What’s Behind Airbnb’s $100B Valuation

Was Airbnb’s stunning IPO a blue-moon event for proptech firms? Or something much more?

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On March 2, hotelier Larry Korman was with RXR Realty CEO Scott Rechler at the wine and cheese emporium Wally’s in Beverly Hills. They were clinking glasses to celebrate their impending partnership with Airbnb at 75 Rockefeller Plaza.

The plan was to put 10 floors of residences at the Midtown tower, which Rechler would develop, Korman’s hospitality brand AKA would manage, and Airbnb would promote.

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A week later, on March 8, Korman was once again with Rechler, this time at his home in downtown Manhattan, at a casual gathering with some friends, including Gov. Andrew Cuomo, Airbnb co-founder Nate Blecharczyk, and others from the real estate industry.

Korman mentioned that he was planning to fly to London the next week to accept an award, and Cuomo suggested that he’d better not. “You might not be coming back,” Korman remembers Cuomo saying.

Three days later, the World Health Organization declared the rapidly escalating spread of COVID-19 a pandemic, and President Donald Trump banned travel from Europe.

The world was coming to a halt.

Travel all but froze, along with all of the sectors associated with it: airlines, cruise lines, hotels, vacation rentals, car rentals, booking sites and entertainment venues. Among them was, of course, Airbnb, where new bookings dried up, existing bookings were canceled by the thousands, and no one knew how long it would last.

The next few months would prove a crucible for the venture-backed travel company, as it was forced to cut costs, refocus its strategy, and contend with a global pandemic that brought the world to a standstill.

But, as 2020 closed out, with the pandemic still at large and an extended vaccination timeline, Airbnb went public with a starting valuation of $47 billion, which doubled overnight to more than $100 billion on the first day of trading.

The market had spoken. And it was very bullish on Airbnb. Depending on whom you ask, that could be due to the strength of its brand, its remarkable rebound during the pandemic, the charm of its founder, or, perhaps most importantly, its potential for growth.

“What’s being priced in is market dominance,” said Jim Kim, founder and general partner of Builders VC. “The commonality across DoorDash’s IPO and Airbnb’s IPO is they are the market leaders.

“If you’re the platform company for a particular customer pain point, how do you even value that?” said Kim. “You’re going to own the customers for a very, very long time, so the lifetime value of your customer is going to be gigantic. So, it’s okay to price in a bump relative to peers.”

“There’s no telling how big it can get,” said K.P. Reddy, founder and general partner of Shadow Ventures. “That’s what people are buying into.”

The Crisis

As a 12-year-old company, Airbnb was fairly old for a Silicon Valley startup to still be private. It had flirted with going public several times before. Co-founder and CEO Brian Chesky was reportedly wary of taking the company public, because he worried about losing some of the freedom that comes with running a company predicated on growth and innovation rather than steady returns.

“If you ask Brian, who is a design major at heart, he’s all about the experiences,” said Korman. “He’s a unique guy in the sense that he cares, first and foremost, about creating these incredible experiences for individuals.”

But many things changed for Chesky in March of this year.

With travel at a standstill, Airbnb shifted to crisis mode, and began cutting costs and non-core projects, while looking for a financial lifeline to get it through the months ahead. In mid-April, Airbnb raised a $2 billion lifeline in a mix of debt and equity from Silver Lake and Sixth Street Partners, which are both investors in the company. Airbnb laid off a quarter of its staff — close to 2,000 people — cut its marketing costs to zero, and canceled non-core projects like the plans for 75 Rockefeller.

After a devastating second quarter, Airbnb rebounded in the third by focusing on the two types of stays that were driving new bookings: cabin-fevered travelers looking for local getaways and the vast remote workforce, which it was by then clear would be working from home indefinitely.

Domestic bookings comprised 80 percent of Airbnb bookings over the summer of 2020, up from less than 60 percent the previous year, according to the Financial Times, while the number of long-term stays drastically increased year over year.

“Stays of longer than a few days started increasing as work-from-home became work-from-any-home on Airbnb,” Airbnb wrote in its S1 filing with the Securities and Exchange Commission. “We believe that the lines between travel and living are blurring, and the global pandemic has accelerated the ability to live anywhere.”

Inside the S1

In the second quarter, Airbnb’s gross bookings revenue plummeted to $3.2 billion from $9.8 billion in the second quarter of 2019. Similarly, its revenue dropped to $335 million in the second quarter, from $1.2 billion in the second quarter of the previous year, according to Airbnb financials released in its S1.

But, in a third quarter comeback, Airbnb racked up $8 billion in bookings, below the $9.7 billion of 2019, but above 2018 levels.

While Airbnb’s ability to rebound during COVID is a strong sign, it’s important to look at its numbers without the confounding factor of the pandemic.

In terms of bookings and revenue, Airbnb had a record year in 2019. Bookings totaled $38 billion, up from $29.5 billion the year before, or a 28 percent increase. As for revenue, Airbnb has been growing since at least 2015, but the growth was slowing pre-pandemic. It started with $919 million in revenue in 2015, moved up to $1.7 billion in 2016, then $2.6 billion in 2017, nearly $3.7 billion in 2018, and $4.8 billion in 2019.

In addition, in 2019, Airbnb lost money for the first time in three years, spending $5.3 billion to make that $4.8 billion. That was largely due to investment in new business lines and projects, such as growing its Experiences platform, a marketplace of activities offered by locals for travelers, and investing in companies like Lyric, a short-term rental startup that shut down in July.

Thanks to the cuts Airbnb made, the third quarter was its first quarter to turn a profit since 2019. That was partially due to the cuts to marketing, for which costs declined from $1.18 billion spent in the first three quarters of 2019 to $546 million in the first three quarters of 2020.

Whether Airbnb’s shift towards longer and more local stays  were right for a specific moment in time or are anticipating longer-term trends is uncertain. Either way, however, the platform can likely go back to serving international visitors or vacationers once travel reopens, while also catering to digital nomads and local trippers.

“This crisis revealed just how adaptable our model is,” Chesky has previously said.

Roman Pedan, the founder and chief executive of short-term rental startup Kasa, said he expects the trend towards longer stays to continue. His company has seen an uptick from the remote or flexible worker demographic, which is an acceleration of an existing trend pre-pandemic.

“Previously, many companies didn’t have the infrastructure to allow for remote work. And, so, there was a fundamental inflexibility that their employees have to abide by, and that has been removed,” Pedan said. “There might be a pullback after COVID, but I would not be surprised if a meaningful portion of this stays durable.”

To the Moon

Larry Korman, co-CEO of Korman Communities and president of AKA, first heard about Airbnb back in the early 2010s, when he helped his daughter book a place on the platform for a post-college trip. “I was enamored by it,” Korman recalled.

As the president of a company that offers luxury short-term hotel residences, Korman chose to welcome Airbnb rather than fight it, like many in the hospitality industry, he said. AKA had been one of the first to offer an alternative to hotels, starting back in the 1960s, and Korman felt that Airbnb would help change the culture of travel overall.

“What Airbnb did, especially for the younger generation, was open them up to the advantages of a residence versus a room, and towards a longer-length stay,” he said. “They, like us, really wanted to play up the experiences one could have by virtue of staying in a residence in a neighborhood.”

He reached out to Chip Conley, a boutique hotelier who had joined Airbnb as an adviser in 2013, and the two met up in one of Korman’s properties in New York City. In the years since, Korman has participated in the various iterations of Airbnb’s luxury and professional programs, and AKA’s residences in cities like New York and D.C., are now available through Airbnb Luxe. And, until COVID, he was in talks with Airbnb on the project at 75 Rockefeller.

“One of the visions was to go to every major city and take these vertical buildings that are commercially zoned, and have an office component, a hotel component, a residential component, a food component, a club component, and take that from city to city,” Korman said.

Once the pandemic started, the plan was shelved in what was a mutual decision between RXR and Airbnb, RXR said.

“As soon as COVID hit, Airbnb had to shut down all spending, so there was a big number they were going to have to spend to do that. We were spending a big number, RXR was spending a big number, but they couldn’t afford to do that,” Korman said.

COVID put an end to the deal at 75 Rockefeller, but it showed the potential for partnerships between management companies like AKA and Airbnb as the distribution platform. The IPO valuation, Korman said, will give Airbnb additional leeway to pick up some of the projects they had to put aside because of the pandemic and is justified, given the potential of the company.

“I think the stock will go down significantly in the next six months, when a lot of people who were early investors get to finally cash out,” said Korman. “But that doesn’t mean the long-term prospects of a Tesla or an Airbnb aren’t going to be spectacular.”

One shift that the pandemic has wrought is the focus on non-core markets, with people looking to get out of cities and visit nearby locations. That could significantly increase the number of hosts, as more homes within driving distance of metro areas join the platform. “As Chip Conley said to me, ‘We have 1 percent of all the residences,’” said Korman. “‘Without owning anything, we’re the same size or double what Marriott is.’”

If Airbnb increased the amount to just 2 percent, they would double their market share, “so the upside potential is still great with Airbnb,” he added.

Focusing on other markets will help Airbnb skirt the impact of the restrictions that cities have imposed on short-term rentals. Instead, Airbnb could focus on homeowner hosts outside of cities, and partner with professional hospitality companies within them.

Airbnb has indeed shifted over the years from its initial vision of homeowners or renters sharing extra space to make some side money to working with a range of professional hosts, hospitality companies, and others who use Airbnb amongst other booking sites. In cities like New York; Austin, Texas; and Denver, hosts with more than one listing make up between 35 and 40 of Airbnb listings. In San Francisco, that number reaches 57 percent, and, in Boston, 73 percent, even after cities have taken steps to curtail professional Airbnb hosting.

IPO vs SPAC

There are not many late-stage proptech companies going public, so each one of them is an indicator of investors’ broader appetite for such firms. “Anytime there is an exit, anytime there’s a liquidity event, that’s a really good thing overall for the industry,” said Builders VC founder Kim.

For other startups in the short-term rental space, Airbnb’s IPO is a validation of their model, said Kasa’s Pedan. “I think it’s a reflection of demand for this kind of stay becoming more and more prominent,” he said.

Both Airbnb and food delivery platform DoorDash experienced a significant first-day trading bump when they went public with an IPO. That may be a thumbs-up for the companies, but it reflects poorly on the process that brought them there, providing another indicator of the difficulty in valuing mature startups as they move from private venture-backed entities into the public eye.

Airbnb shares were priced at $68 per share on Dec. 9, after initially being floated at $44 to $50 per share. But, on the first day of trading, Dec. 10, the share price opened at $146, and has remained above $124 through the end of the month. DoorDash experienced a similar bump when it went public around the same time. It priced at $102 per share, but shot up to $182 on the first day of trading.

“If I’m Airbnb, I’m really pissed right now,” said Kim. “Airbnb left billions on the table. When the market clearing price was so high, the bankers should have ratcheted up the range on the initial offering.”

Airbnb and DoorDash are not the first venture-backed companies to experience that pricing gap. That could be one reason why some tech companies are looking for other means to go public, such as direct listings or through a Special Purpose Acquisition Company (SPAC), a method which has played a more prominent role in tech exits in 2020 than ever before.

“This has been something that, in general, the tech community has been concerned about,” said Kim. “I think as a result of this, you may see more direct listings, and you’ll probably see … people try different things.”

Several proptech companies went public via SPAC this year, including residential marketplaces Opendoor and Porch.com, as did smart-glass maker View, whose glass is used to create more sustainable buildings.

In a SPAC, a sponsor raises the funds from select investors, and then generally has about six months to find a target company to merge with, and they’re not allowed to have conversations before they raise. “When you have all these people with $200 million SPACs with looming deadlines,” Shadow Ventures’ Reddy said, “it’s unnatural.”

But, of course, with an IPO, the company is beholden to the public market, which is a very different game from pleasing a group of select investors.

“What’s always a challenge when you’re going public is you have to make hard decisions,” said Reddy. “[Airbnb] made a ton of hard decisions and staff and expense reductions. I think they did a good job of making that shift into being a public company.”