Welcome to the 101st Pari Passu Newsletter,

After two weeks of back-to-back restructuring concepts, today we have a company deep dive into Airbnb. The company was founded in 2007 when two hosts welcomed three guests to their San Francisco home. Since then, the platform has grown to over five million hosts, facilitating more than 1.5 billion guest stays across nearly every country worldwide [1]. Similar to Uber's business model, Airbnb operates within the sharing economy, connecting hosts and guests directly.

Despite being one of the most famous unicorns to emerge from Y Combinator, Airbnb's share price has declined by 8% since its IPO in late 2020. By contrast, Uber, since its 2019 IPO, has seen its share price increase by 80% [2].

What is happening below the surface? CEO Brian Chesky, who has been with the company since its inception, guided Airbnb through both its pre-pandemic success and the challenges brought on by the pandemic, ensuring that management quality is not a concern, at least under Founder Mode standards😉

Let’s dive into how Airbnb disrupted the hotel industry, what differentiates the company from its peers, and where it’s headed next.

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Founding

In October 2007, Nate Blecharczyk's apartment rent surged by 25%, prompting him and his roommate, Joe Gebbia, to consider moving out. Around that time, Brian Chesky was still in Los Angeles. Sensing an opportunity, Joe called Brian, urging him to move to San Francisco to pursue starting something. Brian quit his job, drove to the city, and upon arrival, learned that the rent had risen to $1,150, due within the week. With only $1,000 in his bank account, Chesky joined Joe in a scramble to find a way to cover not only their own rent but also an empty room in the apartment.

They had been brainstorming ideas for weeks, even before Brian arrived. One idea centered around the International Council of Societies of Industrial Design (ICSID) World Congress, a major design conference set to take place in San Francisco later that month. They anticipated that the influx of designers would overcrowd the city's hotels and inflate rates. Desperate for a solution, the two unemployed art school grads decided, almost on a whim, to rent out air mattresses in their apartment to conference attendees, hoping it would help cover their costs. This simple idea would eventually become the foundation of Airbnb.

They thought, why not create a bed-and-breakfast for the conference out of the empty space in their apartment? Gebbia happened to have three air mattresses in his closet from a camping trip he’d taken. The place was a spacious three-bedroom, so there would be the living room, kitchen, and a full bedroom all for the taking. They could sell a cheap place to stay, and even offer breakfast — and they could advertise their place on the design blogs they knew all the attendees would be reading.

They refined this idea for weeks, and the more they talked about it, the more they realized it was so weird that it just might work — and with a looming deadline to pay the rent, they had little to lose. They started drawing wireframes, skeleton outlines, and mockups for the website that would advertise their concept. Once Chesky moved in, they hired a freelancer who knew HTML to put together a rudimentary website using their designs, calling the service AirBed & Breakfast. The final product featured a basic wordpress website announcing the service (“Two designers create a new way to connect at this year’s IDSA conference”), an explanation of how it worked, and included a listing for three airbeds in their apartment for eighty dollars apiece (amenities listed included a roof deck, a “design library,” “motivational posters,” and 3-D typography). “It’s like Craigslist & Couch surfing.com, but classier,” proclaimed one “endorsement.” 

They e-mailed design blogs and the conference organizers and asked them to help promote their website, which they did; the conference organizers thought it was a funny idea, and the design blogs were more than happy to help support two of their own. Chesky and Gebbia thought that, with any luck, they’d get a couple of hippie backpacker types and would make enough money to pay rent. Within a few days, they had booked three guests: Kat, a thirtysomething designer based in Boston; Michael, a father of five in his forties from Utah; and Amol Surve, a native of Mumbai who’d just graduated from Arizona State University’s master’s program in industrial design. They all went to the conference together and made wonderful friendships so much so that the man from Mumbai invited them to his wedding two years later.

With their great start, the first concept for the company was a simple directory where locals listed spare rooms and visitors would call to book or as Blecharzky put it “a glorified Craigslist”. They noted Twitter's successful debut at the South by Southwest (SXSW) festival, which significantly boosted its traffic from 20,000 to 60,000 tweets per day in 2006, and thought, “Why couldn’t we do the same?” For context, SXSW, an annual festival, combining film, interactive media, and music, attracting tech and media-savvy audiences in Austin, Texas, every March. Initially, Airbnb gained traction through the San Francisco Design Conference and was poised to make a similar impact at another major event, leveraging the festival’s platform to amplify its visibility and engagement. They finished the website a week and a half before the event and got about a dozen properties, with co-founder Brian Chesky being only one of the two users who made an actual booking. Chesky flew to Austin, where his host picked him up, provided dinner, and offered great hospitality. However, since Airbnb didn’t yet process payments online, the host asked Chesky for cash. Chesky had forgotten to go to the ATM, promising to get it the next day.

When the second night arrived, Chesky again forgot the cash and the host began to grow suspicious, questioning who this stranger was that he met online. The hospitality quickly faded. This awkward experience led the founders to realize that upfront online payments would eliminate tension and allow hosts and guests to focus on the hospitality experience from the start.

The feedback from people wanting to use Airbnb outside of events further prompted a shift. The team aimed to transform Airbnb into a platform where booking a home was as effortless as booking a hotel, inspired by Steve Jobs' "three-click principle," which enabled guests to secure a room with just three clicks.

With a new concept in place, the founders looked for upcoming events that everybody would be talking about. Naturally, they decided to launch for the Democratic National Convention (DNC) where Barack Obama was going to be receiving the party’s nomination in August 2008 in Denver. They knew this was a real opportunity when they discovered that there would be a real need for alternative rooms when Denver only had 17,000 hotel rooms but the venue for the DNC held over 880,000 people. Again, the founders rushed to build this website in three months and were able to launch it two weeks before the event started. Luckily, they were able to find a lot of locals who were looking to get out of town and make some money. Within the first week, 800 people were putting up their properties on their website. At the same time, they saw many news stories about how so many people wanted to come to the event so they wrote to the local newspaper with their solution. The newspaper thought it was interesting, ran it, and then by the end of the week CNN was doing a video interview with them and everyone across the nation was hearing about their company. Unfortunately, this media coverage was very short-lived. A week after the DNC, they struggled to drive users to their website.

After the convention, the company needed a new strategy to finance operations and generate press. Fortunately, they had built a large network of reporters through the media coverage from the DNC. They decided to capitalize on the buzz surrounding the upcoming November election and focus on the often-overlooked breakfast aspect of "Air Bed & Breakfast." This led to the creation of presidentially themed cereals, Obama O’s and Cap’n McCain’s.

The founders bought cereal from the supermarket, repackaged it into custom boxes, and mailed 100 of each to reporters. Within a week, they were back on CNN, with their cereal featured as the number one political video of the day, even making it to the homepage. Their website selling the cereal exploded in popularity, with $40 boxes selling every three minutes, generating $30,000 in sales.

By the fall of 2009, after nine to ten months of working on Airbnb, the team struggled to raise additional funds, aside from what they earned through the cereal venture. According to Nate Blecharczyk, the money from the cereal barely covered the cost of production. The founders were making only $200 a week and were seriously considering giving up. One of their advisors, who had experience with Y Combinator, suggested they apply to the startup accelerator.

During their interview with Y Combinator’s head, Paul Graham, the founders faced skepticism, with Graham urging them to consider other business ideas. However, when Joe Gebbia handed him a box of Obama O’s, Graham was impressed by their scrappiness and resourcefulness. He immediately changed his mind and accepted them into Y Combinator.

In Y Combinator’s 13-week accelerator, they received the new famous advice from Graham: "Do things that don’t scale." He explained that it was better to have 100 users who loved them than 1,000 users who merely liked them. Following this advice, the team went to New York, where Airbnb had the largest concentration of hosts. They met with 20 to 30 hosts, helping them with professional photos, website optimization, and pricing tips. This hands-on approach allowed them to refine their product, and soon, people visiting New York began using Airbnb, with many guests eventually becoming hosts themselves.

In November 2010, Airbnb launched its app and was able to secure $7mm in funding, and the idea quickly spread to cities like Berlin, Barcelona, and Hong Kong. In just four years, Airbnb hosted four million guests, and a year later, that number grew by another seven million [4].  In the 2010s, Airbnb continued its explosive growth until the Covid-19 pandemic crushed its business.

Something worth noticing about the 2010s is the 2016 launch of Airbnb Experiences which offers unique activities hosted by locals, providing immersive insights into their passions and interests. Highlights include diverse activities like meditation with a monk, cooking classes, and virtual bike tours with a triathlete, among others, spanning locations worldwide a nice way to upsell the existing customers [5].

Surviving the Pandemic

In April 2020, Airbnb’s gross bookings for nights and experiences plummeted by 72% year-over-year. From March to April, cancellations outpaced bookings. To navigate the turmoil, Airbnb laid off 25% of its workforce—around 1,900 of its 7,500 employees—restructured from a ten-division company into a streamlined, single-division organization, and raised $2bn through equity and debt. The equity portion of the deal valued the company at $18bn, almost half of its 2017 valuation [5].

During this period, Airbnb also paused non-essential activities, including transportation services and Airbnb Studios, and scaled back its investments in hotels and luxury properties to focus on its core host community. Despite the challenges, CEO Brian Chesky ensured that laid-off employees were well-supported: they kept their company laptops, US employees received a year of health insurance, and Airbnb even created a talent directory to help departing employees find new opportunities [6].

By mid-May, signs of recovery emerged, with search data revealing renewed interest in travel, particularly for small gatherings among family and friends. By June, bookings began to rise again, prompting Airbnb to pivot its strategy. The company launched the “Go Near” campaign, introduced enhanced cleaning protocols developed with former surgeon general Dr. Vivek Murthy, and provided $250mm in relief to hosts. Despite difficulties raising more capital, Airbnb recognized that supporting hosts was essential to its survival.

The company’s adaptive model proved resilient during the crisis. Unlike hotels that rely on fixed infrastructure, Airbnb leveraged existing homes at various price points, allowing it to pivot quickly in response to changing travel trends. This flexibility helped the company regain momentum as people sought out more intimate travel experiences [8].

By July, Airbnb was poised for a strong third quarter and reconsidered its IPO plans. Initially advised to delay, Chesky and his team pushed forward, rewriting the S1 to reflect the company’s changes. Chesky personally contributed 14,000 words to the new S1, emphasizing the company’s mission and values. In December, Airbnb raised $3.5bn in its IPO, achieving a valuation of $47bn. The stock price surged 140% on its first day of trading, yes a lot of money was left on the table. For context, Airbnb’s seed round began with a $20mm valuation leading to a staggering 2,350x in valuation for investors like Sequoia Capital and Y Combinator [9].

Since the IPO in 2020, Airbnb has steadily introduced more features for the platform and launched Airbnb.org, a non-profit that connects people to places to stay in times of crisis [10]. But, now let’s dive into the fundamentals of the company to better understand the stagnation of its share price when compared to its peers.

Overview

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