Airbnb’s Battle to Stay Private
bloomberg.com
bloomberg.com
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)
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.)
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.
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?
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.
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.)
I really think they dropped the ball when Airbnb moved into the space
VRBO feels like craigslist, while airbnb feels like eBay to me.
If they did bizarre things so they start getting mentioned more in HN or TechCrunch I guess it'd help their cause :P
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.
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.
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.
> 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.
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...
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...
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.
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.
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.
The returns seem high. That implies extra risk.
Seems difficult to call Paypal an innovator in the field. Paypal is just a bank.
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.
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.
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.
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.
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...
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.
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.
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.
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.
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.
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.
> 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?
They invested in Alibaba early. One of the best VC investments of all time. $58 billion return.
https://techcrunch.com/2018/02/07/softbank-vision-fund-over-...
Selling shitty, slow Internet service to old people, that cuts out when a phone call comes in.
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?
Probably the same thing that happened to GE Capital, which almost managed to capsize GE itself.
Or the DOW dropping 1000 points..?
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?
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.