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Comment by dylandrop | Hacker News Reader

Just out of curiosity, what could this possibly be spent on? Assuming it is going to be used to build out in foreign markets, is this mostly advertising/marketing costs? It already seems like they have a pretty good foothold in foreign markets. I can't imagine with $250M/yr in revenue they really need that $500M for hiring people. Also - how much does this leave the founders with in terms of %?

One speculation I have that might answer my first question is that they're going to spend this on lobbying and legal battles.

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You don't have to spend the money or even have a plan to spend it right away for it to be useful. It has value as:

1. Rainy day fund. When the market is hot, you might as well stow some money away in case bad things happen.

2. Liquidity for existing shareholders at a good price

3. Sets a floor in valuation in case somebody tries to acquire you

4. More flexibility in acquiring other companies (who will probably want some part of it in cash)

5. Good press

Though of course maybe they also have plans to spend it. Who knows. But if people are throwing money at you at a good price, you might as well take it.

6. Push up the valuation to justify a bigger IPO.

I think not (rather, it depends), if they listed the day after say receiving a wire transfer of the amount, their NAV would only be higher by the $500M, so in a sensible world, investors would be buying the cash along with other assets essentially. This wouldn't pump up the fair value, as there would be a dilution (or likely anti-dilution) aspect to the NAV of each share post the transaction.

If on the other hand, they were to find immediate use for that amount, they could justify it being put into tangible and intangible assets whose fair value is higher than book value. Though since the grandparent poster states that they already make $250M in revenue, if they are making a net profit, the cash will only be useful in the medium to long-term for expansion.

never underestimate the value of #1

I think many people agree that's how doubleclick became a $3B acquisition. Doubleclick closed $40m in jun 97 and another $86m in 98. So they (luckily or cannily) raised a ton of money right before the dot com crash, slashed spending, and owe a piece of their success (definitely not all, but a piece) to having the financial reserves to be one of the few companies to weather the crash.

Startups are often about finding money machines. Ideally these guys are constantly asking questions like:

1) What is the lifetime value of a user? 2) What is the lifetime value of a property owner who lists with us?

Once you start to be able to define the LTV of various user types, you then look for way to trade money for users/customers. If a property owner statistically averages $1000 in profit for airbnb over 3 years, you'd be willing to buy a user like that for <$999, right? Not so fast, though. $999 is a lot of $ and 3 years is a long time. Funding like this allows Airbnb to "buy users" (thru paid channels, growth teams, etc) at a rate that would be impossible with just organic revenues/profits.

In short, imagine businesses as an engine where you put $1, and (hopefully) $1.25 comes out. Young businesses don't often have enough cash to fully take advantage of the engine they've built.

This is out of left field, but I'd use it to start a huge home cleaning business. All those homeowners need to clean rooms between guests, why let some other company take that business?

As for other ideas - what else do hotels spend money or hire people to do (cleaning was my example)? Those are the natural areas of expansion.

I'm not an expert on AirBnB in the slightest but I think that's what you would consider their competitive advantage; you make the homeowners assume the responsibilities normally reserved for the Hotel.

That way AirBnB just acts as an intermediary and doesn't need to deal with the fussy details.

AirBnB's advantage is they don't need to invest capital in real estate. But, the fussy details are how company's make money.

Interestingly, most hotels do NOT own the property the offer. Hotel chains like Hilton are hired by property owners to manage the hotel business.

Or at least thats what wikipedia says (1).

like many hoteliers, Hyatt operates hotels for a fee as a management company, and does not usually own the real estate

(1)http://en.m.wikipedia.org/wiki/Hyatt_Regency_walkway_collaps...

Technically, most hotels do own the property they offer. Hilton, Hyatt, Starwood, Marriott, IHG, Choice, Wyndham are all brands. They sell the reputation, that the owners of a hotel building buy (i.e. franchise) and pay royalties to.

Sometimes a hotel brand owns the hotel building, sometimes a hotel brand manages the hotel, and sometimes they do both. But in the vast majority of cases, the hotel brand is in a franchising agreement with the hotel owner, and many times the hotel owner will hire a management company to deal with running the hotel itself.

And I'd say you would be right: http://techcrunch.com/2014/01/31/airbnb-cleaning-service/

They're already piloting this idea.

https://www.airbnb.com/help/question/488

This is an excellent idea. I'm often out of town for 2-3 weeks, but I can't take multiple bookings because I don't have anyone to change the linen & take out the trash.

I'd also like some way of organising the key drop-off.

A couple of companies are already doing this as a standalone service:

http://proprly.com https://apoio.co https://www.airenvy.com

Don't forget new YC Alum http://www.booksuperhost.com/

Actually, Chesky said exactly this recently, from the article, "One starting point: a cleaning service that will offer fresh sheets and towels to Airbnb proprietors." http://www.fastcompany.com/3027107/punk-meet-rock-airbnb-bri...

Maybe lobbying to get laws changed in their favor

Lawyers are expensive. And they will be needed for engagements with cities, getting laws changed and even defending themselves in lawsuits.

Thats's why lawyers will be the last market to be disrupted.

I don't think AirBnB or Uber's execution is good at all. They are essentially cresting a wave that is about to smash into the breakwater of legislation.

Soon both services will be either -

a. Regulated out of existence b. Forced to comply with regulation making them a de facto hotel-like or taxi-like service eroding their entire competitive advantage.

Another example of people stating that "efficiency = deregulated market" without considering the wider reason for societal acceptance of the regulation.

I would rather have my housing area protected than have AirBnB. I would rather my daughter use licensed minicabs than unregulated services.

I was hoping they'd use it to make their listings compliant with all local taxes and ordinances, since that is likely to be quite complex in the software. But I fear y'all are right about the lawyers and lobbyists to bend the laws to their side.

I also wonder if the AirBnB host petition[1] didn't require some astroturf to get started.

[1] http://www.businessinsider.com/airbnb-petition-san-francisco...

I suspect they have bigger ambitions in the "sharing economy". Airbnb (and uber) have demonstrated very good execution so makes sense to place $$ with them.

Left field thought but isn't there a business opportunity to work in the draft of all of AirBnB's legal wrangling. Basically, you just let AirBnB spend all its money dealing with all the legal hassles in each city, and then come in behind them at each of those cities and compete with them.

Lawyers and lobbying.

Airbnb is in for a very rough ride in the near future.

law suits.

I know they are expanding, big time. They've purchased space in Portland and already started hiring. I think they're going to try and grow before they need to. And some backup doesn't hurt.

They won't use it for anything other than to raise the value of their valuation. If they court a buyer, all of that cash in hand just raised their buying price by $500m.

Wait, what? The $500 million comes with a $10 billion evaluation. Surely, being more liquid doesn't raise their valuation?

10 Billion "Pre Money" valuation = 10 Billion + 500 mm "Post Money" valuation.

The 10 Billion figure is typically "Pre Money".

enterprise value = market cap + debt - cash; don't think the additional cash would 'raise their buying price'. If they could have sold for $10B currently (assuming the valuation TPG is buying in at is what they would sell for), I'd think it would make sense to not take additional funding at the expense of giving up equity, so don't see how this would raise the value of their valuation. Thoughts?

You are correct. Besides, raising x amount of money at y valuation, doesn't mean the company as a whole is worth y. Investors typically get preferred stock, which are worth more. Marc Andreessen had a nice tweet chain about that exact topic yesterday, ending with this one - https://twitter.com/pmarca/status/457017580385873921

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