The
Inside Story Behind the Unlikely Rise of Airbnb
In 2007
BriaanChesky and Joe Gebbia were broke and looking to raise money to make their rent in
San Francisco. They decided to rent out air mattresses in their apartment to
attendees of a conference because all the hotels were booked. They called their
service “Air Bed and Breakfast.” In a few years, this small experiment would
create the hotel industry disruptor Airbnb. The privately held company, with
third co-founder Nathan Blecharczyk on board, now lists more than three million lodgings in nearly 200 countries. It
is worth $31 billion, more than Hilton and Wyndham combined, and closing in on Marriott.
Leigh
Gallagher, assistant managing editor at Fortune magazine, chronicles the extraordinary
growth of the company in her new book, The Airbnb Story: How Three
Ordinary Guys Disrupted an Industry, Made Billions … and Created Plenty of
Controversy. She talked about her book
on the Knowledge@Wharton Show, which airs on Sirius
XM channel 111.
An edited transcript of the conversation
follows.
Knowledge@Wharton: What
was it specifically about Airbnb that drew you in?
Leigh Gallagher: I tend
to go for topics that have what I call a “cocktail party factor” — you bring it
up, and everybody has an opinion about it whether it’s good or bad or a
personal experience or whatever.
This company first came on my radar in 2008, 2009. I am the
editor of Fortune’s “40 Under 40” list. Every year, we get these
breathless pitches from these new companies out of Silicon Valley that are
“going to change the world.”
When I heard about this one, as I say in the book, I really
rolled my eyes, and I said, “You know, this is an old idea. I’ve used VRBO or
HomeAway.com for years. What is it with these tech companies that think they
can gloss something up and re-issue it onto the marketplace?” I just sort of
put that away, and then sure enough, a year or two later, they … started to catch
fire.
I had the chance to interview the CEO, Brian Chesky, at a tech
conference Fortune hosts in Aspen every year. … I dug into the
[company] numbers, and they just really spoke for themselves. I quickly learned
I was wrong to dismiss them, and that’s when I first started looking at the
company in closer detail.
Really, what drew me to it is that it’s this incredibly
transformative way to travel. This incredibly social, business and cultural
disruption story — it just touches so many things.
Knowledge@Wharton: What
these guys did — Chesky, along with Joe Gebbia and Nate Blecharczyk starting a
company basically by renting out space in their own apartment — was obviously a
unique way to launch something.
Gallagher: It is,
yes. The whole story around their origin takes a lot more twists and turns than
most people who have read about the company know. They’ve oversimplified it to
tell the story hundreds of times, but it really was purely accidental — as are
many of the most interesting kinds of inventions.
Everyone thought that they were completely crazy; no one thought
this was a good idea. People said to them, “I hope you have another idea. I
hope this isn’t the only thing you’re working on.” Or, “People actually do
this? What’s wrong with them?”
Investors wouldn’t even meet with them, or if they did, they
just said, “You guys are crazy. There’s going to be a murder in one of these
houses. There’s going to be blood on your hands. I am not touching this with a
10-foot pole.” And no one did. They almost didn’t get off the ground. They
almost had to close up shop because people thought it was that crazy
Knowledge@Wharton: What
was the turning point?
Gallagher: There
were two moments, I would say. One was when they first rented out their
apartment when a design conference was coming to town. They needed to make
their rent. … This is in San Francisco. Two of the three co-founders — Brian
Chesky and Joe Gebbia, they were Rhode Island School of Design graduates —
needed to make money, and they rented out their apartment. They said, “Well,
there’s lots of designers coming to town, so let’s offer them a place to stay
with an air mattress, and it’ll be a whole [travel] experience. We’ll show them
the city, etc.”
They thought they were going to get hippie backpackers, and instead,
they got lots of people just like them who wanted those air mattresses. They
had people sending their resumes and their LinkedIn profiles [to prove they are
not security risks], so they thought, “We might be on to something.”
[The next pivot point came] when they got accepted into Y
Combinator, the San Francisco start-up accelerator program. They didn’t even
want to do that. They had to be pushed to applying, because they thought, by
that point, they’d already launched their company. They’d been written up in
TechCrunch, and they were offended that someone would suggest you would need to
do Y Combinator. But [the company] would have died if they didn’t.
That program really gives a lot of advice, a lot of hands-on
guidance, and co-founder Paul Graham told them immediately, “You’ve got to go
to your users.” They didn’t have many users, but the few that they had were in
New York City, and [visiting them] hadn’t occurred to them. They went to New
York, and they really sat with their users and helped them dress up their
properties with better language, better pricing and just gussied up the
listings — and that was enough to turn the numbers to where they then started
to catch fire.
Knowledge@Wharton: You’re
originally from the Philadelphia area, and I’m sure you’ve spent many a summer
weekend down at the Jersey Shore. … When you think about going to a shore
location in the summertime, the majority of the properties available are people
renting out their own houses. That’s been a core economic idea in beach communities
for a long time. So the fact that this idea took so long to really explode in
big cities is a tad surprising.
Gallagher: It is surprising.
That’s why I rolled my eyes and said, “Oh, there’s all these other sites.”
Well, Airbnb really was different: It was urban. These other sites, they were
for beach houses or mountain towns, or they were for second-home rentals, which
is a huge business. And we’ve all done that.
You know, when someone said to Brian Chesky, ‘Oh, I’m interested
in your company because the vacation rental market is huge,’ he said, ‘vacation
rental? Wait. You mean like the houses at the beach my parents used to rent?’
He hadn’t even connected those dots. He did not see Airbnb as a vacation rental
company.
It was that it was urban; it was also that it was home sharing —
renting out space while the owner or the resident was there — that was the
original idea. They still do that, now, but the majority of the business is
renting out a full space. But that was a really new thing, and that was
definitely out there.
And they did other things, like made the profiles really reflect
people’s personalities. They did a review system, which was intended to be a
checks-and-balances system, to keep everybody honest. Also, I think they came
along at the right time, because it was the Great Recession. People were
looking for a cheap way to travel, and they just struck a chord with
millennials, who were a massive market that at the time was not really being
spoken to by the traditional hotel industry.
They loved this way of adventurous travel that was a bargain and
just cool and neat and authentic and artisanal.
Knowledge@Wharton: The
hotel industry did not really take well to having Airbnb as a rival, even
though you bring up the fact that they don’t really see themselves as rivals.
Gallagher: This is
a really complicated topic, and it has changed over time. In the beginning, no
one would dispute that the hotel industry was very late to see Airbnb as even
something they should pay attention to. In my book, at one point, a CFO of one
of the biggest hotel chains was asked about Airbnb in 2013 — not that long ago
— and he said, “What’s Airbnb?”
Then they came around. Originally, they had a friendly
relationship, where the CEOs of a few of the big chains even went to Airbnb’s
headquarters for a day of immersion. But behind the scenes, and increasingly,
it has gotten much frostier. … Both sides try to say that they don’t compete
with each other.
I [recently] had a conversation with Brian Chesky, and he said,
“You know, this is overstated. Most people either wouldn’t travel, or they’d
stay with friends and family [if they didn’t use Airbnb]. We’re not really
replacing hotels.” But the data shows [that Airbnb taking market share is]
increasingly starting to happen; this is a company that’s doubled [in growth]
every year.
And it is competitive, especially around what’s called
‘compression pricing’ where hotels charge a higher rate when there’s a big
event that boosts demand. That’s basic supply-and-demand economics.
Now, Airbnb absorbs all that extra demand, so it’s complicated,
and I think that they’re going to have to find ways to coexist. I mean, the
hotel industry is funding a lot of the opposition to Airbnb in certain key
markets, but they know that this is something that has struck a chord with the
consumer. They are not trying to deny that in the hotel industry.
Knowledge@Wharton: The
other interesting thing is that people were actually willing to offer up their
properties.
Gallagher: One of
the transformative things — and, I think, one of the reasons why it took off —
is that for the first time, if you are a millennial college grad, if you’re
renting a studio apartment, you can turn that into an income stream. You could
become a mini-real estate mogul for yourself, even if your only claim to real
estate was a rented studio apartment.
Obviously, then you’d have to go find some place to stay, and
people become [very] inventive — they crash with friends, or obviously,
sometimes they go out of town, or sometimes they’re staying in the place and
renting out another room.
Everyone has a friend who has made a lot of money by doing this,
and has some kind of side-hobby, or gets to travel more, or gets to do
whatever. Airbnb pitches it as, “We are helping the middle class stay in their
homes.” That’s a very popular and very strongly worded line that they use, and
it’s true. … Anyone can make extra money and do whatever they want with it.
Knowledge@Wharton: What
is the relationship between Airbnb and the hotel industry right now?
Gallagher: It’s
funny. On the surface, the CEOs would say they recognize that Airbnb has struck
upon … this ‘home’ concept. This is something that the consumer likes, and
we’re going to try to address it. Behind the scenes, hotel CEOs did not want to
go on the record with me for the book, except for one — David Kong, the CEO of
Best Western Hotels and Resorts. … He said, “How can the hotel industry say
this isn’t a threat? Next time you’re on stage at a conference, ask the
audience: ‘Raise your hand if you’re staying at an Airbnb,’ and see what
happens.’
It’s really important, this notion that they are trying to adopt
what works for Airbnb. One thing we’re going to see is a lot of experimentation
on behalf of the hospitality industry. [In fact,] we’re already seeing it:
AccorHotels has acquired onefinestay, which is a
competitor in the space that does high-end home stays. It’s much more high
touch, because they come in, and they change the linens and everything. …
Choice Hotels has Vacation Rentals by Choice [Hotels]. This is going to be a
big growth area now, and it’s thanks to Airbnb for exposing it.
Knowledge@Wharton: But how
has the hotel industry reacted with their properties, specifically?
Gallagher: Even
before Airbnb, the hotel industry had started making a lot of changes to try to
address the millennial market, which it hadn’t really been addressing before. …
Marriott, as an example, has launched a few different chains that are designed
for millennials specifically.
But in terms of making tweaks directly in response to Airbnb,
there are a couple of things. Some of them are doing minor things, like putting
unique, different artwork in the rooms. One of the things that many of them are
doing that is really helping is becoming more of a gathering place for locals
in the community, because a big thing that Airbnb sells is that you can live
like a local, and you get to interact with somebody who lives there who can
tell you where to go, etc.
They’re trying to play that up a little more. But then they’re
also trying to offer home rentals; some of them are starting to do that. That’s
what I think we’ll see a lot more of. Many people envision a future where you
can go to a hotel, check in at the front desk, and pick up the keys to your
apartment rental nearby, as these partnerships get more and more developed. There
already have been some pilot projects around that.
The other thing that’s going to change is on the rental front.
People like Airbnb and similar services, but some people want a little more
service. They want to be able to have things delivered to them by room service,
or go to a spa, or go to a lobby bar. There’s going to be all kinds of
experimentation that will allow you to stay in a home rental, but still avail
yourself of some of those services, whether you have to go to a local club or
whether it’s an outside firm that delivers your room service. It’s a brave new
world, and both sides are converging. I think we’ll see more of that.
Knowledge@Wharton: So this
is something that Brian Chesky and his other co-founders of Airbnb are very
well aware of, and they understand that even with the success that they have
had, adjustments will be needed as we go along.
Gallagher: Absolutely.
It’s a hard company to cover from a book perspective, because they’re moving
very fast. One of the big things they did, in terms of looking to the future —
they looked at all the tech giants from the 1990s and saw that almost all of
them are not really relevant anymore today. And they thought, “We don’t want to
be that. We don’t want to be a company that was a flash in the pan, and then
10, 15 years later, people have moved on.”
One of their lessons from that was that the best companies are
in more than one category. So last fall — and Amazon is their big model for
this, who doesn’t want to be like Amazon? — they launched a new platform called
Airbnb Trips, which offers things like experiences and services and restaurant
reservations.
Soon, they’re going to add things like grocery delivery, chef
services, ground transportation. They keep talking about something around
flights. We don’t know what that’s going to be, but they really want to get
into owning [the entire] travel experience and making it all this Airbnb,
people-powered, live-like-a-local experience. … So they are definitely going
forward.
Knowledge@Wharton: Do they
expect to be a target of a takeover somewhere down the road?
Gallagher: Yes,
but right now at a valuation of $31 billion, it’s really going to prohibit a
lot of people from coming after them. Brian has a lot of thoughts about this.
In particular, he really believes that the bigger you are, the more you can
withstand those kinds of things, whether it’s a takeover or being in the public
market. He has this theory [about company size] — [Amazon founder] Jeff Bezos
helped shape this theory in him, and so did [LinkedIn co-founder] Reid Hoffman.
They’ve told him that public companies that are anywhere between
$10 billion and $80 billion market cap don’t tend to do so well. It’s easy for
them to get bounced around in the markets. [However,] if you’re bigger, if you
have a multi-hundred-billion-dollar market cap, you can much more easily
withstand anything that comes your way. It’s not easy to be a public company,
but the bigger you are, the better you can take the blows of the public market.
People keep asking, “When are they going to go public?” and
saying that they’ve been waiting so long. But I think that they really want to
go public when they are as big as they can possibly be. … And I think that
applies to acquisitions or other things. They are now becoming an acquirer.
They just recently acquired a luxury company, and they’re going to get into
that segment of the market. They’ve made some other acquisitions. I think we’ll
see more of that.
Knowledge@Wharton: That
just suggests another level of growth for a company like Airbnb.
Gallagher: That
was a little bit surprising, maybe, to its critics, because that expansion into
these types of on-the-ground, local experiences, is a doubling down on that
whole live-like-a-local, person-to-person, unique, artisanal way to travel.
If they just wanted to be big, they probably could have blown
out the commercial side of things and opened up the platform to many more
commercial users — though they definitely have had their share of those, and it
hasn’t gone very well.
Knowledge@Wharton: There
has to be a level of surprise, even for Brian and his other co-founders, to see
what has happened with Airbnb over the last few years.
Gallagher: Yes,
it’s funny. I recently did a video interview with Brian Chesky for a Fortune article,
and in it, we talked about this. He said in the very beginning, he thought,
“Wow, if we’re really successful with this, someday hundreds of
people might use this.”
But I think that’s also why they got into some trouble with
regulators and with controversies and other things — because they didn’t expect
it to be this big. They didn’t design it to be this big, or to be in these
cities where people don’t like them, where it causes all this trouble and
breaks all these laws. They didn’t foresee that.
When they designed the whole new product around experiences,
they did that much more with eyes wide open, having been through everything
they’ve been through. Recognizing that “well wow, this might get to be really
big. What are the problems we can plan for in advance? And let’s anticipate the
criticism.”
I don’t know that they’ll face as much criticism about the trips
as they’ve had on the housing side — housing is such an incredibly emotional
topic, but they definitely have learned, to your point.
Knowledge@Wharton: They
have worked with the various cities where they’re encountered resistance, and
the entities within cities — including, to a degree, the hotel industry — to …
not necessarily ingratiate themselves, but to fit into those communities
better.
“The hotel industry
is funding a lot of the opposition to Airbnb in certain key markets.”
Gallagher: They have. There
have been a lot of headlines around the situation in New York and San
Francisco, which are two of their toughest and most combative markets. But it’s
true, absolutely: They have gone in and partnered with cities all over the
world. And they are not jerky guys. They’re nice guys, and that translates to
the whole corporate culture, which sets up an interesting contrast with Uber
right now.
But they do come from this place of [encouraging cooperation].
And a few years in, this became a real educational experience for Chesky. He
thought if someone doesn’t like you, you just avoid them. Then his number two,
Belinda Johnson taught him, “No, you’ve got to go face-to-face with the people
that don’t like you. It’s the only way you’re ever going to come to a place of
agreement.”
So that is their approach, but it doesn’t mean that it’s going
to work everywhere. The opposition in some places is very political, and based
around housing issues that the company has come around and changed the policy
on. In places like New York, Airbnb has a policy now where you should only rent
the home that you live in. There’s a neighbor complaint program, to address
[any concerns]. They’ve tried to address these issues as they’ve come up.
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