Airbnb's Newest Destination: IPO

In the decade since the Great Recession, the public markets have seen a decrease in initial public offerings (IPO). The recession contributed to a paradigm shift where, despite a market recovery starting in 2009, investors opted to funnel capital into the private markets in lieu of the public markets (largely due to, among other things, the slow recovery, low interest rate environment, and investors seeking higher returns). The private capital spigot flowed profusely and helped bring private valuations to record highs, but as certain tech startups unveiled their IPO paperwork, institutional investors’ excitement quickly wore off. Investors demurred at the high valuations accompanied by large losses and outsized founder voting rights. As a result, when Airbnb announced in September its plans for a 2020 IPO, questions – unsurprisingly – emerged concerning whether the market is ready for an Airbnb IPO.

Airbnb’s Beginnings

Airbnb was founded in 2008 by Brian Chesky (CEO), Nathan Blecharczyk (Chief Strategy Officer) and Joe Gebbia (Chief Product Officer). The founders started Airbnb to supplement their income, as they couldn’t afford to pay their rent in San Francisco. The idea was simple – turn their loft into a fancy bed and breakfast and rent out air mattresses to travelers. The founders called it Air Bed and Breakfast, which would later be shortened to Airbnb.

The founders tapped into the short-term rental market, which was typically limited to the high-end market (luxurious vacation homes in picturesque travel destinations). Airbnb’s mission was to democratize the industry, giving apartment dwellers and homeowners a means to monetize unused space in their homes and travelers the option to rent single rooms or entire homes at cheaper rates than hotels.

Airbnb quickly gained traction and caught the eyes of well-known venture capital firms, like Sequoia Capital and Andreessen Horowitz. Six years after founding, the company had a valuation of $10.5B and had raised over $800M. Two years later in July 2016, Airbnb raised at a valuation of $31B, bringing the total equity raised to ~$3.4B. Since its inception, Airbnb has expanded its services from home rentals to experiences, adventures, and hotel bookings and acquired a slew of companies, most recently buying Urbandoor and HotelTonight.

Business Model and Competitors

Airbnb is an online marketplace for renting rooms and homes and purchasing experiences and adventures. Airbnb doesn’t own or operate any of the offerings displayed on its website and relies on people around the world to list their homes and experiences. Airbnb charges a host and guest fee dependent on what and where the offering is being listed.

Airbnb, as a result of operating in the travel industry, competes against traditional hotel companies, like Marriott and Hyatt, and online travel agencies, such as Booking and Expedia. Airbnb‘s business model is markedly different from hotel operators, as it doesn’t have properties on its balance sheet nor is it generating management fees for operating franchised hotels. Expedia and Booking, which aggregates lodging, airline tickets, car rentals, etc., are the most comparable to Airbnb. Both these companies have operated for decades and generate their revenue by charging booking fees for reservations and tickets bought on their platforms.

Is The Market Ready for Airbnb?

After operating privately for a decade, Airbnb has finally set its sights on the public market. It’s important to note that Airbnb isn’t pursuing an IPO due to its financial position – it reportedly has over $3B of cash and cash equivalents on its balance sheet. The company was pushed to go public by its employees, looking to liquidate their equity.

Consequently, Airbnb is looking to go public during a turbulent IPO market. 2019 saw some of the largest tech startups, like Lyft and Uber, stumble in the public markets, and others, like Endeavor and WeWork, withdraw their IPOs. The public market is reacting to private valuations justified by growth at any-and-all-costs over profitability.

Thus, when The Information reported last week that Airbnb’s Q1 losses more than doubled to $306M, multiple news outlets raised the same profitability concerns directed at Lyft, Uber, and WeWork. The losses were primarily due to an increase in sales and marketing expenses (likely to increase brand awareness and generate higher revenue prior to the IPO). As an online marketplace, Airbnb’s main lever for topline growth is advertising, which draws in new customers. As a result, the increase in marketing spend is not major issue so long as Airbnb can show that it led to higher growth (in reservations and revenue). When investors ask if there is a path to profitability, we expect Airbnb to point to 2017, when it was reportedly profitable.

Additionally, Airbnb is not like Lyft, Uber or WeWork. Lyft and Uber have been in a yearslong pricing battle, subsidizing costs for riders and drivers, in order to grow or maintain their rideshare turf (transportation-as-a-service is largely a land-grab play). As a result, Lyft and Uber have been bleeding cash to grow their business and have a less clear path to profitability. WeWork, on the other hand, is a capital-intensive business, requiring large cash outflows to sign leases and renovate spaces. The company additionally takes on balance sheet risk by signing long-term leases.

Airbnb’s model is drastically different: the company isn’t in a pricing war with its competitors and has an asset-light business model. Airbnb can easily increase or decrease its spending, quickly reacting to internal and external factors.

Ultimately, the success of Airbnb’s IPO will be dependent on 1) short-term rent regulations and 2) how its financials stack up against Expedia and Booking.

First, Airbnb depends on people to rent out spare rooms or their entire home. Hotel operators have argued that Airbnb runs afoul of short-term rent regulations and in some cases have successfully lobbied to curtail or restrict Airbnb in certain cities. If regulations increase, Airbnb’s growth will likely decrease.

Second, Airbnb will be compared to Expedia and Booking. At its last private valuation, Airbnb exceeds Expedia’s market cap and is a third the size of Booking. Conversely, Expedia and Booking generated $11.2B and $14.5B in 2018 revenue, respectively, compared to Airbnb’s expected 2019 revenue of $4.6B to $5B. As a result, Airbnb will need to justify its valuation based on topline growth, sales and marketing efficiency, and profitability.

Airbnb is in a unique position. By having a large cash position, it can take a measured approach to its IPO in order to address any regulatory concerns and time its IPO to demonstrate the rosiest picture. Eventually though, Airbnb will need to IPO, as its employees will not wait forever to liquidate their equity stakes.