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Airbnb’s Battle to Stay Private (bloomberg.com)
104 points by thedogeye on Feb 7, 2018 | hide | past | favorite | 84 comments



AirBnB is such a great business. No significant competition for now among startups. Primary (initial) market is different from the incumbents (hotels) and it can gradually chip away from their market share too.

It also has better network-effect than say Uber (which has per-city network effect but no significant global network-effect) and less competition than latter. The "moat" is super strong and the leadership (Brian, Joe et al.) seem to be really good.

I'm so in awe of their prospect. My only misgiving is that they rejected my application (which proves no one's perfect after all - as they seem to also make hiring mistakes:P)


Is VRBO/HomeAway not a significant competitor? It's owned by Expedia, so it has a pretty huge backing.

I usually check both AirBnB and HomeAway when I'm looking for a rental and don't see any reason to be loyal to one over the other. (AirBnB has a better website/app, but the whole experience is pretty similar.)


AirBNB has their own version of a 'showrooming' problem as well - last time I went to Hawaii, I found a nice condo that I liked, then searched for that same condo online, found the owner's standalone website offering similar prices but no AirBNB fee. I booked direct.


That's a pretty serious amount of effort to go through, and I don't think is actually a meaningful problem.

Most hosts do not have an alternate presence and it should be pretty easy to contractually forbid this behaviour on the part of hosts, at which point it's a detection problem, rather than a fundamental problem.


I think that would crater AirBnB.

Exclusivity contracts? What's my incentive as a host there? Is AirBnB going to give me more of a cut?

Is AirBnb going to make "exclusivity" actually mean something, and not give me 100s of hits in a square mile or two, so that my listing doesn't appear on page 10 of the results?


It's possible I've misread the host pool, but 80%+ of the places I've stayed at have not been professionally managed apartments, but rather people subletting a room or their entire place when traveling, and doing some quick reverse image searching shows that these places are not available on any alternative sites, for them an exclusivity arrangement doesn't even matter because they were not going to rent elsewhere.

If people sidestepping AirBnB became common, it would be a pretty easy decision for AirBnB to enforce exclusivity and just say goodbye to everyone else, because people showrooming on AirBnB is actively harmful to them vs not having that inventory.

If you're in an area with 100s of hits in a square mile, you have no real leverage here by definition.


I wonder if they start somehow "cracking down" on that. For now, it might not be worth it but eventually?


I think that would be very hard to crack down on. Hotels are listed on multiple booking sites and have their own site as well. As a property owner I would never want to be stuck with only one rental channel, if one tried to force me I would simply stop using it.


Hotels/hostels are not supposed to not list on AirBnB I thought. (I stayed at a very low-end hotel booked from AirBnB in, and I was very disappointed. When I book an AirBnB I hope for a real host, conversation, see how they live and what I got was a stupid hotel... but I digress.)

They can choose to delist the properties that have a separate channel, by crawling the web, or just querying google, query, etc. to find out if the listing is just a shell. Or they can look at the messages to see if the host suggests book instead on this website. (That of course doesn't prevent direct email communication through which the same outcome transpires. It just catches the most naive showroom cases.)


There are lots of 'condotels' in tourist areas, which are essentially full-service condo buildings that explicitly sell on the idea that the owner can use it for their own holidays, then rent it on AirBNB/VRBO in all the other weeks of the year. These condotels almost always have their own booking site.


I’ve definitely stayed at B&Bs that I booked through other means and I found out by chatting with the owner sometimes used AirBnB as well. No idea what is officially allowed. But if I were renting I’d need a real good reason to grant an exclusive.


VRBO seems like the AirBNB of an older generation. My parents and their friends use it exclusively. To the point they never have visited AirBNB by web or app.


This is the first time I've heard of either VRBO or HomeAway. I assume they have a much smaller presence.


VRBO has been around since 1995. My parents had their vacation condo listed on there for a long time. The reason you don't hear about them is that they weren't controversial with sharing out rooms and didn't invest in pretty design.

I really think they dropped the ball when Airbnb moved into the space


It depends a lot on the area you're visiting. VRBO has a much larger supply in certain areas, especially traditional resort type destinations like ski towns or beach towns.


Maybe it's geographic. I've used VRBO exclusively and never found a comparable option on Airbnb. VRBO fees to renters seem lower and you feel closer to the property owner with less glam or polish from the agent obscuring the realities of the property.

VRBO feels like craigslist, while airbnb feels like eBay to me.


VRBO basically is what people used before Airbnb. As a long time user of it I never really understood the Airbnb hype. I guess Airbnb penetrated markets due to hype and marketing which vrbo was unable to. But they are basically the same thing for end users.


I used OwnersDirect once (part of the same group). I just visited it, HomeAway and Vrbo and they all look like Airbnb clones now. At the time I had to pay for the villa by a bank transfer directly, they didn't handle any of that (and I had to pay the international fees which was rubbish) but I'm guessing they've probably got the same payment experience now too.


Well, I hadn't heard of them till this minute.

If they did bizarre things so they start getting mentioned more in HN or TechCrunch I guess it'd help their cause :P


They also blissfully ignore the thousands of hosts using it to skirt zoning laws and operate illegal hotels.


So the question is are laws sacred things that should never be broken. I don't think so. I think there are cases that people should break the law so we progress.

In other words, our laws are not the word of God (so to say), they are the word of men (genderless ofc). Good things can happen when you break them and demonstrate how much value can be unlocked or how much a better society we can become without them. By ignoring the laws you ultimately can become a force for change of the law. Those laws usually are there for a reason, of course. But the point is that sometimes those reasons are antiqued or irrational.

I don't know about the case of AirBnB and zoning laws. Don't know enough to have an opinion there.


Well, something that happened where I live (Portland, OR) is that AirBnB became popular enough that people and businesses would buy houses to rent out. One of the consequences was that, because it was so profitable, these renters could buy more, driving up the cost of housing and contributing to an already bad housing shortage. It became very difficult to find an affordable apartment, and it's still pretty tough. I feel like that trade-off (people who own those properties make more money, visitors have a few more places to stay) is skewed pretty heavily in favor of the property owners. And the businesses making that money could easily come from out of state, draining money from the local economy.

You are supposed to have a license (Accessory Short-Term Rental permit) for AirBnB rentals, and it has to be your primary residence. But people still skirt this law.


To summarize your points AirBnB has these effects: 1) more supply & cheaper options for travelers/short-term renters 2) higher rent and less supply for long term renters. 3) More income for property owners (A more varied demand) 4) Less business for hotels/established incumbents.

It's a very hard tradeoff. I can't tell how to argue for one side or the other. Should we use regulation (or enforce existing ones) to help the long-term renters at the expense of travelers? Or should we let free unregulated market roll? It's not clear-cut case for me either way.


Interesting bit about what Airbnb has been doing with all their raised VC...

> The addition of Tosi in 2015 was a signal for Wall Street to pay attention to the company. He was eager to create new, cash-generating ventures at Airbnb, people familiar with his work said. He quietly built a hedge fund within the company’s finance department. He used a portion of capital from the balance sheet to buy stocks, currencies and fixed-income securities, mimicking the treasury fund he ran at Blackstone. The side project represented 30 percent of the company’s cash flow last year and made about $5 million a month for Airbnb, the people said.


This is basic financial engineering and treasury management.

What's unique about AirBnB's business is that they collect money at the time of booking and don't pay out until after the stay. So basically, they are holding onto a ton of money and getting free float. AirBnB realized they can use this float in investing in low risk treasuries and generate a little revenue. (It is unlikely that equities is an asset class that is used)

This is nothing new. A lot of the major tech companies with large cash balances do this. Google built it's own trading floor in Sunnyvale [1]. Apple has one in Nevada [2]. Microsoft has $126B in marketable securities [3]. And other tech [4]

[1] https://www.bloomberg.com/news/articles/2010-05-27/googles-l...

[2] https://en.wikipedia.org/wiki/Braeburn_Capital

[3] https://ftalphaville.ft.com/2017/04/11/2187328/could-this-be...

[4] http://money.cnn.com/2014/03/13/investing/tech-bonds-oversea...


Agreed this is normal and a pretty regular thing to do with free float like that.

As you pointed out, investing heavily in equities or other more risky assets is probably not normal and would be surprised if they did this - this would essentially mean they were more interested in being a hedge fund rather than Airbnb.

Generally companies stay away from risky investments; even when the aim is for some purpose directly related to their core business things can go sideways fast. See, for example, Southwest and their fuel hedges, which were great when oil was going up huge back in 2007 but not so much anymore:

https://www.fool.com/investing/2016/07/25/southwest-airlines...


> AirBnB realized they can use this float in investing in low risk treasuries and generate a little revenue. (It is unlikely that equities is an asset class that is used)

Yet the quote specifically states they're buying stocks:

> He used a portion of capital from the balance sheet to buy stocks

I have a hard time believing they're returning $5 million a month by holding just low risk treasuries. That's $60m a year which would take a consistent investment of $2.5b at an annual 2.5% interest rate (near the current 5-year yield). Bonds have been moving rapidly so they probably need to keep it shorter term than that which would require an even larger float.


Whts different now is that with rising rates the risk free rate is finally non-zero.

If the average book time is M months in advance of payout, they’re running S in sales, and interest rates are at Y%, then this would generate S x Y x M / 12. With Y even at just 1% that’s some legit money at their scale.


>has been doing with all their raised VC

VC money is not the intent of this program. Airbnb is trying to capitalize on the hundreds of millions of dollars in customer deposits they hold every day. Instead of letting this money sit in a bank account collecting minimal interest, why not invest some of it in a money market fund?

If Airbnb plays their cards right, in a few years they have the option to remove platform fees entirely and still be profitable just from their market investments. Imagine that. They just need to hold on to customer money as long as possible, which I believe they already do (I'd estimate they sit on money for 2+ weeks on average).

Paypal was a major innovator these techniques over a decade ago.


Isn't this how virtually all insurance companies work? I'm sure I read that in relation to Berkshire Hathaway once.


Yes. Warren Buffet discusses the elements of this strategy repeatedly in various iterations of his annual letter. PayPal most certainly didn’t “innovate” this.


Health insurance doesn't really work this way unless you have a MASSIVE book of business. Health Insurance has prompt pay laws and risk based capital risk factors that must be applied to calculate their reserves for those payments. The factors are weighted such that speculative investments such as stocks are hard to hold.


An insurance companies funds will be subject to government regulation to make sure they can fulfill obligations.


Would not AirBnB's? I mean, they can't really come out and say, "Sorry, we can't pay you for the booking, cause the market went down."


> Isn't this how virtually all insurance companies work?

The returns seem high. That implies extra risk.


Yeah, 30% of cash flow sounds absolutely ridiculous. Treasury should be happy to scalp a few bps here and there.


Yes. It's also how banks work.

Seems difficult to call Paypal an innovator in the field. Paypal is just a bank.


Investment banks. Regular banks would hold the funds in treasuries and other low risk securities.


That was only because it was specifically regulated to be so by the Glass Stegall Act, which was repealed in 1999 which was right when PayPal was created. So they had good timing, but it's not like they came up with anything new.


It's certainly how life insurance works


What? That's absolutely wild. Is this typical? How does it compare to what, say, Alphabet's treasury does?


Yes. This is very typical. What do you think Apple does with the hundreds of billions on its balance sheet? It’s not sitting in a savings account earning interest.

Sure Apple uses some cash to build factories and technology but has an internal hedge fund invest the majority of it.

Same goes for Google, Microsoft, etc.


So in the end companies use their cash to invest in each other? I have a hard time wrapping my head around the economic impact but it doesn’t look very healthy to me (or is it?)


It kind of makes sense from the investor's perspective.

Let's say that I've invested 100m in Apple, and that's the amount I wish to have invested. Apple does not need cash at the moment and is currently reinvesting it in other companies. The alternative would be for them to redistribute money to shareholders - say, I'd get 20m back, and could reinvest it in other companies myself. But there's a big difference - if I'd do it, the 20m would get taxed; if Apple does it directly, then it's not.


Stock buybacks are a much better approach than simple dividends from a tax standpoint.

I invest in Apple get say 1%. Over next 20 years Apple buys back 50% of it's stock. I now own 2% of Apple without paying any taxes.


Hm.. You still own 1% of Apple right? Otherwise, what happens at the end of 20 years when a 100 investors each buy 1%?


Apple can only buy stock when someone sells it.

Consider there are 100 shares and you own 1 of them. Now Apple buys 1 share from someone that sold it, that means there are 99 shares and you own 1 of them. Repeat until Apple buys 50 shares, there are 50 outstanding and you own 1 share. Now, apple does a 1:2 split so there are 100 outstanding shares and you own 2 of them post split.

It's true that the people selling stocks have to pay capital gains. However, they always need to do that when selling shares to anyone.


>"So in the end companies use their cash to invest in each other?"

I don't think that's necessarily true. For instance Apple's money manager Braeburn Capital invests their money in very conservative, highly-rated bonds for instance. See:

https://qz.com/393093/the-mysterious-fund-in-the-desert-that...


Its a solid route to take if the market goes south the states have to intervene as they did in 2008. Privatize profits socialize loses.


They don't invest in each other. They buy low risk securities, like Treasuries.


Most companies mobilize their excess reserves. There is no point in holding cash doing nothing. But I don't think many companies come close to the 30% figure of Airbnb.

And hence the question - what happens when markets start go down? If they keep pumping money to the hedge fund they might have a contagion risk on their hands like, as pointed out by paganel in this thread, GE Capital almost taking down GE.


An interesting example is Apple: their hedge fund Braeburn Capital (https://en.wikipedia.org/wiki/Braeburn_Capital) has over $250bn under management. In 2012 it was widely reported as the world's largest hedge fund at less than half its current size so I assume it still is.


Grain companies do this stuff, so it’s not unique to tech either.


Before I say what I'm about to say: I know nothing about Airbnb's finances (aside from what's mentioned in the article) and I have no idea if it actually does or does not make sense for them to go public this year from the standpoint of the success of their business.

However, in a general sense, I believe that any company that provides their employees equity as a part of compensation has a moral obligation to get to a point where they can provide liquidity to those employees. It seems the founders and some early employees of Airbnb were able to cash out some of their shares in previous VC rounds, but that likely leaves the bulk of employees holding options or stock in a position of hanging onto something they aren't sure they'll ever be able to cash out.

Obviously there needs to be a balance of priorities: going public in a situation where the stock price will likely tank or the business will fail before employees can sell will of course not help anyone. But ignoring the fact that you have a ton of employees depending on some sort of liquidity event (even if it's just a company-initiated stock buyback) is IMO unethical.

Not saying that's definitely what's happening here at Airbnb, but the article sure makes it smell that way.


If these companies were profitable from the beginning, some sort of profit sharing mechanism could compensate for providing a financial reward. The challenge is that these businesses are setup to lose money until they get to some "scale" not profit margin. The scale goal leads founders to raise tons of Venture Capital and even VC's like Bill Gurley says that the constraint of profitability has been relaxed across the industry[1].

Bill says it's 10 or 100 times easier to lose 40 million to make 100 million than it is to run a profitable company to 100 million. If you extrapolate that out, there is no incentive from the majority stake holders (VC's) to IPO until they are ready.

[1] - https://youtu.be/-cxK1YQfMXA?t=1165


Sure, but I expect not all companies can be run profitably from day one, or even close. Some markets also benefit from network effects, so prioritizing profit over growth can lead to your eventual failure.

Arguably the excessive availability of venture capital makes it a lot easier to go the growth/scale route, and to do so on someone else's dime, and this encourages people to ignore the idea of building a profitable business from the beginning. And that sucks, but if you're trying to enter a market where the norm is to run at a loss in order to gain scale, you probably aren't going to be successful avoiding VC money and charging higher prices, unless you can differentiate yourself as a premium product, or something.


AirBnB still has all their VC money in the bank.


Sorry, you must not know that AirBnb is in the Silicon Valley/SF Bay Area. “Moral obligations” don’t mean jack shit here.


Can't downvote because you're a direct reply to mine, but please, there's no need for this. I get (and often share) your cynicism, but your comment doesn't add to the discussion at all.


Sounds like employees may have been able to cash out a bit via tender offers.

The founders and early employees have little financial incentive to push for an IPO. They have cashed in about $350 million worth of equity, said people with knowledge of the matter.


Well... that's a small number of "insiders," essentially. The person most vulnerable to the OP's concerns is a rank and file employee with $100k of paper wealth structured as an incentive to stay long-term, the 162nd hire. Equity starts as part of ordinary compensation, but converts to long term employee retention incentives as times goes on and the company increases in value. To be indifferent to these employees' interests is immoral, after you've essentially asked them to make long term decisions based on this deal.

These employees understand the least, have the least amount of information. They have the least negotiation power, and hence have equity deals with the fewest protections. They have the least influence over strategic decisions like this, so their interests come last. Owning so much private shares in one company is typically a bad wealth strategy for them, possibly 100% of their "portfolio." Typically after leaving, iliquid shares must be purchased with cash (exercising options) or the options are lost.

At the very least, (1) employees should have their options exercised, converted to shares at the companies' expense, after vesting. (2) The protections (preferences, anti-dilution etc.) an average investor would demand should be attached to these shares. That would leave them with an asset they may prefer to sell, but at least they unambiguously own it.

Generally though, I agree with the OP. If after raising significant funds and expanding the employee equity pool past 10-20 employees, you can either go for a 5 yr race to IPO or find another liquidity solution for employees. It's possible.


sounds like the softbank purchase could do this. That seems to be what softbank was doing with Uber as well.


If they’re making profits, they could buy back shares from the employees, gradually.


The linchpin for a lot of technology companies staying private has been Softbank. As they highlight in this article:

> The Japanese firm dumped billions of dollars into Uber, WeWork Cos. and other highly valued tech startups in the last year.

I wonder where are these guys getting so much money to "dump". And once all of this is over what will they really be remembered for?


> I wonder where are these guys getting so much money to "dump"

They invested in Alibaba early. One of the best VC investments of all time. $58 billion return.


30% of alibaba stock right? That is much more than 58 billions now...


Check out how much of their $100bn vision fund they've already spent:

https://techcrunch.com/2018/02/07/softbank-vision-fund-over-...


From Saudi oil magnates.


The Crown Prince of Saudi Arabia actually: https://www.bloomberg.com/news/articles/2017-12-10/softbank-...



> I wonder where are these [Softbank] guys getting so much money to "dump"

Selling shitty, slow Internet service to old people, that cuts out when a phone call comes in.


The interesting thing I read from reddit was that 30% of Airbnb’s cash flow last year came from an internal hedge fund holding currencies, equities, fixed income. This hedge fund was set up by their ex-CFO, so it's an interesting model for generating income. They take money from guests immediately, but do not pay out to hosts until the guests check in, this delay can be up to many months in advance. This gives them time to invest those assets how they see fit.

The danger here is that 30% of their cash flow is the result of an incredible bull market, so what happens to Airbnb when we hit a recession?


> so what happens to Airbnb when we hit a recession

Probably the same thing that happened to GE Capital, which almost managed to capsize GE itself.


If they invest predominantly in very short-term fixed income than equities (which would be my guess) then they may actually perform even better as interest rates rise and the market cools.


I’m guessing you didn’t even read the article before commenting? The reason I ask is because that topic is mentioned in the article itself.


> what happens to Airbnb when we hit a recession

Or the DOW dropping 1000 points..?


I heard exactly the same thing about Groupon back in the day. It seems like a standard trick for any company that can hold on to customers' money.


So as per article, Tosi's internal hedge fund contributed to $60m ($5m per month) of Airbnb's $93m annual profit?


Well, $60M of revenue to Airbnb's $2.1B revenue, and of that revenue, $93M was profit.


Why would VC's give Airbnb such much idle cash. 5.3 Billion in cash reserves is ~56 years of their current earnings.

Couldn't VC's take some of that money and invest elsewhere and get better returns on the cash than it sitting unused in a company?


1. When VCs gave Airbnb that money, Airbnb wasn’t profitable.

2. VCs want to own parts of a valuable, growing business. It’s probably doing more good as Airbnb shares, dollar per dollar, than any other private company.


i think youre under estimating the battles Airbnb is fighting in most of its largest markets


Sure, and if they need more money they can go to VCs. However Im suprised VCs will give them all the cash up front. Figured it'd be something like, "Hey I'll commit 1Billion in cash to your needs, however I'm currently holding it in a mutal fund myself. Let me know when you need it"


There are certainly battles they are fighting but if they have over $5B in cash reserves and are profitable to an extent that's no where near the fight that Uber was waging in China were it was burning (net loss) of over $1B a quarter.




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