3 nonprofit. And then they had to convert from a nonprofit into a C-Corp when they raised money. It was...

9:59a whole mess. I mean it makes sense it was a nonprofit because my head the way I always thought about couch surfing and I think when I first heard about Airbnb I sort of equated it with the same thing of like literally a stranger who just lets you crash while you're I don't know in this time I was like a college student so I was like oh I see it's for like other college students or interns or whatever who don't have money and like you can just stay on some stranger's couch. Yeah.

10:22which I think was how Cat surfing started. I think I think Casey was college student and going on a trip. Did you ever use it? I know. I never used it. Yeah, but it always felt a little bit to 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. The really crazy part, this is getting ahead of ourselves, but turns out Brian and Joe actually had dinner with Casey and Daniel right before.

10:50They applied to IC and talked to them. Which was about what they were doing. After, of course, they'd already started and we're working on Airbnb. Yeah. And they talked about the two sites. And anyway, okay, on to the real story of Airbnb. So the year is 2000. We are back in New England, specifically in Providence, Rhode Island.

11:11where 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. Brown and RISD, all the buildings are kind of interspersed. It's actually very, very...

11:32Pretty, very, very cute little place. So Joe shows up as freshmen and he meets and befriends a sophomore there. Now Joe's kind of like a scrappy, he's like a, you know, I don't know if skinny's the right way. He's not, he's not like, he's slight of frame. Let's put it that way. His friend who he meets is a beefy hockey player and...

11:52I 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 Cheskey 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 doing different projects, starting businesses together and they must have stood out because

12:34They 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.

12:56We've got this thing. One day, I predict that we're going to start a company together. You and me and somebody's going to write a book about this. Now, of course, they're telling this to the author who is 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 3D ID, but It's kind of not the fit for him he's he's much more shares or something Yeah, he's design chairs and medical products and like you know, they're like a product design consultancy and he's a junior designer there It's not a not very like glamorous and he doesn't think this is the life for him at the same time So this is what going into 2005 2006 YouTube

13:51Get started. I remember I was in college when YouTube got started and like oh this site is amazing. This thing is happening on the internet. You can watch video and movies and anybody can...

14:01post them and the guys who started it came out of PayPal, young guys backed by Sequoia. Brian starts like researching them becomes obsessed like, oh, this is like a great idea. 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 rings around and he actually starts a company. I guess you could call it a company. It still exists today. It's called a Crip Fund.

14:31And Joe's talked about this a lot. If you'll let's see, we were vaguely listening to how I built this episode. He talks about this. So I guess the story is as part of the curriculum at RISD, one of the key things that you do is you have these critiques, like design critiques in your classes. Like you design something and everybody in the class and the professors, you know, well, critique and you sit around. And I guess these go on for a long time. And there's not comfortable chairs. And so Joe has this idea that he makes literally butt-shaped foam cushions that you can carry around with you, and you can put down on the floor on a bench or whatever, and then be more comfortable during Coutique's 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 order a crit button. It's critbuns.com.

15:25And it is in a full like web 1.5 glory. Yes. In fact, I think it was on the front page of the USA today and they have a big area of their site dedicated to letting you know that. Obviously, of course, by day, we mean Joe. Yeah, because it's not really a company per se. Joe goes around Providence and tries to get the bookstore in town.

15:50carry 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 at 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...

16:25then this is crazy to remember now up in sort of up and coming but mostly still incredibly sketchy area in the south of market neighborhood in San Francisco better known today as Soma and I remember at the time had 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 Soma it was 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. Brian opens up the package. There's a crypt button.

17:16in the package. And as the story goes, at least as old to Brad, the point of the Crip Bun, other than I'm sure just to be high jinky and ironic, was, hey, let's take another shot at this. It's time to do this together. Start a company. We're not meant to be employees. Let's go do this. So Brian comes up to San Francisco after receiving the Crip Bun to visit and stay with Joe. And when he's there, it turns out one of Joe's roommates, this tall programmer guy named Nate who went to Harvard but he's working at this kind of like really weird language tutoring company at the time called Batik and doesn't really seem to be going anywhere. Nate's, Nate's moving out of the apartment and so it's like hey, we need another roommate.

17:59Why 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 great time. He kind of wants to do it, but he's not sure. So he goes back to LA, thinks about it for a while. And then finally in the beginning of September in 2007, when Nate finally moves out that month, Brian's like, okay, I'm gonna do it. So he quits his job, he moves up to San Francisco, he moves into the apartment, but there's a problem. You know, you've replaced Nate, this programmer who You don't have a job who's making money, but this guy Brian, who's designer, who doesn't have a job. So Arumate 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.

18:47international design conferences is happening in San Francisco, the world design congress. And anybody who's traveled to San Francisco for all the big conferences that happen nowadays, they're all tech conferences that happen at the Moscone Center. The hotel situation in this city is Nuts. It is completely awful. WWDC has since moved down to the South Bay and now online, but 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 anticipating that

19:25I mean, 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 want to 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, you know, hotel rates can be like $1,000 plus.

19:46a 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 going to be doing a podcast one day and they wanted to leave a paper trail. Well, they were thinking about, you know, an author writing the book. So there we go. So the subject of the email is sub letter and it reads Brian. I thought of a way to make a few bucks.

20:15turning 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 hitting by emails with that and see if that is the magic that made it all work. You know, yeah, I never really liked, you know, like, bastard cheers, like all the standards, you know. Ha!

20:43Yeah, you can just end with hot. I like that. Hi, exclamation point. Great. Well, it was a pretty good hot. So they take three days. They put together www.airbandandbreakfast.com on WordPress. Then they email out a bunch of design blogs to get some publicity and say, hey, you know, all the people that read your site that come into town for the conference, can't afford hotels, especially, you know, young broke designers like us come stay with us on 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, like I knew air beds, right? Like Airbnb, but like they called it air bed and breakfast. Yeah, so what's it? Do they mean air beds or do they mean mats?

21:26I assume maybe they, they meant as, as they were working on the idea and came up with their bed and breakfast, maybe they went out and got some air beds. So they emailed us out and surprised. They, you know, people are like, oh, this is cool. What a novel idea. And they're right 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.

21:50grad from India named Amal 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 to conference together, they hang out, Joe gives him a tour of the city. It's really a great experience. And at the end of this day, Amal is staying for an extra day after the conference. And he really wants to go down and see the famous D-School at Stanford. Not yet famous for having helped produce DoorDash, as we talked about in our episode yesterday, but still pretty famous nonetheless, especially in the design circles. There's this famous tie between the D-School and IDO, the design agency. So they all drive down together to Stanford. And they attend a lecture by Bill Mogridge, who was one of the IDO founders. And it's a cool experience. And then afterwards, Brian goes up to Bill and just starts

22:46Pitting him, okay, I got him all here. He stayed with the word designers. We have airbendbreakfast.com and it's really hard for young starving designers to go to conferences. Do you think, I think Bill might have been on the board of the Industrial Designers 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?

23:12Air Ben Breakfast did not become the official accommodations for better. 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'd think, right? Like, oh, okay, great. Like, this is the thing. This is what we're going to do. No, they don't, they're like, oh, well, that was a good way to make some money during the conference.

23:36What else? What are we actually going to do? They start brainstorming some ideas. The rope, Nate, who they were still friends with, even though he had left the apartment, back into start working with them on this, since he's actually 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 going to be. They start brainstorming ideas.

23:57One 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?

24:21That'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. 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.

24:42background too. So he had majoring in computer science at Harvard right around the same time as 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 say highly profitable commercially use. So he started.

25:10No. He started writing AOL bots and programs and communication stuff and first he was selling them as shareware and he kind of stumbles into this nascent field. This is in the 90s of email marketing and perhaps the unregulated parts of the email marketing industry where he operates as a consultant during high school.

25:34and 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, uh, the canned spam act was not passed until 2003. It turns out at which point then I think sophomore year at Harvard and eight.

25:56closed 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 train computer scientist who knows how to code and develop and can stand up.

26:16but internet products all on his own. He also knows how to market online. So this is a pretty potent combination here. Yep. They were smart to rope him back in. So they're jamming on these ideas. They're thinking about the roommate thing. It turns out roommates.com already exists. A couple of months go by. It's January, 2008. They're out of other ideas. So Joe and Brian decided, yeah, maybe we'll dust off this airbitten breakfast thing. Give it another go. So they pitch it to me. They actually hand pitch neat until January on.

26:43Working with them on this it was it was just this side project thing So this is like attempt number two at starting Airbnb attempt number two. Yeah, and so the idea is South by Southwest is coming up in March and People are starting to make their bookings for going to Austin and lots of people from San Francisco go go to go to Austin still Well, not this year. We were supposed to go do a live show there this year, but maybe next year And as anybody who's been to South by or Austin knows, once, when these festivals happen, whether it's Austin City Limits or South by, you can't get a hotel room. Like, it's thousand bucks, two thousand bucks a night. It's crazy. I think the first time I went in 2010, I couldn't get a hotel room and I booked an Airbnb. Yeah, I think, I think every time I've gone, I've done an Airbnb, I've never stayed in a hotel for South by.

27:28So like, okay, great. This is where we're going to launch. It's going to be big. They go on Craigslist and say, okay, like who's hosting rooms and who's in the looking section looking for rooms, they start pitching everybody on using airbednbreakfast.com. They get huge success. They get two actual bookings, like two, like one more than one for the festival. And one hundred percent growth rate over their previous attempt. Yeah, exactly. I guess a one hundred percent growth rate.

27:57One of those bookings is Bryan. So they have only one. They still only have one non-founder book. Bryan shows up. And this is just amazing. 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. Extreme Bryan shows up. And he's hanging out there. And he meets up at Joe's suggestion with another one of Joe's former roommates. It's just a little guy named Michael Seibel. No way.

28:27Yeah, guy named Michael Seibel, of course, of Justin.tv 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 Justin TV. They've raised some money there, you know, a known startup.

28:47in the valley, which we've covered on our Twitch episode, as crazy a story, as similarly crazy a story is here in Airbnb. And Sybil says, hey, I can help you, Brian, like it takes a liking to these guys, and he knows Joe, these three roommates. I can help you find some angel investors to make this happen. No, I have no idea Michael's involvement here. Yeah, apparently never held any equity in the company. It was never, you know, an equity advisor or anything, just helped him out.

29:12He did indeed help them out. So Brian gets back. He's all pumped up. You know, this this hot startup and their founders are going to help us raise money. So he shows back up and Nate's like, Hey guys, I've got some news. So my girlfriend from Harvard Elizabeth, who's now his wife, she was I think in 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 going to back to Boston. 50% of the people who are using it are the founders. So yeah.

29:42So he moves back and once again, nothing really kind of happens with the site for the next few months. But meanwhile, Cybel 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 are like, you're doing what? And how many people are using this? No, thank you.

30:03So Brian actually would write a blog post later about this about all the rejections that they that they faced of which there were many so they go back to Cible and and Justin con and they're like well Like if you can't raise money, maybe you should just go do a white commentator like we did it. It's great PG's grade, and it's still pretty early at this point in YC But maybe you'll be able to raise money afterwards, but three three and a half years into it. Yeah, I think It's 2006 happened right. Oh, it's two thousand so one and one or two years into it Yeah, the, uh, or no, it was, um, this is now 2008, but a YC started in 2006. Was it 2005? Yeah. Something like that. So drop box and reddit effectively have gone through, but there haven't been any other high figures yet. And Justin TV. And Justin TV. Nobody really knows outside of the valley about them. Yeah. So they go check out YC and YC was actually, I think this was the first.

30:57startup 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.

31:20Whoa, 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...

31:45It doesn't look like Terminator Bezos, so he's like full on still nerd Bezos mode. And he's pitching at YC for all these rinky-dinked 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. Same deal as Stripe. And anyway, stories for another day. The other person who makes a big impression on Brian and Joe speaking at Startup School, is Sequoia partner, Greg McAdoo, who's speaking there. And of course, great. Sequoia, there's a long history of Sequoia partners, speaking at YC in startup school, Y's Greg speaking there. Well, turns out Greg is speaking there because Sequoia had actually invested in white commentator and Greg was the person who led the investment for them and on 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 going to apply.

32:38The winter batch for OIC 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 convention, so they do the same thing. I think the Democratic convention is in Denver. I forget where the Republican one was. The email local press outlets, they get some bookings. They actually get about 100 bookings.

33:06that summer, which is great, but they're not making that much money. So they're about out of money. And this is when the famous serial story happens, the Obama'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 they pass. I actually realized I had the story wrong. I didn't realize that the Airbnb guys made up Obama O's and Captain McCain's. I thought what they did was they went out and bought a bunch of them and then like when the story's 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

33:58You 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...

34:15Let's go make some boxes, poor Cheerios into them and sell them. It's totally amazing. Heads, I win, tails, you lose situation because you have food no matter what. It's kind of like being the casino. You don't care which side wins because you get food either way. Get food either way. Oh, it's true. Sticks are a little bit lower but.

34:38And 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, 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. This might be a theme that will come back up as we progress through the story. Yeah, I mean, it's only awesome because the company worked. I've been at companies that didn't work and the only profit they ever made was from selling their furniture. It can go either way. Yeah, I think it's an awesome entrepreneurial...

35:27endeavor 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. As designers, they didn't have to outsource the creation of the art for the boxes, so therefore there was more margin available for them. I always think that's a good lesson for entrepreneurs in general, is what is the thing that you yourself can do and not pay yourself anything and generate?

35:52You 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's and Captain McCain story is it's actually what gets them into I see 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, 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 YC interview. He shows up. They're getting ready to drive down. And the story goes as they're leaving Joe grabs.

36:45A box of Obama is an a box of cat and McCain's to give to Paul Graham and apparently Nate is like what do you do it man? Like you look ridiculous like Siri will come on and so they go they do the they do the interview and PG doesn't get it. He's like people people actually are doing this staying on each other's couches they're like well yeah people are doing it but not that many people and and so they're 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

37:23as chronicled in the upstarts and gives Paul the cereal boxes and Paul's like, what are these? Joe tells him the story of how they've stayed alive. And of course, what is one thing that PG values above all else? It's survivorship and grit and default alive, default alive, being a cockroach as he would come to call them. He says, wow, okay, you guys are, you guys are going to stay default alive. I don't know about this whole thing, but you're in. So they get into IC.

37:53they 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 okay, where is 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 changed the name to Airbnb from Airbend breakfast. They go to New York, they figure out that photos are important, they figure out that having a smooth payment experience is important because, you know, bringing a bunch of cash and giving it to your host is pretty awkward. And the very reason why people stopped taking cabs and used Uber instead, because it was a cash-lux experience. I mean, one of the many reasons, but... Exactly. Exactly. So, things start to work. Now, meanwhile, McAdoo, remember, is Sequoia's

38:47liaison with YC, an investor in YC. He's at YC one day and he's talking with PG. And they're talking about this idea of grit and how being default alive and scrapping through things is really, you know, it's a Koya, they believe that that's one of the most important characteristics of entrepreneurship as well. And so MACDUS, PG, well, hey, who in this batch is most like this? And PG says, well, that's easy. That's the Airbnb's.

39:17over there. Love it. Love it. So, McDougas, over he starts talking to them and he's smitten as well. And this is kind of crazy. I mean, Sequoia had just done, if you remember, back to this time, this is beginning 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 the Sequoia partnership and the rest of the valley is thinking about triaging their own portfolios, like the idea that you would give a bunch of money to some crazy kids who are like building a platform for people to sleep on to 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

40:11home away and VRBO and the vacation rental space before. And it's 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 RAP 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.

40:38And this was potentially a way for people to make some extra money and prevent that from happening. Likewise, people still wanted to travel, didn't have the same kind of disposable income to do it. And this was a way to do it much cheaper. You could go to South by Southwest, you could go to a conference in San Francisco for 80 bucks, 100 bucks a night instead of being priced out of the market. Yeah, it's so interesting, like timing plays so much of a role in the success of these companies. And, you know, 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.

41:28Absolutely the right time. And I think all those things are true. And couch surfing, as we talked about a little bit, definitely didn't have the right model. Definitely messed things up. But they also were launching and starting to build in the build up to the financial crisis during the go-go years. Nobody was that interested in cheap travel.

41:52Despite 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. Also, that's nothing. I mean, it's nothing, nothing, nothing for Sequoia today. That's still pretty much nothing for them at the time. I think the current, the fund that they're investing out of, I believe, was a $500 million fund. So what's that point? 1% right of the fund. Yes.

42:50And the funniest thing is that that actually returned to that fund. Like when you're thinking as a venture capitalist and you're like, I can't possibly make a little bet, you know, that's just 0.1% of my fund because like that can't possibly contribute to returning the fund. It's just not. I didn't 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.

43:14They bring in some angel investors alongside the angel investing collective of Keith Roboi, Kevin Hartz, and Joward Curiem, one of the YouTube founders, and we talked with Kevin about this on the Eventbrite episode. They get a small, they were in the angel investing together, they get a small angel allocation of $30,000 between the three of them in the round. The valuation though, so that's the dollar size. The structure though, this is very much a traditional venture round. The round is over 25% of the company. So the post-money valuation on the round for the total round is $615,000, 2.4 million dollar post-money valuation. So Sequoia gets 24 and 3.8% of a percent in ownership in the company and the angel collective of Keith Jawad and Kevin get 1.25% of the company for their $30,000. And that

44:13I think is the last big dilutive round the company would ever do. Is that right? 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 dollars got very, very large. That is...

44:37That is accurate. So, they finally have, back to the seed round, they finally have a little bit of money. So, this is where... Just more than 4 million posts, 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 quay of capital. Sure knows how to get their ownership. They do, they do. They're writing much larger checks these days to get that ownership.

45:02So even with this small amount of money though remember Nate's background Nate basically goes to work and This is this is his time to shine. So first the thing that they do which doesn't require any money People have probably heard about the Craigslist hacking So I didn't realize you know the the thing that I always thought that Airbnb did with Craigslist hacking was going to listings on the site and saying, hey, why don't you come list these on, listings on 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

45:55listing, creating listings on your B&B, they actually also auto published, encourage them to auto publish those listings back to Craigslist. And so you think like, well, why would you want to do that? You're taking your own supply and you're, you're putting your own, you're encouraging your own supply. But if the transaction happens through them, that's a way to go get more demand. Exactly. It was like that traffic yet.

46:17Exactly, and I think this was, I mean, probably both of these were key, but that second piece was especially key because, yeah, how do you get the demand? How do you get traffic? I can go, you know, you can go hand-to-hand combat, convince people to put listings on the site, but how do you get them bookings? Well, you put it on Craigslist, get the bookings through there, and then you...

46:39NATO, you capture those bookings and you don't let them go back to Craigslist and you say, hey, you did this thing, you had this great trip. Why don't you book your next trip with Airbnb? Right. I mean, yes, Craigslist captures very little of the value that they create. So, you know, effectively what they did here is say, there's value being created on Craigslist, we're going to be the way to capture it. So, so that was Craigslist. And then the other thing they do and that Nate does is, especially given his history, you know, as well, is Google and Facebook ads, and this was early days of Facebook ads, so we're talking in 2009. The platform existed, you could do it, but you could and you could target by interest. So what they do is when they want to grow demand, they run Google ad words 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 demand, but how do you get supply?

47:35they use Facebook. And so what they do is they go on Facebook, you can target by geography. Hey, we need some more supply in New York. Okay, we're going to target in New York and we're going to run Facebook ads. We're going to target by interest. And you say, Oh, you 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.

48:03Supply to sign up on the platform and then of course the people that they would send you to no guarantees that they like wine or yoga but But it worked pretty well Now to be fair. So these are some pretty great growth hacks It wasn't just that Airbnb growth hacked their way to success as we talked about like there were a bunch of trends that were at their back here. Financial crisis, needing people needing to pay their rent, people wanting 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

48:52You don't always want a hotel experience, right? Like almost anybody who's traveling, sometimes you want a hotel experience, but sometimes you actually want to stay in a place, especially if you have a family or you're traveling as a group. It just makes it's such a much better and totally new and different experience to travel like this. Yep, that's a great point. And before we move on from the growth hacks to I think it's also important to identify that like The door is closed on doing all of those tactics today and not completely closed obviously like you can still use Facebook and Google ads but the value has largely been arbitraged away where you can't do it You know like a wide open fire hose the way that they were doing it in a cost effective way then yeah

49:39So the notion of like new marketing channels, particularly new digital channels, is always a who found the next hill, go exploit it before all the value gets arbitraged away, then go look for the next hill. And like these are, you know, five generations ago of marketing tactics. Yeah, good luck doing that. There's innovative Facebook things today. You're going to pay through the nose for it. All right, listeners. Now is a great time to tell you about a long time friend of the show, Vanta.

50:07AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would not, and you're done. But in an AI first world, that doesn't hold up anymore. Yep, your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit.

50:33Vanta's own research found that around 70% of companies have this, quote unquote, shadow AI running with no security review at all. Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta agent.

50:52Think of it as a GRC engineer that's governance risk and compliance, except that it's software and it doesn't sleep. It finds the issues drafts the fixes and cuts the time that you'd spend on vendor assessments in half. In half, which is exactly why more than 16,000 companies today run on Vanta. Companies like ramp, cursor, and snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor.

51:19Every AI tool, the whole environment. And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here. And literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at Vanta.com slash acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off and just tell them that Ben and David sent you.

51:49So we're now in 2010 and things are really starting to work. And they have by midway through 2010, they have 700,000 nights booked on the platform, which is for something that seemed like a crazy idea nobody would do. Even the founders thought we need to do permanent roommates, not temporary roommates. It's totally taking off. So they raise, as we said, a $7.2 million series a day from Greylock.

52:19Which, 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 also figured they own 24% of it. They own 24%. Yep. And they're trying to, you know, stretch out the dollars in their fund. It's not like we're out of the financial crisis at this point. Right. So they go to great luck. Read Hoffman leads.

52:48the series A. Now, the supposedly, and I think this is actually true. We'll talk about Airbnb's business model in a minute, but things are going so well. They have more money in the bank than all of the seed dollars that they raised when they raised the series A. Oh wow. Like you never hear about this happening. They raised such a small amount of money, but then they did so well that they made more money in profits.

53:14profitable company Airbnb. Indeed, indeed. So by early 2011, the next year, they hit a million nights book, and then they may 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.

53:36It becomes big national news and this is when Fred Wilson publishes that blog post about how he 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 host and hiring photographers and all that. Yep. So that summer, we talked about fundraising, they raise.

54:02A hundred and twelve million dollar series B. From Andrews and Horowitz at over a billion dollar valuation. This is summer. That's a big series B today. Well, we were talking yesterday on the DoorDash episode about their forty million dollar 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.

54:30You know, Ashton Kutcher comes into the round. Ashton actually doesn't quite come into the round. He comes in at a different time and gets, I think. preferential share price or maybe it's a reference share allocation. But because he sort of has this value prop at the time that he's talking with many companies about, which is I'm going to help you get publicity and, you know, if you're a consumer company, often he would actually come in after rounds, have them reopen it to let him in when the price should have gone up but keep the price the same. It's a great strategy. Hey, leverage your value. Yeah.

55:11So they raise all this money. Why did they raise all this money? There's actually a very specific reason they did, which was, if folks remember back to this time, the Sam War brothers and Rocket Internet in Germany would take all these, you know, new way of post-web 2.0 tech businesses from Silicon Valley, clone them, and roll the mountain Europe. So they did this where they're being beat, with a company called WimDo. And this was like existential, because whether they realized it or not early on, unlike Dordash, food delivery, ride sharing where it's about winning each local market in the end of hand combat, Airbnb is a global network effect. You can't fragment the market. There is going to be one winner globally because when people travel, they travel globally and especially Europeans and North Americans travel back and forth between Europe and North America, you need to just have

56:10One platform, you can't, you can't like give up on Europe. It's such a great point. And whoever wins that global market is also going to trickle down when 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. 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.

56:42That's just not true with Airbnb. Whoever was going to capture this short-term rentals market in a global way was also going to win in a local way. Yep, and for a whole bunch of reasons, one of the reasons being just like...

56:58You and me, I think, been 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, you know, it's truly a winner take all market, flood the money in, make sure you're the winner. That was Inarguably true for Airbnb. Inarguably. So they go fight hard against the Samuara 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 Samuars are doing, they basically start a sweatshop in Berlin of

57:54people, young kids out of college and out of McKinsey and they're like calling hosts and property managers getting listings to put on their platform. Everybody starts doing the same thing. The thing that's interesting though is like, I don't, I don't think that's actually what made the difference. Because if you think back and let's talk about the product for a minute, the reviews on the platform that couch surfing had pioneered initially. Of course, there are no reviews on Craigslist, but couch surfing had them. Reviews and trust.

58:23are so important. 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 going to trust that it's actually going to be a good experience that these are crazy people? Even to play crazy people aside, just that it's actually going to be nice. Well, reviews are super...

58:44important. And so when you're doing something like creating a listings farm, whether this was Airbnb doing it or, or, uh, windy 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. 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,

59:40to 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.

1:00:08holding the money, some portion of which, roughly 12-15% of which is their fees, their revenue, they get that, they hold that upfront, and then they don't have to, plus the other rest of the booking fee that they're gonna give to the host, they hold that, and then they give that out months later. So they went and they raised all this venture capital. They probably didn't even really need it that much, because as long as they're growing, as long as the platform is growing, there is more money coming into the bank account.

1:00:34Right. 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 that 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.

1:01:02when 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.

1:01:17On top of that, what you said about growth is really interesting because sure, you can take that cash as long as you're growing and plow it into your growth because you know that more money is going to be there from the growth that you've achieved. This doesn't work if you're not growing and you can quickly get yourself into trouble with spending money you don't have if you're shrinking. We're definitely going to talk about that. Yeah, this is all predicated on.

1:01:41growth. But I keep talking about how crazy, non-delutive all these rounds of financing were for Airbnb. This is one dynamic. Their growth actually financed the future growth of the company without needing the investor dollars to do it. This is actually something like SaaS companies face the opposite of that, where you're selling deals, but there's deals, you might sell a deal for a million dollars in ARR. Well, this is going to be paid to you month over a month. Right. 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 10 million.

1:02:32night's 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. Like the EJ incident, which when the woman's apartment in San Francisco got trashed and they had to implement the insurance guarantee that was terrible. There were, you know, people.

1:02:54to have 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 8% of the company? Yeah, 78% 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.

1:03:44especially 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 SAFUS. And of course, board member of Dora Dash, as we discussed yesterday. Pretty big week for Alfred. Yeah, crazy, crazy stat on Alfred, uh, Bennett Sequoia for 10 years. Yesterday was his first portfolio company to IPO. And today is his second. Yeah. And they're both some, some pretty big IPOs, I would say. So.

1:04:13Okay, 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 same way our brothers can't take throw on 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 DoorDash, you don't really have the existential requirement to fly low to the ground or operate at the lowest level of detail, shall we say? In fact, you can fly pretty high, you might say. You might be able to fly very high. Yeah, and this shows up in two ways. One, operationally, you can just be sloppier. You just cannot need to be as finely tuned as, say, a performance marketing machine, and there's lots of different areas around the business where that shows up. But also,

1:05:13It 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, The business would probably still grow and would probably still be profitable and would probably still be fine. At some point in their journey, they really did hit that where it was just going whether they touched it or not. Look, this is the dream of a business, is to have a business like this. Not only is there nothing wrong with that, that's amazing.

1:05:59On 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, Leonard, 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.

1:06:22Gold-plated would be an understatement. There's a five-story atrium in the lobby with a living wall that goes up the whole side of one of the sides of the atrium. I mean, it's amazing. There's a 24-7 kitchen. 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...

1:06:50There was too much demand for breakfast on a Saturday. They wanted to create the environment that they thought would enable people to do their best work, to be creative, to create this sort of culture that they wanted among hosts. I get it, but it is absolutely emblematic of the fact that the flywheel was spinning and it was spitting off cash.

1:07:11Yeah, they're famously in 2014. It's now just become normal, but they unveiled the BALO, the design mark of Airbnb the logo. No, the BALO. Depending on your version of the Rorschach test, it looks like, may or may not look like some genitalia, but anyway, it's now the Airbnb mark. Yeah, which is funny. I love the old Airbnb logo. I know it was so good. The cursive script.

1:07:39Also in 2014 they started doing an annual conference for a host called Airbnb Open. They had brought on in 2013 as I think head of hospitality. I got named Chip Conley who Chip was the founder and proprietor of the Jwater Veeve hotel chain which are these like super high-end boutique hotels all around the world and the chips are the basic kind of guru-type guy. So at the at the conference he 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 but he has a great quote about all this in the in the upstarts to Braddy says, well, growth covers a lot of sins.

1:08:35And the growth of this company was spectacular. So also the next I think you you summed it up so well though and in saying this is exactly as an entrepreneur as an investor as an opera like this is exactly the type of business you want to start That just goes on its own and that you don't have to keep you know pushing the rock uphill and once you have that the lesson is do not rest on your laurels. Stay analytical. You have to keep figuring out what's next. Or at least maybe don't say you're going to win the Nobel Peace Prize. I don't know. Anyway, so in 2015, Expedia buys home a way, the only really viable.

1:09:22product-wise competitor out there in the market for just under four billion dollars. And you know, there's some headlines about like, oh, Expedia, Homeboy, they're going to compete with Airbnb. No, like this is surrender. This is basically admitting that there's no viable competitor out there. In 2015, the company Airbnb does almost a billion dollars in net revenue on eight billion dollars in bookings. 2015 is the first year in the S1 where we have this data.

1:09:48They raise $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.

1:10:08Mostly 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, a 25 billion dollar valuation. And then in 2016, they raised another billion and a half across two rounds. Again, not that they really need the cash, but probably, you know, war chest. Super favorable terms. They can think of lots of things to do with it. Investors are desperate to get shares of this company. I do want to

1:11:05take 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 gonna, 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.

1:11:34They have some big announcements and Ben and I went back and we watched this video on YouTube. It's something. It's just, thank you for the internet. It is just miraculous that this thing is still on YouTube because every single product they introduced, except for one, has been a complete failure. 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. They're the current Airbnb product and Anna.

1:12:26Met a 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, a 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 meet up 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 and then all of it lived all together in trips and so within

1:13:20trips, you had aggregated your stays, your experiences, and your places, all the stuff you did. And they didn't launch, but they talked about adding car rentals to trips. They talked about adding grocery delivery to trips. They talked about adding flights and maybe even an airline someday to trips. They even had a flight booking product in the works until March of this year. Oh, wow. I didn't know that. Yep. That was one of the canceled things with coronavirus.

1:13:49interesting. So yeah, I mean, I think the thing was like, look, all these were maybe not bad ideas, but I'm not sure they made a ton of sense within Airbnb. And I think that the disconnect as, you know, looking back for me watching that video was, I think Ryan and the company really believed that like Airbnb was about, they talked about it so much at this, in this conference about belonging, about feeling home when you're travel and about the connections in the community between hosts and guests.

1:14:18And 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 on belonging and people Again, generalizing, use it in a much more transactional way than that. They are logically weighing this option to stay here versus other options. And I just think that that disconnect becomes more and more apparent over time. Yeah. And if you go back to, like, what was one of the original...

1:15:03you know, probably the biggest wine now that made Airbnb work. It was the financial crisis. Like it was, yeah, yeah, you know, it was a nice, a staying apartment and whatnot. But like, I really want to go to San Francisco for a hundred bucks a night or 80 bucks a night, not a thousand bucks a night. It is interesting around the 2014-ish time frame. I remember my narrative of why I loved using Airbnb shifting, where I used to tell people, it's great. I can stay cheaper. And then I was like, actually, it's not really cheaper anymore. But like, gosh, hotels are so sterile and staying in an Airbnb while it's

1:15:32Probably the same prize maybe more expensive, hard to tell. I can access neighborhoods. I otherwise never would have been able to access. I have a unique and cooler experience staying in this house. And I remember this moment in time, it's shifting from a value of a price based value proposition to an experience based value proposition. Yeah. I same deal for me. And what's interesting is I actually didn't go back and look, I should have. But anecdotally I think for 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 the period of time you're talking about it was like well you know when we would go for like a weekend like it would depend on the trip whether we would do Airbnb or

1:16:22Hotels like sometimes we 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're 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's.

1:16:49that sort of becomes true as people consider Airbnb one of their options. Yep, totally, not that we stop doing it at all, and for group trips, you get a family together, going to a place where there isn't great hotel inventory, fantastic use case. But you fast forward to today, we've talked about experiences, places is gone. The trip's concept is gone. It's now refocused much more on stays.

1:17:17So the next year, in 2017, the company tells investors that they're planning to IPO within 12 months. But then at the beginning of 2018, they had hired back in 2015 a big name, CFO, Lawrence Tossi, who had been the CFO of Blackstone and the COO of Merrill Lynch before coming out to San Francisco and joining Airbnb. He leaves the company. So that puts the IPO in jeopardy. And Brian publishes 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 any time soon, which I think was the message behind all that.

1:18:12Brian likely didn't appreciate any of the pushback or guidance he was getting around, I don't know, IP readiness or whatever, 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 there be me going public?

1:18:38Will they go public? What valuation? What is happening? Because of course they had raised all this money from Sequoia and others and it's hard to have an infinite time horizon when you have investors with fund life cycles. I texted David like a month and a half ago. I was like, dude, I think Airbnb is going to IPO before the end of the year and you're like, okay, I believe I want to see it. I heard this story before. We've heard it before. We've heard it before, but they actually do.

1:19:06So we'll get into like the story of this happening and why it's happening now. So the reality that we've talked about, there's kind of like three acts like there are in so many of our stories here. You know, there was the first act here of Airbnb, this crazy thing almost didn't happen, but it was a great idea. It gets into IC, girls and girls and girls. 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 views and usage of the platform here over the last couple years. So 2017, bookings growth slows to 50% from over 70% year before. Still really good. I mean, you're at a huge base, you're growing 50% year over year. That's great. You can totally copy too. Like 10 year old company growing at 70% on that kind of base.

1:20:05Nothing to be ashamed of at all absolutely you can go public with that 2018 bookings growth slows to 40% Okay, but still you know whole company large base growing 40% annually great if they had gone public after five years we wouldn't be They saying this at all we would be like yeah totally they've been public for years makes sense that they're you know into this 40-ish percent growth rate per year. Yeah, the next year in 2019 the last full year we have data for before. COVID, Brookings growth slows to less than 30%. So I believe it was like 28 and a half, 29% last year. And at this point, this is I think 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.

1:21:04So the base is growing, but the amount that you're adding every year is now constant. And of course, then we'll get into what happens in 2020, but... And do you chalk that up to IPO readiness? 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.

1:21:31The 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 starting getting like way more leverage on your fixed costs and they're actually getting.

1:22:01last year. Hmm. Well, that's concerning, concerning indeed. So then 2020 happens. Well, before 2020 happens in September of 2019, they announced that they will go public in 2020. This has been reported elsewhere. But the company now by September 19 is close to 12 years old.

1:22:25the 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 two one year extensions. I don't know actually if employee option contracts mirror that but also at a minimum you know think back to Sequoia like their fund that they invested in must have been a In Airbnb must have been a 2006, 2007 vintage fund. You're now over 10 years into that fund. Right. So you've definitely got shareholders looking for liquidity on the investor side, but you also have these employees that have some form of, you know, expiring options or at the very least, if you try and restructure that, then there's tax implications. Yep. And also, like, you know,

1:23:16everybody 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. So actually this is crazy in March and April of 2020 Airbnb's gross booking values turned negative. They were paying out. They were paying out more in refunds for future bookings than they were taking in in bookings. So they actually had like, I've never thought of it like seeing this before. Not even like negative revenue, the of negative bookings.

1:24:15You'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 that still digging into the S1 in Marches people probably know Airbnb raised two billion dollars in capital from Silver Lake and six street partners and a combination of equity equity and debt the debt piece was at an 11 and a half, there are two pieces, two tranches at an 11 and a half percent interest rate, and a 9 percent interest rate, the equity piece was at an 18 billion dollar valuation, which was down. And that was a billion and each, right? A billion of equity and a billion of debt. I think that's right. I think it is. And I should have 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. Basically a 50% haircut and valuation.

1:25:10And then the debt side interest rates are zero out there. This is like major distress debt. You're pricing a trance at 11.5% interest rate. I think this is what was going on was not only did the business evaporate, but they're paying out refunds. And they probably must have desperately needed the cash at this point in time. Yeah, the way to think, at least the way...

1:25:37I am not first and foremost a finance person, but the way the bucket in my head that I sort of put this cash flow dynamic into is kind of a form of leverage. Like when you're going well, it's a way to basically make sure that you, like we said earlier, you are able to use that cash to grow without raising new equity.

1:26:00The thing about leverage is it levers whatever direction you're going. When you start shrinking, you're in big trouble quickly. Very similar to another thing that was going on with Airbnb and with all tech companies is operating leverage. Airbnb has a really, really, really high set of fixed costs, but their variable costs are obviously much higher than a SaaS company because it's marketplace and they got to pay the hosts.

1:26:30But they make a lot of money on every transaction. And so the whole ball game for tech companies is build the best freaking product you can, and especially recently spend a ton of money on sales and marketing to go capture when you take most or all market. So your sales and marketing costs are high, your R&D costs are high, but those are...

1:26:47relatively fixed, and then hopefully your property costs are. Yes. And then hopefully 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 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 of these mouths to feed, but very few customers to feed them with. So, Airbnb, of course, realizes this. And in May of this year, shortly after the start of COVID and after raising this emergency capital, they have layoffs, they lay off 25% of the company, which is, 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.

1:27:42except that they didn't actually let go a lot of the R&D. They kept mostly R&D people and laid off mostly the people in the customer success service organization. Yeah. Yeah. We might want to get into that in a second. Brian describes it at the time as a quote-unquote second founding of Airbnb as a business. They jettison.

1:28:06All of the other stuff that they were working on experiences are still around and they moved to online experiences, but no places, no trips, no, we didn't talk about it. The company had started a movie studio at some point along the way there called Carousel Street Films. They had a lot of stuff going on. It's all gone. I got a magazine for a while.

1:28:25Yep. All gone. The magazine. I don't hate on the magazine. The magazine makes sense to me. You're a travel company. Like airlines have magazines. That makes sense to me. You're promoting travel. That's like average. That's marketing. So the business goes to zero, basically, less than zero. But by Q3, things do start to recover. We've both traveled this summer for long-term stays. I actually pulled together a great stat.

1:28:52Even 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-honorous 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, you know, it's through the air rather than on surfaces and all these things, people started making their own informed decisions around...

1:29:14how 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. Totally. Same where we've been less active than you since Jenny's more tied to San Francisco than you guys. More of those, more of those came from a bike trip, a different place every night.

1:30:05But 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 the Airbnb was right now. Yeah. Yeah, it was, I mean, I feel for hotels these days. So the business starts to recover.

1:30:30We 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.

1:31:00In September, they were down 17% versus 2019, but things are stabilizing. Right. It would seem reasonable to think that they'll get to parry either before a good chunk of the population is vaccinated or shortly after. Or shortly after, yep. So they basically effectively lost a year of growth. Yeah. Well, they accept that they also shrunk. Right. Well, I think that's the question that we'll talk about in a second in our analysis sections is what it...

1:31:29What 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 growth bookings are down 39%.

1:31:56So unlike Dordash yesterday, where, uh, what did we say that for the first nine months, they're up 300%. I think close to it for the year Airbnb is is down in growth, 39%. Uh, they filed their 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. Yeah, who finance pulled up here is currently trading. Oh, I see it in the acquired slack. People are buzzing about it. You want the live reaction?

1:32:48Oh my god, it opens at 146 a share at 159 a share now. What? Yeah. I mean, after 100%. 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 30ish billion for a while like they were constantly and girls were slowing and 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? Would you go into this market right now? Or I guess the market's doing fine so the IPO window is open, but with their numbers you would think like you can't you wait until they stabilize. Well it's funny like with DoorDash you're like okay yeah it makes sense why they're going now like this is the biggest accelerant to the business in history. Wow wow wow.

1:33:50Okay, 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 their That's much faster than the 28, 29%. We wouldn't have called Uber's growth linear at that point. Lyft was feeling themselves. They were growing, you know, doubling year-over-year at 100% growth. That was coming out of DeLid Uber. Yep. Door-dash, obviously, over 200%. Pinto Duo, who we covered to open this season at 246% year-over-year, again, Chinatech, different in every way. When you gaze over in disaster land,

1:34:44The numbers are also looking pretty good. Slack, which was a product-led growth company primarily at that point 81% year-over-year, Square was 55%. Shopify was actually more than doubling at 110%. The laggard of the bunch, which ended up not becoming a good stock, was Dropbox at 31%. Still a few percentage faster than Airbnb pre-pandemic. That's contextualizing why we're not super excited about.

1:35:12Airbnb 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 is the new zoom of 2020 the the the the new zoom they were going at I believe close to a 200% Wow growth rate at come public so what is going on here this company is shrinking Yeah, this company was had slowed growth and is now shrinking You know, I think an important thing to realize here too the thing that scares me the most is 91 so again, it's it's a sore that cuts both ways 91% of the traffic to Airbnb is direct. It's organic. It's stuff they're not paying for it. Now they're loosely paying in brand ads, et cetera. But again, that's the dream. That's what you want. But anytime that they've tried to lean really heavily into performance marketing, like DoorDash, they have not been able to do that well. And so what I'm a little bit scared of is like, if they do want to turn on the growth engine and they do want to grow a lot faster than 30% year over year, are they going to be able to do that with precision and profitability?

1:36:24It's not like they haven't been trying to. It's not like they don't know that their growth rate was slowing. All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

1:36:49Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like the risks are real. Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI Control Tower.

1:37:13Yup, AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent visible and secure in one place.

1:37:30And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approval, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security. ServiceNow already runs more than 100.

1:37:49billion workflows annually, and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates. And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

1:38:12So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com slash acquired and tell them that Ben and David sent you. All right, David. So I want to so we sort of talked about the growth. I do want to round out history and facts here with a couple a couple IPO nuggets. So the first is the cap table at IPO, the founders owned 31% of the company comparing that to the What is it? 13, 14% that founders of DoorDash owned. Very impressive. Story of two different delusion methodologies of these. Story of two different capital intensive, two different degrees of capital intensity in your business. Yeah, a great point.

1:38:59Great 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 to his name on paper in Airbnb stock. Joe and Nate also both have 10%. I think they sold...

1:39:22a 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 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 guess 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 where the stock is trading. Sequoia would have made about $5 billion. I think now they've made somewhere between $11 and $12, maybe closer to $13 billion. Not bad for 0.1% of your fund if you put into a company. That's crazy. I think total, they put $260 million into the company over 11 years. I assume that has to be over multiple funds. Yeah, for sure.

1:40:21Founders fund invested across a couple of different funds and this information is from the information which we'll link to in our, that's confusing to say that, but capital T, capital I, the information and we'll link to that in our sources. I think they came up.

1:40:38With about three billion dollars after investing about a hundred and fifty million so it's just like winners all around here. Why see owned two percent? Gray lock obviously one big injuries and Horowitz invested sixty million When when they valued Airbnb at about a billion dollars, so I think they probably have three-ish billion coming out of this so Lots of winners in the venture world. You also look around. You mentioned Keith Roboi, Kevin Hartz, Jawad Kareem. Personally, you've got Ron Conway, DST, Jeremy Stoppelman from Yelp, was an investor. Obviously, Bezos personally ended up investing. This is like an Academy of Words speech. It's crazy. You got Jared Leto, you got Ashen Kutcher, and then by proxy, Demi Moore. Lots and lots of people are feeling very good today. Wow.

1:41:30Wow, wow, wow. In addition, of course, to the thousands of employees. Absolutely. Wow. Any other nuggets should we move on to narratives? Let's see. One thing to know before they IPO'd is they had 2.7 billion of cash in the bank, and then they had another 1.8 billion in marketable securities.

1:41:51when they were going to double that cash because they were going to raise 2.4, they ended up raising 3.5. So they now have a cash chest of $7 billion. So the company will continue to be able to weather storms for a while. It looks like, and I'm curious what they'll start reinvesting in now that they're through this period. And obviously have to show a really good quarter and next quarter after that in order to keep the investor excitement as high as where it is right now.

1:42:20Well, I'm just so confused. You wouldn't think that. I'm just so confused, but maybe we should discuss the narratives. Whatever could you be confused about? Let's go into nerves. Oh, great. Okay. Well, should we discuss the bull narrative first? Yeah. Let's do it. And so for folks who are new to the show, narratives are where we talk about what the sort of media was saying when they had a bull case and a bear case for the company coming in. And you know, the The biggest, for me, the biggest bull case that I've heard is that they have the most unique supply of anyone in the industry that they spent a decade creating. They have this brand mode. They have 91% direct traffic that is largely a result of the fact that they did build that unique supply in a unique way to build their brand. So now it's just about harnessing all of these unfair advantages. Like that, that to me is the big story here of why

1:43:18They're kind of in their own lane of competition and they're not really competing with the bookings of the world who all sort of are fighting for the existing hotel supply, although they're trying to bring on the Airbnb type supply too. But that's the biggest bull case. I think maybe there are two other dimensions as well. I think that's probably the biggest piece. But one being that coronavirus and COVID has perhaps permanently changed some behaviors just like the the part of the book the door dashboard case perhaps permanently changed some more behaviors to be more favorable for Airbnb for travel not just in this period but going forward I think that might be a small part of this and then I think the second piece is also we've talked a little bit about tam along the way and

1:44:09Yesterday with DoorDash, that was one of the big, big question marks for DoorDash. I think is like, how big is the Tam? How many do they have to get into adjacent seas, et cetera? You know, I think for Airbnb, what has always been true here is that like, there are no questions on Tam. Travel is big. And although it has taken a big hit this year, it's going to come back.

1:44:32Yeah, they cite a 3.4 trillion dollar number on their team 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 opportunity for experiences, which explains why they're beating the experiences drum so hard. But let's just focus on that $1.8 trillion market of short-term stays. They got a lot of money. I think we can throw out the rest of it. Yeah. Yeah, a lot of room to run there. So I think that's the book. I think if you believe all of those things,

1:45:24And one more stat on the unique supply, great brand, direct traffic thing. The comp there is Expedia and booking spend about $11 billion a year on Google ads, which I think makes them Google's top customers or top handful of customers. And so the classically, the online travel agent market has been one where it's really difficult to acquire a customer and then keep them.

1:45:53rather than needing to go re-acquire them every single time they travel. And so that's why this direct traffic thing is such a big deal, is 91% direct traffic to Airbnb is such a big deal because other players have not been able to acquire 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 contextualizes why people are so excited.

1:46:22Totally, that is a massive benefit to the company and opportunity. Those two companies pay Google almost as much as Google pays Apple for all the iPhone search traffic. That's another way to contextualize that $11 billion. Totally, totally. Okay. Well, I would say should we feed the bear? I don't know. Did there any bears out there right now to make a bear case? We should look at the short ratios and see. Yeah, and see.

1:46:50Okay, so, well, bear case. I think to me, the biggest piece of the bear case is what we spent the last part of history and facts talking about, which is like, hey, the growth is slowing. Like, everything may be true about the product and the unique supply and whatnot, but like...

1:47:11If you want to believe that you're going to access a very, very large chunk of that $1.8 billion short-term stays, trillion or $1.8 trillion short-term stay, Tam, you need to still be run and fast growing into that. And what did they do last year, $38 billion in gross bookings? I think Airbnb did. Yeah, that's like a lot of billions, but that's not a lot compared to $1.8 trillion.

1:47:41And for the growth to be slowing significantly, then you wonder how much of this tamry really going to access. Right. So what does that mean? Does it mean that their tam isn't actually the 1.8 trillion for the short term stays? And it's actually much smaller like the addressable part of that? Or is it that somehow they're just failing to market to the vast majority of people who are living their life in this way and paying for things in this way? Well, I think it's interesting.

1:48:08I think it's probably both, right? Like, if you at least think about my use case and art, it sounds like yours is the same use case with Airbnb over the last couple of 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 equalized more. And then it really became a question of like, do I want an Airbnb or do I want a hotel?

1:48:36And I certainly didn't want an Airbnb or a hotel 100% of the time. It was a mix. Right. And I don't necessarily see any path where prices are gonna go down again on Airbnb and you're gonna have that kind of dislocation in the market. The arbitrage between Airbnb's versus hotels as a traveler. So I think it is gonna get segmented out. Now, maybe back to the bear, to back to the bull case, if you believe that post coronavirus, just the preference for hotels is going to go down a lot, then maybe this is going to be a big accelerant to Airbnb. Yeah. I think that's the right way to think about it. Yeah. I mean, the bear case is kind of keep going for me. So there's this like potential market saturation thing in this low growth. There's a growing belief, I think, that

1:49:28they will have recurring acquisition costs the same way that booking an Expedia do because these... People are starting to multi-home more than ever. Like VRBO is starting to see a lot of the formerly only Airbnb 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 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 too, because I think probably a argument against that in a big lock-in would be as a host if you say, you know, I'm not willing to do that. I get more value being on Airbnb. I'm not

1:50:27willing to multi-home, that would provide some lock-in. But I don't know, how are we feeling at least as host? Well, I'll tell you, I mean, I'm someone that this year has put my Airbnb also on VRBO. There's a huge pain to actually do that because VRBO's product is like, imagine taking Airbnb's product and then just like making it like 30 to 50% worse in every way. And that is the product experience of being a host on VRBO. But once you have it up, like it's up, and sure you have to figure out how you're going to block nights on different calendars, but like I was never someone that multi-homed and I am now and I know lots of other people who are the same way. It's, you know, an opportunity to maximize revenue, minimize vacancy and there are ways to manage it. Yep. Well, and you know, for me,

1:51:17We haven't multi-homed yet but the only reason we haven't is that we haven't listed our house really at all except for like one week this year but if we were and we're traveling more I think we absolutely would and the biggest reasons for me are well there's what you said but I think this is also just a price aspect that I do think the pricing algorithms on Airbnb are biased to Phil rates versus maximizing revenue. I was gonna save this for later in the show, but I've got a diatribe ready about like, and I don't need to fully go on it, but the incentives are misaligned between Airbnb and their host for features like smart pricing. Like it's smart pricing for Airbnb. Airbnb wants to maximize exactly what you're saying, night's booked and total revenue, but like I as a host.

1:52:05do 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 hosts aren't willing to take on these sort of cost and risk associated with that. And Airbnb's smart pricing couldn't care less.

1:52:33Exactly. Well, and so the point I was going to make is that like, you know, I care about price. I want to maximize my revenue as a host. There are these other viable platforms out there. Now, they're not as nice to use as Airbnb, via bio, homeway, and booking.com. On the other hand, they do have traffic. They do have... 100%. Yes. I mostly trust them. I have no reason not to trust them. I think they're viable. They're not some fly-by-night competitive. It's going to send crappy guests my way.

1:53:03anytime that all markets are supply and demand. So if you want to maximize your price in anything, whether you're raising around as a company or you're a host of 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.

1:53:30It's not as enjoyable to be a host on the platform as it once was, and it carries risk to only single list. Like, if Airbnb decides, hey, something fell under this policy. Oh, sorry, you can't actually talk to anyone because we're trying to limit the number of people you can interact with. But, you know, unfortunately, because we perceive you violated this policy, your listing is banned. Or like, we're blocking a week. Or like, you know, for, for people who are using this stuff as livelihood. Imagine if you only listed on the app store and you didn't all this on Google Play and then Apple found something they didn't like about your app and then you're up a creek. I think now that this market is maturing, we're going to see more and more people not willing to take the sort of single provider risk. And one thing that I think has changed over the past couple of years is there now are

1:54:29viable good third-party software tools to do this. Whether it's beyond or guestly, you can pretty frictionlessly as a host have your property listed across all these platforms and not worry about keeping it in sync and having costs associated with that. Yeah, I do think like one credit we should give to Airbnb and like we need to caveat every time we're negative with like I'm negative on this being currently valued at $100 billion. And there's other reasons, there's other things I'm negative about, but like the sum total of innovation they've created is unfrieking 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

1:55:17professionally managed AirBnBs or the people that own big lots of AirBnBs. Yeah, that sort of thing. but something that's totally been proven as sort of a successful, smaller business is all these different software plays that can help you be a more effective host. Now, is it a little silly that Airbnb hasn't done any of that themselves and relies on you to go find it on your own? Yeah, massively dropping the ball. But you got to credit them for enabling an innovation ecosystem.

1:55:50one, one more bear case. Um, well, I had one too. I don't know if it's going to be the same. So yesterday on the DoorDash episode, we mentioned that, you know, with their stock pop, they're seriously budding up against the edges of the total addressable 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. They're actually in not what they possibly could succeed at in the future And I think like as I think through this I was trying to come up with one example where they've done something outside of their bread and butter the thing they stumbled on to in the you know first real year of the company that they've done well and and I just don't I don't think the company is a master executor outside of that initial opportunity

1:56:46It'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. They try luxury. They try building a hotel. They try experiences. They've tried dining. They tried booking air travel. They tried custom design, tiny homes. Even plus. Were you on plus for plus Airbnb? Totally. But it became a terrible experience. It's a bad experience that I got totally deleted. Much like Superhost. What does that even mean anymore?

1:57:16or nothing. So it just feels to me, the personality, the company is one where they're really proud of their ideas and they want to make something their way. And their first idea worked really, really, really, really well. And I don't think any of these other ideas are sort of being tested with rigor. The only thing I can think of, I was thinking about what he said. The only thing I can think of that was, Non-original idea, although it was also pretty early in the company's life that I think they executed on incredibly well was instant book. I think that was over a year into the company that they, uh, 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

1:58:09together they create the symphony that enabled this product to provide tons of value on both sides. But it's all, but really instant book, that's part of the initial product. Like that's not, that's not a subsequent thing. So I agree. I think the other, I debated whether to talk about this in power, but I think, I think makes more sense in narrative, maybe leading into power for a bear case on the company is, as we talked about in the book, so you got to believe that they're going to keep penetrating a huge part of this huge tam.

1:58:39And you probably also have to believe at these prices that coronavirus has shifted the wins in Airbnb's favor. And to a certain extent, I think it probably has. But I think it's also exposed a structural weakness for the company, which is if you think about like zooming out, you mentioned Amazon, like an analogy here. Airbnb is not Amazon. They are much, much, much more like eBay. And eBay has been on a similar path, the enormous damn 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, there's still a good decent sized 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.

1:59:31But what has happened? It's not like e-commerce and it's not like peer-to-peer e-commerce has gone away. And in fact, it's continued to grow. But eBay's not captured that. What's happened is you've had specialized vertical, verticalized marketplaces that have come in and taken away what eBay was doing and then grown those individual verticals. So I'm thinking about companies like Goat. I'm thinking about companies like Reverb and Music. There are a bunch of them out there. You name a niche interest of buying and selling something. There is a verticalized market place out there that is either has or isn't 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.

2:00:29Hippcamp is in the process of off-loading camping type experiences from Airbnb. I'm not hard to get to like the tiny green homes or detached ADUs or anything from there. You can see how they start.

2:00:42outdoorsy out there is doing the same thing for RVs 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 right like okay coronavirus has changed let's assume it has changed people's travel preferences how much of that is going to stay on Airbnb versus how much of that is going to go to some of these other new platforms or even new ones that are in their infancy or yet to be built yet what's a great point And you think about like what did Amazon do to create like so much lock in there? They built all the services around purely selling your goods. So of course they brought you the traffic, but then they also did fulfillment by Amazon. They also did, you know, the all the other third party seller tools that make it way, way, way harder to do that yourself and they were able to aggregate so much consumer attention that way that

2:01:40Anybody who only had a subset of that because they were doing some niche thing they were gonna carve off It was just never interesting enough as a seller because they couldn't get to the scale and you think about all these things that Airbnb could do To make it a no-brainer to work exclusively with them. I mean like a cleaning's a big one There's this thing that everybody has to go fend for themselves and figure out their own cleaner check in 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 could 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. Yep. All right, so we move into power. Yeah, let's do it.

2:02:31The way that for folks who are new to the show, the way that Power works is it's a Hamilton Helmer framework and he's the author of Seven Powers in front of the show and it is the technically defined as the way to achieve persistent differential returns or put another way to become more profitable than their closest competitor and do that on a sustainable basis. And I actually think before we sort of classify what types of power does Airbnb have here, it's actually Very interesting to think about this relative to the stock price because one thing that after reading seven powers always stuck with me was Hamilton makes the point that look the markets are not short-term focused everybody who's accusing Wall Street of

2:03:11you 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 too far in one direction. But really, the way that, you know, a market cap works is, of course, it's an extrinsically defined market for the equity in the company. But intrinsically, what it is is it's a representation of what people believe the sum of all future positive cash flows in the businesses will be discounted to today. And so, you know, as you think about power and market cap are intrinsically linked because whatever you believe the power that allows them to generate persistent profit margins over all those future years are the way that you would calculate the market cap. So if you're someone who's excited about Airbnb as a hundred billion dollar market cap company today, what to what power do you attribute that?

2:04:07Like, why do you believe that they're able to do that? And so, David, with that preamble aside, I'm curious, what types of power do you think show up in Airbnb? Yeah, I think it's, well, okay, the totally obvious one, just like scale economies, where the totally obvious one for DoorDash, the totally obvious one for Airbnb is network economies. This is a two-sided network effect. It is global in nature. It is as powerful as I have ever seen in a business.

2:04:36Rivaling, you know, I think generally, if you think about network effects, like network is single-sided network, or single-node network effects, like a social network, like an Instagram or a Facebook, those tend to be the most powerful. Dual-sided network effects where you've got one class and another class buyers and sellers, hosts and guests, you know, like you would have an eBay or Amazon or here in Airbnb, tend to just generally be a little weaker because you've got, you know, you're bifurcating the types of...

2:05:05participants in the platform, this is amongst the most powerful of the buy of the dual-sided network effects I've ever seen because it's global, it's not local and you really care. The way you measure network effects is you ask for each participant in the system, how much do I actually care about the other nodes in the system being there? So like for Facebook, it's like Instagram. It's like, no, no, I really care that my friends are there. Like having more people on there, I actually really care about that. That's the whole point.

2:05:34for eBay, do I really care about the 16,000th seller of the latest iPhone? Yeah, I mean, maybe you drive the price down a little bit, I don't care that much. For Airbnb, I care quite a bit because I really like having a variety of listings. Yeah, another way to frame that is, for things like iMessage, where I really only iMessage with like 10 or 15 people, As long as the 10 or 15 of us are on the same thing, it's okay. So it's like a reasonably, it's not that strong of a network effect because you don't need to interface with lots and lots of nodes in the system. Whereas with Airbnb, I don't care who owns the place that I'm staying at. I just want the most choice with the most interesting options such that there is sufficient density where I want to go in the sort of like price tier that I want when I get there. And that

2:06:25is 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 none. 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.

2:06:47bigger and more valuable than Facebook because on Facebook, you know, I care about, you know, my friends, my loose circles, maybe maybe there are thousand people on Facebook that 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- But in the early days, yeah. Totally. The cost structure for Airbnb to bring on supply.

2:07:33was 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.

2:07:53building. But somebody's, you know, that economic cost is in the system. Somebody's paying the cost of the building. 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-positioned against the hotel chains because Airbnb could be way cheaper than them and their cost structure just allowed them to without being in the red.

2:08:23And I think this was, well, it was just market dislocation. But 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 a, you know, my house in San Francisco on the platform. Like, I'll make incremental money. My car's cost aren't that big. Cool. I'll list it for 300 bucks a night. Whereas a hotel, you're like, well, I gotta, you know, I gotta run this hotel. Like, yep.

2:08:51And I think the ones that they notably don't have are cornered resource or switching costs. Like for consumers, it's very easy to switch as long as there's another economy. And this is related to cornered resource. You would think their hosts would be the cornered resource, but for a host, it's actually very easy to become uncornered and go list on multiple of these systems. And I think that's going to be a thing that we see increase more and more over time. I think to some extent, the...

2:09:16Rating and review history is some lock in there but Less not that much in 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 list 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 a sign versus something like Airbnb is marketplace assist where in marketplace a sign

2:09:57because all of the supply is completely homogenous. It's effectively the same experience. You don't care as the demand which one gets assigned to you. So you just want it to be close. And as long as it meets that criteria, great. And when that is the case, the business can command a higher take rate. They get to control more of the economics. For something like Airbnb, I browse and I, you know, they assist me to browse, but I pick the specific house and 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 obviously have fees on both sides. They charge the guest more than the host, but they have fees on both sides. They're trying desperately to get more and more of the

2:10:53the 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. Oh, I don't have an opinion on whether that's good or bad or anything, but I just think it's interesting to as we do more and more of these marketplaces to sort of understand why they can each command different take rates. Yeah. All right. Well, let's move on to what would have happened otherwise.

2:11:23Because 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 do we say our number five acquisition of all time? Yeah, I mean my gosh, I forgot they were in called price line at one point price line buying booking was just an unbelievable acquisition and Yeah, if you're kidding, we did a whole one that It was booking in Amsterdam, and what was the London company? They bought two companies. Took the booking name, but the other one was in London. I can't recall, anyway. Yeah. But while these are two very different businesses, one, to oversimplify, booking helps you find a hotel or flights, an 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.

2:12:18really, they didn't invent their supply. They didn't cultivate that supply. They went and forged the right types of deals in order to get them to list on their platform. But it's actually very interesting, I think, just to look at a simplified income statement of both companies. So let's look at 2019 before the effect of the pandemic. We've talked about Airbnb had $38 billion flow through their system from people staying in Airbnb's to hosts and to Airbnb and to taxes over the course of the year.

2:12:46Of that they took 5.3 billion dollars of that in revenue so like for all any of the Nox that we've had an Airbnb so far like this is a Billy is a 5 billion dollar a year revenue company pre pandemic like it's a big free company So the effective take rate on that is is 13.9% there's ways in which you should believe it's higher, there's ways in which you should believe it's lower, but it's always interesting to me just to look at an annual income statement and take the gross divided by the revenue divided by the gross to come up with an effective take rate. Their net income when you go all the way to the bottom line is that they lost $700 million. So all that, that $5.3 billion in revenue, they couldn't

2:13:29They 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. You know, 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 upfront and 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. I think it's shorter now in COVID. It's something like 24 days, but but maybe they have on average a month of free cash flow there, or you could think of it as net 30 effectively on the payment. Okay, so booking, about two and a half times bigger, $96 billion in gross travel bookings, $15 billion in total revenue. So about three times bigger in revenue, that's an effective take rate of 15.7%. So they get to actually own a little bit more of that transaction than Airbnb does.

2:14:27This is where they're very different. Booking turned that into $5 billion of pure, raw net income. Profit that's owned by the business and its shareholders. And, you know, both shareholders. Well, also having to spend a lot more performance marketing than Airbnb. Totally, right? Like, they're, they're, they're cutting a, you know, $678 billion check to Google every year. And they're still able to generate $5 billion in net income. Very different businesses. I think actually, I don't know for sure that this booking number factors out.

2:14:55flights, it may include flights in there, but the point to make here is like, and flights are kind of a silly thing to include because they don't really generate any real revenue on all the revenues made on, or all the commissions are made on hotels. Anyway, two very different businesses. One that lost the better part of a billion, a one that made five billion, and the one that made five billion, took two and a half x the scale to do that. And so it'll be very interesting to see with Airbnb as they get to a bookings type scale. Are they also able to generate the sort of profit that booking does? Well, I think that's what's so alarming about the past few years of financials for Airbnb is like they're increasing their scale, even though that growth rate is slowing, but they're not getting more, you know, they're increasing their expenses faster than they're increasing their growth profit scale. Yeah. Yep.

2:15:51All right playbook playbook playbook. All right 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. Some people can only go on vacations that they otherwise couldn't afford as a host. Some people can make their rent or mortgage that they couldn't afford. These are big, meaningful life-changing things that this company's existence enabled millions and millions of people to do around the world. I mean, there's people that can weather job losses, negative life events. I can't say enough about

2:16:51how much value they created and how much that makes people want to root for your company and put up with a lot over the years. And obviously it comes with a lot of responsibility as people become dependent on you, but I'll sort of hold on that for now and just leave it at like create value for people and amazing things happen. 100% the way I like to think about this, I think this is kind of the same idea is like Can you expand the efficient frontier of a market? The efficient frontier is pricing quality. If you think of a little graph of pricing quality, as price goes up on the y-axis, quality goes up on the x-axis. In any given market, there's an efficient frontier along that of a curve. As I pay more money, I get more quality and there's some curve to that. If you can do something that

2:17:44Expands out that curve so that like before I get more quality for less money right for any given price I get more more quality all the way exactly or even maybe it's only for 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 an Airbnb did this Incredibly well across pretty much the whole graph It's like the economist view of why is this company valuable. Yeah, exactly. The next big one I had was around create unique supply, but I think we've talked sufficiently about that one. One we haven't talked about is addressing Europe. Forty-three percent of nights are booked in Europe on Airbnb. This is not a US-centred center. I think Paris is the biggest city.

2:18:33Historically, it always was. Yeah, I only 29% of bookings are in North America. Interestingly, revenues about even between the two, which means people are spending more money to stay in North America and Airbnb's than European ones. But until diving into this research, I don't think I would have guessed that 43% of its business is done or of bookings are done in Europe. I don't think there's a single other US-based company that we've covered on this show that you could say that about.

2:19:00Yeah, I mean, Ubers, but they're not US based. Yeah, well book, but they're not US. I mean, they're technically US based, but yeah, um, Ubers large in Europe, but I think probably larger in the US. Yeah. Do you have more? All right. I do. Yeah. Uh, free cash flow is one that I think, uh, I don't think I have anything new to say. Um, here, I think, uh, that's my last sort of like positive playbook one. I do have some more. This is kind of our bear and ball thing, but like I do have some playbook items that are the playbook that they ran that don't necessarily have positive outcomes, but I'll turn it over to you first in case you have other. Well, then let me actually maybe expand a little bit on what I was going to say on dear free cash low point, which is I think part of the reason that Airbnb has such has such amazing free cash flow dynamics is whether intentional or not they started this new market new idea.

2:19:53When 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 upfront, and then we pay out the hosts when you book. Now, that's different from hotels like on booking.com and others usually like you make the booking on booking.com, but you don't pay until you check in at the front desk and Airbnb just by virtue of being something new, they could set different terms, and they did, and nobody then questioned it. And so I think it's interesting to know, like whenever you're doing something like this, think through, like, okay, I have the opportunity right now to set the terms. Right. Yeah, as long as I don't tell people I'm like an OTA, then they won't make me price like an OTA. Yeah. So, I'm raising a round. It's not a seed round. It's a new form of investment.

2:20:43Well, like on our LP show, you know, Rah will talk about his fundraising philosophy and all the like he 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. Yep. I have one. It's a mix of two here. So it's a little bit of like a playbook that's been run that I think will ultimately have pretty negative outcomes for the company.

2:21:08That 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

2:21:53Door to Ash, which we covered yesterday, where every cohort spends 50% more than the year before as time goes on, net of churn, like the revenue of that cohort goes up 50%. Airbnb's in year two drops to 30 something percent and then hopefully they are able to get back up to 50%, but they at least so far from what the data we've seen, their cohorts do not get more valuable over time.

2:22:17It makes it so that you have a lot less of a cushion when you decide to deploy performance marketing dollars to grow when that's the case. My last one, I don't know if it's the last one, my next one is about reviews. So they've gotten very far like we've we've extolled the system over and over again to build this sort of trust based network. But they still have a crazy amount of host consistency and quality issues. 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 to, you know, it's through several listings to find somewhere decent. And you have to scroll pretty deep into each listing to do it. Like, I don't actually look forward to browsing Airbnb to find somewhere to stay because it's becoming sort of more and more of a chore. And they've tried it with plus, but plus ended up being pretty meaningless, just like 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 help.

2:23:11you 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 solved every nail of giving you confidence when you're looking for a place to book to book it.

2:23:40One thing that I wanted to call out that wasn't in the S1 that I think could be pretty damning and I really would like to know the numbers is host churn. They talk about revenue for hosts but I really do think it's getting worse and worse to become a host over time as the company does.

2:24:01is subsidizing less and less things with investment dollars is thinking less and less like a startup is trying to be more profitable. And I think that that's going to be an issue for them long term too. Yeah, I'd be curious on that too. So that's it for my playbook. Great. Thank you covered. All mine 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's 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.

2:24:58The 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 this dovetails into the regulatory issue, is the impact on housing supply and housing prices. Because housing prices, especially at the low end of the curve, are extremely sensitive to small changes in supply. And so I was digging into this, there's a good Harvard Business Review article that basically says, I think this is a quote, this means that an aggregate the growth in home sharing through Airbnb contributes to about one fifth of the average annual increase in U.S. rents. And they actually found this to be a causal relationship. And they say that because of Airbnb, absentee landlords are moving their properties out of the long-term rental and for sale markets and into the short-term rental market. And Airbnb has this, I have no ability to sort of rule on this. It's not, I'm not here to 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.

2:25:56But I will say this is a company whose brand potentially may have meaningfully outrun its net global impact in terms of sort of like netting the negative impacts against the positive impacts. I think the like you're not putting in a betting market placement on Nobel Peace Prize. I don't know how that's decided. So I shouldn't go on it.

2:26:22Yeah, 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 wonderful brand that had all of its hosts around the world. Many hosts around the world ring a bell and create a nice video to open the IPO this morning. And that's largely consistent with their brand. And yet, there's a lot of potential. Well, really what this comes down to, and I don't.

2:26:51I don't know the date 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 that. It's 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 great as property managers.

2:27:21and people taking housing stock off the platform purely to become hotels essentially. Yep, well put. And the question is, what is the percentage of each of those use cases of supply on the platform? I don't know. I've seen estimates as high as over 50% is more the hotel use case removing housing stock. But this is one where everybody who's got a, everybody who's waving a data sheet has an opinion here and has a horse in the race.

2:27:51Other than the Harvard Business Review article, I found that there's two sources that have very detailed reports on this. One is Airbnb, and the other is an extremely liberal sort of labor-focused funded think-take. And you're like, OK, who else has on? Who else has on? New York City has fought on this for a long time against Airbnb. And so the New York City has a lot of housing commission and has lots of data on this.

2:28:20I don't know, that's just that either. Point is, there's no doubt that a large portion of the supply on the platform is property managers. How much that is, I don't know. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

2:28:40Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale. Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now.

2:28:57It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers, and how fast you can use that signal to guide what you shipped next. This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

2:29:24So, if you want to make learning your competitive advantage, whether you're building new AI experiences, or just evolving your existing core product, go to statsig.com slash acquired to get started. David Grading. How do we decide we want to grade this one? Do we want to do the same as DoorDash yesterday of use of capital? Collectively. How good of a use of capital was it for the company and the investors to go after this business opportunity in this way? There's nothing to say here.

2:29:51This 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 is going to make today. And then all the other capital that went in along the way too.

2:30:19What did they read before the silver lake round? Let's see before the silver ground. I believe it was around three billion dollars, two and a half to three billion dollars that they had raised comparable to sort of door dash, but you know, only a third of what Uber had raised. Yeah, exactly. Yeah, no, this is like the capitalism dream here. Yeah. I mean, the question that I sort of have similar to my door dash one yesterday is, let's ignore current valuations and current share prices and just think about that total 3 billion ish that's gone in. Let's play it out long term. Does the business at some point generate, you know, have enough power that it generates persistent differential returns? And is this business a cash generating machine that in the long term will return lots of cash to the business and its shareholders? And I think so. Like I have reasonable confidence that despite

2:31:18a 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.

2:31:47Like, 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 in it to me.

2:32:08doing 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.

2:32:18This is even a capital-lapest business, so yes, agree. But I think that's a good point to be an A-not-an-a-plus would be, yes, and they're already, because let's be honest, there's no excuse that this company hasn't already been printing generating tons of cash. This company does not have the right-sized cost structure right now, doing things like the film studio and places and experiences and the airline, building Units and people's backyard like it's just so it's not 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 they're now there for almost a couple of years who said

2:33:10great. I think CFO was the CFO of Amazon's consumer worldwide consumer retail. 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 lean out the business well still growing and realize the great profitable dynamics it can have.

2:33:39What a season. All right. What a season. Should we do some lightweight car vats 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. We've been with pilots. Pin d'Ode, whoa, and Epic games, plastic in their SpaceX. Was that in this one? No, that was last season. I think that was the last season. Epic, though, or Epic episode was epic. The NBA, NBA was so much fun. Yeah. I like that. I loved DoorDash yesterday. That was fun, too.

2:34:08My unlike Dordashes, 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's just phenomenal work and research music. Oh, that's awesome. We'll put that in the show notes and anybody who wants to.

2:34:37to 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 of 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.

2:35:04It has been a very interesting year for the live performing arts when your business is, you know, consists of packing auditoriums full of, you know, three to four thousand people and having a having world-class artist perform in front of them while, you know, like touching each other as part of the art form. So that's been a roller coaster and SFB is doing great, thankfully, of wonderful donors, wonderful audience.

2:35:30But what they did, you know, the Nutcracker is like the big part of the Valley season every year. And it's the holidays and Christmas. And so what they did is they've created a digital Nutcracker experience. It's actually written up in the New York Times. It's really cool. So it's a recording of the Nutcracker. But it's like, I mean, I've seen SFB's Nutcracker dozens of times probably at this point. But it's a different experience to watch it online because you, you know, The camera's zoomed 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 notes. If you need some holiday virtual holidays here, check it out. It's very cool.

2:36:09Well, 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 acquire.fm and if you join the acquired.

2:36:29community slack at acquire.fm slash slack you'll also automatically be signed up for those it's a great way to kind of have something a little bit more 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 lasts 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

2:37:14You can exit out of that anytime if you want. So it's risk-free at acquired.fm slash LP. LP subscriptions make great gifts for the acquired fan in your life. So you can sort of figure that out on your own as a little tricky to kind of go through. So feel free to drop us a note acquired at gmail.com if you want instructions for how to gift the LP subscription. And on that note, you know, we said this yesterday, we want to say it again, we feel very strongly that financial hardship should never keep anyone from being an LP and we want as diverse a group as possible and people of every life stage and every life experience. So please shoot us a note, acquire an FM at gmail.com and just introduce yourself and we're happy to help you out if finances are a constraint. Lastly, if you weren't subscribed and you like what you hear, you should and if you liked this episode.

2:38:02And 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 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...

2:38:17really would get them into it. This is a great one. The Oprah one was great for me to share with my grandma. This is another great one that I think a lot of people will understand. So consider this your opportunity to share the gift of acquired this holiday season. I can't even get through it. We have some holiday joy happening here. No kidding. No kidding. Everyone have a wonderful Christmas Hanukkah New Year's whatever it is that you celebrate time with or without family or perhaps with folks on Zoom, and we will see you next year. Yeah, although we're gonna have a little special. We have a special, a special little holiday present for you coming next year. We're gonna 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.