Airbnb, My $1B Lesson | Hacker News Reader

Airbnb, My $1B Lesson

arenavc.com

504 pointsrvcamo139 comments

It is interesting and a bit ironic that AirBnb accepted funding from YC - who did not believe in their idea [1], and rejected the only investor that not only believed in their crazy idea, but actively sought them out and tried to woo them. Did they go with YC because of its brand, name recognition, or because it offered them better terms?

Of course, it is all counterfactual, but could Airbnb have been as successful had they not joined YC? Recall that PG told them to do things that do not scale - by taking professional photos of rentals in NY - which may have been critical to their early success.

And although PG was initially skeptical of their idea, he quickly changed his thinking about how big Airbnb could become. Revealed in another interesting trail of emails exchanged between PG and Fred Wilson (who also passed on Airbnb). [2]

[1] "In fact, when we funded Airbnb, we thought it was too crazy. We couldn't believe large numbers of people would want to stay in other people's places"

http://www.paulgraham.com/founders.html

[2] http://www.paulgraham.com/airbnb.html

http://avc.com/2011/03/airbnb/

Edit: spelling

>"but could Airbnb have been as successful had they not joined YC?"

These guys had a good idea, some luck, and were able to execute. I doubt that the "brand" of their money or broad aphorisms from VCs had much to do with any of it.

For all intents and purposes, money is money. There's an element of "tech celebrity" in the Valley, and big-name VCs are part of that. In reality, successful businesses around the country are built, every day, by hard-working entrepreneurs who bootstrap it (because their business is making money) or get funding my more traditional means. I don't think VCs have any "secret sauce" for success.

Yes. I don't think that the YC brand or any VCs would have helped them to attract customers. The VCs are well too far as a marketing environment compare to the kind of people who could use their platform. If it's a company like docker then yes: the VCs, tech guys, and companies using it are all connected and know each other. Their mutual respect and actions create their own brand so it works. But here people renting their apartment not so much, even more cities outside the Valley. They can be in the energy industry, banking industry, manufacturing... so with no particular interest in the tech world or VCs/startup world.

The biggest challenge for them was to find people willing to use their platform to rent their apartment to strangers.

frbo.com had been up and operating for many years before airbnb came around. "good idea" in this case wasn't original, so that would leave luck or connections. maybe it wasnt the YC money that helped as much as YC's connections.

in the end we will never really know, but it wasnt the "good idea" part that made them successful.

It's not the idea. It's the execution.

The world is more than just about idea, luck, and connections.

Just by looking at the websites of airbnb and frbo will tell you a ton.

YC invested on the assumption that their business wasn't really working. Arena would have invested on the assumption that it was.[1] YC was right, and helped them get to a true product-market fit. It was the right money to take.

[1] Paige's post is actually very nuanced about how much product-market fit he saw in AirBnB, and how much he wanted to invest because of the market and team. But he clearly gave them more credit on "making something people want" than YC.

"In fact, when we funded Airbnb, we thought it was too crazy. We couldn't believe large numbers of people would want to stay in other people's places"

I don't understand why anyone would have thought this at that time unless they did zero research.

VRBO had been effectively doing that for 13 years by the time Airbnb came along, and was (and is) widely used. Yes, Airbnb's focus is a bit different of a market segment, but clearly their success indicated that large numbers of people were willing to rent someone else's place directly from them in spite of the potential concerns.

This exactly. VRBO and HomesAway are the businesses that AirBnB is really competing with, and they've been going for ages. Hotels are for shorter stays, and generally are quite price competitive with AirBnB when staying short term anyhow. As a long time AirBnB host and guest, I've only ever used the platform to rent entire places, and I think that 80-90% of AirBnB revenue comes from renting entire homes. The original AirBnB idea of renting a room or couch from a local was just a beachhead and clever marketing trick to get noticed IMO. Like couchsurfing, I struggle to see that becoming a big business and taking on the Hotels.

AirBnB is really two businesses in one:

1. A Hotel disruptor - letting people crash on your couch or empty bedroom. This is the original idea as per pitch deck.

2. Holiday Rental / VRBO / HomesAway competitor - renting out an entire home for a period shorter than a 6 month-lease

Would be interesting to see where most of the revenue actually comes from. My guess would be that the traditional model of holiday lets (#2) brings in the vast majority of revenue, whilst the original idea was used as a beachhead / marketing ploy.

I dunno, something like "Make sure you have nice pictures" for a business where visual things (where you're going to sleep) is quite important doesn't seem that groundbreaking of advice.

If it's bad form for a VC to break a handshake deal, it's equally-bad for a startup too... no? Doesn't that reflect poorly upon the founders?

It's so important that YC went through the effort to codify the process: http://www.ycombinator.com/handshake/

You guys are missing the point. AirBnB didn't screw me over - this wa any first deal and I screwed around debating stupid points. I was disappointed they didn't do the deal but this whole post is about lessons learned. And one of the biggest ones was move fast once you have conviction. At the time of this Airbnb event I was just learning. I thought an investor had to worry about all these little details, negotiate tons of clauses, etc. but post Airbnb I realized all that detail was stupid. After that event I learned to move fast.

Example: When I met Peter (Contextlogic now known as Wish) I wrote him a physical check within a day (pretty sure it was his first) as I planned to take whatever terms he ended up negotiating. And then I immediately started brining in other investors, introductions to engineers, etc

So don't take this post as a "Brian screwed me" / the screwing was all self inflicted and a very important lesson

Well, if it did fall apart at the literal last hour and you were going to sign the formal paper work (which only reiterates the terms already negotiated and agreed to at dinner) the next day, but didn't because YC came in overnight and took the entire round...then it does sound like you got screwed.

His general approach does indicate that belief in the product is paramount, his trust in the team second. The takeaway is not to yank the chain too hard negotiating when these two criteria are met. He could have closed a week before.

Those who aren't willing to walk away make bad deals.

This is generally true. "Today and today only" is usually a red flag.

But those who aren't willing to pull the trigger quick enough miss the great deals.

It seems to boil down to "How fast can you be mostly right?"

Pretty close to what was found here: http://arxiv.org/abs/1201.3798

It also sounds fairly intuitive when you verbalize it: the faster you can update your (presumably sound) strategy to new information, the "better" you are likely to do compared to someone who responds to changing information at a slower rate.

Even if your initial strategy is less sound, if you can (and are willing to) update it faster, you can still win (so long as your initial strategy wasn't too horrible).

Thats why comments on Hacker News are editable :)

Happened to my OP :) Pushed down to -1 early, made some edits and now +10

You may want to update the post with this conclusion - it makes the entire article click for me!

I respect you for taking this view cos it's so much easier to be a lesser man and whine about how you missed a great deal. Thanks so much for your candid sharing!

Isn't it bad form to post email correspondence like this? Will this make founders uncomfortable communicating with you in the future?

They probably shook hands after a meeting, as one always does. That is not a "handshake deal". Airbnb probably had similarly positive meetings with dozens of investors. All of them probably talked about doing the deal soon.

He's known for being bold and writing checks on a first meeting. Why didn't he write a check to Airbnb after months of haggling? YC, or any other investor, was free to come along and close the deal at any moment. The way an investor claims a deal is with their checkbook (or a signed term sheet). He learned his lesson and realizes his mistake. Airbnb did nothing wrong.

exactly! I spent three weeks haggling - I should have figures out terms in 24 hours or less or simply given them a check and let it ride into future terms.

Do you honestly think if you hadn't haggled for 3 weeks that:

a) They wouldn't have turned around for advice from YC

b) YC deciding to come over the top once hearing the news

I agree with your assessment that YC was probably trying to keep dumb money out of the cap table but I also hypothesize they originally underestimated the team and once they saw they were actually able to put a TS together that was proof enough their original calculus was wrong and they circled back around. I don't think you were getting this deal either way.

Hello and welcome to HN!

Is it prudent though? I understand the need for expediency, but surely you need to do some due diligence?

Man, I want to hear the answer to this question. I got screwed royally as an angel investor because I was too quick to write a check.

By his story, he spent some time getting to know them but then haggled terms once he'd decided to invest. The way I read the story, his regrets where that he spent that long haggling once he'd decided they were go. Had he closed then, he'd have closed 3-4 weeks before YC, and he would still have had his partners in to spread the risk.

but at the end of the day, the haggling ended, and terms were agreed upon (it seems). Handshakes done.

I think the comments have gone off on a tangent focusing on whether you getting cut out of the deal was ethical (whereas the blog post was just a flat out interesting story to read about). But at least the way your post reads, you definitely got screwed out of the deal. Sure, nothing is done until things are signed, but as many investors have told me "my reputation is everything". Seems like it should go both ways. This certainly doesn't reflect positively on the founders.

> Handshakes done.

Nothing's done until the papers are signed. This goes for all things in life, too, from investing to renting apartments. If you don't have a signed piece of paper, you have no deal.

One of the main selling points of YC is that they promise not to legal obnoxious things. Saying "nothing's done until the papers are signed" is completely missing the point.

is this comment a non-sequitur or am I missing something? The deal we're talking about was between the author of the piece and Airbnb. YC may have made the offer to fund the whole round, but they're not the ones who made the decision to pull out between shaking hands and signing the paper.

In any case, I apparently place too high a premium on paperwork. In another comment thread on this story, someone pointed out that the remedy for breach of contract is to unwind the wrong party's situation to the position they were in before the contract was signed. In this case, until the check has been deposited and spent, it's trivial to tear up the paperwork.

This isn't factually accurate. You can have an implied contract from exchanged emails, verbal communication- pretty much anything that shows intent.

Yes, but going back on a deal once you've agreed makes you a dick, signed or not signed.

I've seen an investor back out on a signed terms sheet (once). In my book the deal isn't done until the check clears or the wire arrives.

I don't know about Handshake Deals, but everybody says it's bad form to back out once term sheets have been signed- but in the single round of VC funding that I had internal insight into, our VC backed out at the 59th minute after term sheets had been exchanged and agreed to, paperwork signed. On the basis of that, we even went out and brought on our first external board member.

Now, this particular VC has only raised about 800mm, so I don't know if that makes them a Tier-1 VC, but it still made me realize that you don't ever know until the money is in the bank account.

Thankfully, Foundation Capital (an awesome Tier-1 VC), stepped up and kept us running/covered payroll and rent, until we found someone else to get money from.

> VC backed out at the 59th minute after term sheets had been exchanged and agreed to, paperwork signed.

I'm curious how this works, legally. If they make the offer and you sign the papers, doesn't that legally obligate them to follow through on their offer?

Approximately 100% of institutional VC term sheets have a "conditions precedent to closing" section that includes something like, "completion of due diligence to sole satisfaction of Investors." Often there are other "outs" as well.

Really, the moral obligation to consummate a deal is only policed by reputation. And that is not often discussed out loud (see, for example, how parent describes the deal but doesn't name the last-minute-back-out VC).

(Plus there are whole other big cans of worms for discussing investor reputation online "out loud" -- it CAN be done and there is a lot of truth out there, but a ton of noise. The real scoop is generally spoken 1:1 over the phone, or over coffee in person.)

Interestingly, the whole gist of TFA is that investors should move fast once they have conviction. But the more they do that (instead of "front-loading" diligence and negotiation), the more like it is that you get last-minute backing out (or perceived backing out).

The way the VC firm I'm affiliated with has always handled it is to "front-load" diligence, and treat a signed term sheet as if it were very nearly binding and final. I think we've pulled ~ 2 signed term sheets, out of almost 100 new deals over the years.

Point is, you can't have your cake (enjoy super-fast handshake commitments without the diligence that is "due") and eat it too (enjoy high certainty of closing on those commitments).

A contract isn't complete until someone actually spend money (or something of value) in reliance. The standard remedy for breach of contract is to unwind the victim's situation to the position they were in before the contract was signed.

So at the moment you sign the paper, but don't hand over money or burn other bridges or whatever, it is trivial to tear up the paper.

The codified "handshake" process, you'll notice, has a written step and includes a core element of contract formation: offer & acceptance.

https://en.wikipedia.org/wiki/Offer_and_acceptance

IANAL, TINLA.

FTA: "At the end of September, we agreed on terms and I flew up to San Francisco to do a closing dinner at a little café next to Brainwash. We had some good food and wine and I thought things were solid. We shook hands and planned to formally close the investment the next day."

I'm gonna go out on a limb and assume that the investor already possessed emails saying "Let's do this" with numbers in it. Is that different than a signed term sheet? You bet -- it's not legally binding! But it also meets all the requirements of the gentleman's agreement -- aka YC Handshake protocol:

1. The investor says “I’m in for [offer].”

2. The startup says “Ok, you’re in for [offer].”

3. The startup sends the investor an email or text message saying “This is to confirm you’re in for [offer].”

4. The investor replies yes.

I believe contract law doesn't require signed physical paper to have an agreement be legally binding (it just makes it easier to litigate disagreements on either side).

I'm starting to get out of range of my recollection of law at this point.

On the tangent of the protocol as the protocol, I also note that it is meant to be exclusive. That is, you don't construct it by piecing together the individual events -- it's written as a once off 2-phase transaction with no other intervening steps to prevent shenanigans and mistakes.

Sorry, but this protocol should be improved: "in" is ambiguous.

All the startup has done is repeat verbatim what the investor said. In this situation the startup has signaled receipt of the investor's offer and has not signaled intent to ratify or otherwise accept.

"You're in for [number]" is meant to be interpreted as acceptance.

Yes, an eager investor might interpret that as acceptance.

>1. The investor says “I’m in for [offer].”

>2. The startup says “Ok, you’re in for [offer].”

You'll notice that the startup has only repeated back what the investor said, correcting for the inverted subject-verb and adding a customary signal opening. The startup has confirmed receipt of the investor's signal.

>3. The startup sends the investor an email or text message saying “This is to confirm you’re in for [offer].”

The startup confirms receipt on a secondary channel.

>4. The investor replies yes.

Waiting on communication from startup.

I can see how you interpret it that way, but since this is a published "handshake deal" protocol, I'm not sure that's how it's meant.

Precisely why it should be improved.

I guess Mark Cuban forgot to explain this correctly.

If you follow sports at all, you know what I'm talking about.

I follow sports, but I don't know what you're talking about.

edit:http://www.tmz.com/2015/07/09/deandre-jordan-clippers-may-ha...

Possibly this? Interesting term in there re: handshakes, called "promissory estoppel".

http://www.investopedia.com/terms/p/promissory_estoppel.asp

Like most things, reputation is important, but is second to money.

Let me get this straight: in June 2008, Airbnb got intro'd to a bunch of investors, who all said no [1]. In September of 2008, Airbnb had a $250k round on the table that valued them at 2.5M[2]. And then, also in September 2008 (before YC usually does interviews) they rejected that offer for YC, who ended up giving them $20k[3], with a valuation presumably around $250k?? (Although Brian Chesky says that didn't happen until November, it sounds like they got some kind of verbal confirmation earlier?)

The timeline is weird.

1. https://medium.com/@bchesky/7-rejections-7d894cbaa084

2. https://arenavc.com/2015/07/airbnb-my-1-billion-lesson/

3. http://www.quora.com/How-much-money-did-Airbnb-raise-What-is...

It's not weird at all. Brian talked to a ton of people over many months. He was raising many months before I met him. And then I came in. I then spent too long negotiating but then we finally worked out a deal end of Sep and then my lawyers and their lawyers negotiated the agreement Sep 26th and then we did our dinner. But then YC smartly moved in after this closing dinner and booted me out. Funny enough Justin Kan and I ended up in Vegas a few years later at a tech party at Caesars hotel and had a good laugh about it. He remembered me as the crazy Marine who was writing a huge check into Airbnb before they elbowed me out. This isn't unusual - they probably googled me at the time (back then all of the results would have been stories about iraq, Syria, afghanistan, Pakistan operations; black operations and crazy shit). They probably thought they were protecting Airbnb and keeping dumb money out of the cap table. It's quite common for good investors to strongly advise you not to take dumb money and I agree with the practice.

And that goes back to one of the lessons from my post. I realized that for founders and investors to take me seriously and not lose deals I had to prove myself, build a positive brand by helping founders and getting smarter about this new world I was operating in.

> ..YC smartly moved in after this closing dinner and booted me out.

Do you think YC told AirBnB "We won't accept you on our programme if you take investment from Paige", or do you reckon it was AirBnB's decision to join the YC programme instead of taking your investment?

Pure speculation here: But objectively I think my money was perceived as "dumb money" and YC had a great rep even back then. When you compare the offers the YC money is clearly the best deal and smarter move.

Thanks for joining the conversation! To clarify, I didn't mean to insinuate that I thought anyone was necessarily lying; it's more of a "surprised" weird. Surprised because:

(a) Based on your story, Airbnb got accepted into YC early (or at least received a strong enough signal that they would be accepted). I don't think that's inconsistent with Airbnb or YC's account, I'd just never heard about it before (amidst a ton of lore about Airbnb's early days at YC).

(b) Airbnb had the foresight to see that YC's deal was better than yours. This would actually have been non-obvious in 2008: Dropbox was only a year old, Stripe didn't exist yet, and YC's best-known successes at the time would have been Heroku and Reddit. Not to mention the fact that you were offering them 10x the cash at 10x the valuation.

So it is "weird" in the way that history is kind of weird. I don't doubt your version of events though, and I appreciate you sharing it.

Deleted comment

See my reply to beambot below. TLDR : my fault not Airbnb

As to posting details of the deal I've held off on this for years as I never wanted to hurt them and I don't see any way these early numbers are going to impact Airbnb. The specific point was to (1) demonstrate that the metrics many investors look for at this stage are meaningless and reinforce that founders working in the right Cardinal direction is what's important (at least to me).

The other details (events, feature list, budget) are documents we were brainstorming on and I wanted to see (1) how they think and (2) how fast they think. The point about the bugs, intros, etc isn't to demonstrate that I added meaningful value. Instead these docs demonstrate tte quality of the founders and their focus and planning.

As for "bossing" people around you're missing the context of this interaction. If you and I are sitting down figuring out your budget, user acquisition and product am I bossing you around when I ask to see results? I'll admit I'm demanding but i certainly don't believe in bossing founders around. If I have to boss you around then I'm walking away from the deal - I like to back founders who's own internal demands and expectations are higher than my own.

Either way appreciate all the thoughts here. I've waited seven years to start discussing startups / funding etc and you'll find that this and future posts will often focus on founder qualities.

Thanks for your post - and welcome to HN, we appreciate your posting here. On reflection I chose to delete the comment, unfortunately I saw that you wrote a reply to it afterward. I think my comment was overly critical.

I think the key insight that a lot of people may miss in your post is about timing - the first email your post quoted from Brian said they wanted to close $100K to operate "for the next 4 months", so a closing time 6 weeks later (1.5 months into that period) is quite late in that process. Early stage companies are radically underfunded and at times running on vapors. If you hadn't closed in time and the company had died, you never would have written about "the time you killed a $25 billion company* by not investing in time when you were the only investor who they could still count on". You would have long-since forgotten them.

So the lesson to investors is to cut the check! You may not have another opportunity.

  Gather ye rosebuds while ye may,
  Old Time is still a-flying;
  And this same deal that smiles today
  To-morrow will be dying.

You being up a great point around the potential of "killing" a great company and this is important. I was always sensitive to their position as I'd been there 5 years earlier when I bootstrapped my company.

I always negotiated in good faith with them and spent time to understand their needs. Look at the budgets: When you look at that budget with handwritten notes that's my writing - I was concerned they weren't raising enough and I asked them to take more money to get more runway AND i agree to increase the valuation to account for the dilution.

As far as the "six weeks goes" that was from the first day we met until the day I had my lawyers at Greenberg Traurig negotiate docs with their counsel at Fenwick. Part of the delay was my own stupidity; I had my lawyers drafting custom docs (which I paid for completely out of pocket and didn't push into the closing costs). Brian has rightly sent me standard YC docs to use but I was too ignorant to even know what those docs were. And then I spent two weeks negotiating terms and final valuation.

The other complication is Brian wanted me to meet with another angel he wanted to bring into the round (I left this out of the post as I didn't want to embarrass this angel; we actually became pretty right friends after all this). So this other guy and I met up a couple times before he decided he wouldn't do the deal and that delayed us as well.

But I was always direct on my commitment to Brian and once we agreed to terms I immediately had my lawyers move to closing quickly.

I just had a similar situation with a company we committed to fund this year. We were coleading the deal with another VC; this other VC ended up in a protracted (2 months) negotiation of docs. We (Arena) couldn't fund our half of the deal until docs were finalized with this other VC. So the founder calls me up because he's now 3 weeks away from missing payroll and may have to slow down user acq that's going great and He's obviously worried that if this seed round fails the company is dead. And I told him not to stress - I offered him a $250k personal loan to his company at the lowest simple interest rate and he didn't have to secure it or offer me any warrants or incentives. I peronsally funded his company two days later and we're all good.

My point being - I do understand the consequences of being a bad investor because I always try to imagine myself in the founders shoes. I was in that spot years ago and I know how vulnerable it can feel. Even though I wasn't a well educated investor when I was doing the Airbnb deal I never took any action that would have harmed their potential.

Six weeks for closing a seed/angel investment from introduction to term sheet sign-off is not "too long". From my reading, it seems there was a firm commitment on both sides and hence, it was bad of both airbnb and YC to cut you off totally. At the very least, I would have expected the likes of YC to allow you to co-invest instead of simply assuming you were a newbie marine. After all, it was not as if YC had seen some stellar exits by mid-2008.

> Investors, if you want a deal, cut a check: it's not complicated. Founders don't have time for your games - you're the one with the cash, they're the ones with burning ships actually doing something.

this makes it sound like investors simply crawl out of bed one day and say something uncomplicated like "mm I feel like giving money away to some startup for breakfast"

Deck: $2.1B in revenue by 2011

Reality: $500M in revenue in 2014

Moral: Even the most successful startups don't hit their seed-stage revenue projections :)

What bugs me is that the founders went back on the deal that was agreed upon in person.

Docs were finished, a "closing dinner" was had, a handshake was made on the deal, and then AirBnb backed out. If an investor pulled that on a YC company I'm sure they would be blackballed rather quickly.

AirBnB has never been one to follow the rules, from the earliest days of Craigslist spamming and flouting lease agreements and hotel regulations.

You don't do handshake deals with people whose fundamental business model is "cutting corners wherever you can sneak away with it"

One thing we can all learn from AirBnB: if any group of people you hire for any reason, even on a contract basis, do one bad thing on the Internet one time, haters on the Internet will never let you live it down. Hire carefully.

Yes, because no one ever passes the buck entirely. I believe this accountability is a good thing; see for example this discussion:

This is how Visa works https://news.ycombinator.com/item?id=4396414 (900+ points 3 years ago)

To be fair, you'll also need to consider if there is a power imbalance with the company and the investor. Co-founder are the "smaller guys" here.

You could equally say:

"Docs were finished, a "closing dinner" was had, a handshake was made on the deal, and then the investor didn't sign"

And we would be just as critical of that investor.

Are we.. I am not so sure..

A deal ain't a deal till its signed off.

I make deals and negotiate all the time and I've negotiated thousands of times.

It's a very good sign when you have a verbal agreement but you're a fool if you think that's a finished deal.

It's the quick and the dead - if people are serious about a deal then they need to move quickly, wrap it up and sign it.

If you are selling something (yourself, your company, shares in your company), you should ALWAYS continue negotiations and keep talking to interested parties until one of them signs.

The tardy buyers/investors/employers who think they can stretch it out and take their time miss out, that's all - and it's important to understand that the mistake is theirs for not signing, it is not the seller being unethical. And if you are the sort of person who says "I made a verbal deal and my word is my bond.", then you might get played by people who will take advantage of that and not sign, perhaps hoping for more information, more favorable conditions, a better deal to come along. They won't hesitate to drop the verbal deal if it suits them.

Every negotiation has a number of properties and variables. One of the absolutely key properties is the time profile. If you do any negotiating then you need to understand how to play the time profile. You can say to buyers "I'm offering something good here but only for X period of time." Or "I'm happy to agree to these terms but only for two weeks and everything is back on the table after that." Or "Great that we have a verbal deal, you need to understand I'll be talking to others until I have a signature so if you are interested then you'd better move quick." Or "If you pay the agreed amount on time then I'll give you a guarantee on our services, pay it late, no guarantee", or "OK happy to go with this investment deal, but I want the cash to hit the account by the 8th August and the deal is off if it's late."

Time profile is one of the most interesting and valuable aspects of any negotiation and can completely change the true value of the deal.

If you like it then you'd better put a ring on it.

A verbal contract is just as legally binding as a written contract. It's just that most people don't have authorized audio/video recordings of these kinds of interactions.

Technically speaking, a recorded verbal contract isn't simply spoken word - it is a matter of record. It's just that the record is an audio file instead of a piece of paper.

About 11 years ago I did a short stint as a customer support bloke for a telco here in Australia. Recorded verbal contracts were the new fashion, and made life easier for switching phone companies. But every 'verbal' recording started with boilerplate stating that this was a recorded conversation, and constituted a contract. The content was specific points, like in a paper document. It was not a casual conversation. Things may have changed here in the meantime, but that's the way it was then.

I also think that a unilateral audio recording wouldn't stand in a lot of places, given that it's illegal in some places to record a private conversation without informing the other party.

Not all contracts... https://en.wikipedia.org/wiki/Statute_of_frauds

Wow, thanks for the link. That's really interesting. Most of those seemed like pretty obvious safety stops, except for the $500 in goods maximum. That one sort of renders verbal contracts useless in nearly all cases, unless I'm misunderstanding.

You are misunderstanding. The $500 limit is specifically for "goods". Not services, for instance.

Unless there's a contract signed at the start that says "no verbal agreement in this process counts as a contract".

Note, that's 100% true (clarifications may stand, IANAL), but I wouldn't be surprised if the VC took steps to ensure no deal was done until the paper was signed.

> A verbal contract is just as legally binding as a written contract.

This is the general principle in Common Law taught to law students in Contracts 100, but it really depends on the subject of contract and jurisdiction.

For example, many jurisdictions have legislation requiring all real property sales to be in writing. Many others require certain financial instruments or transactions to be in writing. And so on.

So while a verbal agreement may raise questions of honour and sometimes equity ("equity" as in the body of law, not the moral concept), it can often be considered non-contractual.

IANAL, TINLA.

>> if people are serious about a deal then they need to move quickly, wrap it up and sign it.

exactly, you see this with recruitment.. when a company meets the right candidate they move very fast...

Anytime I did interviews, I had a 24 hr deadline for me to mentally strike out a option. Everytime I got a job, I was contacted almost within an 1-2 hr of doing the interview.

Any delays means they other party has other good options, same applies IMO here as well..

So in this case unless they sign on the dotted line pronto and give a cheque, things are still up in the air

He was gazumped by a much shinier offer because he had nothing in writing.

He concluded that he needs to move faster on the big picture, rather than haggling the correct protocol for picking of nits.

That's not what I get from the story though.

I sense the founders used the VC as leverage. They had a closing dinner the night before and shook on it. The VC was reasonable to expect the paperwork to be finalised the next day.

YC changing their mind at the very next day sounds very convenient...

I imagine that everyone's recollections differ. I'd hate to speculate.

Edit: I seem to have touched a nerve, but I don't know what it is. Can someone explain what I said that caused annoyance? I have the usual embarrassing secret obsession with made up internet points.

I didn't downvote you...

But they way you worded it seems to suggest that the VC wasn't telling the truth. At this stage, he has the benefit of the doubt.

That seems reasonable. I've been in situations where people simply recall events differently, without any sense of intending to deceive.

This is a really important point that many people are strongly resistant to.

False memory is a thing and many people refuse to accept that it could happen to them.

http://www.bbc.co.uk/news/science-environment-24286258

(There was a radio programme this week that demonstrated the process of giving someone a false memory. I would post a link but First Great Western (the train I'm on) blocks a bunch of BBC website.)

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Are those startups still around? Could you list some examples?

(Note: I'm not being facetious. I'm genuinely curious)

I hear you.

I get that a deal isn't final until it's in writing (i.e. signed), but whatever happened to integrity?

All a matter of perspective.

My basic understanding is that deals are complete when signed off. Where's the lack of integrity in that?

Lying is generally considered lack of integrity.

Integrity: "I like your offer a lot" (but then something actually changed, and I don't sign).

Lack of Integrity: "I'm in." (but then I don't sign.)

I think it's generally understood that signed documents describing the terms in detail is what matters. In my mind, integrity is a) not lying about what's in the docs b) sticking to the letter and spirit of signed docs. Until docs are signed, there is no deal

With all due respect, you'd get crushed by business people who mean business.

But, you can do business and be successful whilst keeping your integrity intact.

I think that integrity is essential in building trust, which is important in any kind of business relationship.

Nice goalpost move.

Welcome to the world of business, I see you're new here.

Please don't post comments unless they are civil and substantive.

https://news.ycombinator.com/newsguidelines.html

It's very interesting hearing a story from the VC's side. One always reads about the trials and tribulations of startups trying to raise capital, but I've never considered that there might be similar issues and competition on the investors' side.

Sequoia arguably strongarming its way to owning 100% of the Whatsapp series A instead of allowing other funds to join would be a prime example of this is recent history.

How on Earth did they strongarm anybody? Whatsapp didn't want to meet with any investors. Sequoia put in a lot of effort to be allowed to invest at all.

The most interesting takeaway for me is the spreadsheet of stats. I find it highly motivating to see how meager their start was. You hear all the time from startups, "We weren't an overnight success. We worked hard for years...", but seeing stats like these in hindsight really sends that message.

If there's one thing I've learned since working at startups and rounds of funding it's definitely:

The deal isn't done until the money is in the bank

Does it strike anyone else as unseemly to share the pitch deck? I get that it's 7 years ago, but still seems like something a little out of bounds to me.

http://www.businessinsider.com/airbnb-a-13-billion-dollar-st...

edit: actually arenavc posted the deck https://arenavc.com/wp-content/uploads/2015/07/airbnb-origin... and much more https://arenavc.com/wp-content/uploads/2015/07/AirbnbEventSc... https://arenavc.com/wp-content/uploads/2015/07/Airbnb-Events...

Pitch decks have a pretty short life time, after 3-4 years of active business development, they don't have that much relevance, and after 7 years they are historical curios more than anything else. And, as others have noted, this particular pitch deck is in the public view already.

The deck has available online for a few years now. You can find it with a quick Google search.

I upvoted you because it is useful to get answers to this, and thought the downvotes are a bit harsh.

"Over the last seven years, I’ve discovered and invested very early in a handful of highly valuable companies (Wish, Lyft, Zenpayroll, Postmates, AngelList, Plated, Styleseat, Klout, etc.) as well as plenty of disasters."

Any middle ground between "highly valuable" and "disaster"?

I think in most VCs minds, there is no middle ground (ie everything not highly valuable is effectively written off as a disaster).

Its an interesting read to hear about other investors who have missed out on deals. I actually tried investing into a startup this year and completely failed due to governmental regulations. Even though i worked my ass off saving for 2 years to have discretionary income in order to invest as i wanted to I did not meet the requirements of being an "accredited investor" and so i missed out on the funding round. I spent at least a month getting everything ready and going back and forth with the founders meeting with them emailing them back and forth to find out from a newsletter that they had closed without me. I guess until the SEC opens it up i'm shit out of luck and am better off going to a roulette table at a casino...

The easiest criteria for becoming an accredited investor is to be a millionaire. So I'm assuming from your post that you are not a millionaire. Startup investing is very high risk, and if you can buy a meaningful stake in one startup, your odds are actually worse than the roulette table. So you need to invest in multiple startups without going broke, and for that you probably should be at least a millionaire. Regulations stopped you from doing something foolish.

If you take that money you've been saving and invest it in something more conventional, it won't explode 100x overnight but you'll definitely get somewhere.

Why would you want to invest in a startup ?, VCs can pull it off because they are playing with a lot of money and can eat the (completely inevitable) losses. It sounds like you only have enough to invest into one startup, thats an incredible amount of risk to take.

People also start companies, which is even riskier. Angeling into one startup may be better than never trying anything at all.

Starting a company is like building an airplane and trying to fly it straight off a cliff. You might crash, it might be a foolish use of your time, and you might die, but you have a lot of control over whether or not that happens.

Investing in a startup, with the bulk of your savings, is like being a passenger on that airplane.

I imagine most start a company without ever investing money they can't afford to lose. Sure a few $1000 but nothing to make them broke. Instead the money comes from 'loseable savings', family gifts, profits, loans or investors.

Yes but picking between investment opportunities is a bit different than starting a company. If you have enough money to buy a significant chunk in an angel round then you also have enough money to open yourself up to other less risky investment opportunities.

Some people like living on the edge. Angels are a certain kind of crazy.

Also high risk -> high reward, right? 10x in 7 years can be game changing.

That's lottery style thinking, and will get you the predictable results - almost certainly.

Maybe turning this around will help you see how ineffectual this is:

If you are a naive investor desperate to put all of your small stake into one company and I am an early stage startup, why would I want your money if I can have smart money with a good network instead?

And if I can't have that, if I'm desperate for the investment, well your odds just got much, much worse.

I'm not sure what the big fuss is over this.

Here's the story in one sentence: an angel recognized Airbnb's potential but never got the deal in writing so they used it as leverage for a better offer.

Paige invested in Lyft, Twitter and Postmates. He's doing fine and learned from this.

I think the fundamental lesson here is speed. What took Paige 3 weeks or more to accomplish took YC 10 minutes, and then they said yes and signed the paperwork. Remember, this was unheard of before YC came along (granted, there's more money involved in Paige's side of things, but even that doesn't matter). Founders recognize this and respect it, and it's going to be what distinguishes the good future dealmakers from the bad ones.

Thanks for sharing this Paige. Excellent write up and valuable lessons learned.

Thanks so much for writing this, I love learning about cases where seemingly concrete rules can be bent. Take a look at Uber who is constantly being told that what they're doing is illegal and their response is essentially "but it's better so the laws need to be fixed". I think that's the same attitude you want when doing everything you can to get back in the deal. Always be optimistic and don't give up to soon.

If I remember correctly, Airbnb struggled to raise after YC as well. Sequoia came in and gave them $600k quietly after Greg McAdoo synthesized and reframed the Airbnb vision (See Nathan's Startup school speech from 2013). Why didn't Paige participate in funding after demo day?

Why are those metrics considered to be bad? I am obviously judging with hindsight and without daily deal noise here but if i look at them:

* Within the first weeks first revenue

* Within 4 months numbers that by themselves each look promising (40-60% response rate although crap product, good revenue per night, good nights booked, etc)

Personally i dont expect any of those metrics nowadays to be further away than 1.5-2x better

The "only" big q's left is:

* is the market big enough it's worth scaling the quantity

* is that team capable of doing it

I feel like i am missing something here (obviously i judge from hindsight) but what about this numbers is "bad metrics"?

This happens the other way around as well for founders. Cheers to Paige for the insight and thoughtful conversations we've had. He's most likely got a nice investment in a few future unicorns.

> After 6 weeks of work, I didn’t get to invest.

That's supposed to be considered a bummer :).

Hey, at least you still have your money !

In fact, who knows, maybe with your investment, Airbnb wouldn't have turned out that great after all.

Maybe you would have lost your money, which would have reduced your reputation and you would have ruminated over it, got depressed, separated, started using drugs and drinking, get arrested for a drunk mishap, resisting arrest and attacking an officer with a tennis ball, then jail time... the wheel of misfortune once set in motion is hard to stop :).

Some grist for Silicon Valley (Mike Judge's show):

> On a tactical level, I repeat this creative destruction almost weekly as I analyze an individual deal; on an operational level I do it every few months (re-evaluating my deal flow, co-investor network, deal structures, etc.); at a strategic level I sit down almost every year and question my overall philosophy on founders, theses, markets, etc.

[shorter: I don't only regret my mistakes but also try to learn from them.]

Otherwise a well-told story. Thanks.

Hey Paige - If I negotiate a potential financing with Arena, and it doesn't work out, will you take all of my emails and publish them as well?

If your emails had anything hurtful, embarrassing, proprietary or damaging to yourself or your company I wouldn't publish them.

In this case these emails and documents make ME look like a novice investor and speak highly of the Airbnb founders. I have no problem exposing my own failures and mistakes but I'd never expose yours unless you were cool with it.

This event was a very important lesson for me and made me a better investor. Most people commenting here are thinking short-term; but the consequence of this Airbnb deal was critical to my development. I learned to move fast and invested a great deal of time and energy into becoming a better investor.

I think it's actually makes you look secure in your self, maybe even a bit gutsy. I'm not sure what the right word would be here, but it I like it.

Someday, I hope to join the ranks of VCs but I figure I need to figure things out first.

Did you ask Brian et al for permission to post emails? Is that something that is required or just a courtesy (regardless if they are harmful etc)

If YC hadn't invested, nobody would have ever heard of AirBnb. This is a case where the investor added a great deal of value to the business.

YC is at the center of a large network of investors, startups and bloggers and somehow its investment decisions ultimately influence the habits of technology consumers in general.

I think it was a lose-lose situation for the author.

Is every successful company from YC?

Is every YC company successful?

You must answer yes to both to believe:

>If YC hadn't invested, nobody would have ever heard of AirBnb.

I'm exaggerating of course. But I'm sure it did make a massive difference.

Time kills all deals.

Interesting to know you look for startups to invest in. I've always wounded how start ups find investors and approach them. I'm working on a personal project that I would love to do full time but with no savings and living in Singapore so have to have a job to stay here. Also scared to look for investors because I don't want them to try change my ideas since I believe in what I'm building.

Jesus. I didn't know any VC/Angels worked that hard to get into a deal. Hell, in my experience it's like they actively try NOT to fund companies.

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