November 10, 2016

BMi: Airbnb + The Social Business Model


Over the last couple years, Airbnb has become a household name in many countries worldwide and the darling of the supposed #sharingeconomy.

Why ‘supposed’ #sharingeconomy?

Because the sharing economy is driven by trust and, well, sharing. Neither of which Airbnb has at the level it once did. How do we know?

  1. Airbnb’s rating on TrustPilot, a well-known proxy of trust in a brand in Europe, is 1.5 out of 10
  2. Despite the company’s claims about the ‘middle-class renting out rooms 4-5 times per year,’ about 40% of Airbnb’s revenues in cities are driven by commercial operators renting out multiple properties as if they were a hotel


+ Airbnb Trust Pilot

To understand what has happened to Airbnb: a) how they became so successful; b) why they are currently reeling; we are going to do a holistic BMi (Business Model Innovation) analysis and look at their journey from $o to $3oB. The lessons from this analysis prove the potential pitfalls of venture capital (VC) financing when the core metric of your business’s success is social (ie. trust, home share experience), and how pie-in-the-sky growth forecasts can become bad for business.

Even though we are Airbnb users and appreciate the service when traveling, the experience has become watered down in the last couple years and the company has become increasingly unreliable and unresponsive when problems emerge. The question is, does every company that nails the social experience need to take on billions in VC financing to expand to every corner of the world at breakneck speed?


From $0 to $30B

Airbnb’s inception is a great story. The idea came when the founders rented out air mattresses in their living room during a weekend in 2007 when San Francisco hotels were sold out.  Fellow Rhode Island School of Design graduates Joe Gebbia and Brian Chesky were struggling to pay rent, and seized the opportunity to rent out three air mattresses via


After initial struggles, they relied on a publicity stunt at the Democratic National Convention (DNC) in 2008 – selling $30,000 worth of Obama O’s and Cap’n McCain cereal – to keep the business alive. They were famously rejected by several prominent VCs before getting accepted into Y Combinator in 2009, which then led to a further $600,000 investment from VCs.

In 2010, Airbnb started to grow like crazy. The big breakthrough came when the founders moved from SF to NYC, where the great majority of their hosts were located, and started photographing apartments. Combined with a Craiglist hack, they started to become the preeminent short-term rental platform. This, in turn, has created a behemoth now valued at $30B based on recent financings.

From $o to $30B, the company has booked millions of rooms, created inspiring local experiences for millions of guests, helped millions of ‘middle class’ hosts earn supplemental income, and inspired a generation to travel in new ways.  In the process, however, they have also killed a lot of the social value that they had in their $0 Days and essentially forced cities to regulate them because of their pollyannish approach to regulations and lack of transparency on commercial hosts. They have also created a lot of uncertainty for the sharing economy as a whole.

Airbnb annual guest growth

Scaling Trust

The tipping point for Airbnb came around January 2011.


The Unstoppable Rise of Airbnb

What caused the tipping point?  Professional photographers.

“Hosts could automatically schedule a professional photographer to come and photograph their space.[4] Though initially only 20 photographers were contracted by Airbnb, the service became an instant hit. [2] Though this initiative wasn’t cheap for the cash-strapped startup, the founders felt that the long-term benefits—enhanced listings resulting from this program are two and half times more likely to be booked, and they earn their hosts an average of $1,025 per month—were well worth the cost. By 2012, that number had grown to more than 2,000 freelance photographers employed by Airbnb to photograph 13,000 listings on six continents.”


Airbnb: Growth Studies

Listings growth exploded.


Airbnb: Growth Studies

The company tapped VCs – including Ashton Kutcher – for growth capital.


Airbnb: Growth Studies

This is what that growth looked like.


The Unstoppable Rise of Airbnb

Word of mouth, and network effects drove the growth cycle: guest has a great experience; guest becomes a host in their home city; host provides the guest a great experience. The cycle repeats.


The key to the whole growth curve in the go-go years of Airbnb were:

  1. The Experience – nothing even came close to the local experience you could get with Airbnb in a foreign city. This experience was driven by people principally, engaged hosts that helped guests experience the city as a local
  2. Trust – even five years ago, hosts were taking a big risk letting strangers into their home. Airbnb pioneered this concept by developing new trust mechanisms based on platform design
  3. Cocaine Capital – $7.2M USD in 2010, $112M USD in 2011, $200M USD in 2012, $450M USD in 2014, $1.5B in 2015, $100M USD in 2015, $1B USD in 2016 (debt), and $555M USD in 2016

“Sleeping in other people’s beds has turned out to be a goldmine for rental startup Airbnb. The controversial Silicon Valley company has raised another half a billion dollars from investors at a price that values the company at $30bn.”

But this growth hasn’t come without some extreme social risk.

The Social Business Model

Big valuation targets and VC money can make anyone feel good about what they are doing to boost the top-line (Airbnb takes 3% from hosts, 10% from guests), but Airbnb must continue to grow at exponential rates to meet it’s 2020 targets:

“The company’s revenue is then expected to grow to $10 billion in 2020, said the people who viewed the projections.”

“To meet its lofty revenue targets, Airbnb would need to increase its share of the global lodging market from 1% to as much as 10% over the next five years, according to Douglas Quinby,an analyst with research firm Phocuswright.” The Secret Math of Airbnb’s Valuation

They are now in the process of seeing 40% of their revenues being cut due to regulations on commerical operators and ‘entire home’ properties, which is exacerbated by the fact that they could:

  • lose hosts: because they no longer trust the company to deal with the problems/vandalism from bad guests
  • lose guests: because the experience is a fraction of what it once was and support staff are globally located and locally unresponsive

Airbnb created these problems for itself and has employed a strategy of spending millions on PR and legal spinsters to deny it. They scrub data and play as though they are the good guys representing the middle class:

Airbnb’s Data on New York City Business Shows Most Hosts Break the Law (Dec. 1, 2015): Airbnb finally released data on its business in New York from Nov. 1, 2014 to Nov. 1, 2015 to the public. The only problem? Before releasing that data, it scrubbed it to remove some 1,500 listings from potential commercial operators, leaving us to wonder if the company was being as transparent as it could, or should be.” Airbnb vs New York

As a result, cities are hitting back.  New York has regulated entire home rentals, London is talking about it, and many more cities who were previously Airbnb advocates will follow, notwithstanding those cities like Berlin that had already regulated the platform. Cities have realized that commercial landlords with multiple, full-home listings are the ones who are driving most of Airbnb’s revenue on the platform:

“This group makes up about 17% of all Airbnb hosts, but they pull in nearly 40% of the revenue in the cities examined, or roughly $500 million of the $1.3 billion in revenues Airbnb earned in this time period.” Airbnb Has  Big Illegal Landlord Problem

This is why the company has been happy to turn a blind eye and continue to raise VC dollars, employing a strategy to shift perceptions and create ‘positive dialogues‘ with cities around the world:

“But its phenomenal growth is proving to be its greatest liability. Authorities in cities around the world fear the impact it is having on their communities and are now seeking to arrest Airbnb’s near unfettered expansion.” Airbnb Faces Worldwide Opposition

Airbnb was built on trust. Early VCs wanted to see the company become a unicorn. They have done that times 30. But what happens now when cities start to regulate 40% of their revenue stream and trust in the brand experience diminishes?

Ecosystem – Foresight

For Airbnb to work, it requires people to trust strangers to enter their homes. Lose trust and …


+ BMInnovation : Beyond the Canvas

Using our BMi ‘Beyond the Canvas’ diagram, we can see that the Macro shapes the Ecosystem/People, which in turn shapes the Business Model. Airbnb’s business model has been driven by four key Macro levers:

  • the emergence of Millennial travelers
  • the internet as a medium of trust
  • economic trends that reduce the disposable income of the middle class
  • rapidly rising house prices and rents in major cities, creating a global market for a ‘spare room’

The ecosystems within which Airbnb operates are major cities. And cities rely on a balance between economic, social, cultural, and political interests. Airbnb has dramatically shifted the social balance in cities and relied on economic arguments to try and justify their strategy:

“a majority of Americans believe “Airbnb helps middle class families afford their homes” and that “Airbnb will become more important to the economy in the next five to ten years” Does Airbnb help the Middle Class?


Unfortunately for Airbnb, regulators and city officials can’t have commercial operators rake in millions on entire homes while citizens are unable to even find an affordable place to rent, even if some members of the middle class make supplemental income.  In an ecosystem context, Airbnb helps one part of society monetize spaces, but harms another part by driving up rental rates. This social risk, within a city context, puts pressure on city officials to act in the best social interests of its citizens.

Did Airbnb lack the foresight to see this collision coming? Not likely. They seem to be focused on furthering their strategy of raising capital to cushion blows.


The counterargument to that point – and this entire post – is that they did it to beat the competition, and had they not taken an aggressive line someone else would have eaten their lunch; Airbnb needed to employ the global-domination playbook in their respective market or fall to the curb. There are valid arguments within that context, but it’s too much to explore in this article.

Simply put, Airbnb must respect the ecosystem and all its corresponding variables. The well-being of citizens and communities are more important to city officials than Airbnb hosts and middle-class rhetoric. When a community of citizens starts to sense that invisible forces are making their already difficult economic situations more difficult, then things will need to change.

Blockchain + Sharing Economy

After all that has been said in relation to their core Homes business, they have some interesting initiatives in relation to blockchain and the sharing economy that could help the company create new revenue streams and deepen the experience:

  • Airbnb Trips* app
  • Blockchain work to create a trust passport
  • Machine Learning and mechanisms of trust

Airbnb can use the trust data that it obtains to pioneer new sharing economy services that benefit the local economy and make that data exportable to other services via the blockchain.  We talked more about this in a previous post:

Rentals, Sharing Economy and the Future of Living


*whatever they are planning to launch at Airbnb Open next week, which will probably be around the travel experience

Since the sharing economy is built on trust, we would advise the company to refocus its efforts in areas that will enhance trust in the service.  Beyond technological solutions, that would include spending money on local teams who can deal with problems at the local level, revisit the Host Guarantee so that hosts can be reimbursed rapidly for damages, and bring the host-guest experience back as the core metric of the success of the business, not the number of listings.

Business Model Innovation (BMi) has been a persistent topic on the Lumos blog since the beginning. BMi is about developing new ways to bring existing product and services to existing markets. One of the key advantages of BMi is that most of the innovation happens beneath the surface, making it difficult to understand and replicate:

Business Model Innovation (BMi) and the #NewEraBiz