Airbnb

Over 13 years after its founding, one of the defining startup companies of the past decade finally makes its public debut — and boy was it a big one. But for all the hype (and all the legitimately great things Airbnb has accomplished), this is a company that looks very different today than in the past. Even before COVID, Airbnb's once-exponential bookings growth had declined to linear levels while the company's costs continued to balloon at accelerating rates. What’s going on here? Are public investors smart to bet on a permanent shift in travel behavior coming out of the pandemic? Or is this a case of unrealistic expectations? As always, we dive in. Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC Playbook Themes from this episode are available on our website at https://www.acquired.fm/episodes/airbnb Carve Outs: David — San Francisco Ballet's Nutcracker: https://www.sfballet.org/productions/nutcracker-online/Ben — Star Wars Lofi HipHop: https://open.spotify.com/playlist/5iu1sp3UBb1rjf8KNKETtJ?si=WxPdJcRpSnelHN9qh0xYSw

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Rosenthal?

  I took Tanny's collar off her so that

• 0:02Ben Gilbert?

  Oh, awesome.

• 0:03David Rosenthal?

  We don't have the same problem.

• 0:06Ben Gilbert?

  That'll save us some time in post.

• 0:19Ben Gilbert?

  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.

• 0:35David Rosenthal?

  And I'm David Rosenthal and I am an angel investor and startup advisor based in San Francisco.

• 0:41Ben Gilbert?

  And we are your hosts. Today, we cover the hottest and most anticipated company to IPO in 2020. And oddly, in a year marred by the global pandemic and just this month, an all-time high number of stay-at-home orders, this hot IPO is a travel company. Airbnb, originally known as Air Bed and Breakfast Incorporated, is going public today, raising over $3.5 billion and initially valued at over $47 billion. The company is insanely impressive. They operate in 220 countries and 100,000 cities. Last year, there were $38 billion of bookings made on the platform. There are over 50

• 1:25Ben Gilbert?

  million active guests who book nights to stay at over 7 million listings. And unlike other companies that we've covered recently, well, yesterday, like DoorDash, this is truly a global company with 86% of hosts outside of the United States. And yet, while this company has changed the world and how a meaningful fraction of the human race travels, their growth has been slowing more severely than any of the other unicorn IPOs we've covered. And that's before even looking at the effects of the global pandemic. Now, of course, David and I did our usual deep homework on the company, but this is one where we've been doing our research for years, not just as guests on the platform since

• 2:06Ben Gilbert?

  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.

• 2:24David Rosenthal?

  Indeed, we do.

• 2:25Ben Gilbert?

  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. Jaclyn Hester and Lyndell Ekman from Foundry Group joined us for part four of our VC fundamentals series, where we went seriously deep on the topic of portfolio construction for a venture capitalist. Sure, this is a useful thing for aspiring VCs, current VCs, to 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,

• 3:10Ben Gilbert?

  it's just insanely valuable. So really awesome to have them on, fun to be diving so deep on this topic and sharing a lot of these conversations with so many of you. If you aren't already an Acquired Limited Partner, you can click the link in the show notes or go to acquired.fm/lp and all new listeners get a seven day free trial. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI 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 nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 3:48David Rosenthal?

  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. Vanta's own research found that around 70% of companies have this "shadow AI" running with no security review at all.

• 4:09Ben Gilbert?

  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. Think 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.

• 4:30David Rosenthal?

  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, every AI tool, the whole environment.

• 4:49Ben Gilbert?

  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/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. All right, David, Airbnb, take us in.

• 5:21David Rosenthal?

  It's time. Is it every time? This company is 13 years old. Come on. Well, it's like a teenager.

• 5:26Ben Gilbert?

  We've thought it was going to be time for a while now. And, you know, here on the bar mitzvah of Airbnb.

• 5:31David Rosenthal?

  Yeah.

• 5:32Ben Gilbert?

  It goes public.

• 5:33David Rosenthal?

  That's right. One quick disclaimer before we get going. In this case with Airbnb, I actually know and have worked with several people who are involved in this story in my past history at my previous venture capital firm. I haven't talked to any of them about the IPO or about this episode. They're all great and I'm sure they're very, very happy today. But just so everyone knows, I don't own any Airbnb stock or any stock in any of its competitors and I'm not planning to buy any.

• 6:02Ben Gilbert?

  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 shareholders going into recording.

• 6:13David Rosenthal?

  Indeed, indeed. We do have a very big thank you to shout out though, again, as so often on this show, Brad Stone and his wonderful book, The Upstarts, where he chronicled much of this history that we're going to borrow from. And Brad is wonderful, past guest here of us on Acquired. So with that, let's dive in.

• 6:33Ben Gilbert?

  Let's do it.

• 6:34David Rosenthal?

  Okay. So Ben, stop me if you've heard this one before.

• 6:38Ben Gilbert?

  Wait, the story of Airbnb's founding? I never heard of it.

• 6:43David Rosenthal?

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

• 7:08Ben Gilbert?

  Yada, yada, yada, RISD Design Conference, South by Southwest. I think I know where this is going.

• 7:13David Rosenthal?

  So they do this. Yep, yep. They build, they build trust on the site with reviews. You can review each other. You, you have, they discover that photos are really important of the listings. They add photos. They figure out how to authenticate real identities. It starts to take off. People start using it.

• 7:28Ben Gilbert?

  You're like going through this way faster than I would have expected.

• 7:30David Rosenthal?

  I know, I know. Or like, we gotta get through a lot here. And, 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 Hofer, and the crew at Couchsurfing.com. And the venture firm that I'm talking about is Benchmark. And the partner who led that deal was Matt Kohler of, you know, little companies like Facebook and Instagram fame.

• 8:08Ben Gilbert?

  Couchsurfing had that many similarities with Airbnb?

• 8:11David Rosenthal?

  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 Couchsurfing roughly the equivalent, for those who have listened to our Uber episode of the, I can't remember if it was Uber or Lyft or both. I think it was Uber, the Homemobiles story.

• 8:29Ben Gilbert?

  Ooh, I think Uber. Good question. I don't know.

• 8:32David Rosenthal?

  I think it was Uber where we did, where we did Homemobiles, which of course pioneered ride sharing. Couchsurfing didn't have a way to pay money. It was, you just stayed in other people's...

• 8:42Ben Gilbert?

  They didn't facilitate the payments?

• 8:42David Rosenthal?

  They didn't facilitate the payments. And the idea was everybody was just going to do this out of the goodness of their heart for their community. And I think for a long time, the only monetization that happened on Couchsurfing was you paid essentially like a verification fee to have your identity verified. And I think the way they did that was they took a credit card payment and then matched your, 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 homebills don't end there. Couchsurfing was for a long time actually a registered 501(c)(3) nonprofit. And then they had to convert from a nonprofit into a C corp when they raised money. It was a whole mess.

• 9:24Ben Gilbert?

  Oh, wow. I mean, it makes sense it was a nonprofit because in my head, the way I always thought about couchsurfing. And I think when I first heard about Airbnb, I sort of equated it with the same thing of like, literally a stranger who just lets you crash while you're, I don't know. At this time, I was like a college student. So I was like, oh, I see. It's for like other college students or interns or whatever who don't have money. And like, you can just stay on some stranger's couch.

• 9:47David Rosenthal?

  Yep, which I think was how couchsurfing started. I think Casey was a college student and going on a trip. Did you ever use it?

• 9:54Ben Gilbert?

  No, I never considered it. Yeah, but it always felt a little bit too like, can I just get a cheap hotel? Or do I know anyone in that city that I actually know?

• 10:03David Rosenthal?

  Yeah, it's kind of crazy to stay on a stranger's couch. The really crazy part, and this is getting ahead of ourselves, but turns out Brian and Joe actually had dinner with Casey and Daniel right before they applied to YC and talked to them about what they were doing.

• 10:19Ben Gilbert?

  Which was after, of course, they'd already started and were working on Airbnb.

• 10:22David Rosenthal?

  Yeah, of course. And they talked about the two sites. Anyway, okay, on to the real story of Airbnb. So the year is 2000. We are back in New England, specifically in Providence, Rhode Island, where a scrappy freshman from Georgia named Joe shows up at the famous Rhode Island School of Design, RISD. Wonderful place. I didn't realize, actually was in Providence last year. RISD and Brown are basically, they're like co-located. Like Providence is a very small town. So Brown and RISD, like all the buildings are kind of interspersed. And it's actually a very, very pretty, very, very cute little place. So Joe shows up as a freshman and he meets and befriends a sophomore there. Now, Joe's kind of like a scrappy, he's like a, you know.

• 11:07David Rosenthal?

  I don't know if Skinny's the right way. He's not, he's not like, he's a sleight of frame. Let's put it that way. His friend who he meets is a beefy hockey player. And I think at this, I don't know if it was this, at this time or after college, aspiring bodybuilder. And he would go around and compete in bodybuilding competitions. Sophomore from upstate New York. Of course, we're talking about the one and only Brian Chesky here. So they're both at RISD. But I don't know, other than my one visit to Providence, I haven't spent a ton of time at RISD or with people from RISD. But my impression is it's like a very artsy kind of place. Whether that was the case or not, that certainly was not the mold that

• 11:46David Rosenthal?

  Joe and Brian fit at RISD. They become fast friends and get into all sorts of hijinks. They're always talking about doing different projects, starting businesses together. And they must have stood out because they became super popular. Joe actually becomes student body president of RISD. He's a year behind Brian. And Brian, a graduation is elected by the class to give the graduation speech when they graduate. So the story goes, when Brian is graduating after this speech, Joe, still there, is another year at RISD, he takes Brian out to dinner before he leaves and says, hey, we've got this thing. One day, I predict that we're 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

• 12:30David Rosenthal?

  who is writing the book about them.

• 12:32Ben Gilbert?

  Yeah, prove it.

• 12:33David Rosenthal?

  Whether it's true or not, we will never know, but it becomes very apt. So after Brian graduates in 2004, he moves to the West Coast, he moves to Los Angeles, and he gets a job working for a design consultancy. They're called 3D ID. But it's kind of not the fit for him. He's, he's much more-

• 12:52Ben Gilbert?

  Isn't he like designing chairs or something?

• 12:54David Rosenthal?

  Yeah, he's designing 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, not, not very 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 gets started. I remember, I was in college when YouTube got started. And like, oh, this site is amazing. This thing is happening on the internet. You can watch video and movies and anybody can post them. And the guys who started it came out of PayPal, young guys, backed by Sequoia. Brian starts like researching, then becomes obsessed, like, oh, this is like- Great. That's what I want my life to be like.

• 13:38David Rosenthal?

  Meanwhile, Joe, the next year in 2005, he graduates from RISD. He's not sure what he wants to do with his life either. He hangs around and he actually starts a company. I guess you could call it a company. It still exists today. It's called Crit Buns. And Joe's talked about this a lot. If you listen, we went back and listened to the How I Built This episode, he talks about this. So I guess the story is as part of the curriculum at RISD, one of the key things that you do is you have these critiques, like design critiques in your classes. Like you design something and everybody in the class and the professors, you know, all critique. And you sit around and I guess these go on for a long time. And there's not comfortable chairs.

• 14:20David Rosenthal?

  And so Joe has this idea that he makes literally butt shaped foam cushions that you can carry around with you and you can put down on the floor or on a bench or whatever. And then, and then be more comfortable during critiques, hence Crit Buns.

• 14:34Ben Gilbert?

  Amazing. And this is still up, right?

• 14:38David Rosenthal?

  Still up. Yep. You can go to, I don't have it written down with the website. We'll, we'll link to it in the show notes. You can go online and, and order a Crit Bun.

• 14:47Ben Gilbert?

  It's critbuns.com. And it is in its full like web 1.5 glory.

• 14:54David Rosenthal?

  Yes.

• 14:55Ben Gilbert?

  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.

• 15:03David Rosenthal?

  Obviously, and of course, by they, we mean Joe.

• 15:05Ben Gilbert?

  Joe.

• 15:06David Rosenthal?

  Yeah. Cause it's not really a company per se. Joe goes around Providence and tries to get the bookstore in town to carry them. I don't know if he actually succeeds, but if he does, like this is not, he's not moving a lot of product. Let's put it that way.

• 15:25David Rosenthal?

  So in 2006, he finally gives in and he moves out to San Francisco. Apparently he always wanted to move to San Francisco. He gets an internship and then a full time job at Chronicle Books, the book publisher, famous book publisher here in San Francisco. And he's working, he's designing book packaging and marketing materials for them. And he with a couple of roommates rents a apartment in the then this is crazy to remember now up and sort of up and coming, but mostly still incredibly sketchy area in the south of market neighborhood in San Francisco, better known today as Soma. And I remember at the time had friends

• 16:07David Rosenthal?

  out here in San Francisco and my wife Jenny was from here and I'd 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 now living in San Francisco. Brian's in LA. Remember, he's not super happy. They're still in really good touch. One day in 2007, Joe sends Brian a package down to LA with a, with an object in it with a message behind it. And Brian opens up the package and there's a crypt button in the package. And as the story goes, at least as told to Brad, the point of the crypt button,

• 16:47David Rosenthal?

  other than I'm sure just to be high janky and ironic was, hey, let's take another shot at this. It's time to do this together. Start a company. We're not meant to be employees. Let's go do this. So Brian comes up to San Francisco after receiving the crypt button to visit and stay with Joe. And when he's there, it turns out one of Joe's roommates, 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 Joe's like, hey, we need another roommate. Why don't you just, why don't you just leave your job down in LA, come up here and, and move in with us. And so Brian's

• 17:29David Rosenthal?

  up there visiting, has a great time. He kind of wants to do it, but he's not sure. So he goes back to LA, thinks about it for a while. And then finally, in the beginning of September in 2007, when Nate finally moves out that month, Brian's like, okay, I'm gonna do it. So he quits his job, he moves up to San Francisco, he moves into the apartment, but there's a problem. You know, you've replaced, you know, Nate, this, this programmer who, you know, had a job who's making money, but this guy Brian, who's designer, who doesn't have a job. So a roommate is, is kind of only as good as they are for the rent money. And Brian and Joe need to, need to make the rent. So they're casting about, they're thinking about something to do. And it turns out the next month, one of the big design, international design conferences

• 18:14David Rosenthal?

  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. You know, the hotel situation in this city is nuts. It is completely awful.

• 18:32Ben Gilbert?

  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, just clearly not enough hotel rooms.

• 18:52David Rosenthal?

  And the thing that you figure out, if you live here and you know, have family and friends who want to visit, is that that's not just WWDC. That's literally every week. Every week, there is a big event going on at the Moscone Center or elsewhere in the city, and there just aren't enough hotels here for demand. And so, you know, hotel rates can be like a thousand dollars plus a night during the week because there's always a big conference going on of some type. So they start cooking up an idea and Joe sends Brian an email. Why he sent this over email when they're living together? I don't know, but he sends him a very famous email.

• 19:24Ben Gilbert?

  They knew that we were going to be doing a podcast one day and they wanted to leave a paper trail.

• 19:29David Rosenthal?

  Well, they were thinking about, you know, an author writing the book. So there we go. So the subject of the email is subletter. And it reads, Brian, I thought of a way to make a few bucks, turning our place into a designer's bed and breakfast, offering young designers who come into town, a place to crash during the four day event, complete with wireless internet, a small desk space, sleeping mat and breakfast each morning. Ha, Joe.

• 19:56David Rosenthal?

  Ha, ha, indeed.

• 19:58Ben Gilbert?

  I'm going to start ending my emails with that and see if, see if that is the magic that made it all work.

• 20:02David Rosenthal?

  You know, yeah, I never really liked, you know, like best or cheers, like all the standard, you know? Yeah, just end with ha. I like that. Ha, exclamation point. Great. Well, it was a pretty good ha. So they take three days, they put together www-airbedandbreakfast.com on WordPress. Then they email out a bunch of design blogs to get some publicity and say like, hey, you know, all the people that read your site, they're coming to town for the conference, can't afford hotels, especially, you know, young, broke designers like us, come stay with us on mats in the, I don't know where the mats came from, maybe like yoga mats or something in the, in this apartment.

• 20:41Ben Gilbert?

  I mean, like I knew air beds, right? Like Airbnb, but like-

• 20:44David Rosenthal?

  Well, they called it Airbed and Breakfast, so-

• 20:46Ben Gilbert?

  Yeah. So what's, do they mean air beds or do they mean mats?

• 20:50David Rosenthal?

  I assume maybe they, they meant, as, as they were working on the idea and came up with Airbed and Breakfast, maybe they went out and got some air beds. So they mail us out and the surprise, they, you know, people are like, oh, this is cool. What a novel idea. And they write about it. And they get a few takers. So they have, it was either two or three, I can't recall how many guests stay with them that weekend, but one in particular, a young, recent Arizona State grad from India named Amal Surya rents one of these air beds and or mats for $80 a night, comes and stays with them. And they become friends, like they attend the conference together, they hang out, Joe gives them

• 21:30David Rosenthal?

  a tour of the city. It's really a great experience. And at the end of this day, Amal is staying for an extra day after the conference, and he really wants to go down and see the famous D-School at Stanford. Now, not, not yet famous for having helped produce DoorDash, as we talked about in our episode yesterday, but still pretty famous nonetheless, and especially in the, in the design circles. And there's this famous tie between the D-School and IDEO, the design agency. So they all drive down together to Stanford and they attend a lecture by Bill Moggridge, who was one of the IDEO founders. And it's this cool experience. And then afterwards, Brian goes up to Bill and just starts pitching him on, hey, I've got Amal here, he's staying with us, we're

• 22:13David Rosenthal?

  designers, you know, we have airbedandbreakfast.com. And, you know, it's, it's really hard for young, you know, starving designers to go to conferences. Do you- Think I think Bill might have been like on the board of the Industrial Designer Society of America or something like this. Do you think we could become the official accommodation provider for the industry association? Unclear what what Bill's reaction was, but Airbed and Breakfast did not become the official accommodations provider.

• 22:40Ben Gilbert?

  I love it. Always pitching, always selling. It's good.

• 22:43David Rosenthal?

  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 gonna do. No, they don't. They're like, oh, well, that was a good way to make some money during the conference. What else? What are we actually gonna do? So they start brainstorming some ideas. They rope Nate, who you know, they were still friends with, even though he'd left the apartment, back in to start working with them on this, since he's actually, you know, a developer. He's left Batik at this point, and he's freelancing. He's working on side projects, thinking about what his next gig is gonna be. They start brainstorming ideas. One thing that they think about is roommate matching, because they're like, maybe inspired by Airbed and Breakfast. Like, this was so cool.

• 23:28David Rosenthal?

  Well, obviously, temporary roommates, that's not very big. Maybe permanent roommates. That's what we need.

• 23:34Ben Gilbert?

  Hmm. And to be totally clear, was Airbed and Breakfast like a website that they stood up for their apartment? Or was it like a platform for any any designer with an apartment to have other designers stay with them?

• 23:46David Rosenthal?

  Ah, that's a good question. I think it was only for their apartment. I'm not 100% sure on that. If it was others to, there were no other hosts during that design conference.

• 23:57Ben Gilbert?

  Got it.

• 23:57David Rosenthal?

  It was a platform of one. So Nate, we've talked about Nate a little bit. Turns out, he has a pretty interesting and very relevant background, too. So he majored in computer science at Harvard, right around the same time as as Brian and Joe were at RISD. But that wasn't really all that he was bringing to the table, or even really probably the most important thing that he was bringing to the table. So in high school, turns out Nate had not only taught himself to code, but he put the code that he was writing to, shall we say, highly profitable commercial use. So he started.

• 24:36David Rosenthal?

  No, he started writing AOL bots and programs and communication stuff. And first he was selling them as shareware. And he kind of stumbles into this nascent field. This is in the 90s of email marketing and perhaps the unregulated parts of the email marketing industry where he operates as a consultant during high school and even through college. He ends up making, he would tell Brad Stone, almost a million dollars.

• 25:05Ben Gilbert?

  And when you say early unregulated email marketing, do you mean he was a spammer?

• 25:09David Rosenthal?

  I mean, he was a spammer. So the, the CAN SPAM Act was not passed until 2003, it turns out, at which point then I think sophomore at Harvard, Nate closed his consultancy business for reasons that have never been discussed. But before that, yeah, he made about a million dollars and put himself through Harvard and much more. Pretty amazing. So in other words, like, not only is he a Harvard-trained computer scientist who, you know, knows how to code and develop and he can stand up, you know, internet products all on his own, he also knows how to market online. So this is a pretty potent combination here. Yep, they were smart to rope him back in. So they're jamming on these ideas, they're thinking about the roommate thing. Turns out roommates.com already exists.

• 25:53David Rosenthal?

  Couple of months go by, it's January 2008, they're out of other ideas. So Joe and Brian decide, eh, maybe we'll dust off this Airbnb breakfast thing. Give it another, give it another go. So they pitch it to Nate. They actually hadn't pitched Nate until January on working with them on this. It was, it was just this side project thing.

• 26:11Ben Gilbert?

  So this is like attempt number two at starting Airbnb?

• 26:13David Rosenthal?

  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 a thousand bucks, 2,000 bucks a night.

• 26:42Ben Gilbert?

  In fact, I think the first time I went in 2010, I couldn't get a hotel room and I booked an Airbnb.

• 26:47David Rosenthal?

  Yeah, I think, I think every time I've gone, I've done an Airbnb. I've never stayed in hotel for South by. So like, okay, great. This is, 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, who's in the looking section, looking for rooms. They start pitching everybody on using airbnb breakfast.com. They get huge success. They get two actual bookings, like two, like one more than one for the festival.

• 27:16Ben Gilbert?

  And 200% growth rate over their previous attempt.

• 27:19David Rosenthal?

  Yeah, exactly.

• 27:20Ben Gilbert?

  I guess a 100% growth rate.

• 27:22David Rosenthal?

  One of those bookings is Brian. So they have only one, they still only have one non-founder booking. Brian shows up and this is just amazing. Like, you know, we talk on the show about how the internet back in the day was like 12 people. Well, it turns out in the mid 2000s, it was, it was still only like 12 people. So Brian shows up and he's hanging out there and he meets up at Joe's suggestion with another one of Joe's former roommates, just a little guy named Michael Seibel.

• 27:50Ben Gilbert?

  No way.

• 27:51David Rosenthal?

  Yeah, guy named Michael Seibel, of course, of Justin.tv fame, which would become Twitch, CEO of Twitch. And then we currently would become and is currently the CEO of Y Combinator. So at the time they're running Justin TV. They've raised some money. They're, you know, a known startup in the valley, which we've covered on our Twitch episode. As crazy a story as similarly crazy story is here in Airbnb. And Seibel says, hey, I can, I can help you, Brian. Like he takes a liking to these guys and he knows Joe, they used to be roommates. I can help you find some angel investors to make this thing.

• 28:27Ben Gilbert?

  No idea Michael's involvement here.

• 28:29David Rosenthal?

  Yeah, apparently never held any equity in the company. He was never, you know, an equity advisor or anything, just helped him out. And he did indeed help them out. So Brian gets back, he's all pumped up, you know, this, this hot startup and the, and their founders are going to help us raise money. So he shows back up and Nate's like, hey, guys, I've got some news. So my girlfriend from Harvard, Elizabeth, who's now his wife. She was, I think in med school in Boston at the time. She wants me to move back to Boston and like, yeah, nothing's really happening with this site. So I'm going to move back to Boston.

• 29:02Ben Gilbert?

  50% of the people who are using it are the founders. So, yeah.

• 29:07David Rosenthal?

  So he moves back and once again, nothing really kind of happens with the site for the next few months. But meanwhile, Cybill did make good on his introduction and he and Justin Khan introduced Brian and Joe to a bunch of angels. They go and do these meetings with angels and the angels are like, you're doing what? And how many people are using this? No, thank you. So 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 Cybill and Justin Khan. And they're like, well, like, if you can't raise money, maybe you should just go do Y Combinator. Like, we did it. It's great. PG is great. And it's still pretty early at this point in YC. But maybe you'll be able to raise some money afterwards.

• 29:49Ben Gilbert?

  What, three, three, three and a half years into it?

• 29:51David Rosenthal?

  Yeah, I think

• 29:52Ben Gilbert?

  Dropbox has happened, right? Oh, it's 2006, one and one or two years into it.

• 29:57David Rosenthal?

  Yeah, the, oh, no, it was, this is now 2008, but YC started in 2006 or was it 2005?

• 30:04Ben Gilbert?

  Something like that, yeah.

• 30:05David Rosenthal?

  Something like that. So it's all pretty early.

• 30:06Ben Gilbert?

  Dropbox and Reddit effectively have gone through, but there haven't been any other high flyers yet.

• 30:11David Rosenthal?

  And Justin TV.

• 30:12Ben Gilbert?

  And Justin TV.

• 30:13David Rosenthal?

  Nobody really knows outside of the valley about them yet. So they go check out YC and YC was actually, I think this was the first startup school that YC put on in kind of an effort to evangelize and bring in more applicants as they moved to the West Coast. So Brian and Joe go down to startup school. And this is amazing. So this is April, I think, 2008. This is where Bezos comes and talks at startup school and uses, I think, for the first time, the electricity metaphor for AWS.

• 30:45Ben Gilbert?

  Whoa, I forgot Bezos spoke at startup school. I mean, you get so wrapped up in the Jeff Bezos of the last five to eight years that like, you kind of forget how much more approachable he was. And a lot of these guys, Zuckerberg, like, they, they would all do the like, little startup speaker circuit, because, you know, their companies weren't that valuable yet.

• 31:05David Rosenthal?

  Totally. Well, and, and here's Bezos, uh, who doesn't look like Terminator Bezos. So this, he's like full on still nerd, nerd Bezos mode. And he's pitching at Y C for all these rinky dink little startups because he's like, I gotta get people to use AWS. And so these little startups are, are gonna use it.

• 31:24Ben Gilbert?

  Which ended up being genius.

• 31:26David Rosenthal?

  Totally genius. I mean, same deal as Stripe. And anyway, uh, stories for another day. The other person who makes a big impression on Brian and Joe, speaking at Startup School, is Sequoia partner Greg McAdoo, who's speaking there. And of course, great Sequoia. And there's a long history of Sequoia partners, you know, speaking at Y C and Startup School. Why is Greg speaking there? Well, it turns out Greg is speaking there because Sequoia had actually invested in Y Combinator and Greg was the person who led the investment for them and on the board.

• 31:56Ben Gilbert?

  Wasn't widely known yet.

• 31:57David Rosenthal?

  Wasn't widely known yet. So Brian and Joe, they're, they're taken. They think Y C is great. They're gonna apply. The winter batch for Y C is the next application. So they're gonna gear up for that. In the meantime, they gotta do something over the summer. And they're like, all right, what are the next events that are coming up? The presidential campaigns are happening. The conventions are happening. Maybe we can use Airbnb at the conventions. So they do the same thing. You know, I think the Democratic convention is in Denver. I forget where the Republican one was. They email local press outlets. They get some bookings. They actually get about 100 bookings that summer, um, which is great, but they're not making that much money. So they're about out of money. And this is when the famous cereal story happens. The Obama O's and the Captain McCain's.

• 32:42Ben Gilbert?

  And I, so I, David, I texted you, hey, let's not like go too much into this story because everybody already knows it. And there's so much more to talk about in recent Airbnb history. And I, as I went back and read the email exchange between Fred Wilson and Paul Graham, and then I read Fred Wilson's blog post talking about how they, they passed, I actually realized I had the story wrong. I didn't realize that the Airbnb guys made up Obama O's and Captain McCain's. I thought what they did was they went out and bought a bunch of them. And then like when the stores ran out, then they like resold them. I didn't realize they like, they took Cheerios and just made their own cereals.

• 33:17David Rosenthal?

  Yeah. Yeah, it's pretty crazy. I mean, I think that's the thing. Everybody knows this happened. But you know, the actual story was they didn't have any money. They're still trying to basically make their rent on the Ralph Street apartment in Soma. And so they had this, you know, middle of the night crazy idea of let's go make some boxes, pour Cheerios into them and, and sell them as limited edition.

• 33:46Ben Gilbert?

  It's a totally amazing heads, I win, tails you lose situation because you have food no matter what. It's kind of like being the casino. Like you don't care which side wins because you get food either way.

• 33:58David Rosenthal?

  You get food either way. It's true.

• 34:01Ben Gilbert?

  Stakes are a little bit lower, but.

• 34:03David Rosenthal?

  And I think, you know, so the story like they make, they end up making somewhere between 20 and $30,000 in profit from selling these things online. And that, that kind of keeps them alive until, until they start Y Combinator. It is, it's also kind of good. When you take a super, super far step back, though, you're like, this is an amazing story of entrepreneurial grit.

• 34:23Ben Gilbert?

  Unbelievable.

• 34:24David Rosenthal?

  You're also like, you're selling, this has nothing to do with the business. And this might be a theme that'll come back up as we progress through the story.

• 34:33Ben Gilbert?

  Yeah. I mean, it's only awesome because the company worked. Like I've been at companies that didn't work and the only profit they ever made was from selling their furniture. So like, you know, it can kind of go either way.

• 34:45David Rosenthal?

  Yeah, I think there's, it's, it's an awesome entrepreneurial endeavor and a great show of scrappiness, but it's a little bit of a double edged sword.

• 34:58Ben Gilbert?

  It's also a great way to use their actual talents. Like as designers, they didn't have to outsource the creation of the, you know, art for the boxes. So therefore there was more margin available for them. I always think that's like a good lesson for entrepreneurs in general is what is the thing that you yourself can do and not pay yourself anything and generate, you know, you don't have to pay the labor. So it's, it's a hundred percent profitable. And like, you know, for our business here at Acquired, like we podcast and we don't have to pay for any podcasters.

• 35:28David Rosenthal?

  So there is, though, the other reason I decided to include the Obama O's and Captain McCain story is it's actually what gets them into Y C. So, characteristically for Brian and Joe, as you can imagine, as the story goes along here, they missed the deadline to apply and Cybill has to lobby P G and say like, hey, these guys missed 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 convince Nate to fly back from Boston, pretend that he's still part of the team to drive down to Mountain View and have the Y C interview. He shows up, they're getting ready to drive down, and the story goes, as they're leaving,

• 36:09David Rosenthal?

  Joe grabs a box of Obama's and a box of Captain McCain's to give to Paul Graham. And apparently, Nate is like, what are you doing, man? Like, you look ridiculous. Like, cereal, come on. And so they go, they do the, they do the interview, and P G doesn't get it. He's like, people, people actually are doing this, staying on each other's couches? And they're like, well, yeah, people are doing it, but not that many people. And, and so there, it doesn't go super well. And after they leave the interview, Joe realizes he's forgotten to give Paul the cereal boxes. So he runs back in and gives Paul the cereal boxes. This is how the story goes, as chronicled in The Upstarts, and gives Paul the cereal boxes.

• 36:53David Rosenthal?

  And Paul's like, what are, what are these? Joe tells him the story of how they've stayed alive. And of course, what is one thing that P G values above all else? It's survivorship and grit and

• 37:04Ben Gilbert?

  Default alive.

• 37:05David Rosenthal?

  Default alive, being a cockroach, as he would come to call them. He says, wow, okay, you guys are, you guys are gonna stay default alive. I don't know about this whole thing, but you're in. So they get into Y C. They start in the winter 2009 batch. And as Paul spends more time with them, he comes to really like these guys. And, and so he gives them advice, famously, he gives them advice, he says, like, hey, so, okay, where's, where's stuff happening right now? Well, the, we've got some bookings in New York. And he says, okay, well, Go to New York and he famously sends the, he starts calling them the Airbnb's. And during Y C, they changed their name to Airbnb from Airbed and Breakfast. They go to New York, they figure out that photos are important.

• 37:48David Rosenthal?

  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.

• 37:55Ben Gilbert?

  And the very reason why people stopped taking cabs and used Uber instead because it was a cashless experience. I mean, one of the many reasons, but.

• 38:03David Rosenthal?

  Exactly, exactly. So things start to work. Now, meanwhile, McAdoo, remember, is Sequoia's liaison with Y C, an investor in Y C. He's at Y C one day and he's talking with P G. And they're talking about this idea of grit and how being default alive and scrap, scrapping through things is really, you know, it's Sequoia. They believe that that's one of the most important characteristics of entrepreneurship as well. And so McAdoo asks P G, well, hey, who, who in this batch is, is most like this? And P G says, oh, well, that's easy. That's the Airbnb's over there.

• 38:42Ben Gilbert?

  Love it.

• 38:43David Rosenthal?

  Love it. So McAdoo goes over, he starts talking to them and he's smitten as well. And this is, this is kind of crazy. I mean, Sequoia had just done, if you remember back to this time, this is beginning of 2009, the R I P. Good Times Sequoia memo, 2008, the leaked memo had just happened a couple of months before, like the world is, 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 other people's air beds and couches. It's out there.

• 39:26Ben Gilbert?

  Yeah, it feels far removed from the reality of the moment.

• 39:30David Rosenthal?

  Yep. So to Greg's eternal credit, though, he sees the potential and he had looked at HomeAway and VRBO and the vacation rental space before. And he says, like, no, I think these guys are doing something different. And of course, we'll get into this a little bit more as we go. But a consequence of the financial crisis and 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. And this was potentially a way for people to make some extra money and prevent that from happening. Likewise, people still wanted to travel, didn't have

• 40:13David Rosenthal?

  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.

• 40:25Ben Gilbert?

  Yeah, it's so interesting. Like, timing plays so much of a role in the success of these companies. And, you know, this, there was so much innovation here and all the different ways that we'll get into around payments and reviews and trusts and all that, that like, it could have succeeded at any time. But boy, did they have the wind at their back from the secular trends going on to, you know, sort of make it a no brainer for a lot of people and really accelerate their ability to find product market fit.

• 40:52David Rosenthal?

  It was absolutely the right time. And I think all those things are true. But, you know, and couch surfing, as we talked about a little bit, definitely didn't have the right model, definitely messed things up. But they also were launching and starting to build in the buildup to the financial crisis during the go-go years. Like, nobody was that interested in cheap travel. So despite getting a lot of pushback from the rest of the Sequoia partnership, McAdoo does end up convincing Sequoia to invest. 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

• 41:33David Rosenthal?

  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-

• 41:53Ben Gilbert?

  Also, like, that's nothing. Like, I mean, like, it's nothing, nothing, nothing for Sequoia today. That's still pretty much nothing for them at the time.

• 42:02David Rosenthal?

  Think the current, the fund that they're investing out of, I believe, was a $500 million fund. So what's that 0.1%?

• 42:12Ben Gilbert?

  Right, like.

• 42:13David Rosenthal?

  Of the fund?

• 42:14Ben Gilbert?

  Yes. And the funniest thing is that that actually returned to that fund. Like, you never, when you're.

• 42:19David Rosenthal?

  Oh, so many times over.

• 42:20Ben Gilbert?

  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, it's just not, I didn't deploy enough of the fund's capital to ever have a multiple big enough to get there. And here we are.

• 42:36David Rosenthal?

  And here we are. So they do 585K. They bring in some angel investors alongside the angel investing collective of Keith Raboy, Kevin Hartz, and Jawad Karim, one of the YouTube founders. And we talked with Kevin about this on the Eventbrite episode. They get a small, they were in 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.

• 43:20Ben Gilbert?

  Whoa, no way.

• 43:22David Rosenthal?

  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 and 1/4% of the company for their $30,000.

• 43:37Ben Gilbert?

  And that, I think, is the last big dilutive round the company would ever do. Is that right? Like, everything from here on out, it was shockingly.

• 43:45David Rosenthal?

  The series, the series A was 7.2 million, I think, at a 60-ish, 60 or 70 million dollar valuation. So roughly 10-ish percent dilution.

• 43:55Ben Gilbert?

  And, and the percentage of the company sold only went down from there, despite the fact that the dollars got very, very large.

• 44:00David Rosenthal?

  That's, that is, that is accurate. So they finally have, back to the seed round, they finally have a little bit of money. So this is where.

• 44:08Ben Gilbert?

  2.4 million post, David, I can't believe it.

• 44:10David Rosenthal?

  Could you believe, I mean, even back then, and it was a different era. Like I said, it was a, it was, it was a different situation.

• 44:18Ben Gilbert?

  That's Sequoia Capital. Sure knows how to get their ownership.

• 44:21David Rosenthal?

  They do, they do. They're writing much larger checks these days to get that ownership. So even with this small amount of money, though, remember Nate's background. Nate basically goes to work and this is, 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, and saying, hey, why don't you come list these on,

• 45:01David Rosenthal?

  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 listing, creating listings on Airbnb, they actually also auto-published, encouraged them to auto-publish those listings back to Craigslist. And so you think like, well, why would you want to do that? You're taking your own supply and you're, you're putting your own, you're encouraging your own supply.

• 45:35Ben Gilbert?

  But if the transaction happens through them, that's a way to go get more demand.

• 45:38David Rosenthal?

  Exactly.

• 45:40Ben Gilbert?

  And for a site without traffic yet.

• 45:42David Rosenthal?

  Exactly. And I think this was, I mean, I think probably both of these were key, but that second piece was especially key because, yeah, how do you get the demand? How do you get traffic? I can go, you know, you can go hand-to-hand combat, convince people to put listings on the site, but how do you get them bookings? Well, you put it on Craigslist, get the bookings through there and then you, you capture those bookings and you don't let them go back to Craigslist and you say, hey, you've got the, you did this thing. You had this great trip. Why don't you book your next trip with Airbnb?

• 46:11Ben Gilbert?

  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.

• 46:23David Rosenthal?

  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 2009. The platform existed, you could do it, but you could, and you could target by interest. So what they do is when they want to grow demand, they run Google AdWords for place to stay in San Francisco, place to stay in Paris, place to stay in, you know, New York. Okay, that seems like a great way to get demand, but how do you get supply that is 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.

• 47:08David Rosenthal?

  And we're going to run Facebook ads, we're going to target by interest. And you say, oh, Brad talks about this in the book. We see this person likes wine. Rent your place to a wine lover. We see this person is interested in yoga. Rent your apartment while you're gone to someone who loves yoga. And so then that's how they would get supply to sign up on the platform. And then, of course, the people that they would send you to, no guarantees that they like wine or yoga. But, 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.

• 47:49David Rosenthal?

  Financial crisis, needing to, people needing to pay their rent, people wanting to travel cost effectively. And I think the, we talked a little bit about the supply constraint nature of hotels in markets when there's big spikes in demand. And I think the other thing, too, that took a while for people to realize, but has probably become the most sustainable part of Airbnb in the ensuing 10-plus years is you don't always want a hotel experience, right? Like, almost anybody who's traveling, sometimes you want a hotel experience, but sometimes you actually want to stay in a place, especially if you have a family or you're traveling as a group.

• 48:31David Rosenthal?

  It just makes, it's such a much better and totally new and different experience to travel like this.

• 48:38Ben Gilbert?

  Yep, that's a great point. And before we move on from the growth hacks too, I think it's also important to identify that like, the door is closed on doing all of those tactics today. And not completely closed, obviously, like you can still use Facebook and Google Ads, but the value has largely been arbitrage 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.

• 49:03David Rosenthal?

  Yep.

• 49:04Ben Gilbert?

  So that 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 arbitrage away, then go look for the next hill. And like, these are, you know, five generations ago of marketing tactics.

• 49:20David Rosenthal?

  Yeah, good luck doing that. Those innovative Facebook things today, you're going to pay through the nose for it.

• 49:26Ben Gilbert?

  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.

• 49:40David Rosenthal?

  Yeah, 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.

• 49:54Ben Gilbert?

  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.

• 50:04David Rosenthal?

  Yep. 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.

• 50:22Ben Gilbert?

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

• 50:38David Rosenthal?

  ServiceNow already runs more than 100 billion 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.

• 50:55Ben Gilbert?

  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?

• 51:04David Rosenthal?

  So 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/acquired and tell them that Ben and David sent you. So we're now in 2010 and things are really starting to work and they have by midway through 2010, they have 700,000 nights booked on the platform.

• 51:29Ben Gilbert?

  Wow.

• 51:29David Rosenthal?

  Which is for something that seemed like a crazy idea, nobody would do. Even the founders thought we need to do permanent roommates, not temporary roommates. It's totally taking off. So they raised, as we said, a $7.2 million Series A from Greylock.

• 51:44Ben Gilbert?

  Which by the way, why did Sequoia not pile on again? Like, isn't, isn't that kind of their strategy?

• 51:49David Rosenthal?

  Well, I think there were a bunch of questions about how big is this? What's going on? There's crazy stuff happening.

• 51:58Ben Gilbert?

  They probably, I mean, they also figured they owned 24% of it.

• 52:01David Rosenthal?

  They already own 24%, yep. And, and they're trying to, you know, stretch out the dollars in their fund. It's not like we're out of the financial crisis at this point.

• 52:09Ben Gilbert?

  Right.

• 52:10David Rosenthal?

  So they go to Greylock, Reid Hoffman leads the 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.

• 52:30Ben Gilbert?

  Oh, wow.

• 52:31David Rosenthal?

  Like you, 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.

• 52:38Ben Gilbert?

  Famed profitable company Airbnb.

• 52:42David Rosenthal?

  Indeed, indeed. So by early 2011, the next year, they hit a million nights booked. And they may have a bunch of, this company has always been great at PR and publicity, probably the, the legacy of, of Brian and Joe. They hit a million nights booked, it becomes big national news. And this is when Fred Wilson publishes that blog post about how he was, it was a huge mistake to pass on the company. And, and because PG had actually introduced them to Fred Wilson and wanted Fred to lead.

• 53:16Ben Gilbert?

  While they were in New York doing the famous, like, uh, meeting the hosts and hiring photographers and all that.

• 53:22David Rosenthal?

  Yep. So that summer, we talked about fundraising, they raised $112 million Series B.

• 53:33David Rosenthal?

  From Andreessen Horowitz at over a billion dollar valuation. This is summer 2011.

• 53:39Ben Gilbert?

  That's a big Series B today.

• 53:41David Rosenthal?

  Well, we were talking yesterday on the DoorDash episode about their $40 million Series B in 2014, 14 or 15, I think it was, being a huge Series B.

• 53:52Ben Gilbert?

  It is ludicrous to call this a Series B for that era, you know?

• 53:56David Rosenthal?

  Yeah. Ashton Kutcher comes into the round. It's Jeff Jordan.

• 54:02Ben Gilbert?

  Ashton actually doesn't quite come into the round. He, he comes in at a different time and gets, I think, preferential share price, or maybe it was just preferential share allocation. But because he sort of has this value prop at the time that he's talking with many companies about, which is I'm going to help you get publicity and, 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.

• 54:33David Rosenthal?

  Hey, leverage your value.

• 54:35Ben Gilbert?

  Value.

• 54:36David Rosenthal?

  Yep. So they raise all this money. Why did they raise all this money? There's actually a very specific reason they did, which was if folks remember back to this time, the Samwar brothers and Rocket Internet in Germany would take all of these, you know, new wave post web 2.0 tech businesses from Silicon Valley, clone them and roll them out in Europe. So they did this with Airbnb with a company called Wimdo. And this was like existential because whether, whether they realized it or not early on, unlike DoorDash, food delivery, ride sharing, where it's about winning each local market in hand to hand combat, Airbnb is a global network effect.

• 55:21David Rosenthal?

  You can't fragment. The market, there is going to be one winner globally because when people travel, they travel globally and especially Europeans and North Americans travel back and forth between Europe and North America. You need to just have one platform. You can't, you can't like, give up on Europe.

• 55:38Ben Gilbert?

  It's such a great point. And whoever wins that global market is also going to trickle down win local markets. Like the, it's actually different than the airline industry, which also has a great cross geography network effect where you have these, you know, United and American Airlines, I guess, American is a big international player at this point, but basically these, you know, the one world alliances, but you still have room for these regional players because the product that's necessary for those regional jets is a, you know, it's a whole different set of infrastructure. That's just not true with, with Airbnb. Like whoever was going to capture this short-term rentals market in a global way was also going to win in a local way.

• 56:17David Rosenthal?

  Yep. And, and for a whole bunch of reasons. One of the reasons being like, just like you and me, I think, Ben, over time, the biggest way that they ended up getting hosts on the platform was people would use the platform as travelers, as guests, they would travel all over the world. They come back to their own city and say, hey, I'd like to make some extra money on my place. And then they would list on Airbnb.

• 56:41Ben Gilbert?

  So that whole strategy, that whole venture capital playbook that we talked about on the DoorDash episode of, you know, it's truly a winner take all market, flood the money in, make sure you're the winner. That was inarguably true for Airbnb.

• 56:54David Rosenthal?

  Inarguably. So they go fight hard against the Samoar brothers in Europe and they end up winning. And it's really interesting to think about why they end up winning. So they do a couple of things. They go, they acquire a few companies, smaller competitors in Europe. They open up a bunch of offices and what the Samoers are doing, they basically start a sweatshop in Berlin of people, 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. Airbnb starts doing the same thing. The thing that's interesting though is like, I don't- I don't think that's actually what made the difference. Because if you think back, and let's talk about the product for a minute.

• 57:39David Rosenthal?

  The reviews on the platform that Couchsurfing had pioneered initially, of course, there are no reviews on Craigslist, but Couchsurfing had them. Reviews and trust are so important. Like, you're doing this crazy thing. You're staying in a stranger's house, or you're letting a stranger stay in your house. How are you gonna trust that it's actually gonna be a good experience? That these aren't crazy people? Even to put crazy people aside, just that like, it's actually gonna be nice. Well, reviews are super important. And so when you're doing something like creating a listings farm, whether this was Airbnb doing it, or Wimdo doing it, you're just gonna end up with a lot of listings with no reviews, and it's gonna be dead.

• 58:22David Rosenthal?

  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. Wimdo, I don't know if it's still around, but it never takes off. The other amazing thing, even though Airbnb went out and raised all this money, it turns out they have a killer part of their business model and how the operations work, which is, you know, when you go make a booking on Airbnb to go stay in a place,

• 59:06David Rosenthal?

  you're usually planning your travel out at least weeks, if not months, in advance. Well, you, as the guest, you pay that money in when you go make that booking. But Airbnb doesn't give that money to the hosts until after the check-in happens. So you could have, you know, up to, you know, six-plus months in advance where Airbnb, they have like the ultimate negative cash flow cycle. They're getting the money in. They're holding the money, some portion of which, roughly 12, 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 win, they raised all this venture capital.

• 59:52David Rosenthal?

  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.

• 59:59Ben Gilbert?

  Right. Yeah, this negative cash conversion cycle is a really, I mean, we talked about it a lot on the Pinduoduo episode to understand it sort of more at a deeper level. But you're so right here. And I think the, the, the most interesting thing to me is how typically in hotels, you would pay when you got to the front desk. And this was a different enough category, like a different enough mindset for people that they were willing to pay when they booked upfront. And that felt like the right thing to do. Like if you were gonna, 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

• 1:00:40Ben Gilbert?

  being different enough. And on top of that, what you said about growth is really interesting because sure, you can take that cash as long as you're growing and, 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, if you're shrinking.

• 1:01:02David Rosenthal?

  We're definitely going to talk about that. Yeah, this, this is all predicated on growth.

• 1:01:07Ben Gilbert?

  But, you know, I keep talking about how crazy non-dilutive all these rounds of financing were for, for Airbnb. Like this is one dynamic, like their, their growth actually financed the future growth of the company without needing the investor dollars to do it.

• 1:01:22David Rosenthal?

  It's, it's so smart. This is actually something like SaaS companies face the opposite of that, where you're selling deals, but those deals are, you might sell a, a deal for, you know, a million dollars in ARR. Well, it's just going to be paid to you month over month.

• 1:01:42Ben Gilbert?

  Enjoy your 100K a month or 80K a month check.

• 1:01:44David Rosenthal?

  Exactly. Okay. So things are working. They're winning in Europe. January 2012, they hit a cumulative 5 million nights booked on the platform. Six months later, in June 2012, they hit 10 million Knights books on the platform. This flywheel is starting to spin.

• 1:02:01Ben Gilbert?

  There's your product market fit right there.

• 1:02:03David Rosenthal?

  Yeah, exactly. Now, there's some bumps along the way. Definite stuff that's been written about elsewhere that we don't have time to cover here, like the EJ incident, which when the woman's apartment in San Francisco got trashed and they had to implement the insurance guarantee. That was terrible. There were, you know, people that had accidents on the platform. There were crimes. There were, 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, 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.

• 1:02:44David Rosenthal?

  So October 2013, they raised $200 million from Founders Fund at a $3 billion valuation.

• 1:02:53Ben Gilbert?

  So here we are selling, what is that, 8% of the company?

• 1:02:56David Rosenthal?

  Yeah, 78% for $200 million. Then the next year in 2014, they raised $500 million from TPG at a $10 billion valuation. And along the way in between there, a special was for the show and it'll, it'll come back up in a minute. Greg McAdoo leaves Sequoia and Alfred Lin joins the board. Alfred Lin from Southwest and of course, board member of DoorDash, as we discussed yesterday. Pretty big week for Alfred.

• 1:03:23Ben Gilbert?

  Yeah, crazy, crazy stat on Alfred. Been at Sequoia for 10 years. Yesterday was his first portfolio company to IPO and today is his second.

• 1:03:34David Rosenthal?

  Yeah. And they're both some, some pretty big IPOs, I would say. So, okay, we're now in 2014. We've just spent all this time. Enumerating all the amazing things about Airbnb's business model, about their growth model, their financing model, the product, why it's defensible, why even the Samwar brothers can't dethrone them. The thing, though, about when you have this sort of like beautiful capital light business model and a global network effect, in contrast to a company like DoorDash, you don't really have the existential requirement to fly low to the ground or operate at the lowest level of detail, shall we say. In fact, you can, you can fly pretty high, you might say.

• 1:04:20David Rosenthal?

  You might be able to fly very high.

• 1:04:22Ben Gilbert?

  Yeah, and this shows up in two ways. One, operationally, you can just be sloppier. Like, you just can not need to be as finely tuned as, you know, say, a performance marketing machine. And there's lots of different areas around the business where, where that shows up. But also, it means you don't have to be as considerate about what you're building and why, because you have this flywheel that's just spinning and profitable. And like, sure, lots of people are showing up to the office every day and doing important work and moving the company forward. But like, if they didn't, other than maybe customer support and success, like, the business would probably still grow and would probably still be profitable and it would probably still be fine.

• 1:05:05Ben Gilbert?

  And at some point in their journey, they really did hit that, where it was just going, whether they touched it or not.

• 1:05:12David Rosenthal?

  And, I mean, look, this is the dream, right? Of like, a business is to have a business like this. Like, there is, there is, not only is there nothing wrong with that, that's amazing. On the other hand, though, that's why it's so interesting to contrast these two IPOs, back to back with DoorDash and Airbnb. All those other things you said, Ben, are totally true, too. So let's go through it. In 2014, the company moves into a new headquarters building at 888 Brannon Street in San Francisco. And for anyone who's ever seen it, or if you haven't seen it, look at pictures of this place. It's Gold plated would be an understatement.

• 1:05:52David Rosenthal?

  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, it's amazing. There's a 24 seven kitchen. It is not no longer 24 seven, but at the time when they opened it, that operates, there's three meals a day, seven days a week.

• 1:06:11Ben Gilbert?

  All free for employees?

• 1:06:12David Rosenthal?

  Yeah, all free for employee. I can't imagine that there was too much demand for like breakfast on a Saturday or but, you know, who knows?

• 1:06:21Ben Gilbert?

  You know, they wanted to create the environment that they thought would enable people to do their best work, to be creative, to create this sort of culture that they wanted among hosts, like, you know, I, I, I get it, but it is absolutely emblematic of the fact that the flywheel was spinning and it was spitting off cash.

• 1:06:36David Rosenthal?

  Yep. They famously in 2014, it's now just become normal, but they unveiled the BOLO, the, the, the design mark of Airbnb, the logo.

• 1:06:45Ben Gilbert?

  Has a name.

• 1:06:46David Rosenthal?

  I know, the BOLO. And, you know, depending on like your, 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.

• 1:06:57Ben Gilbert?

  Yeah. Which is funny, I love the old Airbnb logo, like.

• 1:07:00David Rosenthal?

  I know, it was so good.

• 1:07:01Ben Gilbert?

  The cursive for sure.

• 1:07:02David Rosenthal?

  Script. Then also in 2014, they start doing an annual conference for hosts called Airbnb Open. They had brought on in 2013, as I think head of hospitality, a guy named Chip Conley, who Chip was the founder and proprietor of the Joie de Vivre hotel chain, which are these like super high end boutique hotels all around the world. And, uh, you know, Chip's the amazing kind of guru type guy. So at the, at the conference, he, he says, um, this is in the book. He says, uh, he's quoted as saying that, uh, he's predicting that Airbnb could win the Nobel Peace Prize, Peace Prize within the decade.

• 1:07:42Ben Gilbert?

  And you're like, wow.

• 1:07:43David Rosenthal?

  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, uh, but he has a great quote about all this in the, uh, in the upstarts to Brad. He says, well, growth covers a lot of sins and the growth of this company was spectacular.

• 1:08:05David Rosenthal?

  So also the next-

• 1:08:07Ben Gilbert?

  David, I think you summed it up so well, though, in saying this is exactly as an entrepreneur, as an investor, as an operator, like, this is exactly the type of business you want to start that just goes on its own and that you don't have to keep 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.

• 1:08:35David Rosenthal?

  Or at least maybe don't say you're going to win the Nobel Peace Prize. I don't know.

• 1:08:38Ben Gilbert?

  Yeah.

• 1:08:40David Rosenthal?

  Anyway, so in 2015, Expedia buys HomeAway, the only really viable product-wise competitor out there in the market for just under $4 billion. And, you know, there's some headlines about like, oh, Expedia, HomeAway, they're going to compete with Airbnb. No, like, this is surrender. This is basically admitting that there's no viable competitor out there. In 2015, the company Airbnb does almost $1 billion in net revenue on $8 billion in bookings. 2015 is the first year in the S1 where we have this data. They raise another-

• 1:09:14Ben Gilbert?

  By the way, $8 billion in bookings, that's equivalent to the $8 billion that DoorDash did last year in their gross order volume. So the amount of cash that moved through Airbnb in 2015 is equivalent to the cash that moved through DoorDash last year. It's sort of interesting to think about, I think, these companies, mostly because Airbnb has a much higher price tag per order, much lower orders per year. But, of course, like, thinking about the growth from when they both had that level of money flowing through the system after that is going to be interesting to think about, too.

• 1:09:50David Rosenthal?

  Indeed. In 2016, on top of that base, they grew 80%. And- And they do 14 billion in bookings in 2016, 1.65 billion in net revenue. They had raised in 2015, a billion and a half dollars at a $25 billion 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,

• 1:10:21Ben Gilbert?

  They're getting on super favorable terms. They can think of lots of things to do with it. Investors are desperate to get shares of this company. I do want to take a quick comparison here and say, okay, so the eight 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.

• 1:10:43David Rosenthal?

  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. They have some big announcements and Ben and I went back and we watched this video on YouTube. It's, it's something.

• 1:11:06Ben Gilbert?

  It's, it's just, thank you for the internet. Like, it is just miraculous that this thing is still on YouTube. Because it is, every single product they introduced, except for one, has been a complete failure.

• 1:11:17David Rosenthal?

  They, and you know, again, I mean, I, it's like, you do have to admire the ambition of they wanted to add more products and, and had a big vision for Airbnb to be more than just what it was. All that is good. So at this conference, they launched, Brian says it's the most significant development in Airbnb's history. And that the goal is to do for travel what Apple did to the iPhone with all the things that they were going to launch that day. They'll launch experiences, places, and of course, homes, their, their, their current Airbnb product. And, and a meta product above it all called trips that it's all going to be a part of. So experiences, people probably know experiences are still around today.

• 1:11:57David Rosenthal?

  Although nowhere in the S1 is it broken out, the performance of experiences or how many bookings they have of experiences versus stays.

• 1:12:05Ben Gilbert?

  Yeah, the assumption that everyone's making is experiences are a phenomenally tiny percentage of the overall revenue.

• 1:12:12David Rosenthal?

  Yep. Places is part of the, was part of the Airbnb app. And the idea was it was going to be like a super, like Meituan, like a super app aggregator for all the things you would want to do. So it's like Yelp, it's OpenTable, it's Meetup, everything you would want to do in your city where you live or a city where you're visiting, all within the Airbnb experience. So that was Places. And, and then all of it lived all together in trips. And so within trips, you had aggregated your, your stays, your experiences and your places, all the stuff you did. And they didn't launch, but they talked about adding car rentals to trips.

• 1:12:57David Rosenthal?

  They talked about adding grocery delivery to trips. They talked about adding flights and maybe even an airline someday to trips.

• 1:13:04Ben Gilbert?

  They even had a flight booking product in the works until March of this year.

• 1:13:09David Rosenthal?

  Oh, wow. I didn't know that.

• 1:13:11Ben Gilbert?

  Yep. That was one of the canceled things with coronavirus.

• 1:13:14David Rosenthal?

  Interesting. So, yeah, I mean, I think the thing was like, like all these were, were maybe not bad ideas, but I'm not sure they made a ton of sense within Airbnb. And I think that the disconnect is, is, you know, looking back for me watching that video was, I, I think Brian and the company really believed that like Airbnb was about, they talk about it so much at this, in this conference about belonging, about feeling home when you're traveling and about the connections in the community between hosts and guests. And I think that undoubtedly there are people that use Airbnb that love meeting strangers on the platform. I'm not sure that it's most of the people who use Airbnb though.

• 1:13:54Ben Gilbert?

  Yeah, I think there's a recurring theme that seems to happen kind of from this point forward in the business, which is Brian and management feeling very aspirational about why people want to use Airbnb, particularly around community, particularly around belonging. And people, again, generalizing, use it in a much more transactional way than that. They are logically weighing this option to stay here versus other options. And like, I just think that that disconnect becomes more and more apparent over time.

• 1:14:25David Rosenthal?

  Yeah. And if you go back to like, what was one of the original? You know, probably the biggest why now that made Airbnb work. It was the financial crisis. Like it was, yeah, yeah, you know, it's nice to stay in an apartment and whatnot, but like, I really want to go to San Francisco for a hundred bucks a night or 80 bucks a night, not a thousand bucks a night.

• 1:14:41Ben Gilbert?

  It is interesting. Around the 2014 ish timeframe, I remember my narrative of why I loved using Airbnb shifting, where I used to tell people, it's great. I can stay cheaper. And then I was like, actually, it's not really cheaper anymore. But like, gosh, hotels are so sterile and staying in an Airbnb, while it's probably the same price, maybe more expensive, hard to tell. I can access neighborhoods I otherwise never would have been able to access. I have a unique and cooler experience staying in this house. And I, I remember this moment in time, it shifting from a value of a price based value proposition to an experience based value proposition.

• 1:15:18David Rosenthal?

  Yep. Same deal for me. And what's interesting is, I actually didn't go back and look, I should have. But anecdotally, I think for, for us in our travel, there was a period of time, certainly when we were younger and more price sensitive, where all of our travel was on Airbnb. Like, we weren't staying in any hotels. And then during that, the period of time you're talking about, it was like, well, you know, when we would go for like a weekend, like it would depend on the trip, whether we would do Airbnb or hotels. Like sometimes we'd go, I was living in Seattle at the time, we were living, Jenny and I were living in Seattle. We'd come down to the Bay Area, maybe we'd go up to, to see our family. Maybe we'd go up to Sonoma or Napa. Sometimes we'd stay in Airbnb. Sometimes we'd stay in a hotel. But then, yeah, as the prices

• 1:16:02David Rosenthal?

  started equalizing, we were like, you know, a lot of these Airbnbs aren't that great.

• 1:16:07Ben Gilbert?

  Hotels are nice.

• 1:16:08David Rosenthal?

  There's some really nice hotels. Maybe we're just gonna stay in a hotel.

• 1:16:13Ben Gilbert?

  Right. And I think the thing that's, that sort of becomes true is people consider Airbnb one of their options.

• 1:16:19David Rosenthal?

  Yep, totally. Not that we stopped doing it at all. And for group trips, getting a family together, going to a place where there isn't great hotel inventory. Fantastic use case, but you fast forward to today, you know, we've talked about, we've talked about experiences, places is gone, the trips concept is gone, it's now refocused much more on on stays. So the next year in 2017, the company tells investors that they're planning to IPO within 12 months. And but then, at the beginning of 2018, they had hired back in 2015, a big name CFO, Lawrence Tossi, who had been the CFO of Blackstone and the

• 1:17:04David Rosenthal?

  COO of Merrill Lynch before coming out to San Francisco and joining Airbnb, he leaves the company. So that puts the IPO in jeopardy. And Brian publishes a blog post when he leaves saying that Airbnb has an infinite time horizon and is focused on being a 22nd century company.

• 1:17:24Ben Gilbert?

  Oh, that is like some interesting shade.

• 1:17:28David Rosenthal?

  Yeah, I'm not, I'm not sure what it means to be a 22nd century company, but it definitely means they're not going public anytime soon, which I think was the message.

• 1:17:36Ben Gilbert?

  And it sounds like Brian likely didn't appreciate any of the pushback or guidance he was getting around, I don't know, IPO readiness or whatever, whatever the opinions were of the CFO and other finance leaders who would come in afterwards.

• 1:17:52David Rosenthal?

  Yep, indeed. So, you know, that starts off a whole cycle of speculation in the press, internally, externally, about when is Airbnb going public? Will they go public? At what valuation? What is happening? Because of course, they had raised all this money from Sequoia and others. And it's hard to have an infinite time horizon when you have investors with fund life cycles.

• 1:18:16Ben Gilbert?

  I texted David like a month and a half ago. I was like, dude, I think Airbnb is going to IPO before the end of the year. And you're like, okay, I'll believe it when I see it. Heard this story before.

• 1:18:27David Rosenthal?

  We've heard it before. We've heard it before, but they, they actually do. So we'll get into like the story of this happening and why it's happening now. So the reality, you know, we've talked about this kind of like three acts, like there are so many of our stories here, you know, there was to be the first act here of Airbnb, this crazy thing almost didn't happen, but it was a great idea. Gets into YC, grows and grows and grows. Then, you know, we've now gone through the second act of like, the growth is still happening, but. Some puzzling decisions are happening, but like, okay. The thing is though, after all this, starting in 2017, the growth no longer keeps going.

• 1:19:08David Rosenthal?

  And which we've alluded to in our own views and usage of the platform here over the last couple of years. So 2017 bookings growth slows to 50% from over 70% the year before. Still really good. I mean, you're at a huge base, growing 50% year over year. That's great.

• 1:19:25Ben Gilbert?

  It's a 10 year old company too. Like 10 year old company growing at 70% on that kind of base. Like nothing to be ashamed of at all.

• 1:19:32David Rosenthal?

  Absolutely. You can go public with that. 2018 bookings growth slows to 40%. Like, okay, but still, you know, whole company, large base, growing 40% annually. Great.

• 1:19:45Ben Gilbert?

  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.

• 1:19:55David Rosenthal?

  Yep. The next year in 2019, the last full year we have data for before COVID, bookings growth slows to less than 30%. So I believe it was like 28 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, the growth is linear. So they added eight and a half billion dollars in bookings in 2018. That was two years ago growth. They also added eight and a half billion dollars in bookings in 2019. So like the growth, the base is growing, but the amount that you're adding every year is now constant. And of course, then we'll get into what happens in 2020, but like.

• 1:20:38Ben Gilbert?

  And do you chalk that up to IPO readiness? Like they shifted their mentality from a grow at all costs company to a, we should start thinking about profitability company?

• 1:20:49David Rosenthal?

  I don't think so because the costs keep growing and this is maybe as if not more alarming. The company's cost structure keeps growing as if it were a growth company. So in 2019, total expenses grew 46%, even though bookings grew 28, 29%. Variable costs in 2019 grew 41% and fixed costs grew 60%. So like if anything, as you grow and especially on this huge base, you should be start getting like way more leverage on your fixed costs. And they're actually getting less here.

• 1:21:28Ben Gilbert?

  Hmm. Well, that's concerning.

• 1:21:30David Rosenthal?

  Concerning indeed. So then 2020 happens. Well, before 2020 happens in September of 2019, they announced that they will go public in 2020. And this has been reported elsewhere, but the company now by September 19 is is close to 12 years old. The early employee options are going to start expiring.

• 1:21:54Ben Gilbert?

  Yeah. So how does that work?

• 1:21:55David Rosenthal?

  I don't know exactly. I think, I don't know if it mirrors like, as I think about like a, 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.

• 1:22:21Ben Gilbert?

  Yep.

• 1:22:21David Rosenthal?

  You're now over 10 years into that fund.

• 1:22:24Ben Gilbert?

  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.

• 1:22:38David Rosenthal?

  Yep. And also like, you know, everybody would just would like some liquidity, I would assume here, not to mention. So. They announced they're going to go public and then COVID happens in March of 2020. And overnight, the business evaporates. And not just evaporates, we talked about the huge benefit of Airbnb's cash flow cycle. When you're growing, well, when you're shrinking, that like really hits you. So actually, this is crazy. In March and April of 2020, Airbnb's gross booking values turned negative.

• 1:23:22David Rosenthal?

  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 like, seen this before, not, not even like negative revenue. Do you have negative bookings? You're actually paying people more than you are getting.

• 1:23:44Ben Gilbert?

  Brutal, which of course it's a global pandemic. So of course it's

• 1:23:48David Rosenthal?

  Totally, totally brutal. So in March, and I wondered, I didn't quite realize that still digging into the S1. In March, as people probably know, Airbnb raised $2 billion in capital from Silver Lake and Sixth 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% interest rate. The equity piece was at an $18 billion valuation, which was down.

• 1:24:20Ben Gilbert?

  A billion in each, right? A billion of equity and a billion of debt.

• 1:24:22David Rosenthal?

  I think that's right. I think ish. And I sort of wondered at the time, like, why would the, you know, these are pretty onerous terms, like on both sides, you know? Massive haircut and valuation.

• 1:24:33Ben Gilbert?

  Basically a 50% haircut and valuation.

• 1:24:36David Rosenthal?

  And then the debt side, interest rates are zero out there. This is like, this is like major distressed debt. Like you're, you're pricing, pricing a tranche at 11 and a half percent interest rate. I think this is what was going on was not only did the business evaporate, but like they're paying out refunds. And they probably, they must've just desperately needed the cash at this point in time.

• 1:24:58Ben Gilbert?

  Yeah, the way to think, at least the way, you know, my, I am not first and foremost a finance person, but the way, the bucket in my head that I sort of put this cash flow dynamic into is is kind of a form of leverage. Like when you're, when you're going well, it's a way to, it's a way to basically make sure that you, like we said earlier, you are able to use that cash to grow without raising new equity. But it, you know, the thing about leverage is it levers whatever direction you're going. And so when you, you start shrinking, you know, you're in big trouble quickly. Very similar to another thing that was going on sort of with Airbnb

• 1:25:39Ben Gilbert?

  and with all tech companies is operating leverage. Like Airbnb has a really, really, really high set of fixed costs, but their variable costs are, you know, obviously much higher than a SaaS company because it's a marketplace and they got to pay the, the hosts. But like they make a lot of money on every transaction. And so the whole ballgame for tech companies is build the best freaking product you can. And especially recently, spend a ton of money on sales and marketing to, to go capture a winner take most or all market. So your sales and marketing costs are high, your R and D costs are high, but those are relatively fixed. And then hopefully your

• 1:26:15David Rosenthal?

  At least your R and D costs are.

• 1:26:17Ben Gilbert?

  Yes. And then hopefully your, your, your profit margins on a unit basis help you outrun all those fixed costs or high operating leverage. Now, when you're shrinking, or when you, you know, when your revenue is, is low, then that hurts you in the exact same way that it helps you as you're growing. Because now you've got all of these mouths to feed, but very few customers to feed them with.

• 1:26:40David Rosenthal?

  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

• 1:26:57Ben Gilbert?

  Huge.

• 1:26:57David Rosenthal?

  reduction in force. They cut $800 million in marketing expenses. So there you go, addressing each of those two points you just made, Ben.

• 1:27:07Ben Gilbert?

  Except that they didn't actually let go a lot of the R and D like they kept, they kept mostly R and D people and laid off mostly the people in the customer success service organization.

• 1:27:19David Rosenthal?

  Yeah, yeah, we might want to get into that in a sec. Brian describes it at the time as a quote unquote second founding of Airbnb as a business. They jettison all of the other stuff that they were working on. Experiences are still around and they moved to online experiences, but no places, no trips, no, we didn't talk about the company had started a movie studio at some point along the way there called Rouse Street Films. They also, well, they had a lot of stuff going on.

• 1:27:49Ben Gilbert?

  I got the magazine for a while.

• 1:27:50David Rosenthal?

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

• 1:28:15Ben Gilbert?

  Pulled together a great stat. Even though I think there's been basically two eras of the pandemic for Airbnb. There's the initial era where everything froze up and they had to do this super onerous deal. But then there's the second one, which is as people, as we knew more about COVID-19 and understood how it spreads and you know, it's, it's through the air rather than on surfaces and all these things, people started making their own informed decisions around how can I live my life safely? And it turns out Airbnb was actually a great option to live your life safely, more so than hotels. Like I remember a moment where Airbnb's bookings were down something like 50%, but hotels were down 90%. And I don't, I don't exactly remember which month this is, but I think that, that narrative is definitely one that played out during, during the pandemic.

• 1:29:00Ben Gilbert?

  And for me personally, I have stayed in only one hotel since March. It was the only option and it was in the middle of nowhere. And I sort of had to book the hotel much to my chagrin, but I've stayed in six Airbnbs. And I think that that is illustrative of act two of the pandemic for this company.

• 1:29:17David Rosenthal?

  Totally same. We're, we're, we've been less active than you since Jenny's more tied to San Francisco than you guys.

• 1:29:25Ben Gilbert?

  More of those, more of those came from a bike trip. Different place every night.

• 1:29:30David Rosenthal?

  But yeah, we've stayed in two Airbnbs 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.

• 1:29:43Ben Gilbert?

  Who wants to walk through a lobby right now?

• 1:29:46David Rosenthal?

  Yeah, yeah, it was, uh, it was, I mean, I feel for hotels these days.

• 1:29:52Ben Gilbert?

  Yep.

• 1:29:53David Rosenthal?

  So the business starts to recover. So we should say for all of 2020 so far, the first nine months of 2020 versus the first nine months of 2019, gross bookings are down 39% in aggregate. So the growth, as makes sense, because the pandemic, uh, growth has gone from slowing to, to literally shrinking, but things are recovering in August of this year, month over month, August bookings were only down by 14% versus the year before. In September, they were down 17% versus 2019, but things are stabilizing.

• 1:30:31Ben Gilbert?

  Right. It would, it would seem reasonable to think that they'll get to parity, you know, either before a good chunk of the population is vaccinated or shortly after.

• 1:30:39David Rosenthal?

  Or shortly after, yep.

• 1:30:40Ben Gilbert?

  So they basically effectively lost a year of, of growth.

• 1:30:43David Rosenthal?

  Yeah.

• 1:30:43Ben Gilbert?

  Well, except that they also shrunk.

• 1:30:46David Rosenthal?

  Right. Well, and I think that's the, the question that we'll talk about in a second in our analysis sections is what, what 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, uh, in a surprising move. They make good on their promise to go public in 2020, even though there's a pandemic, even though the business gross bookings are down 39%. So unlike DoorDash yesterday, where, uh, what did we say that for the first nine months, they're up 300%, I think?

• 1:31:28Ben Gilbert?

  Close to it.

• 1:31:29David Rosenthal?

  For the year, Airbnb is is down in growth 39%. They filed their S1 and then last night on December 9th, 2020, they priced the IPO at $68 a share, end up raising $3.5 billion at a $47 billion market cap. So.

• 1:31:48Ben Gilbert?

  Big, man. Like, that makes that Silver Lake investment at 18 billion, just what, six, eight months ago, look like a genius move.

• 1:31:56David Rosenthal?

  Indeed. And so let's see, what did we say? We said they priced at $68 a share. Got Yahoo Finance pulled up here. It is currently trading.

• 1:32:08Ben Gilbert?

  Oh, I see it in the acquired Slack. People are buzzing about it.

• 1:32:11David Rosenthal?

  You want the live reaction?

• 1:32:13Ben Gilbert?

  Oh, my God. Opens at 146 a share, at 159 a share now.

• 1:32:20David Rosenthal?

  Yeah. Yeah.

• 1:32:23Ben Gilbert?

  I mean, after DoorDash yesterday, I was expecting some kind of pop, but so now they're valued at over $100 billion?

• 1:32:32David Rosenthal?

  So, yeah, that would imply they're valued at over $100 billion. Wow.

• 1:32:38Ben Gilbert?

  This company's hovered at like 30-ish billion for a while. Like, they were constantly.

• 1:32:44David Rosenthal?

  And then the pandemic, and growth was slowing, and then the pandemic.

• 1:32:47Ben Gilbert?

  I mean, I'm thinking to myself when they dropped this in November, like, this company really had to go out this year, because otherwise, why on earth would you go into this market right now? Or I guess the market's doing fine, so the IPO window's open, but with their numbers, you would think, like, can't you wait until things stabilize a little bit?

• 1:33:06David Rosenthal?

  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, wow. Okay, well, we'll get into it, but that.

• 1:33:17Ben Gilbert?

  And even with 2019 growth rates, so, okay, I put together some numbers to try and contextualize why David and I are talking about growth rates the way that we are. So Uber was, 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 and IPO in 2018? It was growing at 42% when they IPO'd. So that's probably, you know, that's much faster than the 28, 29%. We wouldn't have called Uber's growth linear at that point. Lyft was feeling themselves. They were growing, you know, doubling year over year at 100% of growth.

• 1:33:53David Rosenthal?

  That was coming out of Delete Uber.

• 1:33:55Ben Gilbert?

  Yep. DoorDash, obviously over 200%. Pinduoduo, who we covered to open this season at 246% year-over-year. Again, China tech, different in every way. When you gaze over into SaaS land, the numbers are also looking pretty good. Slack, which was a product-led growth company primarily at that point, 81% year-over-year. Square was 55%. Shopify was actually more than doubling at 110%. The laggard of the bunch, which ended up not becoming a good stock, was Dropbox at 31%. Still a few percentage faster than Airbnb pre-pandemic. So that's sort of contextualizing why we're not super excited about Airbnb as a growth company at this point.

• 1:34:41David Rosenthal?

  And what I'm looking at, I don't have the numbers right at hand, but for Snowflake, which before this week had been the darling IPO of 2020, the new Zoom, they were going at, I believe, close to a 200% growth rate at going public. So what is going on here? This company is shrinking.

• 1:35:03Ben Gilbert?

  Yeah, this company had slowed growth and is now shrinking. I think an important thing to realize here, too, the thing that scares me the most is 91... So again, it's a sword that cuts both ways. 91% of the traffic to Airbnb is direct. It's organic. It's stuff they're not paying for. Now, they're loosely paying in brand ads, 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, if they do want to turn on the growth engine and they do want to grow a lot faster than 30% year-over-year,

• 1:35:45Ben Gilbert?

  are they going to be able to do that with precision and profitability? Like, it's not the muscle they've trained.

• 1:35:52David Rosenthal?

  You have to imagine. It's not like they haven't been trying to... It's not like they don't know that their growth rate was slowing.

• 1:36:00Ben Gilbert?

  All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 1:36:13David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 1:36:30Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 1:36:45David Rosenthal?

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

• 1:37:09Ben Gilbert?

  And they recently launched Logora 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.

• 1:37:28David Rosenthal?

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

• 1:37:58Ben Gilbert?

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

• 1:38:23Ben Gilbert?

  All right, David. So I want to, so we sort of talked about the growth. I do want to round out history and facts here with a couple IPO nuggets. So the first is the cap table. At IPO, the founders owned 31% of the company, comparing that to the, what is it? 13, 14% that founders of DoorDash owned.

• 1:38:47David Rosenthal?

  Very impressive.

• 1:38:48Ben Gilbert?

  Story of two different dilution methodologies.

• 1:38:52David Rosenthal?

  Story of two different capital intensive, two different degrees of capital intensity in your business.

• 1:38:58Ben Gilbert?

  Yeah, great point. Great point. So Brian Chesky owned 11% going into the IPO. I was all prepared to talk about how he is now has more than $4 billion to his name. I think now this means he has 10 plus billion dollars to his name on paper in Airbnb stock. Joe and Nate also both have 10%. I think they sold 100 million collectively going into the IPO just to get a little bit of liquidity. I'm curious if there were other selling shareholders or if all of the investors held at the IPO and if they'll all be subject to the same lockup. I don't, do you know anything about the lockup on this one, David?

• 1:39:37David Rosenthal?

  I don't. I'm sure it's in the S1, but I haven't.

• 1:39:40Ben Gilbert?

  I assume 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, maybe closer to 13 billion.

• 1:40:04David Rosenthal?

  Not bad for 0.1% of your fund that you put into a company.

• 1:40:08Ben Gilbert?

  That's crazy. And that I think total, they put 260 million into the company over 11 years. So, and I assume that has to be over multiple funds.

• 1:40:18David Rosenthal?

  Yeah, yeah, for sure.

• 1:40:21Ben Gilbert?

  Founder's Fund invested across a couple of different funds and this information's from the information, which we'll link to in our, that's confusing to say that, but capital T, capital I, the information, and we'll link to that in our sources. I think they came up with about $3 billion after investing about 150 million. So it's just like winners all around here. YC owned 2%, Greylock, obviously, won big. Andreessen Horowitz invested 60 million when they valued Airbnb at about $1 billion. So I think they probably have 3-ish billion coming out of this. So lots of winners in the venture world.

• 1:41:03Ben Gilbert?

  You also look around, you mentioned Keith Raboy, Kevin Hartz, Jawad Karim personally, you've got Ron Conway, DST, Jeremy Stoppelman from Yelp was an investor, obviously Bezos personally ended up investing.

• 1:41:17David Rosenthal?

  This is like an Academy of Words speech.

• 1:41:19Ben Gilbert?

  It's crazy. You got Jared Leto, you got Ashton Kutcher, and then by proxy, Demi Moore. Like lots and lots and lots of people are feeling very good today.

• 1:41:27David Rosenthal?

  Wow. Wow, wow, wow.

• 1:41:31Ben Gilbert?

  In addition, of course, to the thousands of employees.

• 1:41:34David Rosenthal?

  Absolutely. Wow. Any other nuggets or should we move on to narratives?

• 1:41:39Ben Gilbert?

  Let's see. One thing to know before they IPO'd is they had 2.7 billion of cash in the bank and then they had another 1.8 billion in marketable securities. So when they, they were going to double that cash because they were going to raise 2.4, they ended up raising 3.5. So they now have a sort of cash chest of 7-ish billion dollars. So the company will continue to be able to weather storms for a while, it looks like. And I'm curious what they'll start sort of reinvesting in now that they're through this period and obviously have to show a really good quarter and next quarter after that in order to keep the investor excitement as high, as high as where it is right now.

• 1:42:19David Rosenthal?

  Well, I'm just so confused. You would think that. I'm just so confused, but maybe we should discuss the narratives.

• 1:42:29Ben Gilbert?

  Whatever could you be confused about? Let's, let's go into narratives.

• 1:42:32David Rosenthal?

  Oh, great. Okay. Well, should we discuss the bull narrative first?

• 1:42:36Ben Gilbert?

  Yeah, let's do it. And so for folks who are new to the show, narratives are where we talk about what the sort of media was saying when they had a bull case and a bear case for the company coming in. And, you know, the biggest, for me, the biggest bull case that I've heard is that they have the most unique supply of anyone in the industry that they spent a decade creating. They have this brand mode. They have 91% direct traffic that, 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.

• 1:43:14Ben Gilbert?

  Like that, that to me is the big story here of why they're kind of in their own lane of competition and they're not really competing with the bookings of the world who all sort of are fighting for the existing hotel supply. Although they're trying to bring on the Airbnb type supply too, but that, that's the biggest bull case.

• 1:43:32David Rosenthal?

  I think maybe there are two other dimensions as well. I think that's probably the biggest piece, but um, one being that uh, coronavirus and COVID has perhaps permanently changed some behaviors, just like the, the part of the, the DoorDash bull case, perhaps permanently changed some more behaviors to be more favorable for Airbnb for travel, not just in this period, but going forward. I think that might be a, a small part of this. And then I think the second piece is also, we've talked a little bit about TAM along the way. And yesterday with DoorDash, that was one of the big, big question marks for DoorDash, I think is like, how big is the TAM? How many, do they have to get into adjacencies, et cetera?

• 1:44:18David Rosenthal?

  You know, I think for Airbnb, what has always been true here is that like, there, there are no questions on TAM.

• 1:44:26David Rosenthal?

  The travel is, is big. And although it has taken a big hit this year, it's going to come back.

• 1:44:32Ben Gilbert?

  Yeah, they cite a $3.4 trillion number on their TAM. And I think that the way they break that down is that 1.8 trillion of it is short-term stays. And then only 210 billion of it is long-term stays. So 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, an interesting comp, and tells you why they're not sprinting that aggressively toward long-term stays, but rather they believe there's a $1.4 trillion opportunity for experiences, which explains why they're beating the experiences drum so hard. But let's just focus on that $1.8 trillion market of short-term stays. You know, they got a lot of room.

• 1:45:13David Rosenthal?

  I think we can throw out the rest of it.

• 1:45:14Ben Gilbert?

  Before they saturate that, yeah.

• 1:45:15David Rosenthal?

  Yeah, yeah, a lot of room to run there. So I think that's, I think that's the book. I think if you believe all of those things.

• 1:45:23Ben Gilbert?

  And one more stat on like the, you know, unique supply, great brand, direct traffic thing. Like, the comp there is Expedia and Booking spend about $11 billion a year on Google Ads, which I think makes them Google's top customers or top handful of customers. And so that classically, the online travel agent market has been one where it's really difficult to acquire a customer and then keep them, rather than needing to go reacquire them every single time they travel. And so this, that's why this direct traffic thing is such a big deal. It's 91% direct traffic to Airbnb is such a big deal because other players have not been able to acquire a customer once and keep them.

• 1:46:08Ben Gilbert?

  And Booking is trying. They're ramping down their Google spend in an effort to form a sort of multi-transaction relationship with a customer. But Airbnb is really the one who's proven they can do that. So I think that's, that contextualizes why people are so excited.

• 1:46:21David Rosenthal?

  Yep, totally. That is a massive benefit to the company and opportunity.

• 1:46:28Ben Gilbert?

  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 number.

• 1:46:37David Rosenthal?

  Totally. Totally. Okay. Well, I would say, should we feed the pig? I don't know that there are any bears out there right now to, to make a bear case.

• 1:46:45Ben Gilbert?

  I don't, I, we should look at the short ratios and see.

• 1:46:48David Rosenthal?

  Yeah, and see. Um, okay. So, uh, well, bear case, I, I, I think to me, the, 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, the growth is slowing. Like, everything may be true about the product and the unique supply and whatnot, but like, if you want to believe that you're going to access a very, very large chunk of that $1.8 billion short-term stays TAM, or $1.8 trillion short-term stay TAM, you need to still be running fast growing into that. Uh, and what did they do last year? $38 billion in gross bookings, I think Airbnb

• 1:47:33David Rosenthal?

  did? You know, yeah, that's like, that's like a lot of billions, but, but that's not a lot compared to 1.8 trillion. And for the growth to be slowing significantly, then you wonder how much of this TAM are you really going to access?

• 1:47:47Ben Gilbert?

  Right. So what does that mean? Does it mean that their TAM isn't actually the 1.8 trillion for the short-term stays and it's actually much smaller, like the addressable part of that? Or is it that like somehow they're just failing to market to the vast majority of people who are, you know, living their life in this way and paying for things in this way?

• 1:48:05David Rosenthal?

  Well, I think it's interesting. It's, um, I think it's probably both, right? Like, if you at least think about my use case and our, 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? And I certainly didn't want an Airbnb or a hotel 100% of the time. It was a mix.

• 1:48:40Ben Gilbert?

  Right.

• 1:48:41David Rosenthal?

  And I don't, I don't, 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, back to the bull case. If you believe that post coronavirus, just the preference for hotels is gonna go down a lot. Then maybe this is gonna be a big accelerant to Airbnb.

• 1:49:11Ben Gilbert?

  Yeah, I think that's the right way to think about it. Yeah, man, the bear cases kind of keep going for me. The, so there's this like potential market saturation thing and then the slowing growth. There's a growing belief, I think, that they will have recurring acquisition costs the same way that booking and Expedia do because these people are starting to multi-home more than ever. Like VRBO is starting to see a lot of the formerly only Airbnb listings show up there. Booking is trying like hell to be able to have these sort of unique experiences, the Airbnb type of listing in addition to hotels on that, their platform.

• 1:49:51Ben Gilbert?

  So everyone is skating toward a more homogeneous 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?

• 1:50:08David Rosenthal?

  Well, and this is, um, this is maybe a good case to talk about our own experiences as hosts too. Cause I think probably a, yeah, an argument against that and a big lock-in would be as a host, if you say, you know, I'm not willing to do that. I get more value being on Airbnb. I'm not willing to multi-home. That would provide some lock-in. But I don't know, how are we feeling at least as hosts?

• 1:50:35Ben Gilbert?

  Well, I'll tell you, I mean, I'm someone that this year has put my Airbnb also on VRBO. It was a huge pain to actually do that because VRBO's product is like, imagine taking Airbnb's product and then just like making it like 30 to 50% worse in every way. And that is the product experience of being a host on VRBO. But once you have it up, like it's up. And sure, you have to figure out how you're going to block nights on different calendars. But like, I was never someone that multi-homed and I am now. And I know lots of other people who are the same way. It's, you know, an opportunity to maximize, maximize revenue, minimize vacancy. And there are ways to manage it.

• 1:51:15David Rosenthal?

  Yep. Well, and you know, for me, we haven't multi-homed yet, but the only reason we haven't is that we haven't listed our house really at all, except for like one week this year. But if we were, and we're traveling more, I think we absolutely would. And the biggest reasons for me are, well, there's what you said, but I think it's also just a price aspect that I do think the pricing algorithms on Airbnb are biased to fill rates versus maximizing revenue.

• 1:51:47Ben Gilbert?

  100%. I was going to save this for later in the show, but I, I've got a diatribe ready about like, and I don't need to fully go on it, but the incentives are misaligned between Airbnb and their hosts for features like smart pricing. Like it's smart pricing for Airbnb. Airbnb wants to maximize exactly what you're saying, nights booked and total revenue. But like I, as a host, do not want to maximize total revenue at the, like, I wouldn't want to take a $30 booking one night, but Airbnb would be like, great. You know, this is like, there's higher liquidity, there's more supply on the platform with more nights available. We got some revenue out of that transaction. But if you basically factored into a labor cost, there's a price at which the people aren't willing, the hosts aren't willing to take on the sort of cost and risk associated with that. And Airbnb's smart pricing.

• 1:52:32Ben Gilbert?

  Couldn't care less.

• 1:52:33David Rosenthal?

  Exactly. Well, and so this, the point I was going to make is that like, you know, I care about price. I want to maximize my revenue as a host. There are these other viable platforms out there. Now they're not as nice to use as Airbnb, VRBO, HomeAway and booking.com. On the other hand, they do have traffic. They do have

• 1:52:53Ben Gilbert?

  100%.

• 1:52:53David Rosenthal?

  guests. I mostly trust them. I have no reason not to trust them. I think they're viable. They're not some fly by night competitor that's going to send like crappy guests my way. Anytime that you're, you know, all markets are supply and demand. So if you want to maximize your price in anything, whether you're raising around as a company, or you're a host, you know, of a, of a apartment 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.

• 1:53:24Ben Gilbert?

  Yeah. And especially as Airbnb tries to be more scalable and more capital efficient. It's not as enjoyable to be a host on the platform as it once was, and it carries risk to only single list. Like

• 1:53:37David Rosenthal?

  Yep.

• 1:53:38Ben Gilbert?

  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 as their livelihood, like, it's, you know, it's, imagine if you only listed on the app store and you didn't all list on Google Play and then Apple found something they didn't like about your app and then you're up a creek. You know, I think now that this market is maturing, we're going to see more and more people not willing to take the sort of single provider risk.

• 1:54:20David Rosenthal?

  And one thing that I think has changed over the past couple of years is there now are viable, good third-party software tools to do this.

• 1:54:32Ben Gilbert?

  Yeah.

• 1:54:32David Rosenthal?

  Whether it's Beyond or Guestly, you can pretty frictionlessly as a host, have your property listed across all of these platforms and not worry about keeping it in sync and having costs associated with that.

• 1:54:47Ben Gilbert?

  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 a hundred billion dollars. And, and there's other reasons, there's other things I'm negative about, but like the sum total of innovation they've created is unfreaking believable. And they're one of the few companies that actually did create an ecosystem around them. There's like, obviously the ecosystem that has yet to be proven with the sort of like professionally managed Airbnbs or the people that own big blocks of Airbnbs. Yeah, that, that sort of thing. But something that's totally been proven as sort of a successful

• 1:55:28Ben Gilbert?

  smaller business is all these different software plays that, that can help you be a more effective host. Now, is it a little silly that Airbnb hasn't done any of that themselves and relies on you to go find it on your own? Yeah, massively dropping the ball. But you gotta credit them for enabling an innovation ecosystem.

• 1:55:48David Rosenthal?

  Yep.

• 1:55:49Ben Gilbert?

  Okay, one, one more bear case.

• 1:55:53David Rosenthal?

  Great. Well, I had one too. I don't know if it's gonna be the same.

• 1:55:55Ben Gilbert?

  All right. So, so yesterday on the DoorDash episode, we mentioned that, you know, with their stock pop, they're seriously butting up against the edges of the, the total addressable market for takeout in the United States. In order to value them the way the market is currently valuing them, you have to believe they can expand into adjacencies and be the local real-time FedEx. For Airbnb, they have demonstrated a pattern of trying this many times over the years and failing. So you have to sort of value this company based on the market they're actually in, not what they possibly could succeed at in the future. And I think like, as I think through this, I was trying to come up with one example where they've done something outside of their bread and butter, the thing they stumbled onto in the, you know, first real year of the company, that they've done well. And, and

• 1:56:38Ben Gilbert?

  I just don't, I don't think the company is a master executor outside of that initial opportunity. Like, it's, it's almost like the anti-Amazon, who's really effective at testing new adjacencies to expand into and killing the ones that don't, and then leaning hard into the ones that do. Like, they tried luggage. They tried building a hotel. They tried experiences. They've tried dining. They tried booking air travel. They tried custom designed tiny homes.

• 1:57:05David Rosenthal?

  Even plus, I don't know. Were you on plus for you on plus Airbnb?

• 1:57:09Ben Gilbert?

  Totally, but it became meaningless.

• 1:57:10David Rosenthal?

  Terrible experience.

• 1:57:11Ben Gilbert?

  It's a bad experience and it got totally diluted, much like Superhost. Like, what does that even mean anymore? Nothing. So I, it just feels to me like the personality of the company is one where they're really proud of their ideas and they want to like, make something their way. And their first idea worked really, really, really, really well. And I don't think any of these other ideas are sort of being tested with rigor.

• 1:57:36David Rosenthal?

  The only thing I can think of, I was thinking about what he said. The only thing I can think of that was a non-original idea, although it was also pretty early in the company's life that I think they executed on incredibly well was Instant Book.

• 1:57:51Ben Gilbert?

  Oh, yeah.

• 1:57:51David Rosenthal?

  I think that was, I think that was over a year into the company that they innovated on Instant Book.

• 1:57:57Ben Gilbert?

  A hundred percent, and they deserve all the credit for that. I mean, I think the innovations of Instant Book, payment through the platform, messaging through the platform, and their review system is like, that is, together they create the symphony that enabled this product to, to provide tons of value on both sides of the balance.

• 1:58:15David Rosenthal?

  But it's all, but really Instant Book, that, that's part of the initial product. Like, that's not, that's not a subsequent thing. So, I agree. I, I think the other, I debated whether to talk about this in Power, but I, I think, I think makes more sense in narrative, maybe leading into Power for a bear case on the company is, as we talked about in the bull case, you gotta believe that they're gonna keep penetrating a huge part of this huge TAM. And you probably also have to believe at these prices that coronavirus has shifted the winds in Airbnb's favor.

• 1:58:47Ben Gilbert?

  Yep.

• 1:58:48David Rosenthal?

  And to a certain extent, I think it probably has. But I think it's also exposed a structural weakness for the company, which is, if you think about like zooming out, you mentioned Amazon, like an analogy here. Airbnb is not Amazon. They are much, much, much more like eBay. And eBay has been on a similar path, enormous TAM, global network effect. Torrid growth for many years, but then has slowed and has, you know, now it's, I don't know what their growth is, but like it's fine. They're still like a decent sized company and whatnot, but.

• 1:59:26Ben Gilbert?

  We don't talk about them as part of the FAANG.

• 1:59:28David Rosenthal?

  We don't talk about them as part of FAANG. But what has happened, it's not like e-commerce and it's not like peer to peer. E-commerce has gone away. And in fact, it's continued to grow, but eBay has not captured that. What's happened is you've had specialized 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, like you name a niche interest of buying and selling something. There is a verticalized marketplace out there that is either, either has or is in the process of offloading that market from eBay.

• 2:00:11David Rosenthal?

  Now with Airbnb, you're actually starting to see the same thing happen. Now, how much this will happen and how deep Airbnb's moat goes and how big their, their core market is, I think it's still a question, but Hipcamp is out there. Hipcamp is, is in the process of offloading camping type experiences from Airbnb.

• 2:00:36Ben Gilbert?

  And not hard to get to like the tiny green homes or detached ADUs or anything from there, you can see how they start.

• 2:00:42David Rosenthal?

  Outdoorsy out there is doing the same thing for RVs. You could book an RV on Airbnb or you could book an RV on Outdoorsy. And with dedicated, you know, feature specific stuff that people care about in a niche community. And so I think this is the big question, right? Like, okay, coronavirus has changed. Let's assume it has changed people's travel preferences. How much of that is going to stay on Airbnb versus how much of that is going to go to some of these other new platforms or even new ones that have, are in their infancy or yet to be built yet?

• 2:01:10Ben Gilbert?

  That's a great point. And you think about like, what did Amazon do to create like so much lock in there? They built all the services around purely selling your goods. So of course they brought you the traffic, but then they also did fulfillment by Amazon. They also did, you know, 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 anybody who only had a subset of that because they were doing some niche thing they were going to carve off, it was just never interesting enough as a seller because they couldn't get to the scale. And you think about all these things that Airbnb could do to make it a no brainer to work exclusively with them.

• 2:01:54Ben Gilbert?

  I mean, like cleaning is a big one. There's this thing that everybody has to go fend for themselves and figure out their own cleaner. Check in is a great one. It's these things that people rate you on that, you know, Airbnb 13 years in hasn't built host services for. You can imagine those things being game changing for their lock in and for, for guest satisfaction. Like, once you know that something is done the Airbnb way, in the same way that like, oh, this thing isn't sold by Amazon, but it's on Prime. Eh, same thing. I trust it. It's got the Airbnb, the Amazon stamp of approval on it.

• 2:02:27David Rosenthal?

  Yep. All right. Should we move into power?

• 2:02:29Ben Gilbert?

  Yeah, let's do it. The way that, for folks who are new to the show, the way that power works is it's a Hamilton Helmer framework, and 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

• 2:03:11Ben Gilbert?

  You know, valuing a company based on last quarter's results, that's not at all what they're doing. They're using that as a bellwether for the next 30 years of results. And sure, they may swing too far in one direction, but really, the way that, you know, a market cap works is, of course, it's an extrinsically defined market for the equity in the company. But intrinsically, what it is, is it's a representation of what people believe the sum of all future positive cash flows in the businesses will be discounted to today. And so, you know, as you think about, power and market cap are intrinsically linked, because whatever you believe, the power that allows them to generate persistent profit margins over all those future years are the way that you would calculate the

• 2:03:55Ben Gilbert?

  market cap. So if you're someone who's excited about Airbnb as a $100 billion market cap company today, to what power do you attribute that? Like, why do you believe that they're able to do that? And so, David, with that preamble aside, I'm curious, what types of power do you think show up in Airbnb?

• 2:04:16David Rosenthal?

  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.

• 2:04:27Ben Gilbert?

  Yep.

• 2:04:27David Rosenthal?

  This is a two-sided network effect. It is global in nature. It is as powerful as I have ever seen in a business. Rivaling, you know, I think generally, if you think about network effects, like network, single-sided or single node network effects, like a social network, like an Instagram or a Facebook, those tend to be the most powerful. Dual-sided network effects, where you've got one class and another class, buyers and sellers, hosts and guests, you know, like you would have an eBay or Amazon or here in Airbnb, tend to just generally be a little weaker, because you've got, you know, you're bifurcating the types of participants in the platform. This is like amongst the most powerful of the buy of the dual-sided network effects I've ever seen, because it's global, it's

• 2:05:12David Rosenthal?

  not local, and you really care. The way you mentioned network effects is you ask for each participant in the system, how much do I actually care about the other nodes in the system being there? So like for Facebook, it's like, or Instagram, it's like, no, no, I really care that my friends are there. Like, having more people on there, I actually really care about that. That's the whole point. For eBay, you're like, do I really care about the 16,000th seller of the latest iPhone? Yeah, I mean, maybe he drives the price down a little bit. I don't care that much. For Airbnb, I care quite a bit because I really like having a variety of listings.

• 2:05:47Ben Gilbert?

  Yeah. Another way to frame that is for things like iMessage, where I really only iMessage with like 10 or 15 people. As long as the 10 or 15 of us are on the same thing, it's okay. So it's like a reasonably, it's not that strong of a network effect because you don't need to interface with lots and lots of nodes in the system. Whereas with Airbnb, I don't care who owns the place that I'm staying at. I just want the most choice with the most interesting options such that there is sufficient density where I want to go in the sort of like price tier that I want when I get there. And that is like a truly amazing network effect where exactly to your point, every node that's added to the system

• 2:06:31Ben Gilbert?

  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.

• 2:06:40David Rosenthal?

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

• 2:07:06Ben Gilbert?

  Yep. Yep.

• 2:07:08David Rosenthal?

  Okay. So I think that's the 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.

• 2:07:18Ben Gilbert?

  Counter positioning?

• 2:07:19David Rosenthal?

  Yes.

• 2:07:19Ben Gilbert?

  Yeah, that's exactly what I had too. I was like, is counter positioning one? Well, less than it used to be.

• 2:07:25Ben Gilbert?

  Yeah, I think the

• 2:07:26David Rosenthal?

  But in the early days.

• 2:07:28Ben Gilbert?

  Totally. The cost structure for Airbnb to bring on supply was so much lower than it was for a Marriott to go and be the, I don't totally know how it works, but I know they don't own the real estate. So basically the operator of a hotel and brand at Marriott and take on

• 2:07:45David Rosenthal?

  Management company.

• 2:07:46Ben Gilbert?

  Yeah, I guess they don't take on the lease. They sign a contract to be the management company with the owner of that building.

• 2:07:54David Rosenthal?

  But somebody's, you know, that economic cost is in the system. Somebody's paying

• 2:07:57Ben Gilbert?

  Exactly, exactly.

• 2:07:59David Rosenthal?

  The lease.

• 2:08:00Ben Gilbert?

  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.

• 2:08:23David Rosenthal?

  Yeah, totally. And I think this was, well, A, it was just market dislocation. But in the early days when Airbnbs were so much cheaper than hotels, part of it was market dislocation. But I think part of it was this too. Like, oh yeah, I could put a, I could put a, you know, a house in San Francisco on the platform. Like, I'll make incremental money. My cars costs aren't that big. Cool. I'll list it for 300 bucks a night. Whereas a hotel, you're like, well, I gotta, I gotta run this hotel.

• 2:08:50Ben Gilbert?

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

• 2:09:13David Rosenthal?

  I think to some extent, the rating and review history is some lock in there, but

• 2:09:22David Rosenthal?

  less, not that much and less than it used to be. Like in the early days when this was a new concept and people are like, I really need a lot of trust here to make this work. I think it was more powerful, but now like, yeah, I don't know. List on HomeAway, it's fine.

• 2:09:35Ben Gilbert?

  Yep. Well, one thing that I want to do here, and it's not exactly power, but it's sort of like a business model feature that I want to talk about is the different types of marketplaces and what take rates you can command with each one. And I've heard it described where something like Uber is marketplace assign versus something like Airbnb is marketplace assist, where in marketplace assign, because all of the supply is completely homogeneous, 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

• 2:10:15Ben Gilbert?

  command a higher take rate. They get to control more of the economics. For something like Airbnb, I browse and I, you know, they assist me to browse, but I pick the specific house and, you know, boom, I've booked it. And in the mind of the consumer, the real merchant, when I'm getting an Uber feels like it's Uber, but the merchant, when you're on Airbnb, feels like it's the host and that Airbnb is just helping me with that transaction. And they kind of, you know, they obviously have fees on both sides. They charge the guest more than the host, but you know, they have fees on both sides. They're trying desperately to get more and more of the take rate, but ultimately they're never going to get to that 30 plus percent that you see in like ride sharing where there's, you know, people

• 2:11:00Ben Gilbert?

  feel like they're buying from the company when really they're just facilitating you to buy from the provider.

• 2:11:06David Rosenthal?

  Yep, agree.

• 2:11:08Ben Gilbert?

  So 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.

• 2:11:18David Rosenthal?

  Yep.

• 2:11:18Ben Gilbert?

  All right. Well, let's move on to what would have happened otherwise. And because I don't think it's that interesting to guess what would have happened otherwise if Airbnb didn't IPO, I think we should run a counterfactual that compares Airbnb to Booking, which is a very different business. You know, Booking doesn't have this sort of-

• 2:11:37David Rosenthal?

  What did we say, our number five acquisition of all time?

• 2:11:40Ben Gilbert?

  Yeah. I mean, my gosh, I forgot they were called Priceline at one point. Priceline buying Booking was just an unbelievable acquisition. And yeah, if you're curious-

• 2:11:49David Rosenthal?

  The, um-

• 2:11:50Ben Gilbert?

  We did a whole episode on that.

• 2:11:52David Rosenthal?

  It was Booking in Amsterdam and what was the London company? Uh, shoot, they booked, they bought two companies, took the Booking name, but the other one was in London. I can't recall. Anyway.

• 2:12:02Ben Gilbert?

  Yeah. But while these are two very different businesses, one, to oversimplify, booking helps you find a hotel or flights and Airbnb helps you find an Airbnb, which I think even in the nomenclature there, you can kind of see the difference where booking doesn't really, they didn't invent their supply. They didn't sort of cultivate that supply. They, they went and forged the right types of deals in order to get them to list on their platform. But it's actually very interesting, I think, just to look at a simplified income statement of both companies. So let's look at 2019 before the effect of the pandemic. We've talked about Airbnb had $38 billion flow through their system from people staying in Airbnbs to hosts and to Airbnb and to taxes over the course of the year. Of that,

• 2:12:47Ben Gilbert?

  they took $5.3 billion of that in revenue. So like for all, any of the knocks that we've had on Airbnb so far, like this is a billion, this is a $5 billion a year revenue company pre pandemic. It's a big freaking company. So the effective take rate on that is 13.9%. There's ways in which you should believe it's higher. There's ways in which you should believe it's lower, but it's always interesting to me just to look at an annual income statement and, and take the gross divided by the, or the revenue divided by the gross to come up with that effective take rate. Their net income, when you go all the way to the bottom line, is that they lost $700 million. So all that, that 5.3 billion in revenue, they couldn't, they couldn't generate any profit at the end of the day from that because they had

• 2:13:32Ben Gilbert?

  to pay so much to headcount, sales and marketing leases, you know, everything that goes into running the fixed costs of a business.

• 2:13:38David Rosenthal?

  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 then paying it out later.

• 2:13:47Ben Gilbert?

  Yep. Yep. And I think it's something like the average person books like 36 days or something like that at a 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 like net 30 effectively on the, the payment. Okay. So booking, about two and a half times bigger, $96 billion in.

• 2:14:12Ben Gilbert?

  In gross travel bookings, $15 billion in total revenue, so about three times bigger in revenue. That's an effective take rate of 15.7%. So they get to actually own a little bit more of that transaction than Airbnb does. This is where they're very different. Booking turned that into $5 billion of pure raw net income. Profit that's owned by the business and its shareholders. And, you know,

• 2:14:37David Rosenthal?

  Also having to spend a lot more performance marketing than Airbnb.

• 2:14:40Ben Gilbert?

  Totally, right? Like, they're cutting a, you know, $6, $7, $8 billion check to Google every year, and they're still able to generate $5 billion in net income. Very different businesses. I think, actually, I don't know for sure that this booking number factors out flights. It may include, it may include flights in there. But, you know, the point to make here is like, oh, and flights are kind of a silly thing to include because they don't really generate any real revenue on those. All the revenues made on, or all the commissions are made on hotels. Anyway, two very different businesses. One that lost the better part of a billion and one that made $5 billion. And the one that made $5 billion, you know, took 2.5x the scale to do that. And so it'll be very interesting to see with

• 2:15:25Ben Gilbert?

  Airbnb as they get to a bookings type scale, are they also able to generate the sort of profit that booking does?

• 2:15:32David Rosenthal?

  Well, I think that's what's so alarming about the past few years of financials for Airbnb is like, they're increasing their scale, even though that growth rate is slowing, but they're not getting more, you know, they're increasing their expenses faster than they're increasing their gross profit scale.

• 2:15:48Ben Gilbert?

  Yeah. Yep. All right. Playbook?

• 2:15:52David Rosenthal?

  Playbook. Let's do it.

• 2:15:54Ben Gilbert?

  Playbook is if you wanted to start Airbnb, what playbook would you run to do it? And of course, no one can do that because no one can teleport to 2008 and have a unique and original idea. But if you want to draw parallels and apply them in your business, what would the playbook be? My very first one is The unbelievable, never skip over this fact that they have created an incredible amount of value for hosts and for guests over the years. Like, create no-brainer value for everyone in the ecosystem and really good things are gonna happen to you. And I think that some people can only go on vacations that they otherwise couldn't afford as a host. Some people can make their rent or mortgage that they couldn't afford.

• 2:16:35Ben Gilbert?

  These are like, big, meaningful, life-changing things that this company's existence enabled millions and millions of people to do around the world. I mean, there's people that can weather job losses, negative life events. I can't say enough about how much value they created and how much that makes people want to root for your company and put up with a lot over the years. And obviously, it comes with a lot of responsibility as people become dependent on you, but I'll sort of hold on that for now and just leave it at like, create value for people and amazing things happen.

• 2:17:09David Rosenthal?

  100%. The way I like to think about this, and I think this is kind of the same idea, is like, can you expand the efficient frontier of a market? And the efficient frontier is like, price and quality. So like, if you think of a, you know, a little, a little graph of like, price and quality, it's like, as price goes up on the y-axis, quality goes up on the x-axis. And in any given market, there's, you know, an efficient frontier along that of like, that of a curve. Like, as I pay more money, I get more quality and there's some curve to that. And so if you can do something that expands out that curve so that like, for I get more quality for less money.

• 2:17:48Ben Gilbert?

  Right. For any given price, I get more, more quality all the way across the spectrum.

• 2:17:51David Rosenthal?

  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 Airbnb did this incredibly well across pretty much the whole graph.

• 2:18:13Ben Gilbert?

  It's like the economist view of why is this company valuable?

• 2:18:16David Rosenthal?

  Yeah, exactly.

• 2:18:17Ben Gilbert?

  The next big one I had was around create unique supply, but I think we've, we've talked sufficiently about that one. One we haven't talked about is addressing Europe. Forty-three percent of nights are, are booked in Europe on Airbnb. This is not a US centered company.

• 2:18:30David Rosenthal?

  I think Paris is the biggest city, or at least historically it always was.

• 2:18:34Ben Gilbert?

  Yeah, 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 American Airbnbs than European ones. But until diving into this research, I don't think I would have guessed that 43% of, of its business is done or of bookings are done in Europe. Like that, that is, I don't think there's a single other US-based company that we've covered on this show that you could say that about.

• 2:19:00David Rosenthal?

  Yeah, I mean, Uber's.

• 2:19:00Ben Gilbert?

  Maybe booking, but they're not US-based.

• 2:19:02David Rosenthal?

  Yeah, well, but they're not US. I mean, they're technically US-based, but yeah.

• 2:19:07David Rosenthal?

  Uber's large in Europe, but I think probably larger in the US. Yeah. Do you have more? All right.

• 2:19:14Ben Gilbert?

  I do. Yeah. Free cash flow is one that I think, I don't think I have anything new to say here. I think that's my last sort of like positive playbook one. I do have some this is kind of our bear and bull 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.

• 2:19:35David Rosenthal?

  Well, don't let me, I'd actually maybe expand a little bit on what I was going to say on, on the free cash flow point, which is, I think part of the reason that Airbnb had such, has such amazing free cash flow dynamics is whether intentional or not, they started this new market, new idea. When you do that, you have an opportunity to set the terms of how the market operates and they set the terms that you pay us 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, by virtue of being something new.

• 2:20:16Ben Gilbert?

  Yeah.

• 2:20:17David Rosenthal?

  They could set different terms and they did, and nobody then questioned it. And so I think it's worth, it's interesting to note, like whenever you're doing something like this, think through like, okay, I have the opportunity right now to set the terms.

• 2:20:27Ben Gilbert?

  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.

• 2:20:33David Rosenthal?

  Yep.

• 2:20:35David Rosenthal?

  So.

• 2:20:36Ben Gilbert?

  David, I'm raising a round. It's not a seed round. It's a new form of investment.

• 2:20:43David Rosenthal?

  Well, like on our LP show, you know, Rahul talked about his fundraising philosophy and all the like, he did that in a lot of ways with with interstitial rounds and like some innovations.

• 2:20:52Ben Gilbert?

  Yeah, that's a great point.

• 2:20:53David Rosenthal?

  You know, he's positioning the rounds that he's raising relative to the next rounds.

• 2:20:58Ben Gilbert?

  Yep. I have one. It's a mix of two here. So it's a little bit of like a playbook that's been run that I think will ultimately have pretty negative outcomes for the company. That all that direct traffic that they've been able to harness is a gift and a curse. And we talked a lot about the gift. The curse is that they don't develop the performance marketing muscle. And when you have always sort of experimented and had questionable return on direct marketing spend compared to your competitors who are, you know, laser focused on it. 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.

• 2:21:42Ben Gilbert?

  And there's very reasonable rationale for this where, you know, most people go on one vacation a year. So unless Airbnb is getting 100% of your spend, you're not going to be able to do that. But, you know, you look at DoorDash, which we covered yesterday, where every cohort spends 50% more than the year before as time goes on, net of churn, like the revenue of that cohort goes up 50%. You know, Airbnb is in year two drops to 30 something percent. And then, you know, hopefully they are able to get back up to 50%. But they, at least so far from what the data we've seen, it's their cohorts do not get more valuable over time. So it makes it so that you have a lot less of a cushion when you decide to deploy performance marketing dollars to to grow when that's the case.

• 2:22:24Ben Gilbert?

  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 this system over and over again to build this sort of trust-based network. But they still have a crazy amount of host consistency and quality issues. Like I think it's a thing that's holding the marketplace back is that you have to hunt through a listing like crazy to, you know, through several listings to find somewhere decent. And you have to scroll pretty deep into each listing to do it. Like, I don't actually look forward to browsing Airbnb to find somewhere to stay because it's becoming sort of more and more of a chore. And they've tried it with Plus, but Plus ended up being pretty meaningless, just like Superhost, which I think is kind of like the Airbnb equivalent of winning the participation award.

• 2:23:08Ben Gilbert?

  Like yay, you're a super host. You held, you know, two people that didn't give you terrible reviews. Congratulations. So I just think that the company relied heavily on like, reviews will save us for everything, but it hasn't been a silver bullet in making it easy and enjoyable.

• 2:23:24David Rosenthal?

  Most reviews are meaningless.

• 2:23:26Ben Gilbert?

  Yeah.

• 2:23:28David Rosenthal?

  There are some that are helpful.

• 2:23:30Ben Gilbert?

  And it hasn't been the hammer that's solved, that's solved every nail of

• 2:23:36Ben Gilbert?

  giving you confidence when you're looking for a place to book to book it. One thing that I wanted to call out that wasn't in the S1 that I think is, could be pretty damning, and I really would like to know the numbers is host churn. Like they don't, they talk about revenue for, for hosts, but I really do think it's getting worse and worse to become a host over time. As the company does, is subsidizing less and less things with investment dollars, is thinking less and less like a startup, is trying to be more profitable. And I think that that's gonna, that's gonna be an issue for them long-term too.

• 2:24:13David Rosenthal?

  Yeah, I'd be curious on that too.

• 2:24:15Ben Gilbert?

  So that's it for my playbook.

• 2:24:17David Rosenthal?

  Great. I think you covered all my inoling there, too.

• 2:24:21Ben Gilbert?

  All right. Value creation and value capture. So this section has two components. The first is literally the name of the section. Are they Craigslist at capturing the value they create in the world? Or are they Google, who does a very good job of creating the value or capturing the value they create? And then lastly, you know, how do you compare the value they created for the world

• 2:24:42Ben Gilbert?

  to any value destruction that they've had? And I don't think Airbnb is that interesting to discuss, like, do they effectively capture the value they create? I think so. I think the more interesting one to focus on here is negatives for the world versus positives for the world. And we spend a lot of time on the positives for the world. The thing that I think goes a little bit less discussed about Airbnb, and it comes in waves. Sometimes it's a hot topic, sometimes it's not, and this dovetails into the regulatory issue, is the impact on housing supply and housing prices. Because housing prices, especially at the low end of the curve, are extremely sensitive to small changes in supply. And so I was digging into this. There's a good Harvard Business Review article that basically says, I think this is a quote, "This means that in aggregate, the growth in home sharing through Airbnb contributes to about one-fifth

• 2:25:27Ben Gilbert?

  of the average annual increase in US rents." And they actually found this to be a causal relationship. And they say that because of Airbnb, absentee landlords are moving their properties out of the long-term rental and for sale markets and into the short-term rental market. And Airbnb has this, I have no ability to sort of rule on this. It's not, I'm not here to arbit, whether this is, you know, more value destructive than it is creative. I think there's lots of think tanks doing lots of work on that. But I will say, this is a company whose brand potentially may have meaningfully outrun its net global impact in terms of sort of like netting the negative impacts against the positive impacts. The like

• 2:26:11David Rosenthal?

  You're not, you're not putting in betting market placement on Nobel Peace Prize happening anytime soon?

• 2:26:18Ben Gilbert?

  I don't know how that's decided, so I shouldn't bet on it. But yeah, I think it's worth making the point that like Uber is condemned. As this massively evil company and yet created a way for millions of people to earn a living. Airbnb is extolled as this sort of like wonderful brand that had all of its hosts around or many hosts around the world ring a bell and create a nice video to open the IPO this morning. And that's largely consistent with their brand. And yet, there's, there's a lot of potential value.

• 2:26:47David Rosenthal?

  Well, really what this comes down to, and I don't, I don't know the data. I've seen various parts of it, but it really comes down to like, what, who's the supply on the platform? Like, I think for people that own their homes, that live in the homes, that are renting them out, either are they renting out rooms while they live there to help with income, or renting them out while they're on vacation. It's hard to see much value destruction from that. It's like, hey, they're living there. They would live there anyway. This is like pure, like helping them make money. Where this gets really different and gray is property managers and people taking housing stock off the platform purely to become hotels, essentially.

• 2:27:27Ben Gilbert?

  Yep. Well put.

• 2:27:28David Rosenthal?

  And, and the question is like, what is the percentage of each of those use cases on of supply on the platform? I don't know. I've seen estimates as high as over 50% is more the hotel use case removing housing stock. But this is one where like, everybody who's got a, everybody who's waving a data sheet has an opinion here and has a horse in the race. So like,

• 2:27:50Ben Gilbert?

  Other than the Harvard Business Review article, I found the two, one was a, there was two sources that have very detailed reports on this. One is Airbnb. And the other is a extremely liberal sort of like labor focused funded think take. And you're like, okay, well, you're, who else has, you know, who else has?

• 2:28:09David Rosenthal?

  Like, well, you know, New York City has fought on this for a long time against Airbnb. And so like, the New York City has lots of, Housing Commission has lots of data on this. It's like, I don't know that just that either. Like, you know, so point is, there's, it is very, very much, there's no doubt that a large portion of the supply on the platform is property managers. And how much that is, I don't know. All right, listeners, now is a great time to talk about one of our favorite companies, Statsig.

• 2:28:40Ben Gilbert?

  Yes, 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.

• 2:28:50David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It'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 ship next.

• 2:29:11Ben Gilbert?

  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.

• 2:29:23David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 2:29:34Ben Gilbert?

  David, grading.

• 2:29:36David Rosenthal?

  Whew, grading. All right. So what do we, how did we decide we want to grade this one? Do we want to do the same as DoorDash yesterday of use of capital?

• 2:29:42Ben Gilbert?

  Collectively, how, how good of a use of capital was it for the company and the investors to go after this business opportunity in this way?

• 2:29:50David Rosenthal?

  There's nothing to say here. This is like the greatest use of capital of all time. It's 100% A+. Like, 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 like generating cash and have that be worth, you know, whatever Sequoia is going to make today. And then all the other capital that went in along the way, too.

• 2:30:18Ben Gilbert?

  Yeah, what did they raise to date before the Silver Lake round?

• 2:30:21David Rosenthal?

  Ooh, let's see, before the Silver Lake round, I believe it was around $3 billion, $2.5 to $3 billion that they had raised.

• 2:30:29Ben Gilbert?

  Comparable to sort of DoorDash, but you know, only a third of what Uber had raised.

• 2:30:35David Rosenthal?

  Yep, exactly. Yeah, no, this is like the capitalism dream here.

• 2:30:40Ben Gilbert?

  Yeah, I mean, the question that I sort of have similar to my DoorDash one yesterday is, let's ignore current valuations and current share prices and just think about that total 3 billion-ish that's gone in. Let's play it out long-term. Does the business at some point generate, you know, have enough power that it generates persistent differential returns? And is this business a cash generating machine that in the long-term will return lots of cash to the business and its shareholders? And I think so. Like, I have reasonable confidence that despite a lot of my reservations around slowing growth, around increasing competition,

• 2:31:24Ben Gilbert?

  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 very profitable business even with a reasonable amount of competition in the market. Like, I think there exists a steady state for this business where they don't need to spend as much in R and 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+ territory, but I am certainly in A territory when you think about it through that lens.

• 2:32:04David Rosenthal?

  I like that a lot. Yeah, I mean, I think to me, doing the research and thinking about this and talking to people, it's just so clear. This is eBay here. That's what this is. The same type of network effect, same dynamics, same cash flow dynamic. Like, this is eBay, capital-light business. So, yes, agree. And, but I think, yeah, that's a good point to be an A, not an A+. An A+ would be, yes, and they're already, because like, let's be honest, there's no excuse that this company hasn't already been printing, generating tons of cash. Like, there's just like, this company does not have the right-sized cost structure right now, like doing things like, you know, the film studio and places and experiences and the airline, like, you know, building units in people's backyard. Like,

• 2:32:47David Rosenthal?

  it's just, it's nuts. Like, you strip out all that cost. And this company at an efficient operations would already have been generating hundreds and hundreds of millions of free cash flow.

• 2:32:58Ben Gilbert?

  I will be very, very interested to see how that evolves with the changes that they've made to bring in more heavy hitters to their management team. With, you know, a CFO now there for almost a couple of years who's had great, I think CFO was the CFO of Amazon's consumer worldwide consumer retail. Like they've really buffed up the management team with, you know, capital allocators and, and depending on how they all sort of work together. I, I think there's real potential here to sort of lean out the business while still growing and, and realize the, the great, you know, profitable dynamics it could have.

• 2:33:35David Rosenthal?

  Yep.

• 2:33:36Ben Gilbert?

  Woo, man, what a season.

• 2:33:39David Rosenthal?

  All right.

• 2:33:40Ben Gilbert?

  Should we do, should we do some lightweight carve outs here on the way out the door?

• 2:33:43David Rosenthal?

  Yeah, let's do it.

• 2:33:45Ben Gilbert?

  All right.

• 2:33:45David Rosenthal?

  It's been a great season, by the way.

• 2:33:46Ben Gilbert?

  Dude, it has.

• 2:33:47David Rosenthal?

  We had some highlights.

• 2:33:48Ben Gilbert?

  Pinduoduo and.

• 2:33:50David Rosenthal?

  Epic Games.

• 2:33:51Ben Gilbert?

  Getting Virgin Galactic in there. SpaceX, was that in this one?

• 2:33:54David Rosenthal?

  No, that was last season, I think.

• 2:33:55Ben Gilbert?

  End of last season.

• 2:33:57David Rosenthal?

  Epic, though, our epic episode was, was epic. The NBA, NBA was so much fun.

• 2:34:04Ben Gilbert?

  Yeah, I like.

• 2:34:05David Rosenthal?

  And I loved DoorDash yesterday.

• 2:34:07Ben Gilbert?

  That was fun, too. My, unlike DoorDash's, I will only have one carve out this time and it's, it's much lighter weight. So, uh, it's a Spotify playlist that I don't actually have no idea who made it. But it's, uh, Star Wars lofi hip hop and it's covers of.

• 2:34:24David Rosenthal?

  Nice.

• 2:34:25Ben Gilbert?

  Uh, all Star Wars music in a lofi hip hop style and like, it is just phenomenal work, work and research music. So.

• 2:34:33David Rosenthal?

  That's awesome.

• 2:34:34Ben Gilbert?

  We'll put that in the show notes and anybody who wants to, to chill and jam can.

• 2:34:38David Rosenthal?

  I can't wait for you to send me your, uh, links for carve outs and sources so I can start listening to that one.

• 2:34:44Ben Gilbert?

  You got it.

• 2:34:45David Rosenthal?

  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've said on the show, my wife Jenny works for San Francisco Ballet here in San Francisco, which is one of the premier world-class, best ballet companies in the whole world. And it has been a very interesting year for the live performing arts when your business is, you know, consists of packing auditoriums full of, you know, three to 4,000 people and having, having world-class artists perform in front of them while, you know, like touching each other as part of the art form. So that's been, that's been a roller coaster and SFP is doing great, thankfully, of wonderful donors,

• 2:35:29David Rosenthal?

  wonderful audience. But what they did, you know, the Nutcracker is like the big part of the ballet season every year and it's the holidays and Christmas. And so what they've did is they've created a digital Nutcracker experience. It was actually written up in the New York Times. It's really cool. It's a, so it's a, it's a recording of the Nutcracker, but it's, it's like, I mean, I've seen SFP's Nutcracker dozens of times probably at this point, but it's, it's a different experience to watch it online because you, you know, the camera zooms in and like it's, it's a different experience and they have a cool digital, like a virtual opera house tour and experience around it. So we'll link to it in the show notes. Recommend, if you need some holiday, virtual holiday cheer, check it out. It's very cool.

• 2:36:09Ben Gilbert?

  Well, for folks who don't know, as we start to wind down here, we have been codifying the playbook section from each episode in some written bullet points. And we email those out now after posting each episode. So if this is something you want, you can sign up to receive those playbooks at acquired.fm. And if you join the acquired community Slack at acquired.fm/slash/Slack, you'll also automatically be signed up for those. It's a great way to kind of have something a little bit more, 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

• 2:36:52Ben Gilbert?

  of company building and investing in addition to our monthly LP calls where we talk with so many of you directly, including book club, which actually the last three, we've talked to the author for, for each one. And hopefully they'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 You can exit out of that at any time if you want, so it's risk free at acquired.fm/lp. LP subscriptions make great gifts for the acquired fan in your life. So you can sort of figure that out on your own. It's a little tricky to kind of go through, so feel free to drop us a note, [email protected] 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

• 2:37:37Ben Gilbert?

  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, [email protected] and just introduce yourself and we're happy to help you out if finances are a constraint. Lastly, if you weren't subscribed and you like what you hear, you should. And if you liked this episode and you have a friend that you want to send it to, perhaps an Airbnb host or guest or fan of the company or bear or bull or

• 2:38:09David Rosenthal?

  Any type of farm animal.

• 2:38:10Ben Gilbert?

  You've been looking to get your parents into Airbnb or into acquired and you're like, oh, what episode could I send my parents that really would get them into it? This is a great one. The Oprah one was great for me to share with my grandma. This is another great one that I think a lot of people will understand. So consider this your opportunity to share the gift of acquired this holiday season. I can't even get through it without laughing.

• 2:38:34David Rosenthal?

  We have some holiday joy happening here.

• 2:38:36Ben Gilbert?

  No kidding. No kidding. Everyone have a wonderful Christmas, Hanukkah, New Years, whatever it is that you celebrate, time with or without family or perhaps with with folks on Zoom and we will see you next year.

• 2:38:49David Rosenthal?

  Yeah, although we're gonna have a little special. We have a special, a special little holiday present for you coming next year. Or not next year, next week.

• 2:38:58Ben Gilbert?

  Yeah, let's, let's not announce it. It's outside the bounds of, of, of our official season here, but we're yeah, excited to get this one in your hands by the end of the year too.

• 2:39:06David Rosenthal?

  Some holiday fun.

• 2:39:07Ben Gilbert?

  Yep. All right. On that note, thanks so much, everyone. We will, we'll see you soon.

• 2:39:12David Rosenthal?

  We'll see you soon.