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Comment by jonknee | Hacker News Reader

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.

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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.

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