Airbnb: From Humble Beginnings to Cultural Change
In 2007, two design students, Brian Chesky and Joe Gebbia, who struggled to pay rent on their San Francisco apartment, saw an opportunity: The international design conference, World Design Congress, was coming to town, and with limited hotel availability, they decided to rent out airbeds in their apartment through their newly founded website, airbedandbreakfast.com—now known as Airbnb. Three design students, Michael, Kat, and Amol, took them up on the offer, and became the first guests on the platform.
Since those humble beginnings, Airbnb has grown tremendously. Today, Airbnb has 5 million hosts, and with 8 million active listings, over 2 billion guests have been welcomed. While hotels offer standardized travel experiences limited to crowded attractions and hotel districts, Airbnb provides travelers the opportunity to rent unique accommodation, and access neighborhoods and experiences, otherwise inaccessible to them. The traditional travel industry’s one-size-fits-all approach, offered to travelers, is in sharp contrast to Airbnb, where guests can have authentic experiences and live like locals. Beyond accommodation, Airbnb has ‘Experiences’, where locals can share their passions and talents through activities, such as cooking classes featuring regional cuisine, guided city tours on bike, and much more.
Demand has increased rapidly since inception, fueled by multiple value propositions: Hosts are able to access a large (and growing) global demand through Airbnb’s platform—50% of new listings are booked within four days of becoming available. Airbnb simplifies hosting with tools like Smart Pricing to suggest optimal rates, insurance, payment facilitation, and scheduling assistance, which makes it easy to list and manage a property through the platform. For guests, Airbnb offers a huge selection of accommodations spanning over 100,000 cities, ranging from major urban hubs to rural communities, often underserved by hotels. Compared to hotels, Airbnbs usually offer superior value in terms of space, amenities, and affordability. Besides this, Airbnb has services, such as fraud protection, refund policies, and an urgent safety line.
One thing is certain: A better selection of listings attracts more guests to the platform—and vice versa. Airbnb’s competitive advantage is, thus, its network effect—and the more growth it achieves, the stronger it becomes.
Airbnb’s stellar growth is reflected in its financials, compounding its Gross Booking Value (GBV)—the total dollar value of bookings on the platform—at an annual rate of 32%, since 2015. GBV growth has primarily been driven by the Number of Nights and Experiences Booked, contributing to the annual increase with nearly 27%, while the increase in Average Daily Rate has contributed with the rest. Despite a decrease in GBV by almost 40% in 2020, due to the pandemic, it has rebounded—tripling since. Revenue growth has outpaced GBV at almost 35%, due to an increase in Airbnb’s Take Rate (the fee for facilitating bookings) from just over 11% in 2015 to almost 14% in 2023.
Airbnb is, furthermore, more countercyclical, compared to the rest of the travel industry: In economic downturns, property owners are able to rent out their apartments to earn additional income—and since Airbnbs usually have higher affordability, compared to hotels, Airbnb is less impacted by a decrease in travel activity.
So, what has led to this success? A significant culture shift. What was previously unthinkable—renting out one’s apartment to strangers—has become normalized. And the reason for this culture shift is thanks to Airbnb’s ability to build systems of mutual trust, allowing a large number of strangers to trust each other. The platform has achieved this through mutual reviews, insurance against property damage, a messaging service, background checks, a secure payment system, and support to assist with potential issues.
The travel industry is huge, representing a massive opportunity, with a total addressable market estimated well above $3 trillion. Airbnb’s current GBV represents only a small fraction, leaving huge opportunities for future growth—and as home-sharing becomes more mainstream, Airbnb is well-positioned to capture larger market shares.
Airbnb does face threats, however, due to low switching costs—allowing, especially, professional hosts to cross-list their properties to their own platforms. While Airbnb’s system of trust decreases the incentive to transact outside of its platform, cross-listing allows for the bypassing of Airbnb’s fees, and reduces the host’s risk of vacancies. Furthermore, competing platforms, such as Booking.com and Expedia, are attempting to offer the same experience—which could lower Airbnb’s future Take Rate.
Airbnb has a globally recognized brand, and the word “Airbnb” is used both as a noun and a verb all over the world—and with a strong brand association of unique stays, Airbnb has a competitive edge.
Airbnb’s capital-efficient business model allows it to earn a return without having capital invested—as it does not own the properties listed on its platform. Because of this, it has practically no capital expenditure requirements. Having created a market niche, Airbnb has been able to set favorable industry standards: For example, hosts are paid at check-in, and not when a booking is made—and since travelers book their accommodation well in advance, Airbnb benefits from a $6 billion ‘float’, providing an opportunity to earn a return. Since the float is invested in money market funds and short-term, high-quality bonds, Airbnb benefits from today’s higher interest rate environment. Airbnb also has an impressive net working capital surplus of over $4 billion, or about 40%, compared to revenues.
Brian Chesky has been Airbnb’s CEO since its inception. With a $1 annual salary and a 10% ownership stake, Chesky is strongly aligned with creating long-term shareholder value. Chesky has an extremely down-to-earth attitude, and a designer-first approach, where creativity is used to come up with unconventional solutions—a cornerstone of Airbnb’s culture. Chesky described the pandemic as Airbnb’s “second founding”, and used the crisis to simplify operations to focus on what Airbnb does better than anyone—its core home rental business. The best businesses do, indeed, emerge stronger in the aftermath of crises.
After its first trading day, Airbnb closed at $145 per share, 113% above its IPO price of $68. Today, more than four years later, Airbnb has become profitable, free cash flow generative, and has increased its revenues many-fold—yet, despite this, the current share price is 10% lower at $130. Airbnb trades at a 5.4% free cash flow yield based on 2023 results (or 3.8% when adjusted for share-based compensation) and a forward yield of 6% (or 4.1% adjusted) based on 2024 consensus estimates.
