Rooms Rentals & Shares

A brief history of Airbnb’s $1.3 billion dollar room-letting service

Sep 08, 2012 5:31 am

Skift Take

Airbnb has become the dominant player in short-term apartment letting in major cities. The bigger fight will come when it makes a bigger push to go head-to-head with HomeAway in major vacation markets.

— Jason Clampet

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The rise of the room-letting website Airbnb is testament to the growing popularity of ‘collaborative consumption’ – sharing, swapping and renting your possessions.

It was 9am and, first meeting over, the music was pumping at nightclub level. The in-house chef had laid out breakfast: fruit, bagels and industrial-size tubs of Philadelphia cheese. iPads mounted on the walls announced what was on the lunch menu – tofu steaks and sea bass. A man with scruffy hair and skinny jeans roller-skated, coffee in hand, over to his desk. The atmosphere was one of excitement, high energy and creativity.

Fortune Brainstorm TECH 2012

Airbnb CEO Brian Chesky. Photo by Fortune Live Media.

I was at the San Francisco headquarters of the internet company Airbnb, recently valued at $1.3 billion. Airbnb is, to put it simply, a room-letting website. Anyone, anywhere in the world, can list spare space (from a room to a treehouse, castle, or even a Fijian island ) on the website and rent it out to travellers, or log on and book a night in someone’s house. Airbnb offers a professional photographer, deals with the money and provides a 24/7 customer support service (including $1 million insurance for the host). To date the company has had more than 10 million nights booked in more than 19,000 cities in 192 countries, mostly in Europe. It is now so popular that every two seconds someone books an Airbnb room.

The HQ is in a three-storey grey building in the design district of San Francisco, with fellow internet company Zynga (the social gaming company that created Farmville and recently bought Draw Something for $200 million) as its neighbour. Upstairs the walls are decorated with world maps dotted with hundreds of coloured pins charting its world domination; downstairs the company history is drawn out like a huge comic-book sequence.

Airbnb started in 2007 when Joe Gebbia and Brian Chesky, then both 27, who had met five years earlier at Rhode Island School of Design, were struggling to pay their rent. There was a design conference coming to San Francisco and the city’s hotels were fully booked, so they came up with the idea of renting out three airbeds on their living-room floor and cooking their guests breakfast. The next day they created a website, airbedandbreakfast.com; six days later they had a 30-year-old Indian man, a 35-year-old woman from Boston and a 45-year-old father of four from Utah sleeping on their floor. They charged $80 each a night. ‘As we were waving these people goodbye Joe and I looked at each other and thought, there’s got to be a bigger idea here,’ Chesky told me, sitting on the edge of the sofa, still excited by their idea. Gebbia had already dabbled in entrepreneurship – designing a cushion for back sufferers and building a website for product designers to find eco-friendly resources – ‘sort of Amazon for sustainable materials’. Chesky had recently left his job as a designer on the Simon Cowell show American Inventor in LA – ‘the last straw came when I designed a new kind of toilet seat’ – and moved to San Francisco. Both wanted to be entrepreneurs, but neither wanted to ‘create more stuff that ends up in landfill’. The idea of creating a website based on renting something that was already in existence was perfect. They decided to target conferences and festivals across America, getting local people to list their rooms and travellers to book them.

They enlisted Gebbia’s former flatmate, Nathan Blecharczyk, 29, a computer science graduate and ‘brilliant programmer’, to develop the website. Blecharczyk, who had funded his Harvard college fees with the proceeds of an internet software business he founded when he was 14, is the quietest of the three. When he told me about ‘eating up 500-page computer reference books’ as a teenager, the other two, with their design backgrounds, mocked him for being a geek. ‘They made me switch from my PC to a MacBook years ago,’ he smiled.

In summer 2008 they found the perfect kick-start for their business. Barack Obama was due to speak in Denver at the Democratic National Convention, and 80,000 people were expected to be there, but again, there was a shortage of hotel rooms. Gebbia, Chesky and Blecharczyk finished the website in time to launch it two weeks before the conference. Within a week they had 800 listings. But the site wasn’t making any money. Taking advantage of election fever, they bought bulk quantities of cereal and designed packaging branded as ‘Obama’s O’s’ and ‘Cap’n McCain’ cereal. It was initially meant to be a PR stunt, but they sold 800 ‘limited-edition’ boxes at $40 each and made more than $30,000.

That was just the start of the money trail. In early 2009 they received $20,000 of funding from an angel investor, Paul Graham, the co-founder of Y Combinator (a start-up mentoring programme), which led to a further $600,000 from venture capitalists. Early on the team realised they had to handle payments, ‘otherwise it was just a messaging site,’ and charged up to 15 per cent of the booking (the host pays three per cent and the traveller between six and 12 per cent). By April they were making enough to pay living expenses (‘and we could stop eating the leftover cereal,’ Gebbia joked). In November 2010 they raised another $7.2 million from a venture capitalist; in May 2011 the actor Ashton Kutcher invested a ‘significant amount’ and now sits on the board as a strategic adviser. Then in July 2011 the company received a further $112 million in venture funding, and was reportedly valued behind the scenes at $1.3 billion.

The funding meant they could hire more staff (they now employ about 500 worldwide) and move into an office – out of the flat where their first members of staff had to make sales calls in the bathroom and hold conferences in the kitchen. Today meetings are held in mock-up rooms of the most popular Airbnb listings dotted around its headquarters – so an apartment in Hong Kong is next door to a cabin in Vermont (‘you can come in for a strategic nap,’ one staff member said), all of which you can rent in real life. Online other Airbnb rooms range from the cheap and cheerful – a one-bedroom flat in Paris near the Eiffel Tower is £35 per night – to deluxe, such as a five-bedroom 11th-century manor house in Surrey for £1,470 per night, or a three-bedroom deluxe villa in Bali with swimming-pool for £328 per night.

By January last year the company had had one million bookings; by July that year it had had more than two million; at the end of 2011 it had had five million and in June it hit 10 million. Over the past 12 months the site has grown by 400 per cent, and Airbnb says it expects to maintain a similar rate of growth over the next 12 months. I asked how they could expect to keep growing in cities that were already full of Airbnb listings, and a spokesman said it was a problem that could be solved by clever marketing.

There have been a couple of hitches. Last June a woman called EJ wrote on her blog that her house had been trashed by an Airbnb renter and her story was reported internationally. In response Chesky wrote a contrite message on the site’s blog, saying they had ‘dropped the ball’ and announced that hosts would now be insured (before this there was no insurance) – initially at $500,000 and now $1 million, backed by Lloyds of London. There would also be a 24/7 helpline manned by customer service agents, often also Airbnb hosts (who work from home around the world) and even published his own email address in case customers couldn’t get through. Then, a month later another man, Troy Dayton, blogged that his house had also been vandalised by his Airbnb guest. He was compensated by the company and has gone on to rent out his apartment through the website again.

This year has been one of the busiest for the company. It opened offices across Europe, including in London, Paris and Moscow, and worldwide in São Paulo and India. Over the Olympic period London hosted more than 4,500 bookings from over 6,000 guests earning a total of £770,000. August 4 was its busiest night so far, with 60,000 guests staying in 500 cities around the world. Airbnb said that out of the respondents 4,100 were travelling for work, 2,000 were going to a wedding, 900 were celebrating an anniversary, 500 were honeymooning and 36,000 were taking a holiday. And where they stayed? Ten guests were on private islands, 30 in treehouses, 15 in caves and 120 on boats. Significantly, three quarters of the guests were first-time users.

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Despite the huge global expansion, nothing much has changed for the founders personally. Chesky and Gebbia still rent the same flat they started in (Blecharczyk lives with his wife outside the city), they have made no extravagant purchases (Chesky said he doesn’t like owning ‘things’ and doesn’t even have a bed) and all three still work 15-16-hour days. While there are signs of fun around the office – from ping-pong tables to a free bar in the canteen – most of the head office’s 150 employees, who seemed to be mainly under 30 years old, share the founders’ work ethic.

Part of their success is good timing. They created a company that at its core is based on sharing, just as the movement dubbed ‘collaborative consumption’, or the sharing economy, was developing as a trend (‘When we started no one had heard the term yet,’ Gebbia said. ‘We were just living it’.) Rachel Botsman, an author on the subject, explained collaborative consumption as ‘taking us back to old market behaviours, such as sharing, swapping, lending and renting’ but re-invented with the help of technology. She cites the fact that the average power drill is used for only 12-13 minutes in its entire life. ‘So why buy one, why not rent or borrow?’

While the idea of collaborative consumption instantly appeals to young people who have grown up sharing books, music and film online, it is not restricted to them. Much like the first-ever guests who stayed in Gebbia and Chesky’s apartment, the average age of Airbnb users is older than you might expect. ‘We’ve got more people aged 55 and over on the site than those aged 18-25, who only make up seven per cent of the site,’ Chesky said. Botsman said when she explained the idea of collaborative consumption to her grandmother, ‘it didn’t seem new to her – she got the idea quicker than my parents did.’

‘What’s cool is that it doesn’t matter what age you are,’ Gebbia added. He told me about Harrison, who rented out a treehouse in Vermont, which he had built for his now grown-up son. The money he has made from renting it out at £82 per night has enabled him to pay off his mortgage. Or Liz, 55, from south-east London, who has used Airbnb since her husband of 30 years left. A double room in her Victorian terrace costs £50 per night. Her 27 reviewers have all given her five stars. And she has used the money to start a new career as an acupuncturist.

I stayed in an Airbnb apartment when I visited San Francisco (one of 3,762 Airbnb apartments listed in the city). My host, Jason, who was out of town, had left me the keys and a note saying ‘Bagels are in the freezer, snacks in the cupboard, help yourself.’ He wrote down directions to his favourite coffee shop, his Wi-Fi login, and his Netflix account details. While it was strange seeing evidence of someone else’s life – wedding invitations on the fridge, photos of his girlfriend on the dressing table – I soon felt at home (and I did eat his bagels when I woke up with jet lag at 3am). I emailed him later to thank him, he replied, and if I go back to San Francisco, I will stay with him again. The 800sq ft apartment, with access to a shared gym, costs £184 per night (plus a one-off £22 cleaning charge – cleaning is something the host arranges, not Airbnb or the guest). A small room at the nearby Hilton hotel would have cost £150; a junior suite closer to £200. I was Jason’s first guest (he had been a member since February), but since I stayed he has had five guests who have all left him five-star reviews.

What the founders seem most pleased about, and what stops them being just a tour operator, is the personal connections that their community forms. ‘When you share your space with somebody it is a personal, meaningful experience,’ Chesky said.

‘What we’re doing with Airbnb feels like the nexus of everything that is right,’ Gebbia said. ‘We’re helping people be more resourceful with the space they already have and we’re connecting people around the world. We can see ourselves doing this for a decade to come – a generation.’

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