[00:02:18] His mom’s advice that she told Brian when he goes to get a job was to make sure it provides good health insurance. Brian Chesky’s experience at college had a really profound impact on him because growing up he had always been told what to do and you’ll be punished for stepping outside the lines and questioning the norm.

[00:02:34] Well, design school was the opposite and really encouraged creativity while growing up, Brian was always told to behave and always do what you’re told, and then he walks into design school and they tell him that he had the power to change the world. While Chesky was in school, he met one of his co-founders, Joe Gebbia.

[00:02:52] Brian and Joe quickly realized that when they worked together on projects, they thought much differently than most others, and they were really good at building on top of each other’s ideas. After school, Chesky moved to LA and enjoyed his first job as an industrial designer, but he had Joe constantly reaching out to him, telling him he needs to move to San Francisco and start a company with him.

[00:03:13] Brian’s first job was somewhat of a reality check for the way the world really worked. While design school told him he had the power to change the world, doing so at a large corporation was very difficult because they just simply handed you the tasks that needed to be done. Brian had started searching for jobs in San Francisco and visited the city often and came around to really loving it.

[00:03:35] This is where Joe Gebbia lived at the time. The energy and the creative entrepreneurial spirits reminded him of his time at the Rhode Island School of Design. So Brian eventually came to the conclusion that he needed to quit his job with health insurance and agreed with Joe that he needed to move in with him and start a company together.

[00:03:54] So he quit his job in October of 2007, packed up everything he had and moved to San Francisco with only $1,000 in his bank account. Meanwhile, he was moving into his friend Joe’s apartment, which was going to cost Brian $1,150, so he didn’t even have enough money to pay rent. Additionally, they had to figure out a way to cover rent for the third bedroom as well that was vacant.

[00:04:19] So they had to figure out how they were going to come up with the money to pay rent, and then they realized that there was a large design conference coming up that weekend in San Francisco, and they noticed that all the hotels in that area were going to be sold out. So they figured there would probably be people that needed a place to stay, that wanted to go to the conference.

[00:04:38] So Brian came up with the idea to put up a bed and breakfast for people that needed a place to stay for the conference. And his buddy Joe had three air mattresses people could sleep on, which is how they came up with the name Air Bed and Breakfast. So the initial idea worked as they scrapped together a website and managed to book three guests for $80 per night per person, and they managed to make a thousand dollars from that one big weekend.

[00:05:02] At this point, they weren’t particularly convinced that building a platform that allowed others to stay in your house was their big idea or their big company they were going to work on full-time because it was simply too weird to most people at the time. So this was their idea to just simply make ends meet while they muster up their really big idea.

[00:05:22] So they were working on this airbed and breakfast idea to just try and make ends meet and stay up to date on rent. So since Brian and Joe were both designers, Brian asked Joe, who the best engineer he knew, and he said, Nate Blecharczyk. Since his last name’s pretty hard to say. I’m just going to use Nate for this episode.

[00:05:42] Nate was a computer scientist that had went to Harvard and he had taught himself how to code at the age of 12, and it quickly became an immense passion for him. He managed to make over $1 million online from selling marketing software by the time he had graduated high school. Nate was a key addition to the team as he knew the computer science side and was practically a genius with previous experience in working at startups.

[00:06:07] When Brian was first starting his company, he went back home for the holidays and his extended family would ask him what he was up to, and he told them that he was an entrepreneur working on his own business, and his parents would quickly jump in correcting him, stating that he’s actually unemployed. So his parents and family were pretty worried about Brian because he had struggled to make ends.

[00:06:28] They didn’t really know anyone who called themselves an entrepreneur, so they simply thought it was just a coverup or excuse for being unemployed and barely able to even cover rent while they were working on the Airbnb concept or airbed and breakfast. At this time, they met Michael Siebel, who was 25 years old and was helping them learn how to build a startup because Chesky at the time was totally just winging it as he was an art and design guy.

[00:06:53] He wasn’t your typical entrepreneur who had a business-type background. He didn’t know what angel investors were or how the standard practices of business were supposed to be done. Siebel eventually co-founded Twitch and sold it to Amazon for 970 million. So Chesky was working with quite a capable man at the time.

[00:07:13] SIP at the time, had recently gone through a training program for startup entrepreneurs called Y Combinator, which was co-founded by Paul Graham. Siebel served as a great friend and mentor that they would bounce ideas off of and keep him updated, and he would really help Brian and Joe ensure they weren’t veering too far away from their vision.

[00:07:35] Then Chesky and Gebbia received the unfortunate news that Nate would be quitting so he could move to Boston for his girlfriend, now wife, who needed to move from medical school. As they continued to work with Siebel, they changed their vision from purely targeting conferences to being a website where it was easy to book a room in someone’s home as it was to book a hotel, which essentially is the platform we see today.

[00:07:59] This was a huge step for them and an ambitious vision as this would require a revamped website, a payment system that didn’t take customers away from the site, as well as a way to leave reviews on each. Luckily for Chesky and Gebbia. Nate’s project in Boston wasn’t going as well as he would’ve hoped, so he decided to recommit to Airbnb except do it remotely from Boston.

[00:08:23] As Chesky then started getting connected with angel investors, most of them hated the Airbnb idea, or they just weren’t interested. They either didn’t end up backing him or said that the total addressable market wasn’t big enough, or that the travel industry wasn’t something they were interested in, or they just simply weren’t interested at all.

[00:08:42] One investor they met with simply got up with no warning and walked out halfway through the meeting, leaving his half full smoothie on the table. I totally don’t blame these earlier investors at all as these guys were in the very, very early stages of just getting started and really barely had a proven concept.

[00:09:01] They just practically had no money to get off the ground. Jet ski and the crew were looking for someone to purchase 10% of the company for $150,000, putting the valuation of Airbnb at 1.5 million. While it was still a very nascent idea, anyone who had taken up that offer and held on to today would now be worth over $6 billion.

[00:09:23] The first real event that Airbnb really launched for was the Democratic National Convention, which was in Denver, and Barack Obama would be visiting. There were 80,000 people heading to the convention, and all the hotels were booked as they only had 27,000 hotel rooms in the city. So there was definitely plenty of opportunity to potentially be seized.

[00:09:47] They launched their site on August 11th, 2008, just a few weeks before the convention. So the way they tried to tackle this problem of allowing people to find their website was to try and get a ton of press on their site. So a ton of people would start to learn about it, read about it online, and then go and book a place on Airbnb, and it might catch fire through this spontaneous combustion of sorts where there’s just all this media and press covering them.

[00:10:15] They managed to get featured in TechCrunch, which created a decent amount of buzz for the company as the site received so much traffic that it actually ended up crashing. Now, scaling was such a huge problem for Airbnb. Initially, Chesky described it as the chicken and egg problem. They wanted customers, but in order to get customers, they needed hosts on the platform.

[00:10:36] They also needed hosts, but in order to attract them, they would need customers. So it’s impossible to have one without the other in order to create the transaction. And not only do you need both parties, you need both parties in locations all over the world in order to scale. So they’ve reached out to the mainstream news outlets.

[00:10:55] They responded and told them that they were crazy and that no one would wanted to stay in someone else’s home. Then they reached out to the local news and got the same response. But there were some small blogs that at least had some audience that did write about Airbnb. So word naturally did spread a little bit, and they’d show up in the Google search results.

[00:11:14] When people search for a place to stay for the D N C event, then a domino effect kind of picked up where everyone was covering them because the story was a success at attracting that attention and just created that spontaneous combustion that they were going for in terms of getting some bookings. The strategy actually worked as 800 people listed their homes on the site, and 80 people booked for the DNC convention in Denver.

[00:11:40] Then unfortunately, after the D N C bookings on the site went down to practically zero, so they addressed the problem of helping people find a place to stay during these very busy one-off type weekends. But after that, their business was just going to zero. Now the three founders had zero traffic. They were in debt, and they add no money since the business wasn’t working as much as they had tried, they transitioned to try and sell breakfast food since they had bills and they had rent that needed to be paid.

[00:12:10] You know, it’s a saying that desperation leads to creativity, and these guys were pretty creative. So they created this specialty branded Obama owes and Captain McCain cereal for Barack Obama and John McCain, and they managed to sell each box for $40 a box and branded them as limited edition. This move was total desperation in their creativity coming out just to produce some cash to try and get by.

[00:12:36] So now Brian and his team could officially start calling themselves serial entrepreneurs as they repackaged the cheapest cereal they could find into their own limited additions. The Obama owes cereal managed to sell out in just three days. At this point, they had made $5,000 from their core business and 20 to $30,000 from selling limited edition cereal.

[00:12:59] They had handmade, according to Leigh Gallagher’s book, the Airbnb story, Che’s mother, that he can’t just live off the Captain McCain cereal and that he should go buy some milk, but he just refused to do so. By this time, Siegel had convinced Chesky that it was time to apply for Y Combinators so they could start leveling up their business.

[00:13:20] So they went ahead and applied to Y Combinator in their 10-minute interview with Paul Graham. He thought they were crazy into Paul’s defense. In hindsight, the original business focused on people who could rent out space in their current house, where both the hosts and the guests were present.

[00:13:36] Oftentimes with Airbnbs today, when you book a place, you have the whole space to yourself that is included in the booking, so you’re not sharing it with the host against the will of the other founders. After the interview, Nate handed Paul Graham a box of cereal and told Graham that they used these limited edition cereals to fund the company, and Graham was blown away and told them that they were crazy to think that you could convince people to stay in other people’s random houses.

[00:14:04] But if they could convince people to pay $40 for a $4 box of cereal, then maybe they can make the idea work. So they did ultimately get accepted into Y Combinator, and this was a really, really big deal for them because it was seen as one of the most prestigious launch pads in all of Silicon Valley. It offered $20,000 in funding for them, as well as a wealth of knowledge, connections, operational assistance, as well as mentorship by Graham and others.

[00:14:34] Nowadays, Y Combinator takes on over a hundred companies, but back in January 2009, airbed and Breakfast was one of just 16 startups selected to participate in that round. Because this was the middle of the great financial crisis, this was not the best time to be running a startup. So Graham emphasized the importance of being profitable for Demo Day, which was the biannual event where the company gets pitched to prospective investors.

[00:15:01] So for the next three months, the three founders committed to working from 8:00 AM to midnight, seven days a week for the next three months. And if on the last day they didn’t get funding, then they would just go on their separate ways. Now, Paul Graham was critical to the success of Airbnb as he offered mentorship and guidance to the founders.

[00:15:20] Graham gave them the advice that it’s better to have a hundred customers that love you than 1 million customers that just sort of like you. This is totally the opposite of what’s typical on Silicon Valley, which is more focused on growth and scale. If people love you, it’s inevitable that you will grow because of word of mouth.

[00:15:40] Almost all movements in history have grown this way as well. Your true fans will spread the word about your product like wildfire. Chesky described this extremely freeing experience as in your mind, it’s much more achievable to try and make 10 or a hundred people love your product than to try and get a million people just to like it.

[00:16:01] Most of Airbnb’s users by this time were in New York, and Graham said that if you want to build a product for your customers, you need to get to know them. So in order to try and get people to love their product, they spoke with the people that actually used their product. They found out what were their needs, what were their pain points, how could they improve the experience as a host, how could they improve the experience for the guests?

[00:16:24] One of the very first pain points they discovered was that the photos were terrible on their website. Nobody knew how to do this back then. So a great house would have a pretty terrible listing because of the photos. So Brian and Joe borrowed their friend’s camera and went around to the listings that wanted their photos updated and starting updating the photos themselves for free for the hosts.

[00:16:46] As they were talking with customers, they would continually send the feedback to Nate who was in California. That was hard at work at improving the site and the backend. Their next targeted event was the inauguration of Barack Obama, which ended up pulling in 150 bookings. One person in the city asked the team if he could rent out his entire apartment while he was gone.

[00:17:07] Chesky and Gebbia told him no, because the host needed to provide the guest breakfast. But this feedback from customers opened up their eyes to the truly massive market that they could be accommodating. So they eliminated the breakfast requirement and started to allow users to rent out their entire space.

[00:17:25] The company was starting to see Wiggles of Hope as they were getting 20 bookings per day and a thousand dollars in revenue per week. Their time in New York and their marketing efforts were starting to see some traction. So first, they focus on building something that just a few people would love. Then the next step is figuring out how to scale that so you can service more and more people, and in order to scale it up, they’ve really needed funding.

[00:17:51] Investors were stopping by Y Combinator, including Greg McAdoo from Sequoia, which was a venture capital firm that funded Google, Apple, Oracle, and many others. Greg asked Paul Graham, if any founders in the Y Combinator class had what it took to get their company off the ground, and Graham was most impressed by the founders of Airbnb.

[00:18:12] Luckily for them, Greg McAdoo had spent the past year and a half doing deep analysis on the vacation rental business and how it was a 40 billion industry. Next thing you know, Sequoia decided they wanted to give $585,000 in funding to Airbnb, which valued the company at 2.4 million. Overall, Chesky reflected on this saying that as soon as Sequoia funded them, the rocket ship really took.

[00:18:40] This is one of the only times early on that someone had heard about their idea and thought it was brilliant and exciting rather than just ridiculous and unrealistic, which proved to be a huge shift mentally for the founders. Jet Ski later reflected that the Sequoia investment was the inflection point for the company in a very critical moment.

[00:19:00] For them, this was so critical because so many investors just told them no, and they just thought it was such a stupid and dumb idea. But Sequoia saw what other people were not seeing. Eight years later, that $585,000 Sequoia investment would turn into roughly $4.5 billion or up 7,700 times their money.

[00:19:23] As the number of daily listings continued to increase, the founders started to pay themselves in the annual salary of $60,000, which really felt like a fortune to them as they were doing anything they could to live on as little as possible. Most prospective investors who met with the founders were disappointed with what they were currently working on, but glossed over how obsessive these guys were in learning and improving.

[00:19:48] Although it took time to really get the idea and the product right, they eventually got there. This highlights the importance for me that if you’re investing in a company, the management team is so critically important because they dictate where the company will be going forward. By August of 2009, that $1,000 per week had turned into $10,000 per week with over $100,000 in weekly volume.

[00:20:13] Through their bookings, they now had a product market fit and a concept that worked. Now, they had to build out their company and expand. They needed to hire employees. They needed to build a culture and allow others to help them scale up the company. Chesky knew the importance of hiring the right people initially and wasn’t a decision that should be taken lightly.

[00:20:34] The first person they hired was Nick Grandy, who was a fellow Y Combinator alum, whose company never got off the ground. He started in the late summer of 2009 as an engineer, and by the summer of 2010, the team had grown to around 25 people. At this time, Airbnb was still operating out of the founder’s apartment.

[00:20:55] The bedrooms became, the meeting rooms in the stairwell bathroom in the roof were used for interviews. The platform was still slowly growing, mostly by word of mouth and pr, but growth was still a challenge for the company. Cheki and GAO were constantly going around to different cities, to big events to try and spread the word.

[00:21:13] Nate also did some clever thanks online to try and implement some growth hacks on the website, one of which was building a backdoor to leverage the scale that Craigslist had achieved, which had tens of millions of users. The feature that Nate built allowed Airbnb host to simply click one button and rebroadcast their listening on Craigslist.

[00:21:36] Thus, it was the best of both worlds for Airbnb. The host got access to Craigslist scale in millions of users for free, plus word of mouth would naturally spread as more and more people discovered Airbnb’s site through all the promotion that the other two founders were doing In terms of what Airbnb’s actual business is, it’s really simple.

[00:21:56] They connected buyers and sellers, and they would take a commission, which is known as a service fee. The service fee was described on the site as the charge that helped the site run smoothly and offered 24 7 customer service. Traveler fees range from six to 12%. The more the customer was paying, the lower the percentage fee, the host then paid a 3% fee to cover the cost of payment transfer.

[00:22:20] Thus, if someone purchased a room for a hundred dollars a night, they would attack on $12 for the service fee that goes to Airbnb, and the host would receive $97 after paying the $3 payment processing fee. So in this case, Airbnb would net $15. Fundamentally, what makes Airbnb such a success once it reaches scale is the network effect.

[00:22:42] Each incremental user they add to the platform makes the platform more valuable for all the other users. The more hosts that list their space, the better the platform is for travelers and the more travelers there are that use the platform, the more enticing and profitable it is for hosts to list their space.

[00:23:00] So it’s a two-way street to reinforce this network effect. So once Airbnb was able to create a product that people loved, primarily in New York, the product naturally spread to other cities because people would travel to New York from all over the world, and the word would naturally spread and they would want to host in their own city.

[00:23:19] Oftentimes, the people who were willing to be a guest on the platform would also be open to being a host as well, because they saw the potential to create a revenue stream for themselves. Then once they started spreading to other cities, Brian and Joe would travel to all these cities and meet with 10 or 20 hosts in each city and meet them and educate them and continue to find ways they can improve the platform.

[00:23:43] So they kept pushing and pushing on the massive flywheel that’s now spinning almost effortlessly today and 2022, at least relative to how it did initially. Two of Chesky’s biggest lessons in starting the company was first, don’t worry about anyone stealing your idea, because if it’s any good, everyone’s going to dismiss it.

[00:24:03] Two. He started Airbnb because he was solving his own problems, and it’s not a life-changing problem, it’s simply a nuisance. Chesky was highly influenced by Steve Jobs in making things as simple and seamless as possible. He made a rule when he officially launched the company in 2008 that you should be able to book a place on Airbnb in just three clicks through the site.

[00:24:27] This originated from Steve Jobs as jobs stated that an iPhone or an iPod user should always be three clicks away from a song. When they launched the company, they didn’t have any money. So Chesky was so passionate about this business that since he didn’t have any money, he took on $30,000 in credit card debt and just kept opening up a bunch of new cards when they needed cash.

[00:24:50] Now, there were other sites trying to do similar things as Airbnb, but what made Airbnb so successful relative to companies like Couch Surfing, HomeAway, VRBO, and even Craigslist, is because the founders didn’t stop at just pushing the idea or product. They optimized and designed their site effectively, the way it looks, the way it’s perceived by customers, the user experience, and using things like the three-click rule to enhance and simplify that experience.

[00:25:19] They also ensured that the listenings on their site looked beautiful and attractive to users. Most investors thought that chess, ski and GI being designers was their biggest negative and made an easy pass for them. But this skillset of being extremely creative designers is what actually enabled them to succeed because they took that Steve Jobs-type approach of making the customer experience as good as they could possibly be.

[00:25:46] As the business continued to grow the way the company operated continued to evolve as well. They discovered that listings with professional photos generated two to three times more bookings, so they expanded their professional photography program from 1000 listings to 5,000 listings per month. It started to get to the point where instead of trying to push for growth, they were simply trying to keep up with it.

[00:26:10] In 2010, the company grew nights booked by 800%, and by November of that year, they had booked 700,000 nights, 80% of which had occurred in the previous six months. In November of 2010, Airbnb secured series A funding from Reid Hoffman and Greylock Partners for 7.2 million. The general public was in awe that Airbnb wasn’t having any issues with guests and their bookings.

[00:26:38] During the first 1.6 million stay. Chesky stated in an interview that they hadn’t received any reports of major problems in terms of murders, arrests, and anyone being hurt, but Chesky knew that these problems were likely inevitable when you’re dealing with millions and millions of interactions and knew that other issues regarding scaling were yet to be faced.

[00:27:00] One issue they faced, not to any surprise, was competition. One notable competitor came from overseas in Europe, from a trio of brothers that would copy successful companies in the US and apply it to the European market and then sell it once it hit scale. In Europe. They had applied this concept to eBay, Amazon, Zappos, Groupon, and in 2011 they targeted Airbnb.

[00:27:25] They had a company called Wimdu and hired 400 people and started targeting the people who hosted on Airbnb and tried to get them to switch over to Wimdu. As WDU had 400 people on their team. Airbnb only had 40 and had trouble fending off these attacks from Wimdu because they were outmanned to a degree.

[00:27:44] The Wimdu founders offered to sell the company to Airbnb, but Airbnb ultimately declined. Although Wimdu threatened Airbnb’s entire business, they didn’t want to take on 400 new employees. They had no say in hiring, and they didn’t believe the founders would be building the business for very long.

[00:28:02] They’re in the business of flipping and selling to a new owner. Airbnb immediately did acquire a small German company and started building out a team to expand in the European market. Within three months, they hired hundreds of people overseas to try and fend off the attack from Wimdu. Wimdu ultimately did not end up scaling globally, and they ended up getting acquired by a competitor in 2016.

[00:28:26] On June 29th, 2011, Airbnb had another huge issue to deal with related to bad actors. One host published on her blog that her space got completely destroyed by tenants and got a locked closet broken into as she lost her camera, iPod computer, her grandmother’s jewelry, her birth certificate, and her social security card.

[00:28:49] This case was a total disaster for Airbnb in order to live up to the company’s values and reputation. Chesky guaranteed protecting hosts against damage up to $1 million, and he doubled his customer support team to make sure there is always support 24 7 for the hosts and guests. Leigh Gallagher covers a number of different incidences that are quite horrifying in her book.

[00:29:12] The Airbnb story. In 2015, the company stated that 40 million guests booked on their platform and 0.002% of bookings led to damage of more than $1,000. So when these cases do occur, they’re actually not very common at all. But Chesky and his team did take these cases very seriously. So as the company matured, the challenges the founders were presented with were much different and just as difficult.

[00:29:41] Originally, they struggled with just getting people to use the platform and figure out how they were going to cover rent. Now they had fierce competition and a crisis occurring with some of their hosts. The growth of Airbnb as a company generally went in three phases in terms of markets they were addressing in the first few years.

[00:29:58] They had a reputation for being a website for millennials who wanted a cheap couch to sleep on while they were traveling. Phase two was the expansion into unique experiences where it was a really cool place you would tell your friends about, such as a log cabin in the forest in the middle of nowhere, an Airstream next to the ocean, or a zoo-themed home next to the Henry Doley Zoo in Omaha.

[00:30:21] So the first phase of guests didn’t really care about what they were getting into. They just wanted something really cheap and someplace that had ac, the second phase was much more sophisticated in particular of what they were getting into in the third phase, brought in the mass adoption where it became a platform for everyone.

[00:30:39] As of 2022, Airbnb has roughly 5.6 million active listings that offer everything from $20 to sleep on an air mattress to tens of thousands of dollars to rent out an equivalent of a palace. I feel like back when I was in college in 20 16, 20 17, when Airbnb was really going mainstream, it felt like the narrative was that Airbnb was just so much better and they were going to take over the hotel industry.

[00:31:06] And I personally don’t see it that way at all today. I think many people, when they’re staying somewhere for one or two nights, that staying in a hotel will likely be easier and potentially even cheaper because Airbnbs can get somewhat expensive after taking into account the service and cleaning fees.

[00:31:23] For me, I think Airbnbs make a bit more sense when you’re staying somewhere for at least three or four nights. My brother and I have recently went to Colorado for four nights and we booked an Airbnb. It was super affordable and totally worth it. Plus, when you travel to a unique place and stay in a real home, it really enhances that traveler experience that hotels just simply can’t offer.

[00:31:45] While hotels have, for the most part become a commoditized ties industry, Airbnb has become the anti-commodity. Where being unique is how hosts can really stand out from the others if they’d like to. Another advantage that Airbnb has is that hotels are oftentimes in the commercialized part of a city.

[00:32:04] Whereas Airbnb can offer a location or experience that is much more personal and desirable by travelers, it allows travelers to experience a place like they’re a local and not like they’re a traveler. Now, in mid-2014, Airbnb did a rebrand focused around belonging in making people feel that they could belong anywhere in the world.

[00:32:25] Although Airbnb would love for anyone to use their platform. Today, roughly 60% of their users are millennials, which is my own demographic, Chesky, and the team took this idea of belonging extremely seriously, and he felt that this would be the company’s mission for the next 100 years. When thinking about what this mission really meant, he mentioned how today’s world seems very disconnected from what it once was.

[00:32:51] That feeling of belonging was what people experienced when they traveled with Airbnb. When travelers leave their homes, they feel alone, but when they’ve reached their Airbnb, they feel accepted and taken care of by their host, whether that be through kind messages on the app or a welcome note and treat when they arrive.

[00:33:09] This mission of belonging was so important for growth of the company. That’s how the business model operates, includes some of the most intimate things people do, visiting people’s homes, sleeping in their beds, and using their showers and bathrooms. This aspect of the business is what separates it from other shared economy Companies like Uber, Lyft, and Upwork, for example.

[00:33:31] The most hardcore users of the platform are a small subset of people who live in an Airbnb full-time and hop from one location to another from month to month when traveling around and being a bit savvy with the locations you choose in the listings you select, it can cost just as much to use Airbnb as it does to rent out an apartment in a big city such as New York City or Seattle.

[00:33:55] Especially with this trend to work from home. Ever since the pandemic, more and more people are finding the value in booking in Airbnb, working from anywhere and making the world a place to be continually explored. Now, Chesky and his crew were well aware that their platform and company was nothing without the hosts.

[00:34:13] Because of the number of listings on their platform, it makes them the number one largest provider of accommodations. Yet they neither own or control any of the listings they offer. Airbnb was sure to offer resources to host to help them provide the best accommodation possible to travelers. This type of relationship between Airbnb and the hosts was a win-win.

[00:34:36] If Airbnb could help the host offer a better traveler experience, then this meant better reviews for the hosts and likely more bookings in the future. Reviews and trusts on the platform also serve as a network effect because if the hosts and travelers have the most reviews on Airbnb compared to other platforms that enhances that network effect in.

[00:34:57] Additionally, it’s important to consider that the review system rewards good behavior and disincentivizes bad behavior. The review system also allows Airbnb to prefer to show travelers the best listings at the top of a search result, which proved to be extremely valuable digital real estate as the top listings by far get the highest number of bookings to take this incentive structure even further, hosts who hosted at least 10 trips in the past year had a 90% response rate, received a five star review at least 80% of the time, and rarely canceled.

[00:35:32] Reservations were upgraded to Superhost status, which helped further that trust with travelers as the Airbnb continued to develop. They ran into another issue they might not have ever considered. If you ever tune into Robert Leonard’s Real Estate 1 0 1 Show under the Investor’s Podcast Network, you know that in his episodes covering Airbnb investing, that these types of investment properties are highly regulated In some cities, for example, Atlanta released a regulation that states that each person could only own two short-term rental properties, one of which must be your primary residence.

[00:36:09] Many other cities have similar restrictions, which of course limits the growth of the number of hosts within such cities. The major concern for the cities for why these laws exist is to help keep housing more affordable for those looking to purchase a home. Plus, it helps keep existing communities intact, as it prevents half of the homes in the neighborhood from turning into short-term rental properties.

[00:36:33] This is a big speed bump for Airbnb as their very business model was being partially or fully outlawed in some areas. Thus, Airbnb has worked with authorities in many cities to ensure that it was legal, at least to some degree. New York City was where one of Airbnb’s most hard-fought battles occurred.

[00:36:51] The shortage of rental housing is a huge issue in the city as vacancy rates are very low at just 3%. The hotel market is very hot in New York City as the rates are so high. So this gives an incentive for hotels to try and enforce restrictions on short-term rentals as well, so they can get more profits.

[00:37:09] The hotel’s argument would be that allowing individuals to rent out housing units further worsens the problem of affordable housing In New York City. In late 2013, New York City started to crack down on what some would call illegal hotels. Airbnb handed over the data to authorities on the activity that was happening in their city.

[00:37:30] When the Attorney General’s report was released, it showed that 72% of Airbnb’s private listings in New York were in violation of state law. While 94% of hosts only had one or two listings, the other 6% were considered commercial hosts as they had three or more that accounted for more than one-third of bookings and revenue.

[00:37:51] Ever since 2010, it was technically illegal for anyone to rent out their full apartment, but that seemed to have gone relatively unchecked as many people did it. Airbnb has Long said that they don’t want corporate profiteers taking advantage of their platform, and that it has intended for it to be a way for normal everyday people to earn an additional income stream and share their space. But it’s questionable whether they have actually tried to prevent these corporate profiteers from benefiting from their platform. As with the example that we’ve seen come out of New York City in late 2013, Chesky also publicly stated that if there is a real housing issue, then he’s fine with a policy that only allows one Airbnb listing per person.

[00:38:34] Otherwise, people should be able to list multiple units if they choose to. However, it’s not always black and white as there’s a spectrum of how severe a housing shortage can be, and it can be defined differently based on who you asked what a real housing shortage is. According to Gallagher’s book, which again was published in 2017, there were over 40,000 Airbnb listings in New York City, but with over 3 million housing units in total, the Airbnb listings represent less than 1.5% of the total.

[00:39:04] Gallagher also stated that 200,000 housing units were vacant for various reasons. Chesky also states that since the beginning, the core of the community has always been ordinary hosts in everyday people. One other major issue Airbnb has grappled with is landlords, and many leases state that tenants aren’t allowed to list the property on Airbnb because the landlord doesn’t want to risk mismanagement of the property, and they potentially be on the hook for much of the damages.

[00:39:33] Airbnb obviously recognized this issue and has worked with larger landlords with large properties to see what it would take for them to allow Airbnb rentals to exist within their units. From Airbnb’s perspective, they pitched that many millennials want to be able to tap into that potential revenue stream, and they would be happy to share the data with landlords, and landlords would potentially agree to the terms if they thought it would lead to more good tenants within their properties.

[00:40:00] Some landlords with 2000 units came to agreements with Airbnb, but only captured a fraction of the overall potential market with regards to regulations in the US at least, Airbnb likely has the upper hand relative to regulators because ultimately the consumers want Airbnb to exist, even if it might mean tighter regulations than the ideal situation.

[00:40:23] In New York, which has been the most controversial Airbnb hub. The business community supports Airbnb except for the hotels of course. Airbnb in many ways is a middle class movement because it empowers the individual both as a host and as a guest. One of my favorite quotes is that you can’t kill an idea whose time has come, and no matter how much the hotel industry or different groups hate it, I’m a firm believer that you can’t kill innovation that makes millions of people’s lives better, and that is something that I see with Airbnb.

[00:40:56] I could definitely see it being a platform I use one or two times a year for the rest of my life, whether that be for a long weekend trip or some conferences that I go to. Outside of giving pushback to regulators, hotels have had to decide how they want to handle the disruption that Airbnb is bringing.

[00:41:14] Should they invest in short-term rentals themselves? How can hotels continue to innovate and adapt and ensure they don’t go out of business? As with most industries, the hospitality industry is no exception in that the incumbents both missed and were late to the new trends in changing consumer preferences.

[00:41:32] And Airbnb benefited from being ahead of the curve relative to others. However, many hotel executives have tipped their hat to the tremendous progress that Airbnb has made, but they also recognize that it would be difficult for Airbnb to be as consistently high quality as hotels, which is an area many hotel chains do have the upper hand.

[00:41:52] With many hotels, you know what you’re getting into, but with Airbnb, you may be caught by surprise with certain things such as the space not being as clean as you’d like, or they’re being disturbing neighbors or whatever else. One important way that hotels have made money over the years is how they change their rates, depending on demand.

[00:42:10] So if there’s a large event in town, they can raise their rates because they know people will need to book rooms. Airbnb is a big disruptor that eats into profitable times. Because when there’s a huge event, Airbnb listings can skyrocket for that one weekend as people want to take advantage of the demand for a place to stay.

[00:42:29] Goldman Sachs issued a survey to see how much consumers enjoyed using Airbnb for travel from 2015 to 2016. The number of respondents familiar with Airbnb rose from 24 to 40% year over year. Half of those who are familiar with the site had used a site like Airbnb, and many experience a dramatic shift in preferences as they did a 180 from preferring hotels to preferring the home-sharing option.

[00:42:55] There’s of course people on the other side who couldn’t imagine doing anything else other than the hotel experience of always having the front desk to call, having breakfast prepared for you and having room service a click away. Chesky has often said that he encourages hosts to deliver a seven star experience going far and above the five star service that people expect.

[00:43:16] During a chat in 2013, Chesky laid out three reasons people stayed in hotels. That’s a frictionless booking experience, knowing what they’re going to get and services. He then stated that Airbnb was going to become more and more frictionless. It would be able to, to deliver a more consistent product over time in every one of those services is something that somebody in a city could do.

[00:43:39] I sense that Chesky and the founders almost are taking a slight of hand approach where they’ll keep saying they don’t want to dislodge or disrupt hotels, but in many ways that’s exactly what they’re doing. Now, I could go on and on about Chesky and the leadership team at Airbnb, and I believe for good reason Sequoia’s managing partner, Doug Leon once told Chesky that he had the hardest job of any c e O in the Sequoia portfolio.

[00:44:05] To be able to keep up with this hockey stick level growth where they were simply trying to keep up with demand is a remarkable feat, especially given that the founders didn’t really have much business experience prior to starting the company, Chesky, especially in order to help foster that growth of Airbnb.

[00:44:22] Gallagher described Chesky as a learning machine. Rather than learning from a bunch of different people in weighing the different opinions, he would oftentimes identify the one person that knew more than anyone else regarding a particular subject, and learn everything he could from them. As he stated, quote, if you picked the right source, you can fast forward.

[00:44:43] The more successful Airbnb became the higher level people. Cheki had access to people, including Apples. Joni Ivy on design, Disney’s Bob Iger on management, Mark Zuckerberg on product. Cheryl Sandberg on international expansion to nama. Few. It’s incredible to think about the number of high level people Chesky was in contact with and how he wanted to learn as much as possible from these incredible business leaders.

[00:45:09] Chesky derived a ton of inspiration from the biographies of two of his biggest heroes, Walt Disney and Steve Jobs, just like many other people we’ve studied here on the show, Chesky reads books like crazy when he was on vacation with his family once per year. His way of recharging was to ingest as many books as possible.

[00:45:31] Chesky even built a relationship with Warren Buffett. Chesky had worked with Berkshire Hathaway to help house people during the annual shareholders meeting, which is one of Omaha’s most popular events of the year. Chesky wanted to connect with Buffet, so he asked to grab lunch with them, to which Buffet accepted.

[00:45:48] It was supposed to be a one-hour lunch, but it ended up lasting four and a half hours. The biggest takeaway that Chesky picked up from the Oracle of Omaha was the value of not getting caught up in the noise. As Chesky stated quote, he’s literally in the center of Omaha. There’s no tickers, no TVs anywhere.

[00:46:05] He spends all day reading. He takes maybe one meeting a day and thinks so deeply in quote. Buffett wasn’t impressed with what Chesky had done, although he knew it wasn’t something that he would ever use. But he understood why many other people did find value in it. Those who knew Chesky knew that he had this extreme level of curiosity, and he’s been so successful growing Airbnb because of how obsessed he is with continuous learning.

[00:46:33] From an early age, Chesky was always obsessed with something, whether that be ice hockey as a child or art. Throughout his high school years, his high school art teacher had said that he would eventually be a famous artist someday. Paul Graham of Y Combinator had said that what drove Chesky was different than other founders.

[00:46:51] Most others wanted wealth, influence, or success. While Chesky was driven by a much higher purpose in the company’s purpose of belonging and driving home, the idea of home sharing to people as Airbnb’s mission was to create a world where you can belong anywhere. Many people consider Chesky’s vision to be unrealistic or idealistic, and Chesky was asked about whether that was the case, and he stated a quote that I just love.

[00:47:16] Pessimists are usually right, but it’s the optimists who changed the world. Gallagher touches on the other two founders as well in the book and their backgrounds. Joe Gebbia had gone to college with Chesky and met him there. As mentioned earlier, Gebbia had a reputation of being a perfectionist, and people were afraid to be transparent with him when projects really weren’t working out.

[00:47:38] Gabe hired a coach to help him continue to develop and work on his weaker points as a leader. While Chesky and Gebbia received most of the media attention over the years, you can’t overlook the importance of Nate’s critical role in this company’s success. He was the technical encoding genius behind it all, and they were very lucky to have him.

[00:47:58] He would be the CTO of the company. And today as the chief strategy Officer in the Chairman of Airbnb, China, Nate has been described as a very methodical and disciplined thinker that can simplify very complex problems. A number of years ago, the three founders took a personality test and they had all different personalities in so many ways, so they really balanced each other out and were able to apply each of their own strengths in their own unique.

[00:48:26] Out of curiosity, I looked up how much each of the founders are worth today. Surprisingly, while the market cap of Airbnb is around 63 billion, each of the three founders are worth roughly seven to 8 billion, which to me is a sign of how important the other two founders were. Even though Chesky is who most people are aware of when covering Airbnb, it’s almost impossible not to cover the impact that Covid had on their business.

[00:48:53] When the Covid pandemic hit roughly 1 billion worth of reservations, wanted refunds, and the company was essentially forced to go through with those refunds, this put both the company and the hosts in a really tough position financially, as they had practically lost 80% of their business overnight. To help support the hosts, Airbnb decided to send them 250 million off their balance sheet and send it to host because Airbnb knew that their platform was nothing without them.

[00:49:23] Then they managed to raise 2 billion in equity and debt from investors to try and ensure the survival of the company. They ended up cutting 25% of their workforce, letting go 1900 people out of their 7,500 employees. They had to implement plenty of measures to help keep hosts and guests safe while still operating their business.

[00:49:44] When reflecting on the Covid crisis, Chesky is reminded of the Andy Grove quote, that bad companies are destroyed in a crisis. Good companies survive a crisis, but great companies are defined by a crisis end. Chesky really wanted to be in that third category, so rather than being a victim and complaining about the situation, he said that this was the company’s defining moment.

[00:50:09] Eventually, later in 2020, the business did bounce back as people learned to travel in different ways, such as by car to a remote location rather than by plane to an urban city. I’m also really glad that Gallagher also talked about Airbnb’s culture as well. Peter Teal’s fund had invested in 2012 and Teal told Chesky not to mess up the culture because it was one of the reasons he invested.

[00:50:33] And he also said that once the company got to a certain size, it would eventually happen. He stated, if you break the culture, you break the machine that makes your products. This message really hit home for Chesky and he really put a high priority on it. He obsessed over culture as he wrote a Sunday night email to employees, and he personally interviewed every job candidate until the company got to be more than 300 people.

[00:50:57] In 2016, Airbnb ranked number one on Glassdoor’s employees choice awards. Culture is obviously very difficult to get right as you want people to feel comfortable and welcomed, but on the other hand, when you’re starting a company, it can be very demanding. Chesky created a hardworking environment that expected a lot out of people.

[00:51:18] The final chapter of Gallagher’s book is titled What’s Next, which describes what may be coming in the future for Airbnb. As this was written in 2017, we know some of that and how it’s played out in the book. She touches on experiences that allow travelers to meet up and do different things together on their trip, which expands their mission of belonging.

[00:51:38] When I check out their website today, they offer a number of experiences, both in person and online. Things such as cooking lessons, magic shows, games, escape rooms. The list goes on forever. The types of things you can do through their experiences section. Now, I’ve never used the experiences section specifically myself, but I do have a friend that mentioned that he’s done a fly fishing guide as well as a painting workshop, and he said they were really good value and super easy to do while traveling.

[00:52:07] So from the limited people I’ve talked to, they’ve seemed to really like the experiences section. I’m not sure how big this business is relative to their core business but interesting to say the least. This expansion into experiences and enhancing that travel experience doubles down on their focus on living like a local Chesky is well aware that they can’t be complacent if Airbnb is going to be a lasting company well into the future.

[00:52:32] As he saw many Mighty Tech giants stick too close to their core product and become irrelevant over time, such as Blackberry, blockbuster, and others. He studied the likes of Google, Apple, and Amazon and came to the conclusion that the survival of a tech company depends on a willingness to branch into new categories, and the c e O has to have the discipline to put the new ventures ahead of the existing business and to take the new project on personally to help foster continued growth.

[00:53:02] Airbnb went public on December 10th, 2020, and the stock went up 112% on its first day of trading, hitting a market cap of 86 billion, even though this was in the middle of the Coronavirus pandemic. At the end of the book, Gallagher also mentioned that the founders all signed the Giving Pledge As they’ve come to terms with the kind of responsibility that comes with the massive wealth they’ve accumulated.

[00:53:26] Warren Buffett and Bill and Melinda Gates originally started this movement in reflecting on how far Airbnb has come. Chesky told Gallagher that they aren’t visionaries and they were just ordinary guys that took action on an idea that made sense to them. He also said that they had the instincts and the courage to act on the opportunity, and in hindsight, if they knew any better, they wouldn’t have pursued how big of a task they ended up undertaking.

[00:53:53] A ton of things had to go right for them to make it as big as they did. He called it kind of a weird one-in-a-million type shot, and if they lived another 1000 lives, it would be hard to imagine if everything were to click in the same way. Now to round out the episode, I wanted to go through some of the company’s recent filings to give you an idea of just how far they have come.

[00:54:15] In Q3 of 2022 alone, the company did 99.7 million nights in experiences booked, which was up 25% year over year. Gross booking value was 15.6 billion, up 31%. Year-over-year revenue was 2.9 billion, up 29% on the year in net income was 1.2 billion, up 46% on the year. The company stated that historically, Q3 is typically their highest revenue quarter.

[00:54:45] Just looking at 2021 to use as an example, Q4 revenues were roughly 31% lower than Q3 just due to the seasonality of the business. Their most recent quarter was their biggest and most profitable quarter ever. Despite all of the macro headwinds, which I believe shows how much tailwinds they have behind their business and is a testament to the MO they’ve built.

[00:55:07] The trends who work from home has been greatly beneficial for Airbnb as this has led to younger people doing longer term stays in Airbnb units. As they’re able to work from anywhere, the number of new hosts continues to grow and is really strong. Airbnb makes the case that they do well in tough economic times because of the individual’s desire to earn an extra income stream with the property they own.

[00:55:30] As of July 2022, it was estimated that Airbnb now has 5.6 million listings worldwide, which includes 220 countries and regions. 48% of their bookings were in high-density urban areas. 20% of bookings were for 28 days or more consistent with the prior year, and 45% of bookings were at least seven nights.

[00:55:54] Additionally, average daily rates were $128, which was a 5% increase year over year. So not only do they have the tailwind of more and more bookings each year, the average daily rate of those bookings are increasing as well. Management also stated that they are seeing strong growth in the number of new hosts on their platform during Q3 of 2022.

[00:56:17] The implied take rate, which is the company’s revenue divided by gross booking value, was 18.5%, meaning that for every $100 of gross booking value, the company received $18 and 50 cents. Since its inception, the company has connected hosts with more than 1 billion guests, and as of year in 2021, they had over 6,100 employees.

[00:56:42] Related to Airbnb, China in May of 2022, Airbnb announced that they would be removing all 150,000 of their listings in China because of their zero covid policy and its constant lockdowns. Since they launched in China in 2017, they struggled to compete with the domestic players, but the loss of these listings isn’t really a major blow to the company.

[00:57:05] As China accounted for roughly 1% of Airbnb’s total revenue, it was going to be really difficult for them to reach scale in China, and it may never have become profitable, so it was likely the best move to cut their losses and focus on other regions. Over the trailing 12 months, they generated a whopping 3 billion in free cash flow, which is quite impressive.

[00:57:27] However, one item I think we will want to keep an eye out on for Airbnb is their stock-based compensation. In the data I’m looking at, I see stock-based comp of 3 billion in 2020 and $900 million in 2021, and it’s looked a little bit more reasonable as of late relative to their free cash flows as the stock-based comp has come down and the free cash flows have grown, the stock-based comp was abnormally high in 2020 because of their I P O, but this is one item investors will definitely want to keep an eye on.

[00:57:57] It’s easy for investors to say, Hey, look at all those free cash flows the company is producing. Well, if they’re diluting shareholders with stock-based compensation and management isn’t effectively reinvesting those cash flows, then we may want to reconsider maybe how valuable those cash flows truly are.

[00:58:14] So the price of free cash flow ratio is around 21, which seems quite good for a tech company that’s growing as fast as they are now. Full disclosure, I do have a small position in Airbnb stock. I really like the company. I love the founders and really like the direction they’re heading. Additionally, it’s a really capital light business and it’s very scalable, which will allow them to grow at a high rate of growth while their operating leverage continues to gain strength.

[00:58:40] Che Ski and his team have managed to turn the name of their company into both a noun and a verb when most people refer to where they’re staying when they travel. All right. That is all I have for today’s episode. I really hope you enjoyed the story of Airbnb, as I loved going through Lee ER’s book. If you’re interested in checking it out, I’ll be sure to link that in the show notes.

[00:59:03] Also, I wanted to mention that I am just super grateful for everyone in the audience’s support of the show. Putting this show out wouldn’t be possible without our loyal listeners, so thank you so much. If you enjoyed this episode and would like a chance to get a free copy of Leigh Gallagher’s book, The Airbnb Story, all you have to do is tweet out this episode on Twitter and tag me at @Clay_Finck and I will select two people at random to send this book to one week after this episode’s release on Monday, December 19th at noon Eastern time.

[00:59:36] Again, just simply tweet this episode out and tag me to get a chance to win The Airbnb Story, and I’ll select two people at random. Thank you so much for tuning in. I really, really appreciate your support With that, I’ll see you again next week. Thank you so much for tuning in.

[00:59:51] Extro: Thank you for listening to TIP.

[00:59:55] Make sure to subscribe to Millennial Investing by The Investor’s Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consultant professional, this show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.