Airbnb is one of those unstoppable Unicorns that came out of nowhere and revolutionized an entire industry over the course of a decade. But now as they enter a more precarious IPO stage, where the company will be much more out in the open, they face many challenges in relation to the social dimensions of their 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?
- Airbnb’s rating on TrustPilot, a well-known proxy of trust in a brand in Europe, is 1.5 out of 10
- 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
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 airbedandbreakfast.com.
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.
The tipping point for Airbnb came around January 2011.
What caused the tipping point? Professional photographers.
Listings growth exploded.
The company tapped VCs – including Ashton Kutcher – for growth capital.
This is what that growth looked like.
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:
- 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
- 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
- Venture 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
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:
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:
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 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:
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?
These are challenges that the company will continue to have to grapple with; however, they have deep cash reserves and the mindshare of the younger generation, so we will see how they react in the years ahead to the pressure of public earnings and greater municipal scrutiny.
What is Business Model Innovation? Innovation using the Business Model as the main mechanism, rather than product or technological innovation. Reinventing a business model – or creating a new one – is a matter of remixing the core components of a business model and developing new value propositions, revenue streams, and cost structures.