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Season 7, Episode 8

ACQ2 Episode

December 10, 2020
December 10, 2020

The Complete History and Strategy of Airbnb

Over 13 years after its founding, one of the defining startup companies of the past decade finally makes its public debut — and boy was it a big one. But for all the hype (and all the legitimately great things Airbnb has accomplished), this is a company that looks very different today than in the past. Even before COVID, Airbnb's once-exponential bookings growth had declined to linear levels while the company's costs continued to balloon at accelerating rates. What’s going on here? Are public investors smart to bet on a permanent shift in travel behavior coming out of the pandemic? Or is this a case of unrealistic expectations? As always, we dive in.

The Airbnb Playbook:

1. If you can create value for all sides in a market ("expand the efficient frontier"), you really can’t help but be successful.

  • Born out of the 2008 financial crisis, Airbnb was able to fundamentally change the nature of the travel market and provide guests with more quality for less money, while also enabling hosts to earn meaningful extra income during a very difficult economic period. This led to incredible market adoption of the service, at times almost despite the company's own actions and activities.

2. When you create a market, you have an opportunity to set the terms.

  • By virtue of creating a whole new class of supply that had never participated in the travel market before, Airbnb was able to enact much more platform-favorable payment terms versus the hotel industry. Unlike Booking.com and the OTAs, guests pay Airbnb at the time of booking, and Airbnb keeps that cash (including fees) until after check-in — which could occur weeks or even months later.
  • This created an enormously beneficial cashflow dynamic for Airbnb that allowed them to grow while burning much less cash than otherwise would have been required.

3. When you don't fly low to the ground, you aren't forced to operate at the lowest level of detail.

  • Unlike DoorDash which needed to create an enormously efficient operational machine just in order to survive, Airbnb's capital-light business model, low operational intensity and favorable cashflow dynamics meant they've never had to operate in a particularly cost-disciplined or product-focused manner. While the core business has been insulated from competition due to its global network effects, the company has missed or poorly executed on Amazon-like opportunities to expand into adjacent markets and services that could have continued to drive new growth.

4. Relying solely direct/organic traffic is both a gift and a curse.

  • Undeniably, direct/organic customer acquisition is a wonderful goal for any business to strive for. Who wouldn't want to acquire customers without paying for them? However, if you don't also build the muscle for profitable and reliable growth through paid channels, you can be left vulnerable vulnerable when organic growth slows, as it inevitably will.

Carve Outs:

Episode Sources:



We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Season 1, Episode 26
LP Show
December 10, 2020

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
December 10, 2020


Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

Season 4, Episode 1
LP Show
December 10, 2020

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

Season 1, Episode 11
LP Show
December 10, 2020

6. Booking.com

Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.

Booking.com (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
December 10, 2020

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

Season 1, Episode 23
LP Show
December 10, 2020

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Season 1, Episode 20
LP Show
December 10, 2020

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

Season 1, Episode 7
LP Show
December 10, 2020

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Season 1, Episode 2
LP Show
December 10, 2020

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at: acquiredfm@gmail.com
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!


  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here: https://www.svb.com/next
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at: https://www.wsgr.com/

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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: Welcome to season 7, episode 8, the season finale of Acquired, the podcast about great technology companies, and the stories and playbooks behind them. I'm Ben Gilbert and I'm the co-founder of Pioneer Square Labs, a startup studio and venture capital firm in Seattle.

David: And I'm David Rosenthal and I am an angel investor and startup advisor based in San Francisco.

Ben: We are your hosts. Today, we cover the hottest and most anticipated company to IPO in 2020. Oddly, in a year marred by the global pandemic and just this month an all-time high number of stay-at-home orders, this hot IPO is a travel company. Airbnb—originally known as AirBed and Breakfast Incorporate—is going public today raising over $3.5 billion, and initially valued at over $47 billion. The company is insanely impressive. They operate in 220 countries and 100,000 cities. Last year, there were $38 billion of bookings made on the platform. There are over 50 million active guests who book nights to stay at over 7 million listings.

Unlike other companies that we've covered recently—yesterday, like DoorDash—this is truly a global company with 86% of hosts outside of the United States. And yet—while this company has changed the world and how a meaningful fraction of the human race travels—their growth has been slowing more severely than any of the other unicorn IPOs we've covered. That's before even looking at the effects of the global pandemic.

Now, of course, David and I did our usual deep homework on the company, but this is one where we've been doing our research for years. Not just as guests on the platform since 2010, but actually as hosts too, starting in 2015 for David and 2017 for me. Does Airbnb see its market saturation on the horizon, or is this a global community movement that’s still getting started? Today we dive.

David: Indeed, we do.

Ben: As always, if you love Acquired and you want to hone your own craft of company building, you should join the community of Acquired Limited Partners. On our LP show last week, David and I did a first for us and had our own actual limited partners, investors in our current and former funds on the show. Jaclyn Hester and Lindel Eakman from Foundry Group joined us for part IV of our VC fundamental series where we went seriously deep on the topic of portfolio construction for a venture capitalist.

Sure, this is a useful thing for aspiring VCs, current VCs to hone their thinking on that. But if you're a founder or an employee at a startup, I think understanding the incentives and strategy of your investors—big stakeholders in your company—and your potential future investors, it's just insanely valuable. It’s really awesome to have them on. Fun to be diving so deep on this topic and sharing a lot of these conversations with so many of you.

If you aren't already an Acquired limited partner, you can click the link in the show notes or go to acquire.fm/lp, and all the listeners get a 7-day free trial.

Now, on to our presenting sponsor for all of season 7, Tiny and its founder, Andrew Wilkinson. Alright Andrew, for our last episode of the season, we've talked a lot about the strategy and philosophy behind Tiny. Let's get super tactical. If someone were to do a deal, what does the process look like?

Andrew: It's super simple. They just have to send us an email and tell us a little bit about their business. We'll ask a few questions. Typically, we’ll make an offer within seven days and we’ll close within 30. It's very, very simple. The diligence that we do is in-depth, but most of it is really digging through Stripe or credit card processing and looking at financials and stuff. We really just try and cut all the BS out of it.

If someone's ever-curious or they're thinking about doing this, they don't need to overthink it. They can always just call us up or email us and walk us through it, and we won't waste their time. We’ll tell them what we realistically would pay. If they're interested, they can do it, and if it doesn't make sense then, no worries.

Ben: That's great. I can say, it's been fascinating learning about you and about Tiny and about the way you do business over the course of the season. Thank you so much for being our season 7 sponsor.

Andrew: Of course, I'm a huge fan and a long time listener, so it's cool to be here.

Ben: It's been a great season with Tiny. And if you are contemplating a sale or even wondering what it might look like in the future for your wonderful internet business if you did sell, you should reach out and just tell them that Ben and David from Acquired sent you. You can learn more at tinycapital.com or by clicking the link in the show notes. All right David, Airbnb, take us in.

David: It's time. Is it ever time? This company is 13 years old. Come on, it’s like a teenager.

Ben: We thought it was going to be time for a while now and here on the bar mitzvah of Airbnb, it goes public.

David: That's right. One quick disclaimer before we get going. In this case with Airbnb, I actually know and have worked with several people who are involved in the story in my past history at my previous venture capital firm. I haven't talked to any of them about the IPO or about this episode. They're all great, and I'm sure they're very, very happy today. Just so everyone knows, I don't own any Airbnb stock or any stock in any of its competitors, and I'm not planning to buy any.

Ben: As always, the show is not investment advice, but we thought it was extra important for us to highlight that neither of us are shareholders going into recording.

David: Indeed. We do have a very big thank you to shout out though—again, as so often on the show—Brad Stone and his wonderful book, The Upstarts, where he chronicled much of this history that we're going to borrow from. Brad is a wonderful past guest here of us on Acquired. With that, let's dive in.

Ben: Let's do it.

David: Ben, stop me if you've heard this one before.

Ben: Wait, the story of Airbnb’s founding? I’ve never heard of it.

David: Okay. A group of friends from New England—one of whom is from Harvard and the other two with a design and adventurous background—start a company in the early 2000s with a mission to connect people and facilitate interesting experiences. They're going to accomplish that mission by having people stay with other people in the site's homes.

Ben: RISD, design conference, South by Southwest—I think I know where this is going.

David: They built trust on the site with reviews. You can review each other. They discovered that photos are really important for listings. They had photos. They figured out how to authenticate real identities. It starts to take off. People start using it.

Ben: You’re going through this way faster than I would have expected.

David: I know, we got to get through a lot here. It seems totally crazy at the time to everyone—including Silicon Valley. They raised money from one of the very best venture capital firms—Story venture capital firm in Silicon Valley. Of course, I'm not talking about Airbnb. I am talking about Casey Fenton, Daniel Hoffer, and the crew at couchsurfing.com. The venture firm that I'm talking about is Benchmark, and the partner who led that deal was Matt Kohler of a little company like Facebook and Instagram fame.

Ben: CouchSurfing had that many similarities with Airbnb?

David: They had a lot of similarities, but there was one thing that was missing. It turns out that that was one of the key things that made CouchSurfing roughly the equivalent of—for those who listened to the Uber episode of the—I can’t remember if it was Uber, Lyft, or both. I think Uber, the HomeMobil story.

Ben: I think Uber, good question. I don't know.

David: I think it was Uber where we did HomeMobil, which of course pioneered ridesharing. CouchSurfing didn't have a way to pay the money.

Ben: They didn’t facilitate the payments?

David: They didn't facilitate the payments, and the idea was everybody was just going to do this out of the goodness of their heart for their community. I think, for a long time, the only monetization that happened on CouchSurfing was you paid essentially a verification fee to have your identity verified. I think the way they did that was they took a credit card payment and then matched your name with the name on the credit card. That was the only way they made money.

Actually, the similarities to HomeMobil don't end there. CouchSurfing was—for a long time—actually registered 501(c)(3) nonprofit. And then they had to convert from a nonprofit into a C-Corp when they raised money. It was a whole mess.

Ben: I mean it makes sense it was a nonprofit because in my head—the way I always thought about CouchSurfing and I think when I first heard about Airbnb, I sort of equated it with the same thing of literally a stranger who’ll just let you crash while you're, I don’t know. At this time, I was a college student. I see it's for other college students, or interns, or whatever who don't have money and you can just stay on some stranger's couch.

David: Yup, which I think was how CouchSurfing started. I think Casey was a college student and going on a trip. Did you ever use it? I looked at it, but I’ve never used it.

Ben: No, I definitely considered it, but it always felt a little bit, can I just get a cheap hotel? Do I know anyone in that city that I actually know?

David: Yeah. It's kind of crazy staying on a stranger’s couch. The really crazy part—this is getting ahead of ourselves—it turns out, Brian and Joe actually had dinner with Casey and Daniel right before they applied to YC and talked to them about what they were doing.

Ben: Which was after, of course, they had already started and were working on Airbnb.

David: Yeah. They talked about the two sites. Anyway, on to the real story of Airbnb. The year is 200. We are back in New England, specifically in Providence, Rhode Island where a scrappy freshman from Georgia named Joe shows up at the famous Rhode Island School of Design, RISD—a wonderful place. I didn't realize, I actually was in Providence last year. RISD and Brown, they’re like co-located. Providence is a very small town. So Brown and RISD, all the buildings are kind of interspersed. It’s actually a very cute little place.

Joe shows up as a freshman and he meets and befriends a sophomore there. Joe is scrappy. I don’t know if skinny is the right word. He's a sleight of frame, let's put it that way. His friend who meets is a beefy hockey player and—I don't know if it was at this or after college—an aspiring bodybuilder. He would go around and compete in bodybuilding competitions, a sophomore from Upstate New York. Of course, we're talking about the one and only Brian Chesky here.

They’re both at RISD. I don't know other than my one visit to Providence. I haven't spent a ton of time at RISD or with people from RISD, but my impression is it's like a very artsy kind of place.

Ben: Yeah, it makes sense. In my head, I remember early on hearing of so and so went to RISD. To me, it always signaled upper echelon design school—very talented, but also a very independent thinking crowd.

David: I don't necessarily think of it as commercial. I think green hair, counter-culture. I could be wrong on that, but that's the impression I have.

Ben: Business and tech guys here pontificating on how to label a design school.

David: Indeed. Whether that was the case or not, that certainly was not the mold that Joe and Brian fit at RISD. They become fast friends and get into all sorts of hijinks. They're always talking about doing different projects, starting businesses together, and they must have stood out because they became super popular. Joe actually became student body president of RISD. He’s a year behind Brian. Brian—at graduation—was elected by the class to give the graduation speech when they graduate.

The story goes, when Brian is graduating after this speech, Joe is still there. He has another year at RISD. He takes Brian out to dinner before he leaves and says, we've got this thing. One day, I predict that we're going to start a company together, you and me, and somebody's going to write a book about this. Of course, they’re telling this to the author who is writing the book about them. Whether it's true or not, we will never know, but it becomes very apt.

After Brian graduates in 2004, he moves to the west coast. He moves to Los Angeles and he gets a job working for a design consultancy there called 3D-ID. But it's kind of not the best fit for him.

Ben: Didn’t he design any chairs or something?

David: Yeah, he’s designed chairs and medical products. They're a product design consultancy, and he's a junior designer there. It's not very glamorous, and he doesn't think this is the life for him. At the same time—this is going into 2005-2006—YouTube got started. I remember I was in college when YouTube got started. This site is amazing. This thing is happening on the internet. You can watch videos and movies and anybody can post them. The guys who started it came out of PayPal, young guys. They are backed by Sequoia. Brian starts researching them. He becomes obsessed. He’s like, that's what I want my life to be like.

Meanwhile Joe—the next year in 2005—graduates from RISD. He's not sure what he wants to do with his life either. He actually starts a company. I guess you could call it a company, it still exists today. It's called a CritBuns. Joe’s talked about this a lot. We will beg you to listen to the How I Built This episode, he talks about this with Guy.

I guess the story is as part of the curriculum at RISD, one of the key things that you do is you have these design critiques in your classes. You design something, everybody in the class, the professors are all critique and you sit around. I guess this goes on for a long time, and there are non-comfortable chairs. So Joe has this idea that he makes literally butt-shaped foam cushions that you can carry around with you and you can put down on the floor, on a bench, or whatever and then be more comfortable during critiques, hence CritBuns.

Ben: Amazing. This is still up, right?

David: Still up. I don't know if I’ve written down their website. We’ll link to it in the show notes. You can go online and order CritBun.

Ben: It’s critbuns.com, and it is in its full web 1.5 glory. I think it was on the front page of USA Today, and they have a big area of their site dedicated to letting you know that.

David: Obviously. And of course, by they, we mean Joe. It's not really a company per se. Joe goes around Providence and tries to get the bookstore in town to carry them. I don't know if he actually succeeds, but if he does, he's not moving a lot of product, let's put it that way. In 2006, he finally gave in and he moved out to San Francisco. He always wanted to move to San Francisco. He gets an internship and then a full-time job at Chronicle Books, a famous book publisher here in San Francisco and he's working. He's designing book packaging and marketing materials for them.

He, with a couple of roommates, rents an apartment in the then—this is crazy to remember now—sort of up and coming, but mostly still an incredibly sketchy area in the South of Market neighborhood in San Francisco better known today as SoMa. I remember at the time, he had friends out here in San Francisco and my wife, Jenny was from here. I came out and visited and you didn't go to SoMa. It was a real sketchy place. It's still kind of a sketchy place but has transformed incredibly since then, of which Airbnb is a big part of.

Joe's now living in San Francisco, Brian’s in LA. Remember he’s not super happy. They’re still in really good touch. One day, in 2007, Joe sends Brian a package down to LA with an object in it, with a message behind it. Brian opens up the package, there's a CritBun in the package. As the story goes—at least as told to Brad—the point of the CritBun—other than I'm sure just to be hijinks and ironic—was, hey, let's take another shot at this. It's time to do this together—start a company. We’re not meant to be employees. Let’s go do this.

Brian comes up to San Francisco after receiving the CritBun to visit and stay with Joe. When he's there, it turns out one of Joe’s roommates—this tall programmer guy named Nate—who went to Harvard, but he's working at this really weird language tutoring company at the time called [...] and doesn't really seem to be going anywhere. Nate’s moving out of the apartment. Joe is like, we need another roommate. Why don't you just leave your job down in LA come up here and move in with us? Brian’s up there visiting, he has a great time. He wants to do it, but he’s not sure. He goes back to LA, thinks about it for a while.

Finally, at the beginning of September in 2007 when Nate finally moved out that month, Brian’s like, I’m going to do it. He quits his job, moves up to San Francisco, he moves into the apartment, but there's a problem. You've replaced Nate, this programmer who had a job, who is making money with this guy Brian, who’s a designer, who doesn't have a job. A roommate is only as good as they are for the rent money, and Brian and Joe need to make the rent. They're thinking about something to do.

It turns out, the next month, one of the big international design conferences is happening in San Francisco, the World Design Congress. Anybody who's traveled to San Francisco for all the big conferences that happen nowadays, they're all tech conferences that happen at the Moscone Center. The hotel situation in this city is nuts. It is completely awful.

Ben: WWDC has since moved down to the South Bay and now online. But I remember looking at hotel rooms for the week of WWDC before it got announced because people are speculating on what week it would be and rates were still like 5x what you would expect them to be because people are pre-anticipating. There are clearly not enough hotel rooms.

David: The thing that you figure out if you live here and you don't have family friends you want to visit is—that's just not WWDC, that's literally every week. Every week, there is a big event going on at the Moscone Center or elsewhere in the city. There just aren't enough hotels here for demand. Hotel rates can be like $1000+ a night during the week because there is always a conference going on of some type. They start cooking up an idea and Joe sends Brian an email. Why he sent this over email when they're living together, I don't know, but he sent him a very famous email.

Ben: They knew that we're going to be doing a podcast one day and they wanted to leave a paper trail.

David: They were thinking about an author writing the book, so there we go. The subject of the email is subletter. It reads, “Brian, I thought of a way to make a few bucks - turning our place into “designer's bed and breakfast,” - offering young designers who come into town a place to crash during the four-day event, complete with wireless internet, a small desk space, sleeping mat and breakfast each morning. Ha! Joe.”

Ben: Ha!

David: Ha indeed.

Ben: I’m going to start ending emails with that and see if that's the magic that made it all work.

David: I never really liked best or cheers, all the standard. You just end with Ha, I like that. Ha! Great. It was a pretty good ha. They take three days to put together www.airbedandbreakfast.com on WordPress, and then they email out a bunch of design blogs that they read to get some publicity. They said, all the people that read your site that come into town for the conference can’t afford hotels, especially young broke designers like us. Come stay with us on mats—I don't know where the mats came from, maybe like yoga mats or something—in this apartment.

Ben: I knew airbeds, like Airbnb.

David: Well, they called it Airbed and Breakfasts.

Ben: Do they mean airbeds, or do they mean mats?

David: I assume maybe they meant as they were working on the idea came up with AirBed and Breakfast, maybe they went out and got some airbeds. They mail this out in surprise. People were like, this is cool. What a novel idea? They're right about it. They get a few takers. They have either two or three, I can't recall how many guests stayed with them that weekend. One, in particular, a young recent Arizona state grad from India named Amal [...] rents one of these airbeds and/or mats for $80 a night. He comes and stays with them, and they become friends. They attend the conference together, they hang out. Joe gives him a tour of the city. It's really a great experience.

At the end of the stay, Amal is staying for an extra day after the conference, and he really wants to go down and see the famous d.school at Stanford, not yet famous for having helped produce DoorDash as we talked about in our episode yesterday, but still pretty famous nonetheless especially in the design circles. There's this famous tie between the d.school and IDEO—the design agency. They all drive down together to Stanford and they attend a lecture by Bill Moggridge who is one of IDEO’s founders, and this is a cool experience.

Afterward, Brian goes up to Bill and just starts pitching him. We got Amal here. We’re designers. We have airbedandbreakfast.com. It's really hard for young starving designers to go to conferences. I think Bill might have been on the board of the Industrial Designer Society of America or something like this. Do you think we could become the official accommodation provider for the Industry Association? It’s unclear what Bill's reaction was but AirBed and Breakfast did not become the official accommodations provider.

Ben: I love it, always pitching, always selling.

David: Always be hustling. This happens, the conference ends, and they have this amazing experience. You’d think, this is the thing, this is what we're going to do. No, they don't. That was a good way to make some money during the conference. What are we actually going to do?

They start brainstorming some ideas. They rope Nate—who they were still friends with even though he’d left the apartment—back in to start working with them on this since he's actually a developer. He left [...] at this point and he's freelancing. He's working on side projects thinking about what his next gig is going to be. They start brainstorming ideas.

One thing that they think about is roommate matching because they may be inspired by AirBed and Breakfast, this was so cool. Obviously, temporary roommates, that's not very big, maybe permanent roommates, that's what we need.

Ben: To be totally clear, was AirBed and Breakfast a website that they stood up for their apartment, or was it like a platform for any designer with an apartment to have other designers stay with them?

David: That's a good question. I think it was only their apartment. I'm not 100% sure on that. There were no other hosts during that design conference.

Ben: Got it.

David: It was a platform of one. We’ve talked about Nate a little bit. It turns out he has a pretty interesting and very relevant background. He had gone to Harvard, majored in Computer Science at Harvard, right around the same time as Brian and Joe were at RISD. But that wasn't really all that he was bringing to the table or even really probably the most important thing that he was bringing to the table.

In high school—it turns out—Nate had not only taught himself to code, but he put the code that he was writing to (shall we say) a highly profitable commercial use.

Ben: Finance?

David: No. He started writing AOL bots, programs, and communication stuff. First, he was selling them as shareware, and he stumbled into this nascent field—this is in the 90s—of email marketing and perhaps unregulated to parts of the email marketing industry where he operates as a consultant during high school and even through college. He ends up making—he would tell Brad Stone—almost $1 million.

Ben: When you say early unregulated email marketing, do you mean he was a spammer?

David: I mean he was a spammer. The CAN-SPAM Act was not passed until 2003, it turns out. At which point then, I think sophomore at Harvard, Nate closed his consultancy business for reasons that have never been discussed. Before that, he made about $1 million and put himself through Harvard and much more. It’s pretty amazing. In other words, not only is he a Harvard-trained computer scientist who knows how to code, develop, and can stand up internet products all on his own, he also knows how to market online. It is a pretty potent combination here.

They were smart to rope him back in. They jam in on these ideas. They’re thinking about the roommate thing, turns out roommates.com already exists. A couple of months go by, it's January 2008. They're out of other ideas. Joe and Brian decided, maybe we’ll dust off this AirBed and Breakfast thing, give it another go. They pitch it to Nate. They actually hadn’t pitched Nate until January on working with them on this. It was just this side project thing.

Ben: This was attempt number two at starting Airbnb?

David: Attempt number two, yeah. The idea is, South by Southwest is coming up in March, and people are starting to make their bookings going to Austin, and lots of people from San Francisco go to Austin still. Not this year, we were supposed to go do a live show there this year, but maybe next year. As anybody who's been to South By or Austin knows once when these festivals happen, whether it's Austin City Limits or South By, you can’t get a hotel room. It’s $1000, $2000 a night, it’s crazy.

Ben: In fact, I think the first time I went in 2010, I couldn’t get a hotel room and I booked an Airbnb.

David: I think every time I've gone, I've done an Airbnb. I've never stayed in a hotel for South By. Okay, great. This is where we’re going to launch. It's going to be big. They go on Craigslist. Who’s hosting rooms and who's in the looking section looking for rooms? They start pitching everybody on using airbedandbreakfast.com. They get a huge success. They get two actual bookings, one more than one for the festival.

Ben: 100% growth rate over their previous attempts.

David: Yeah, exactly. One of those bookings is Brian. They still only have one non-founder booking. Brian shows up. This is just amazing. We talked on the show about how the internet—back in the day—was like 12 people. It turns out in the mid-2000s, there were only 12 people. Brian shows up and he's hanging out there. He meets up—at Joe's suggestion—with another one of Joe's former roommates. It's just a guy named Michael Seibel.

Ben: No way.

Davi: Yeah. A guy named Michael Seibel, of course, of Justin.tv fame, which would become Twitch. He’s the CEO of Twitch and then would become and is currently the CEO of Y Combinator.

At the time, they were running Justin.tv. They’ve raised some money, they’re a known startup in the Valley, which we've covered on our Twitch episode. A similarly crazy story as here on Airbnb. Seibel says I can help you, Brian. He takes a liking to these guys and he knows Joe, these three roommates. I can help you find angel investors to make this thing for real.

Ben: I had no idea of Michael's involvement here.

David: Apparently never held any equity in the company. He was never an equity advisor or anything, just helped them out, and he did indeed help them out. Brian gets back. He's all pumped up. This hot startup and its founders are going to help us raise money. He shows back up and Nate's like, guys I've got some news. My girlfriend, from Harvard, Elizabeth—who’s now his wife. She was in med school in Boston at the time. She wants me to move back to Boston. Nothing's really happening with the site, so I’m moving back to Boston.

Ben: 50% of the people who are using it are the founders.

David: He moves back and once again, nothing really happens with the site for the next few months. Meanwhile, Seibel did make good on his introduction, and he and Justin Kan introduced Brian and Joe to a bunch of angels. They go into these meetings with angels and the angels are like, you’re doing what? How many people are using this? No, thank you.

Brian would write a blog post later about this, about all the rejections that they faced, of which there were many. They go back to Seibel and Justin Kan and they're like, if you can’t raise money, maybe you should just go do Y Combinator. We did it, it's great. PG’s great. It's still pretty early at this point in YC. Maybe you'll be able to raise money afterward.

Ben: It’s three or three-and-a-half years into it.

David: I think it was 2006.

Ben: Maybe Dropbox has happened. It was 2006, so it’s one or two years into it.

David: No, this was now 2008, but YC started in 2006, or was it 2005.

Ben: Something like that.

David: It’s all pretty early.

Ben: Dropbox and Reddit effectively have gone through, but there have been any other high flyers yet.

David: And Justin.tv. Nobody really knows outside of the Valley about them yet. They go check out YC and YC was actually—I think this was the first startup school that YC put on. An effort to evangelize and bring in more applicants as they move to the west coast. Brian and Joe go down to the Startup School. This is amazing, I think this is April 2008. This is where Bezos comes in, talks at Startup School, and uses (I think) for the first time the electricity metaphor for AWS.

Ben: I forgot Bezos spoke at Startup School. You get so wrapped up in the Jeff Bezos of the last 5-8 years that you forget how much more approachable he was, and a lot of these guys— Zuckerberg. They would all do the little startup speaker circuit because their companies weren’t that valuable yet.

David: Totally. Here is Bezos, who doesn't look like terminator Bezos. He's full-on still nerd Bezos mode. He’s pitching at YC for all of these rinky-dink startups because he's like I got to get people to use AWS. These little startups are going to use it.

Ben: Which ended up being genius.

David: Totally genius. Same deal as Stripe. Anyway, stories for another day. The other person who makes a big impression on Brian and Joe—speaking at the Startup School—is Sequoia partner Greg McAdoo, who is speaking there. There's a long history of Sequoia partners speaking at YC in Startup School. It turns out that Greg is speaking there because Sequoia had actually invested in Y Combinator. Greg was the person who led the investment for them and was on the board.

Ben: It wasn’t widely known yet.

David: It wasn't widely known yet. Brian and Joe, they're thinking YC is great. They're going to apply. The winter batch for YC was the next application, so they're going to gear up for that. In the meantime, they got to do something over the summer. They're like, what are the next events that are coming up? The presidential campaigns are happening. The conventions are happening, maybe we can use Airbnb at the convention. They do the same thing. I think the Democratic convention is in Denver. I forgot where the Republican one was.

They emailed local press outlets. They get some bookings. They actually get about 100 bookings that summer, which is great, but they're not making that much money. They're about out of money and this is when the famous serial story happens—the Obama O’s and Cap’n McCain’s.

Ben: David, I texted you, let's not go too much into this story because everybody already knows it. There's so much more to talk about in recent Airbnb history. As I went back and read the email exchange between Fred Wilson and Paul Graham, and then I read Fred Wilson's blog post talking about how they passed, I actually realized I had the story wrong. I didn't realize that the Airbnb guys made up Obama O's and Cap'n McCain's. I thought what they did was they went out and bought a bunch of them and then when the store ran out, they resold them. I didn't realize they took Cheerios and just made their own cereals.

David: Yeah. It's pretty crazy. I think that's the thing, everybody knows this happened, but the actual story was they didn't have any money. They're still trying to basically make their rent on the Rausch street apartment in SoMa. They had this middle-of-the-night crazy idea of let's go make some boxes, pour Cheerios into them, and sell them. It’s a limited edition.

Ben: It's a totally amazing, heads I win, tails you lose situation because you have food no matter what. It's like being in a casino. You don't care which side wins because you get food either way.

David: You get food either way. It's true.

Ben: The stakes are a little bit lower.

David: They end up making somewhere between $20,000 and $30,000 in profit from selling these things online, and that keeps them alive until they start Y Combinator. It’s cool. When you take a super far step back, you’re like, this is an amazing story of entrepreneurial grit. This has nothing to do with the business. This might be a theme that'll come back up as we progress through the story.

Ben: Yeah. It's only awesome because the company worked. I've been at companies that didn't work, and the only profit they ever made was from selling their furniture. It can kind of go either way.

David: It's an awesome entrepreneurial endeavor and a great show of scrappiness. It's a little bit of a double-edged sword.

Ben: It's also a great way to use their actual talents. As designers, they didn't have to outsource the creation of the art for the boxes, so therefore there was more margin available for them. I always think that a good lesson for entrepreneurs, in general, is what is the thing that you yourself can do and not pay yourself anything and you don't have to pay the labor. It's 100% profitable. For our business here at Acquired, we podcast. We don’t have to pay for any podcasters.

David: Talking to the internet? There is though the other reason I decided to include the Obama O’s and Cap’n McCain’s story is it’s actually what gets them into YC. Characteristically, Brian and Joe—as you can imagine as the story goes along here—missed the deadline to apply, and Seibel has to lobby PG and say these guys missed the deadline, but can you just give him an interview anyway? I vouch for them, they're good. Brian and Joe convince Nate to fly back from Boston, pretend that he's still part of the team to drive down the Mountain View, and have the YC interview.

He shows up. They're getting ready to drive down. The story goes—as they're leaving—Joe grabs a box of Obama O’s and a box of Cap'n McCain's to give to Paul Graham. Apparently, Nate is like, what are you doing? You look ridiculous. Cereal? Come on. They go, they do the interview, and PG doesn't get it. He's like, people actually are doing this? Staying on each other's couches? They're like, well yeah, people are doing it, but not that many people. It doesn't go super well.

After they leave the interview, Joe realizes he's forgotten to give Paul the cereal boxes. He runs back in and gives Paul the cereal boxes. This is how the story goes as chronicled in The Upstarts. He gives Paul the cereal boxes and Paul was like, what are these? Joe tells him the story of how they've stayed alive. Of course, what is one thing that PG values above all else? It's survivorship, grit, and default alive—being a cockroach as he would come to call them.

He says, wow, okay. You guys are going to stay default alive. I don't know about this whole thing, but you're in. They get into YC. They start in the winter 2009 batch. As Paul spends more time with them, he comes to really like these guys. Famously, he gives them advice. He says, where is stuff happening right now? We've got some bookings in New York. He says go to New York. He famously sends the—he starts calling them the Airbnb’s. During YC, they changed the name to Airbnb from AirBed and Breakfast.

They get to New York. They figure out that photos are important. They figure out that having a smooth payment experience is important because bringing a bunch of cash and giving it to your host is pretty awkward.

Ben: The very reason why people stopped taking cabs and used Uber instead because it was a cashless experience. I mean, one of the many reasons.

David: Exactly. Things start to work. Now meanwhile, McAdoo, remember, is Sequoia's liaison with YC and investor in YC. He's at YC one day and he's talking with PG. They're talking about this idea of grit, how being default alive and scraping through things—at Sequoia, they believe that's one of the most important characteristics of entrepreneurship as well. McAdoo asked PG, who in this batch is most like this? PG says that’s easy. That’s the Airbnbs over there.

Ben: Love it.

David: Love it. McAdoo goes over, he starts talking to them, and he’s smitten as well. This is kind of crazy. If you remember, back to this time—this is the beginning of 2009—the R.I.P. Good Times Sequoia memo 2008. The leaked memo had just happened a couple of months before. The world is falling apart. The Sequoia partnership and the rest of the Valley is thinking about triaging their own portfolios. The idea is you would give a bunch of money to some crazy kids who are building a platform for people to sleep on other people’s air beds and couches. It’s out there.

Ben: Yeah. It feels far removed from the reality at the moment.

David: Yup. To Greg’s internal credit though, he sees the potential, and he had looked at HomeAway, Vrbo, and the vacation rental space before. He’s like, no, I think these guys are doing something different. Of course, we’ll get into this a little bit more as we go. But a consequence of the financial crisis, R.I.P. Good Times, and everything that was going on in the world at this point in time was it was also a housing crisis. People were having a really hard time paying their rent, paying their mortgages, and getting kicked out of their houses. This was potentially a way for people to make some extra money and prevent that from happening.

Likewise, people still wanted to travel, didn’t have the same disposable income to do it, and this was a way to do it much cheaper. You could go to South by Southwest, or you could go to a conference in San Francisco for $80, $100 a night instead of being priced out of the market.

Ben: Yeah. It’s so interesting. The timing plays so much of a role in the success of these companies. There was so much innovation here and all the different ways that we’ll get into payments, reviews, trust, and all that that it could have succeeded in any time. But boy, did they have the wind at their back from the secular trends going on to make it a no brainer for a lot of people and really accelerate their ability to find product-market fit.

David: It was absolutely the right time. I think all these things are true, and CouchSurfing—as we talked about a little bit—definitely didn’t have the right model, definitely mess things up, but they also were launching and starting to build in the build-up to the financial crisis during the go-go years. Nobody was that interested in cheap travel.

Despite getting a lot of push back from the rest of the Sequoia partnership, McAdoo does end up convincing Sequoia to invest. Rather than doing it as a Series A, they say, I’m not sure about a lot of money here. I’m not sure about this being a full traditional investment. We need to conserve our cash and triage our portfolio. Let’s do a small seed check. They say we’ll lead a seed round. Sequoia will invest just under $600,000 in this company, $585,000. We’ll bring in some other folks.

Ben: Also, that’s nothing for Sequoia today. That’s still pretty much nothing for them at that time.

David: I think the fund that they’re investing in (I believe) was a $500 million fund. What’s that? 0.1% of the fund.

Ben: Yes. The funniest thing is that actually returned to that fund.

David: Oh, so many times over.

Ben: When you’re thinking like a venture capitalist and you’re like ah, I can’t possibly make a little bet. That’s just 0.1% of my fund. Because that can’t possibly contribute to returning the fund. I didn’t deploy enough of the fund’s capital to ever have a multiple big enough to get there. And here we are.

David: And here we are. They do $585,000, they bring in some angel investors alongside. The angel collective of Keith Rabois, Kevin Hartz, and Jawed Karim—one of the Youtube Founders. We talked with Kevin about this on the Eventbrite episode. They were angels in investing together. They get a small angel allocation of $30,000 between the three of them in the round. The valuation though, that’s the dollar size.

The structure though is a very much traditional venture round. The round is over 25% of the company. The post-money valuation on the round for the total round is $615,000, $2.4 million post-money valuation.

Ben: Whoa, no way.

David: Sequoia gets 24 and ⅜% in ownership in the company, and the angel collective of Keith, Jawed, and Kevin get 1 ¼% of the company for their $30,000.

Ben: That, I think, is the last big dilutive round the company would ever do. Is that right? Everything from here on out was shockingly dilution.

David: Yes. The Series A was $7.2 million out of $60 million or $70 million valuation. Roughly 10-ish% dilution.

Ben: And the percentage of the company sold, all they went down from there despite the fact that the dollars got very, very large.

David: That is accurate. Back to the seed round, they finally have a little bit of money.

Ben: 2.4 million posts. David, I can’t believe it.

David: Even back then, and it was a different era (like I said), it was a different situation.

Ben: That’s Sequoia Capital sure knows how to get their ownership.

David: They do, they do. They’re writing much larger checks these days to get that ownership. Even with this small amount of money though, remember Nate’s background. Nate basically goes to work, and this is his time to shine.

First, the thing that they do, which doesn’t require any money. People have probably heard about the Craigslist hacking. I didn’t realize the thing that I always thought that Airbnb did with Craigslist hacking was going to listings on the site and saying, why don’t you come to list these listings on Craigslist and email them, get around Craigslist email blocking and say, why don’t you come to list these properties on Airbnb.

The other thing that they did was actually the reverse, which was for people who were creating listings on Airbnb, they encouraged them to auto-published those listings back to Craigslist. You think, why would you want to do that? You’re taking your own supply and you’re encouraging your own supply[...]?

Ben: But if the transaction happens through them, that’s a way to go get more demand. And for a site without traffic yet.

David: Exactly. Probably both of these were key, but that second piece was especially key because yeah, how do you get the demand, how do you get traffic? You can go hand-to-hand combat, convince people to put listings on the site, but do you get them bookings? You put it on Craigslist, get the bookings through there, and you capture those bookings and you don’t let them go back to Craigslist. You say, hey, you did this thing, you had this great trip, why don’t you book your next trip with Airbnb?

Ben: Right. Craigslist captures very little of the value that they create. Effectively, what they did here is say there’s value created on Craigslist. We’re going to be the way to capture it.

David: That was Craigslist. And then the other thing they do, that Nate does—especially given his history that he knows well—is Google and Facebook Ads. These were the early days of Facebook Ads. We’re talking 2009. The platform existed, you could do it, and you could target by interest. What they do is when they want to grow demand, they run Google Adwords for places to stay in San Francisco, places to stay in Paris, places to stay in New York. Okay, that seems like a great way to get demand, but how do you get the supply that uses Facebook?

What they do is they go on Facebook, you can target by geography. Hey, we need some more supplies in New York. Okay. We’re going to target New York, and we’re going to run Facebook Ads. We’re going to target by interest. Brad talks about this in the book. We see this person likes wine—rent your place to a wine lover. This person is interested in yoga—rent your apartment while you’re gone to someone who loves yoga.

That’s how they would get supplies to sign up on the platform. And then, of course, the people that they would send, no guarantees that they like wine or yoga, but it worked pretty well. To be fair, these are some pretty great growth hacks. It wasn’t just that Airbnb growth hacked their way to success—as we talked about. There were a bunch of trends that were at their back here. The financial crisis, people needing to pay their rent, people want to travel cost-effectively.

We talked a little bit about the supply-constrained nature of hotels in markets when there are big spikes in demand. I think the other thing too that took a while for people to realize—but has probably become the most sustainable part of Airbnb in the ensuing 10+ years—is you don’t always want a hotel experience. Almost anybody who’s traveling, sometimes you want a hotel experience, but sometimes you actually want to stay in a place. Especially if you have a family or you’re traveling as a group. It’s such a much better and totally new and different experience to travel like this.

Ben: Yup. That’s a great point. Before we move on from the growth hacks too, I think it’s also important to identify that the door is closed on doing all of those tactics today. And not completely close, obviously, you can still use Facebook and Google Ads. But the value has largely been arbitraged the way where you can’t do it like a wide-open fire hose the way that they were doing it in a cost-effective way then.

The notion of new marketing channels—particularly new digital channels—is always who found the next hill? Go exploit it before all the value gets arbitraged away, then go look for the next hill. These are five generations ago of marketing tactics.

David: Yeah. Good luck doing those innovative Facebook things today. You’re going to pay through the nose for it. We’re now in 2010. Things are really starting to work. By midway through 2010, they have 700,000 nights booked on the platform. For something that seemed like a crazy idea, nobody would do—even the founders, we need to do permanent roommates, not temporary roommates. It’s totally taking off. They raised the $7.2 million Series A from Greylock.

Ben: Which by the way, why did Sequoia not pile on again? Isn’t that their strategy.

David: I think there were a bunch of questions about how big is this? What’s going on? There’s crazy stuff happening.

Ben: They also figured they own 24% of it.

David: They already own 24%, and they’re trying to stretch out the dollars in their fund. It’s not like we’re out of the financial crisis at this point. They go to Greylock, Reid Hoffman leads the Series A. I think this is actually true. We’ll talk about Airbnb’s business model in a minute, but things are going so well. They have more money in the bank than all of the Seed dollars that they raised when they raised the Series A. You’d never hear about this happening. They raised such a small amount of money, but then they did so well that they made more money.

Ben: Fame profitable company, Airbnb.

David: Indeed, indeed. By early 2011, the next year, they hit a million nights booked. This company has always been great at PR and publicity—probably the legacy of Brian and Joe. They had a million nights booked, it became big national news. This is when Fred Wilson publishes that blog post about how it was a huge mistake to pass on the company, and XPG had actually introduced them to Fred Wilson and wanted Fred to lead.

Ben: While they were in New York doing things like meeting the host, hiring photographers, and all that.

David: Yup. That summer—we talked about fundraising—they raised $112 million Series B from Andreessen Horowitz at over $1 billion valuation. This is summer 2011.

Ben: That’s a big Series B today.

David: We were talking yesterday on the DoorDash episode about their $40 million Series B in 2014 or 2015 being a huge Series B.

Ben: It is ludicrous to call this a Series B for that era.

David: Yeah. Ashton Kutcher comes into the round.

Ben: Ashton doesn’t actually quite come into the round. He comes in at a different time and gets (I think) preferential share price. Or maybe it’s just preferential share allocation because he has this value propped at the time that he’s talking with many companies about, which is I’m going to help you get publicity if you’re a consumer company. Often, he would actually come in after rounds, have them reopen it to let him in when the price should have gone up but keep the price the same. It’s a great strategy.

David: Leverage your value. They raised all this money. Why did they raise all this money? There’s actually a very specific reason they did, which was if folks remember back to this time, the Samwer brothers and Rocket Internet in Germany would talk all of this new wave of post web 2.0 tech businesses from Silicon Valley, clone them, and roll them out in Europe.

They did this with Airbnb with a company called Wimdu. This was existential because whether they realized it or not early on, unlike DoorDash food delivery, ride-sharing where it’s about winning each local market in hand-to-hand combat, Airbnb is a global network. You can’t fragment the market. There is going to be one winner globally because when people travel, they travel globally. Especially Europeans and North Americans travel back and forth between Europe and North America. You need to just have one platform. You can’t give up on Europe.

Ben: It’s such a great point. Whoever wins that the global market is also going to trickle down win local markets. It’s actually different from the airline industry, which also has a great cross geography network effect where you have these United and American Airlines. American is a big international player at this point—Oneworld Alliances. But you still have room for these regional players because the product that’s necessary for those regional jets, it’s a whole different set of infrastructure. That’s just not true with Airbnb. Whoever was going to capture this short-term rentals market in a global way was also going to win in a local way.

David: Yup. For a whole bunch of reasons, one of the reasons being just like you and me, Ben, over time the biggest way that they ended up getting hosts on the platform was people would use the platform as travelers. As guests, they would travel all over the world. They come back to their own city and say, I’d like to make some extra money on my place and then they would list it on Airbnb.

Ben: That whole strategy, that whole venture capital playbook that we talked about on the DoorDash episode of it’s truly a winner take all market, flood the money in, make sure you’re the winner—that was inarguably true for Airbnb.

David: Inarguably. They go fight hard against the Samwer brothers in Europe and they end up winning. It’s really interesting to think about why they end up winning. They do a couple of things. They acquire a few companies—smaller competitors in Europe. They open up a bunch of offices. What the Samwers are doing, they basically start a sweatshop in Berlin of young kids out of college and out of McKinsey into calling hosts and property managers getting listings to put on their platform. Airbnb starts doing the same thing.

The thing that’s interesting though is I don’t think that’s actually what made the difference. Because if you think back—and let’s talk about the product for a minute—the reviews on the platform that CouchSurfing had pioneered—initially, there are no reviews on Craigslist, but CouchSurfing had them. Reviews and trust are so important. You’re doing this crazy thing. You’re staying in a stranger’s house or you’re letting a stranger stay in your house, how are you going to trust that it’s actually going to be a good experience, that these aren’t crazy people. Crazy people aside, just that it’s actually going to be nice—reviews are super important.

When you’re doing something like creating a listings farm—whether this was Airbnb doing it or Wimdu doing it—you’re just going to end up with a lot of listings with no reviews and it’s going to be dead. There’s going to be no life happening. Airbnb—because they’d been operating globally from the get-go—had listings with reviews already in Europe. I think once you start to get that, then it’s really hard to compete with that.

Ben: It’s like a flywheel.

David: It’s a real flywheel going. They end up winning. Wimdu, I don’t know if it’s still around, but it never takes off. The other amazing thing—even though Airbnb went out and raised all this money—it turns out, they have a killer part of their business model and how the operations work. Which is when you go make a booking on Airbnb to go stay in a place, you’re usually planning your travel out at least weeks if not months in advance.

You, as the guest, pay that money when you go make that booking, but Airbnb doesn’t give that money to the host until after the check-in happens. You could have up to six-plus months in advance where Airbnb, they have the ultimate negative cash flow cycle. They’re getting the money in, they’re holding the money—roughly 12%, 15% of which is their fees, their revenue. They get that, they hold that upfront, plus the other rest of the booking fee that they’re going to give to the host—they hold that and then they give that out months later.

They raised all this venture capital, they probably didn’t even need it that much. Because as long as they’re growing, as long as the platform is growing, there is more money coming into the bank account.

Ben: Right. This negative cash conversion cycle—we talked about it a lot on the Pinduoduo episode, to understand that more at a deeper level. But you’re so right here. The most interesting thing to me is how, typically, in hotels, you would pay when you got to the front desk. This was a different enough category, a different enough mindset for people that they were willing to pay when they booked upfront. That felt like the right thing to do.

If Hilton was actually, we’re going to start charging when you start making a reservation, that wouldn’t fly. They couldn’t take advantage of this cashflow dynamic the way that Airbnb was able to by being different enough. On top of that, what you said about growth is really interesting. Because sure, you can take that cash as long as you’re growing and plow it into your growth because you know that more money is going to be there from the growth that you’ve achieved. This doesn’t work if you’re not growing. You can quickly get yourself into trouble with spending money you don’t have if you’re shrinking.

David: We’re definitely going to talk about that. This is all predicated on growth.

Ben: I keep talking about how crazy non-dilutive—all these rounds of financing were for Airbnb. This is one dynamic. Their growth actually financed the future growth of that company without needing the investor dollars to do it.

David: It’s so smart. This is actually like SaaS companies face the opposite of that where you’re selling deals. You might sell a deal for $1 million in ARR. It’s just going to be paid to you month after month.

Ben: Enjoy your $100,000 or $80,000 a month check.

David: Exactly. Things are working, they’re winning in Europe. January 2012, they had a cumulative 5 million nights booked on the platform. Six months later, in June 2012, they hit 10 million nights booked on the platform. This flywheel is starting to spin so fast.

Ben: There is your product-market fit right there.

David: Exactly. There are some bumps along the way. Definite stuff that’s been written about elsewhere that we don’t have time to cover here. The EJ incident when the woman’s apartment in San Francisco got trashed and they had to implement the insurance guarantee. That was terrible. They had accidents on the platform, there were crimes. There was stuff going on.

Not to mention the regulatory piece, which we’ll probably talk about at the end of the episode—New York and San Francisco in particular. Like, hey, you guys are running a hotel. This is not allowed. All that said, as difficult as those things were, the flywheel is spinning this company. Nothing is going to stop this growth.

In October 2013, they raised $200 million from Founders Fund at a $3 billion valuation.

Ben: They were selling 8% of the company?

David: Yeah, 7%, 8% for $200 million. Then the next year in 2014, they raised $500 million from TPG at a $10 billion valuation. Along the way, in between there—especially for the show, it’ll come back up in a minute—Greg McAdoo leaves Sequoia and Alfred Lin joins the board—Alfred Lin from Zappos and, of course, board member of DoorDash as we discussed yesterday. Pretty big week for Alfred.

Ben: Yeah. Crazy stat on Alfred. He’s been at Sequoia for 10 years, yesterday was his first portfolio company to IPO, and today is his second.

David: They’re both some pretty big IPOs, I would say. We’re now in 2014. We’ve just spent all this time enumerating all the amazing things about Airbnb’s business model, their growth model, their financing model, the product, why it’s defensible, why even the Samwer brothers can’t dethrone them. The thing though about when you have this beautiful capital business model and a global network effect, in contrast to a company like DoorDash, you don’t really have the existential requirement to fly low to the ground or operate at the lowest level of detail, shall we say. In fact, you can fly pretty high, you might say. You might be able to fly very high.

Ben: Yeah. This shows up in two ways. One, operationally, you can just be sloppier. You just can not need to be as finely tuned as say a performance marketing machine, and there are lots of different areas around the business where that shows up. But also, it means you don’t have to be as considerate about what you’re building and why because you have this flywheel that’s just spinning and profitable.

Sure, lots of people are showing up to the office every day, doing important work, and moving the company forward. But if they didn’t, other than maybe customer’s support and success, the business would probably still grow, it would probably still be profitable, and it would probably still be fine. At some point in their journey, they really did hit that where it was just going whether they touched it or not.

David: Look, this is the dream of a business is to have a business like this. Not only there is nothing wrong with that. That’s amazing. On the other hand though—that’s why it’s so interesting to contrast these two IPOs back to back with DoorDash and Airbnb. All those other things you said, Ben, are totally true too. Let’s go through it.

In 2014, the company moved into a new headquarters building at 888 Brannan Street in San Francisco. For anyone who’s ever seen it or if you haven’t seen it, look up pictures in this place, gold plated would be an understatement. There’s a five-story atrium in the lobby with a living wall that goes up the whole side of one of the sides of the atrium. It’s amazing. There’s a 24/7 kitchen. It’s no longer 24/7, but at the time, when they opened it, that operated. There are three meals a day, seven days a week.

Ben: All free for employees?

David: Yeah, all free. I can imagine that there was too much demand for breakfast on a Saturday, but who knows?

Ben: They wanted to create the environment that they thought would enable people to do their best work, to be creative, to create this culture that they wanted among hosts. I get it, but it is absolutely emblematic of the fact that the flywheel is spinning and it was spitting off cash.

David: They [...]. It’s now just become normal, but they unveiled the Bélo—the design mark of Airbnb.

Ben: I love that it has a name.

David: I know, the Bélo. Depending on your version of the Rorschach test, it may or may not look like some genitalia. Anyway, it’s now the Airbnb mark.

Ben: Yeah. I love the old Airbnb logo. I have [...] for sure.

David: I know. So good, the cursive script. Then, also in 2014, they started doing an annual conference for hosts called Airbnb Open. They had brought on in 2013 as Head of Hospitality, a guy named Chip Conley. Chip was the founder and proprietor of the Joie de Vivre hotel chain, which are these super high-end boutique hotels all around the world. Chip is an amazing guru-type guy.

At the conference—this is in the book—he’s quoted as saying that he’s predicting that Airbnb could win the Nobel Peace Prize within the decade.

Ben: Wow.

David: Okay, man. All right. Never heard of a startup winning a Nobel Peace Prize, but okay. Alfred’s going to resent us for this, but he has a great quote about all these in Upstarts to Brad. He says, “Well, growth covers a lot of sins, and the growth of this company was spectacular.”

Ben: David, I think you summed it up so well in saying this is exactly as an entrepreneur, as an investor, this is exactly the type of business you want to start that just goes on its own and that you don’t have to keep pushing the rock uphill. Once you have that, the lesson is, do not rest on your laurel. Stay analytical. You have to keep figuring out what’s next.

David: Or at least, don’t say you’re going to win the Nobel Peace Prize. Anyway, in 2015, Expedia bought HomeAway—the only really viable product-wise competitor out there in the market for just under $4 billion. You know, there are some headlines about, Expedia, HomeAway, they’re going to compete with Airbnb. No, this is surrender. This is basically admitting that there is no viable competitor out there.

In 2015, Airbnb made almost $1 billion in net revenue on $8 billion in bookings. 2015 is the first year in the S1 where we have this data.

Ben: By the way, $8 billion in bookings, that’s equivalent to the $8 billion that DoorDash did last year in their gross order volume. The amount of cash that moved through Airbnb in 2015 is equivalent to the cash that moved through DoorDash last year. Sort of interesting to think about these companies, mostly because Airbnb has a much higher price tag per order, much lower orders per year. But of course, thinking about the growth from when they both had that level of money flowing through the system after that is going to be interesting to think about too.

David: Indeed. In 2016, on top of that base, they grew 80%, and they do 14 billion in bookings, $1.65 billion in net revenue. They had raised in 2015 $1.5 billion in a $25 billion valuation. And then in 2016, they raised another $1.5 billion across two rounds. Again, not that they really need the cash, but probably a war chest.

Ben: They’re working on super favorable terms. They can think of lots of things to do with it. Investors are desperate to get shares of this company. I do want to take a quick comparison here and say, okay, the $8 billion and then they grew 80%. Last year, DoorDash had $8 billion in gross volume and then grew over 200% the next year.

David: We’ll keep talking about the growth rate as we go along here. I imagine, one of the things that they raised the money for, in 2015, 2016 was at the 2016 Airbnb Open the conference in Los Angeles, they have some big announcements. Ben and I went back and we watched this video on YouTube. It’s something.

Ben: It’s just a thank you for the internet. It is just miraculous that this thing is still on YouTube. Every single product they introduced—except for one—has been a complete failure.

David: It’s like you do have to admire the ambition of they wanted to add more products and had a big vision for Airbnb to be more than just what it was. All that is good. Though, at this conference they launched—Brian says, it’s the most significant development in Airbnb’s history. That the goal is to do for travel what Apple did to the iPhone with all the things that they’re going to launch that day. They launch Experiences, Places, of course, Homes–—their current Airbnb product, and a meta product above it all called Trips, that it’s all going to be a part of.

Experiences, people probably know, Experiences are still around today. Although nowhere in the S1 is it broken out the performance of Experiences or how many bookings they have of Experiences versus Stays.

Ben: The assumption that everyone’s making is Experiences are a phenomenally tiny percentage of the overall revenue.

David: Yup. Places was part of the Airbnb app. The idea was it was going to be like Meituan—a super app aggregator for all things you would want to do. It’s like Yelp, it’s OpenTable, it’s Meetup, everything you would want to do in your city where you live or a city where you’re visiting, all within the Airbnb experience. That was Places.

And then all of it lived all together in Trips. Within Trips, you have aggregated your Stays, your Experiences, and your Places, all the stuff you did. They didn’t launch but they talked about adding car rentals to Trips. They talked about adding grocery delivery to Trips. They talked about adding flights and maybe even an airline someday to Trips.

Ben: They even had a flight booking product in the works until March of this year.

David: Oh wow, I didn’t know that.

Ben: Yup. That was one of the canceled things with coronavirus.

David: Interesting. We’re moving at bad ideas, but I’m not sure they made a ton of sense within Airbnb. I think the disconnect is as looking back for me watching that video was I think Brian and the company really believed Airbnb—they talked about it so much in this conference—about belonging, about feeling home when you travel, and about the connections in the community between hosts and guests.

Undoubtedly, there are people that use Airbnb that love meeting strangers on the platform. I’m not sure that it’s most of the people who use Airbnb though.

Ben: I think there’s a recurring theme that seems to happen from this point forward in the business, which is Brian and management feeling very aspirational about why people want to use Airbnb, particularly around the community, particularly on belonging. People—again, generalizing—use it in a much more transactional way than that. They are logically weighing this option to stay here versus other options. I just think that that disconnect becomes more and more apparent over time.

David: Yeah. If you go back to what was one of the original—probably the biggest—why that made Airbnb work was the financial crisis. It was nice to stay in an apartment and whatnot, but I really want to go to San Francisco for $100 a night or $80 a night, not $1000 a night.

Ben: It is interesting around the 2014-ish timeframe, I remember my narrative of why I loved using Airbnb shifting. Where I used to tell people, it’s great, I can stay cheaper. And then I was like, actually, it’s not really cheaper anymore. But like, gosh, hotels are so sterile. Staying in an Airbnb—while it’s probably the same price, maybe more expensive, hard to tell—I can access neighborhoods I otherwise never would have been able to access.

I have a unique and cooler experience staying in this house. I remember this moment in time, it shifted from a price-based value proposition to an experience-based value proposition.

David: Yup. Same deal for me. What’s interesting is, actually, I didn’t go back and I should’ve. But anecdotally, for us, in our travel, there was a period of time—certainly when we were younger and more price-sensitive where all of our travel is in Airbnb. We won’t stay in any hotels.

And then during the period of time you’re talking about, it was like, when we would go for a weekend, it would depend on the trip whether we would do Airbnb or hotels. Sometimes, we’d go—Jenny and I were living in Seattle—we’d come down to the Bay Area. Maybe we go up to see our family, maybe we go up to Sonoma or Napa. Sometimes we’d stay in an Airbnb, sometimes we’d stay in a hotel. But then, as the prices started equalizing. We’re like, probably these Airbnbs aren’t that great.

Ben: Hotels are easy, hotels nice.

David: There are some really nice hotels. Maybe we’re just going to stay in a hotel.

Ben: Right. I think the thing that becomes true is people consider Airbnb one of their options.

David: Yup. Totally. Not that we stopped doing it at all. For group trips, getting the family together, going to a place where there isn’t great hotel inventory—a fantastic use case. But you fast forward to today, we’ve talked about Experiences, Places is gone, the Trips concept is gone. It’s now refocused much more on Stays.

The next year, in 2017, the company tells investors that they’re planning to IPO within 12 months. But then, at the beginning of 2018, they had hired back in 2015 a big name CFO, Laurence Tosi, who had been the CFO of Blackstone and the COO of Merrill Lynch before coming out to San Francisco and joining Airbnb.

He leaves the company. That puts the IPO in jeopardy. Brian publishes a blogpost when he leaves saying that Airbnb has an infinite time horizon and is focused on being a 22nd Century company.

Ben: That is some interesting shade.

David: Yeah. I’m not sure what it means to be a 22nd Century company, but it definitely means they’re not going public any time soon. Which I think was the message behind all that.

Ben: It sounds like Brian likely didn’t appreciate any of the push back or guidance he was getting around IPO readiness or whatever the opinions were of the CFO and other finance leaders who would come in afterward.

David: Yup, indeed. That starts off a whole cycle of speculation in the press internally, externally about when is Airbnb going public, will they go public, at what valuation, what is happening? Because, of course, they had raised all of this money from Sequoia and others, and it’s hard to have an infinite time horizon when you have investors with fund life cycles.

Ben: I texted David a month and a half ago. I was like, dude, I think Airbnb is going to IPO before the end of the year. And you’re like, okay. I’ll believe it when I see it. Heard this story before.

David: We’ve heard it before, but they actually do. We’ll get into the story of this happening and why it’s happening now. The reality that we’ve talked about—this 3x [...] so many of our stories. The first act here of Airbnb, this crazy thing, almost didn’t happen, but it was a great idea, gets into YC, grows and grows and grows. We’ve now gone through the second act of the growth is still happening, but some buzzling decisions are happening. But okay.

The thing is though, after all this starting in 2017, the growth no longer keeps going. Which we’ve alluded to in our own deed of use and usage of the platform here over the last couple of years. 2017, booking growth slows to 50% from over 70% the year before. Still really good. You’re at a huge base, going 50% year over year—that’s great. And totally IPO.

Ben: It’s a 10-year-old company too. A 10-year-old company growing at 70% on that base, nothing to be ashamed of at all.

David: Absolutely, you can go public with that. 2018, bookings growth slows to 40%. Okay, but still, old company, large base, and growing 40% annually—great.

Ben: If they had gone public after five years, we wouldn’t be naysaying this at all. We would be like, yeah, totally. They’ve been public for years. It makes sense that they’re into this 40-ish% growth rate per year.

David: Yup. The next year, in 2019, the last full year we have data before COVID. Bookings growth slows to less than 30%. I believe it was like 28 1/2%, 29% last year. At this point—to me at least—what’s most concerning is the growth is linear. They added $8.5 billion in bookings in 2018. That was two years ago growth. They also added $8.5 billion in bookings in 2019. The base is growing, but the amount that you’re adding every year is now constant. Of course, then we’ll get into what happens in 2020.

Ben: Indeed chuck that up to IPO readiness. They shifted their mentality from a grow at all cost company to we should start thinking about profitability.

David: I don’t think so because the costs keep growing—and this is maybe as if now more alarming—the company’s cost structure keeps growing as if it were a growth company. In 2019, total expenses grew 46% even though bookings grew 28%, 29%. Variable cost in 2019 grew 41% and fixed cost grew 60%. If anything as you grow—especially on this huge base—you should start getting way more leverage on your fixed cost, and they’re actually getting less here.

Ben: That’s concerning.

David: Concerning, indeed. Then 2020 happens. Before 2020 happens, in September of 2019, they announced that they will go public in 2020. This had been reported elsewhere, but the company now—by September 19—is close to 12 years old. The early employee options are going to start expiring.

Ben: Yes. How does that work?

David: I don’t know exactly. I don’t know if it mirrors—I think about like a venture capital fund life cycle. Usually, it’s a 10-year life cycle and then you have two 1-year extensions. I don’t know actually if employee option contracts mirror that. But also, at a minimum, think back to Sequoia, their fund that they invested in Airbnb must have been a 2006, 2007 vintage fund. You’re now over 10 years into that fund.

Ben: You’ve definitely got shareholders looking for liquidity on the investor side, but you also have these employees that have some form of expiring options or, at the very least, if you try and restructure that then there are tax implications.

David: Yup. And also, everybody would just like some liquidity, I will assume here, not to mention. They announced they’re going to go public and then COVID happens in March 2020. Overnight, the business evaporates. Not just evaporates, we talked about the huge benefit of Airbnb’s cash flow cycle when you’re growing. When you’re shrinking that really hits you.

This is crazy. In March and April of 2020, Airbnb’s gross booking values turned negative.

Ben: Is that because of refunds?

David: They are paying out more in refunds for future bookings than they were taking in in bookings. They actually had not even negative revenue. They have negative bookings. You’re actually paying people more than you are getting.

Ben: Brutal, which of course, it’s a global pandemic. Of course, it’s going to be brutal.

David: Totally, totally brutal. I didn’t quite realize this until digging into the S1, in March—as people probably know—Airbnb raised $2 billion in capital from Silver Lake and Sixth Street Partners in a combination of equity and debt. The debt piece, there were two pieces, two tranches at an 11 ½% history and a 9% interest rate. The equity piece was at an $18 billion valuation.

Ben: That was at a billion each, right? A billion of equity and a billion of debt-ish?

David: I think that’s right. I think -ish. I wondered at the time, these are pretty onerous terms on both sides. Massive haircut in valuation.

Ben: Obviously a 50% haircut in valuation.

David: And then the debt side, interest rates are zero out there. This is major distress debt. You’re pricing a tranche at 11 ½% percentage history. I think this is what was going on. Not only did the business evaporate, but they’re paying out refunds, and they must have desperately needed the cash at this point in time.

Ben: I am not, first and foremost, a finance person, but the bucket in my head that put this cash flow dynamic into is kind of a form of leverage. When you’re going well, it’s a way to basically make sure that (like we said earlier) you are able to use that cash to grow without raising new equity. The thing about leverage is it levers whatever direction you’re growing. When you start shrinking, you’re in big trouble quickly.

Very similar to another thing that was going on with Airbnb and with all tech companies is operating leverage. Airbnb has a really, really, really high set of fixed costs, but their variable costs are obviously much higher than a SaaS company because it’s a marketplace and they got to pay the host. But they make a lot of money in every transaction. The whole ball game for tech companies is to build the best freaking product you can—especially recently—and spend a ton of money on sales and marketing to go capture a winner takes most or all market. Your sales and marketing costs are high, your R&D costs are high, but those are relatively fixed.

David: Probably true R&D costs are.

Ben: Yes. And then, hopefully, your profit margins—on a unit basis—help you outrun all those fixed costs or high operating leverage. Now, when you’re shrinking or when your revenue is low, then that hurts you in the exact same way that it helps you as you’re growing. Because now you got all of these mouths to feed, but very few customers to feed them with.

David: Airbnb, of course, realizes this. In May of this year—shortly after the start of COVID and after raising this emergency capital—they have layoffs. They lay-off 25% of the company. That’s a significant reduction in force. They cut $800 million in marketing expenses. There you go—addressing each of those two points you just made, Ben.

Ben: Except that they didn’t actually let go a lot of the R&D. They kept mostly R&D people and laid off mostly the people in the customer success service organization.

David: Yeah. We might want to get into that in a sec. Brian describes it at the time as a “second founding” of Airbnb as a business. They jettison all of the other stuff that they were working on. Experiences are still around, and they moved to online Experiences. But no Places, no Trips. The company had started a movie studio at some point along the way there called Rausch Street Films. They had a lot of stuff going on. It’s all gone.

Ben: They had the magazine for a while.

David: Yup, all gone. The magazine. I don’t hate the magazine. The magazine makes sense to me. You’re a travel company. Airlines have magazines. That makes sense to me. You’re promoting travel. That’s marketing.

The business goes to zero—basically less than zero. But by Q3, things do start to recover. We’ve both traveled this summer for long-term stays.

Ben: A lot. I actually pulled together a great stat. There’s been basically two eras of the pandemic for Airbnb. There is the initial era, where everything froze up and they had to do this super onerous deal. But then there’s the second one, which is as we knew more about COVID-19 and understood how it spreads—it’s through the air rather than on surfaces, and all these things—people started making their own informed decisions around can I live my life safely?

It turns out, Airbnb was actually a great option to live your life safely more so than hotels. I remember a moment where Airbnb’s bookings were down something like 50%, but hotels were down 90%. I don’t exactly remember which month this is, but I think that narrative is definitely one that played out during the pandemic.

For me, personally, I have stayed in only one hotel since March. It was the only option, and it was in the middle of nowhere. I had to book the hotel, much to my chagrin, but I’ve stayed in six Airbnbs. That is illustrative of act two of the pandemic for this company.

David: Totally. We’ve been less active than you since Jenny’s more tied to San Francisco than you guys are.

Ben: More of those came from a bike trip, [...] to a different place every night.

David: But yeah, we’ve stayed in two Airbnbs and one hotel because we had to check out of Airbnb before we were ready to go home. The hotel was kind of a weird experience.

Ben: Who wants to walk through a lobby right now?

David: Yeah. I feel for hotels these days. The business starts to recover. We should say for all of 2020, so far, the first 9 months of 2020 versus the first 9 months of 2019, gross bookings are down 39% in aggregate. As makes sense because of the pandemic, growth has gone from slowing to literally shrinking. But things are recovering. In August of this year, month over month, August bookings were only down by 14% versus the year before. In September, they were down 17% versus 2019. But things are stabilizing.

Ben: It would seem reasonable to think that they will get to [...] either before a good chunk of the population is vaccinated or shortly after. They basically effectively lost a year of growth, except that they also shrunk.

David: I think that’s the question that we’ll talk about in a second in our analysis sections is what is going to be the growth rate going forward post-pandemic, post vaccines? That I think is the key question for this company. On November 16, 2020, Airbnb does file its S1 in a surprising move. They make good on their promise to go public in 2020, even though there’s a pandemic, even though the business gross bookings are down 39%. Unlike DoorDash yesterday where—what did we say? That for the first nine months, they’re up 300%.

Ben: Close to it.

David: For the year, Airbnb is down in growth by 39%. They filed their S1, and then last night, on December 9, 2020, they priced the IPO at $68 a share and upraising $3.5 billion at a $47 billion market cap.

Ben: Big, man. That Silver Lake investment at $18 billion just six, eight months ago looks like a genius move.

David: Indeed. What did we say? We said they priced at $68 a share. Got Yahoo Finance pulled up here. Who’s currently trading.

Ben: I see it in the Acquired Slack. People are buzzing about it.

David: You want the live reaction.

Ben: Oh my god. Opens up $146 a share at $159 a share now.

David: Yeah. Up over 100%.

Ben: I was expecting some kind of pop. Now they’re valued at over $100 billion?

David: Yeah. That would imply they’re valued at over $100 billion.

Ben: Wow. This company hovered at $30-ish billion for a while. And then the pandemic. I’m thinking to myself when they drop this in November, this company really had to go out this year because otherwise, why on earth would you go into this market right now? The market’s doing fine. The IPO window is open, but with their numbers, you would think, can’t you wait until things stabilize a little bit?

David: It’s funny. With DoorDash, you’re like, yeah, it makes sense why they’re going now. This is the biggest accelerant to the business in history. Wow. Wow, wow, wow. Okay, we’ll get into it.

Ben: Even with the 2019 growth rate—I put together some numbers to try and contextualize why David and I are talking about growth rates the way that we are. Uber, which I think is a reasonable comp because it’s also a marketplace business, and it was also at a global scale, it had also been a long time—10 years between founding an IPO in 2018. It was growing at 42% when they IPOed. That’s much faster than the 28%, 29%. We wouldn’t have called Uber’s growth linear at that point.

Lyft was filling themselves. They were doubling year over year at 100% growth.

David: That was common out of delayed Uber.

Ben: Yup. DoorDash obviously over 200%. Pinduoduo—who we covered to open this season—at 246% year over year. Again, trying to attack differently in every way.

When you gaze over into SaaS land, the numbers are also looking pretty good. Slack, which was a product-led growth company, primarily at that 0.81% year over year. Square was 55%. Shopify was actually more than doubling at 110%. The laggard of the bunch, which ended up not becoming a good stock, was Dropbox at 31%. Still a few percent faster than Airbnb pre-pandemic.

That’s contextualizing why we’re not super excited about Airbnb as a growth company, at this point.

David: I don’t have the numbers right at hand. But at first, Snowflake, which before this week had been the darling IPO of 2020.

Ben: It’s the new Zoom.

David: The new Zoom. They were growing at (I believe) close to a 200% growth rate going public. What is going on here? This company is shrinking.

Ben: This company has slowed growth and is now shrinking. I think an important thing to realize here too, the thing that scares me the most is, again, it’s a sword that cuts both ways. 91% of the traffic to Airbnb is direct, it’s organic. It’s stuff they’re not paying for. They’re loosely paying in brand ads, et cetera. But, again, that’s the dream, that’s what you want. But anytime that they’ve tried to lean really heavily into a performance marketing like DoorDash, they have not been able to do that well.

What I’m a little bit scared of is if they do want to turn on the growth engine and they do want to grow a lot faster than 30% year over year, are they going to be able to do that with precision and profitability? It’s not the muscle they’ve trained

David: You have to imagine, it’s not like they haven’t been trying. It’s not like that they don’t know that their growth rate was slowing.

Ben: Right. We do have some more nuggets here that we want to pull out from the S1 as we bring history and facts to a close. But I want to take this moment to thank Bamboo, the official sponsor of the analysis of season 7. As you know and have heard all season, Bamboo is one of the top growth marketing firms, and I actually have some breaking news.

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David: That’s awesome.

Ben: Just fun to get that anecdote. Bamboo has supported world class-growth companies besides DoorDash like AllTrails, Peloton, rover.com, and many more. And with paid search, paid social, creative production, attribution, and product analytics, Bamboo services always have the same objectives in mind. Helping tech companies earn growth marketing budgets back faster and retain customers longer.

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All right, David. We talked about growth. I do want to round out history and facts here with a couple of IPO nuggets. The first is the cap table. At IPO, the founders owned 31% of the company, comparing that to the 13%, 14% that founders of DoorDash owned. Story of two different dilution methodologies over the years.

David: Story of two different degrees of capital intensity in your business.

Ben: Yeah, great point. Brian Chesky owned 11% going into the IPO. I was all prepared to talk about how he now has more than $4 billion to his name. I think now, this means he has ten plus billion dollars to his name on paper in Airbnb stock. Joe and Nate also both have 10%. I think they sold $100 million collectively going into the IPO, just to get a little bit of liquidity. I’m curious if there were other selling shareholders or if all of the investors held at the IPO, and if they’ll all be subject to the same lock-up. Do you know anything about the lock-up on this one, David?

David: I don’t. I’m sure it’s in the S1.

Ben: I assume it’s a standard six months. Sequoia, again, all my numbers here that I had prepared are just nonsensical now with this crazy leap in where the stock is trading. Sequoia would have made about $5 billion. I think now they’ve made somewhere between $11 billion and $12 billion, maybe closer to $13 billion.

David: Not bad for 0.1% of your fund you put into a company.

Ben: That’s crazy. I think in total, they put $260 million into the company for over 11 years. I assume that has to be over multiple funds.

David: Yeah, for sure.

Ben: Founders Fund invested across a couple of different funds. This information is from our The Information, and we’ll link to it in our sources. I think they came up with about $3 billion after investing about $150 million. It’s just like winners all around here. YC owned 2%, Greylock obviously one big, Andreessen Horowitz invested $60 million when they valued Airbnb at about $1 billion. I think they probably have made $3-ish billion coming out of this. Lots of winners in the venture world.

You also looked around, you mentioned Keith Rabois, Kevin Hart, Jawed Karim—personally, you’ve got Ron Conway, DST, Jeremy Stoppelman from Yelp was an investor, obviously, Bezos personally ended up investing.

David: This is like an Academy Awards speech.

Ben: It’s crazy. You got Jared Leto, you got Ashton Kutcher, and then by proxy Demi Moore. Lots and lots and lots of people are feeling very good today. In addition, of course, to the thousands of employees.

David: Absolutely. Any other nuggets, or should we move on to narratives?

Ben: Let's see. One thing to know before they IPOed is they had $2.7 billion of cash in the bank and then they had another $1.8 billion in marketable securities. They were going to double that cash because they were going to raise $2.4 billion. They ended up raising $3.5 billion. They now have a cash chest of $7 billion-ish.

The company will continue to be able to weather storms for a while, it looks like. I'm curious what they'll start reinvesting in now that they're through this period, and obviously have to show a really good quarter and next quarter after that in order to keep the investor excitement as high as where it is right now.

David: I'm just so confused. Maybe we should discuss the narratives.

Ben: Whatever could you be confused about? Let's go into narratives.

David: Great. Should we discuss the bold narrative first?

Ben: Yeah, let's do it. For folks who are new to the show, narratives are where we talk about what the media was saying when they had a bull case and a bear case for the company coming in. For me, the biggest bull case that I've heard is that they have the most unique supply of anyone in the industry that they spent a decade creating. They have this brand mote. They have 91% direct traffic that is largely a result of the fact that they did build that unique supply in a unique way to build their brand.

Now, it's just about harnessing all of these unfair advantages. That, to me, is the big story here of why they're in their own lane of competition. They're not really competing with the bookings of the world who all are fighting for the existing hotel supply. Although they're trying to bring on the Airbnb-type supply too, that's the biggest bull case.

David: I think maybe there are two other dimensions as well. I think that's probably the biggest piece, but one being that coronavirus and COVID has perhaps permanently changed some behaviors just like the part of the DoorDash ball case, perhaps, permanently changed more behaviors to be more favorable for Airbnb for travel. Not just in this period, but going forward. I think that might be a small part of this.

I think the second piece is—also, we've talked a little bit about TAM along the way—yesterday, with DoorDash, that was one of the big question marks for DoorDash is how big is the TAM? Do they have to get into adjacencies, et cetera? I think, for Airbnb, what’s always been true here is that there are no questions on TAM. Travel is big and although it has taken a big hit this year, it's going to come back.

Ben: Yeah. They cite a $3.4 trillion number on their TAM. I think the way they break that down is that $1.8 trillion of it is short-term stays, and then only $210 billion of it is long-term stays. The long term stay market—which is longer than 28-days stays—is actually smaller than the food delivery market, which I think is sort of an interesting comp. It tells you why they're not sprinting that aggressively toward long-term stays, but rather, they believe there's a $1.4 trillion opportunity for experiences, which explains why they're beating the experiences drum so hard.

Let's just focus on that $1.8 trillion markets of short-term stays. They got a lot of room to fully saturate that.

David: A lot of room to run there. I think that's the bull case. I think if you believe all of those things…

Ben: One more stat on the unique supply, great brand, direct traffic thing, the comp there is Expedia and Booking spend about $11 billion a year on Google ads, which I think makes them Google's top customers or a top handful of customers. Classically, the online travel agent market has been one where it's really difficult to acquire a customer and then keep them, rather than needing to go re-acquire them every single time they travel.

That's why this direct traffic thing is such a big deal. It’s 91% direct traffic to Airbnb is such a big deal because other players have not been able to acquire a customer once and keep them. Booking is trying, they're ramping down their Google spend in an effort to form a multi-transaction relationship with a customer. But Airbnb is really the one who's proven they can do that. I think that contextualizes why people are so excited.

David: Totally. That is a massive benefit to the company and opportunity.

Ben: Those two companies pay Google almost as much as Google pays Apple for all the iPhone search traffic. That's another way to contextualize that $11 billion number.

David: I would say should we feed the bear? I don’t know if there are any bears out there right now to make a bear case.

Ben: We should look at the short ratios and see.

David: Bear case, to me, the biggest piece of the bear case is what we spent the last part of history and facts talking about, which is that growth is slowing. Everything may be true about the product, the unique supply, and whatnot, but if you want to believe that you're going to access a very, very large chunk of that $1.8 trillion short-term stays TAM, you need to still be running fast-growing into that. What did they do? Last year, $38 billion in gross bookings Airbnb did? That's like a lot of billions, but that's not a lot compared to $1.8 trillion. And for the growth to be slowing significantly, then you wonder how much of this TAM are you really going to access?

Ben: Right, so what does that mean? Does that mean that their TAM isn't actually in the $1.8 trillion for the short-term stays and it's actually much smaller like the addressable part of that? Or is it that somehow, they're just failing to market to the vast majority of people who are living their life in this way and paying for things in this way?

David: Well, I think it's interesting. It's probably both. At least think about my use case scenario, it sounds like yours is the same use case with Airbnb over the last couple of years. In the early days—when it was just much cheaper than hotels—it was almost all of my travel. But then the prices went up and equalized more, and then it really became a question of do I want an Airbnb or do I want a hotel?

I certainly didn't want an Airbnb or a hotel 100% of the time. It was a mix. I don't necessarily see any path where prices are going to go down again on Airbnb and you're going to have that dislocation in the market. The arbitrage between Airbnb versus hotels as a traveler. I think it is going to get segmented out. Now, maybe back to the bull case, if you believe that post-coronavirus—just the preference for hotels is going to go down a lot—then maybe this is going to be a big accelerant to Airbnb.

Ben: Yeah, I think that's the right way to think about it. The bear case is going to keep going for me. There are potential market saturation thing and slowing growth. There is a growing belief that they will have recurring acquisition costs the same way that Booking and Expedia do because people are starting to multi-home more than ever. Vrbo is starting to see a lot of the formerly only Airbnb listings show up there. Booking is trying like hell to be able to have these sorts of unique experiences, the Airbnb-type of listing in addition to hotels on their platform.

Everyone is scathing toward a more homogeneous set of supply than has existed in the last 10 years. With that being the case, will that brand affinity keep up, will people start comparing their options, or in fact, be willing to book an Airbnb-like listing from Booking?

David: This maybe is a good case to talk about our own experiences as hosts too, because I think probably an argument against that and a big lock-in would be as a host if you say I'm not willing to do that. I get more value being on Airbnb. I'm not willing to multi-home, that would provide some lock-in. But I don't know how we are feeling, at least, as hosts.

Ben: I’ll tell you, I'm someone that, this year, has put my Airbnb also on Vrbo. It’s a huge pain to actually do that because Vrbo’s product is like—imagine taking Airbnb’s product and then just making it 30% to 50% worse in every way. That is the product experience of being a host on Vrbo, but once you have it up, it's up. Sure, you have to figure out how you're going to block nights on different calendars, but I was never someone to multi-home than I am now, and I know lots of other people who are the same way. It's an opportunity to maximize revenue, minimize vacancy, and there are ways to manage it.

David: For me, we haven’t multi-homed yet, but the only reason we haven’t is that we haven't listed our house really at all except for one week this year. But if we were—and we're traveling more—I think we absolutely would. The biggest reasons for me are—there's what you said but, I think it is also just the price aspect that I do think the pricing algorithms on Airbnb are biased to fill rates versus maximizing revenue.

Ben: 100%. I was going to save this for later in the show but I’ve got a diatribe ready about—and I don't need to fully go in it. But the incentives are misaligned between Airbnb in their host for features like smart pricing. I get smart pricing for Airbnb. Airbnb wants to maximize exactly what you're saying—nights booked and total revenue.

I, as a host, wouldn't want to take a $30 booking one night, but Airbnb would be like, great. There's higher liquidity. There’s more supply on the platform with more nights available. We got some revenue out of that transaction. But if you basically factored into a labor cost, there's a price at which the hosts are willing to take on the cost and risk associated with that. Airbnb’s smart pricing couldn't care less.

David: Exactly. The point I was going to make is that I care about the price. I want to maximize my revenue as a host. There are these other viable platforms out there. No, they're not as nice to use as Airbnb, Vrbo, HomeAway, and booking.com. On the other hand, they do have traffic. They do have guests. I mostly trust them. I have no reason not to trust them. I think they're viable. They’re not some fly-by-night competitor that’s going to send to crappy guests my way.

All markets are supply and demand, so if you want to maximize your price in anything—whether you’re raising around as a company, or you're a host of an apartment listing, then you want to maximize the amount of demand for your listing. It would be dumb not to be on multiple platforms.

Ben: Especially as Airbnb tries to be more scalable and more capital efficient. It's not as enjoyable to be a host on the platform as it once was, and it carries a risk to only single-list. If Airbnb decides something falls under this policy. Sorry, you can’t actually talk to anyone because we're trying to limit the number of people you can interact with. Unfortunately, because we perceive you violated this policy, your listing is banned. We’re blocking a week.

For people who are using this as their livelihood, imagine if you only listed on the app store and you did all this on Google play, and then Apple found something they didn't like about your app, and then you're up a creek. I think now that this market is maturing we're going to see more and more people not willing to take the single provider risk.

David: One thing that I think has changed over the past couple of years is there now are viable good third-party software tools to do this. Whether it's Beyond or Guestly, you can pretty frictionlessly—as a host—have your property listed across all of these platforms and not worry about keeping it in sync and having costs associated with that.

Ben: Yeah. I do think one credit we should give Airbnb, we need to caveat every time we’re negative with. I'm negative on this being currently valued at $100 billion. There are other things I'm negative about, but the sum total of innovation they've created is unbelievable. They're one of the few companies that actually did create an ecosystem around them.

There’s, obviously, the ecosystem that has yet to be proven with the professionally managed Airbnbs or the people that are [...] blocks of Airbnbs, that sort of thing. Something that's totally been proven as a successful smaller business is all these different software plays that can help you be a more effective host.

Now, is it a little silly that Airbnb hasn't done any of those themselves and relies on you to go find it on your own? Yeah, massively dropping the ball, but you got to credit them for enabling an innovation ecosystem. One more bear case.

David: I have one too, I don't know if it's going to be the same.

Ben: All right. Yesterday, on the DoorDash episode, we mentioned that with their stock pop, they’re seriously butting up against the edges of the total addressable market for takeout in the United States. In order to value them the way the market is currently valuing them, you have to believe they can expand into adjacencies and be the local real-time FedEx. For Airbnb, they have demonstrated a pattern of trying this many times over the years and failing. You have to value this company based on the market they’re actually in, not what they possibly could succeed at in the future.

As I think through this, I was trying to come up with one example where they've done something outside of their bread and butter. The thing they stumbled onto in the first real year of the company that they've done well. I don't think the company is a master executor outside of that initial opportunity. It's almost like the anti-Amazon, who's really effective at testing on new adjacencies to expand into and killing the ones that don't and then leaning hard into the ones that do. They tried luxury. They tried building a hotel. They tried experiences. They’ve tried dining. They tried booking air travel. They tried custom-designed tiny homes.

David: Were you on the Airbnb Plus listing? It’s a terrible experience.

Ben: Totally. But it became meaningless. It’s a bad experience and it got totally diluted. Much like Superhost, what does that even mean anymore? Nothing. It just feels to me the personality of the company is one where they're really proud of their ideas, and they want to make something their way. Their first idea worked really, really, really well, and I don't think any of these other ideas are being tested with rigor.

David: I was thinking about what you said. The only thing I can think of that was a non-original idea—there was also pretty early in the company's life that I think they executed incredibly well—was Instant Book. I think that was over a year into the company that they innovated on Instant Book.

Ben: 100% and they deserve all the credit for that. I think the innovations of Instant Book, payments through the platform, messaging through the platform, and their review system—together, they create the symphony that enabled this product to provide tons of value on both sides of the business.

David: Instant Book, that's part of the initial product. That's not a subsequent thing. I debated whether we talked about this in power, but I think it makes more sense a narrative maybe leading into power for a bear case on the company is—we talk about the bull case. You got to believe that they're going to keep penetrating a huge part of this huge TAM.

You probably also have to believe that these prices that coronavirus has shifted the winds in Airbnb’s favor. To a certain extent, I think it probably has. But I think it's also exposed a structural weakness for the company, which is if you think about zooming out—you mentioned Amazon like an analogy here—Airbnb is not Amazon. They are much more like eBay, and eBay has been on a similar path, enormous TAM, global network effect, torrid growth for many years, but then it slowed and has now—I don't know what their growth is, but they’re still a decent size company and whatnot.

Ben: We don't talk about them as part of the FANG.

David: We don't talk about them as part of the FANG. But what has happened?? It’s not like ecommerce, it’s not like peer-to-peer ecommerce has gone away. And in fact, it's continued to grow, but eBay's not captured that. What happened is, you've had specialized verticalized market places that have come in and taken away what eBay was doing, and then grown on those individual verticals. I'm thinking about companies like GOAT, I'm thinking about companies like Reverb in music.

There are a bunch of them out there. You name a niche interest of buying and selling something, there is a verticalized marketplace out there that either has or is in the process of offloading that market from eBay.

Now, with Airbnb, you're actually starting to see the same thing happen. How much this will happen and how deep Airbnb smoke goes and how big their core market I think is still a question. But Hipcamp is out there. Hipcamp is in the process of offloading camping-type experiences from Airbnb.

Ben: It's not hard to get to tiny green homes, detached ADUs, or anything from there. You can see how they start.

David: Outdoorsy out there is doing the same thing for RV’s. You can book an RV on Airbnb, or you can book an RV on Outdoorsy with dedicated feature specific stuff that people care about in a niche community. I think this is the big question. Let's assume coronavirus has changed people’s travel preferences. How much of that is going to stay on Airbnb, versus how much of that is going to go to some of these other new platforms or even the ones that are in their infancy or yet to be built?

Ben: That's a great point. You think about what Amazon did to create so much lock in there? They built all the services around purely selling your goods. Of course, they brought you the traffic, but then they also did fulfillment by Amazon. All the other third-party seller tools make it way harder to do that yourself. And they were able to aggregate so much consumer attention that way that anybody who only had a subset of that because they were doing some niche thing they were going to carve off, it was just never interesting enough as a seller because they couldn't get to the scale.

You think about all these things that Airbnb could do to make it a no-brainer to work exclusively with them, cleaning is a big one. There’s this thing that everybody has to go fend for themselves and figure out their own cleaner. Check-in is a great one. It’s these things that people rate you on that Airbnb, 13 years in, hasn't built host services for. You can imagine those things being game-changing for their lock-in and for guest satisfaction. Once you know that something is done the Airbnb way—in the same way, that this thing isn't sold by Amazon but it's on Prime, the same thing. I trust it. It's got the Amazon stamp of approval on it.

David: All right. Should we move into power?

Ben: Yeah let's do it. For folks who are new to the show the way the power works is it's a Hamilton Helmer framework. He’s the author of 7 Powers and a friend of the show. It is technically defined as the way to achieve persistent differential returns or put another way to become more profitable than their closest competitor and do that on a sustainable basis. I actually think—before we classify what types of power Airbnb has here, it's actually very interesting to think about this relative to the stock price. One thing that after reading 7 Powers always stuck with me was Hamilton makes the point that the markets are not short term focused.

Everybody who's accusing Wall Street of valuing a company based on last quarter's results, that's not all that they're doing. They're using that as a bellwether for the next 30 years of results. Sure, they may swing too far in one direction, but really the way that a market cap works is, of course, it's an extrinsically defined market for the equity in the company. Intrinsically, what it is it's a representation of what people believe the sum of all future positive cash flows in the businesses will be discounted to today.

As you think about power and market cap are intrinsically linked because whatever you believe the power that allows them to generate persistent profit margins, overall those future years are the way that you would calculate the market cap. If you're someone who's excited about Airbnb as a $100 billion market cap company today, to what power do you attribute that? Why do you believe that they are able to do that? David, with that preamble aside, I’m curious, what types of power do you think show up in Airbnb?

David: The totally obvious one—just like scale economies were the totally obvious one for DoorDash—for Airbnb is network economies. This is a two-sided network effect. It is global in nature. It is as powerful as I have ever seen in a business. I think, generally, you think about network effects, single-node network effects like a social network like an Instagram or Facebook—those tend to be the most powerful.

Dual-sided network effects where you've got one class and another class, buyers and sellers, hosts and guests like you would have in eBay Amazon, or here in Airbnb, tended to just generally be a little weaker because you're bifurcating the types of participants in the platform. This is amongst the most powerful of the dual-sided network effects I've ever seen because it’s global, it’s not local, and you really care.

The way you measure network effects is you ask each participant in the system how much do I actually care about the other nodes in the system being there? For Facebook or Instagram, it’s like, I really care that my friends are there. Having more people in there, I actually really care about that. That’s the whole point. For eBay, do I really care about the 16,000th seller of the latest iPhone? Maybe it drives the price down low, but I don’t care that much. For Airbnb, I care quite a bit because I really like having a variety of listings.

Ben: Another way to frame that is, for things like iMessage where I really only iMessage with like 10 or 15 people, as long as the 10 or 15 of us are on the same thing, it's okay. It's not that strong of a network effect because you don't need to interface with lots and lots of nodes in the system. Whereas with Airbnb, I don't care who owns the place that I'm staying at. I just want the most choice with the most interesting options such that there is sufficient density where I want to go in the price tier that I want when I get there.

That is a truly amazing network effect where—exactly to your point—every node that's out of the system has meaningful additional value rather than this concentration where my friends around me provide value, but everyone else that’s on the network provides me none.

David: That's actually a good point. I hadn’t thought about this, but this is probably why Instagram is—long run, even now—bigger and more valuable than Facebook. Because on Facebook, I care about my friends, my loose circles, maybe there are a thousand people on Facebook I care about.

On Instagram, there are brands and there are influencers. I don't care about the rondos on there, but I do care about the millions of people making interesting content. Okay, so I think that's a big one. I do think there's another one though, this power is weakening for Airbnb over time, but in the beginning, was big…

Ben: Can I guess it? Counter positioning?

David: Yes.

Ben: Yeah. That’s exactly what I had too. I was like, is counter positioning one? Well, less than it used to be. The cost structure for Airbnb to bring on supply was so much lower than it was for a Marriott to go and be the—I don't totally know how it works, but I know they don't know the real estate—operator of a hotel and brand it Marriott, take on the [...], and all that. I guess they don't take on the lease. They signed a contract to be the management company with the owner of that building.

David: That economic cost is in the system. Somebody’s paying the cost of the build-out and the lease.

Ben: Airbnb doesn't need to pay a dollar to bring that new house of supply on to their system. I mean, there are marketing expenses to bring that person onto the platform, but it's so much lower. They were wildly counter-positioned against the hotel chains because Airbnb could be way cheaper than them, and their cost structure just allowed them to without being in the red.

David: This was just market dislocation. But in the early days—when Airbnb’s were so much cheaper than hotels—part of it was market dislocation but I think part of it was this too. I could put up my house in San Francisco on the platform. I’ll make incremental money, my costs aren't that big. I’ll list it for $300 a night. Whereas, a hotel you’re like, I got to run this hotel.

Ben: I think the ones that they notably don't have are cornered resource or switching costs. For consumers, it's very easy to switch as long as there's another economy and this is related to cornered resources. You would think their hosts would be the cornered resource, but for a host, it's actually very easy to become un-cornered and go list on multiple of these systems. I think that's going to be a thing that we see increasingly more and more over time.

David: I think to some extent, the rating and review history is some lock-in there, not that much and less than it used to be. In the early days, when this was a new concept and people were like, I really need a lot of trust here to make this work. I think it was more powerful, but now, less than HomeAway, it’s fine.

Ben: Well, one thing that I want to do here—and it's not exactly power, but it's like a business model feature that I want to talk about—is the different types of market places and what take rates you can command with each one. I've heard it described where something like Uber is marketplace assign versus something like Airbnb is marketplace assist. Where in marketplace assign, because all of the supply is completely homogenous, it's effectively the same experience. You don't care as the demand, which one gets assigned to you. You just wanted to be close, and as long as it meets that criteria, great.

When that is the case, the business can command a higher take rate. They get to control more of the economics. For something like Airbnb, they assist me to browse, but I pick the specific house, and boom, I've booked it. In the mind of the consumer, the real merchant when I'm getting an Uber feels like it’s Uber. The merchant when you're on Airbnb feels like it's the host and Airbnb is just helping me with that transaction.

They obviously have fees on both sides. They charge guests more than the host, but they have fees on both sides. They're trying desperately to get more and more of the take rate, but ultimately they're never going to get to that 30+% plus that you see in ride-sharing where people feel like they're buying from the company when they're just facilitating you to buy from the provider.

David: I agree.

Ben: I don't have an opinion on whether that's good, bad, or anything, but I just think it's interesting—as we do have more of these marketplaces—to understand why they can each command different take rates.

David: Yeah.

Ben: All right. Let's move on to what would have happened otherwise because I don't think it's that interesting to guess what would happen otherwise if Airbnb didn’t IPO. I think we should run a counterfactual that compares Airbnb to Booking, which is a very different business.

David: What do we say, our number five acquisition of all time?

Ben: Yeah. I forgot they were even called Priceline at one point. Priceline buying Booking was just an unbelievable acquisition.

David: It was Booking in Amsterdam and what was the London company? They bought two companies, took the Booking name, but the other one was in London. I can't recall, anyway.

Ben: While these are two very different businesses—to oversimplify, Booking helps you find a hotel or flights, and Airbnb helps you find an Airbnb. I think even in the nomenclature there, you can see the difference where Booking didn't invent their supply. They didn't cultivate that supply. They went and forged the right types of deals in order to get them to list on their platform. But it’s actually very interesting just to look at a simplified income statement of both companies.

Let's look at 2019, before the effect of the pandemic. We’ve talked about Airbnb having $38 billion flow through their system from people staying in Airbnb’s, to hosts, to Airbnb, and to taxes over the course of the year. They took $5.3 billion of that in revenue. Any of the knocks that we’ve had on Airbnb so far, this is a $5 billion a year revenue company pre-pandemic. It’s a big freaking company.

The effective take rate on that is 13.9%. There are ways in which you should believe that’s higher. There are ways in which you should believe it is lower, but it's always interesting to me just to look at an annual income statement and take the revenue divided by the gross to come up with an effective take rate.

Their net income—when you go all the way to the bottom line—is that they lost $700 million. All that $5.3 billion in revenue, they couldn't generate any profit at the end of the day from that because they had to pay so much to headcount, sales, and marketing leases—everything that goes into running the fixed costs of the business.

David: Now, they were cash-flow positive in large part because of that cash flow dynamic we talked about earlier where they're getting the cash upfront then paying it out later.

Ben: Yup. I think it's something like the average person books 36 days or something like ahead of time. I think it’s shorter now in COVID. It’s something like 24 days, but they have on average a month of free cash flow there. You could think of it as net 30, effectively, on the payment.

Okay, so Booking, about two-and-a-half times bigger—$96 billion in gross travel bookings, $15 billion in total revenue, so about times bigger in revenue. That’s an effective take rate of 15.7%. They get to actually on a little bit more of that transaction than Airbnb does. This is where they're very different. Booking turns that into $5 billion of pure raw net income—profit that's owned by the business and its shareholders.

David: While also having to spend a lot more performance marketing than Airbnb.

Ben: Totally. They’re cutting $6 billion, $7 billion, $8 billion checks to Google every year and they're still able to generate $5 billion in net income. Very different businesses. I don't know for sure that this Booking number factors out flights. It may include flights there. Flights are kind of a silly thing to include because they don't really generate any real revenue on those. All the commissions are made on hotels.

Anyway, two very different businesses, one that lost to the better part of $1 billion and one that made $5 billion. The one that made $5 billion took 2.5x the scale to do that. It'll be very interesting to see with Airbnb—as they get to a Booking-type scale—are they also able to generate the profit that Booking does?

Ben: Well, I think that's what's so alarming about the past few years of financials for Airbnb. They're increasing their scale, even though their growth rate is slowing, but they're increasing their expenses faster than they're increasing their gross profit scale.

Ben: Yeah. All right, playbook?

David: Playbook, let’s do it.

Ben: Playbook is if you wanted to start Airbnb, what playbook would you run to do it? Of course, no one can do that because no one can teleport to 2008 and have a unique and original idea. But if you want to draw parallels and apply them in your business, what will the playbook be?

My very first one is unbelievable, never skip over the fact that they have created an incredible amount of value for hosts and for guests over the years. Create no-brainer value for everyone in the ecosystem and really good things are going to happen to you. Some people can only go on vacations that they otherwise couldn't afford. As a host, some people can make their rent or mortgage that they couldn't afford.

These are like big meaningful life-changing things that this company's existence enabled millions and millions of people to do around the world. There are people that can weather job losses, negative life events. I can't say enough about how much value they created and how much that makes people want to root for your company and put up with a lot over the years. Obviously, it comes with a lot of responsibility as people become dependent on you, but also to hold on to that for now and just leave it at creating value for people and amazing things happen.

David: 100%. The way I like to think about this—and I think this is the same idea—is can you expand the efficient frontier of a market? The efficient frontier is price and quality. If you think about a little graph of price and qualities, as price goes up on the Y axis, quality goes up on the X-axis. In any given market, there's an efficient frontier along with that of a curve. As I pay more money, I get more quality, and there's some curve to that. If you can do something that expands out that curve so that I get more quality for less money.

Ben: Right, for any given price, I get more quality all the way across the spectrum.

David: Exactly or even maybe it's only for a portion of that curve, but for some area of the graph, you have exceeded the current market. If you can do that in any market, you will be successful. Airbnb did this incredibly well across pretty much the whole graph.

Ben: It's like the economist's view of why this company is valuable.

David: Yeah, exactly.

Ben: The next big one I had was around creating unique supplies, but I think we've talked sufficiently about that one. One we haven't talked about is addressing Europe, 43% of nights are booked in Europe on Airbnb. This is not a US-centric company.

David: Paris is the biggest city. Historically, it always was.

Ben: Yeah. Only 29% of Bookings are in North America. Interestingly, revenues about even between the two, which means people are spending more money to stay in North American Airbnb’s than European ones. Until diving into this research, I don't think I would’ve guessed that 43% of bookings are done in Europe. I don't think there's a single other US-based company that we've covered on the show that you could say that about.

David: Yeah.

Ben: Maybe Booking, but they're not US-based.

David: I mean they’re technically US-based. Uber’s large in Europe, but I think probably larger in the US. Do you have more?

Ben: I do, yeah. Free cash flow is one. I don’t think I have anything new to say here. I think that's my last positive playbook one. This is kind of our bear and bull thing, but I do have some playbook items that are the playbook that they ran that don't necessarily have positive outcomes. But I'll turn it over to you first, in case you have others.

David: Well, I’d actually maybe expand a little bit on the free cash flow point. I think part of the reason that Airbnb has such amazing free cash flow dynamics is—whether intentional or not—they started this new market, new idea. When you do that, you have an opportunity to set the terms of how the market operates. They set the terms that you pay us upfront and then we pay out the hosts when you book. Now that's different from hotels. On booking.com and others, usually, you make the booking on booking.com but you don't pay until you check-in at the front desk.

Airbnb—just by virtue of being something new—they could set different terms, and they did and nobody then questioned it. I think it's interesting to note, whenever you're doing something like this, think through. I have the opportunity right now to set the terms.

Ben: Right. As long as I don't tell people I'm like an OTA, then they won't make me price like an OTA.

David: Yup. Go for it.

Ben: I'm racing around. It’s not a seed round. It’s a new form of investment.

David: On our LP show, Rahul talked about his fundraising philosophy and all that. He did that a lot of ways with interstitial rounds and some innovations. He's positioning the rounds that he's raising relative to the next rounds.

Ben: I have one, it's a mix of two here. It’s a little bit of a playbook that's been run that I think will ultimately have pretty negative outcomes for the company. All that direct traffic that they’ve been able to harness is a gift and a curse. We talked a lot about the gift. The curse is that they don't develop the performance marketing muscle. When you have always experimented and had a questionable return on direct marketing spend compared to your competitors who are laser-focused on it. I get worried especially when you combine that with the fact that their guest cohort retention drops like a rock after the first year and never really comes back anywhere close to the first year of spend.

It's a very leaky bucket funnel. There's a very reasonable rationale for this where most people go on one vacation a year. Unless Airbnb is getting 100% of your spending, you're not going to be able to do that. You look at DoorDash, which we covered yesterday where every cohort spends 50% more than the year before as time goes on. Net of churn, the revenue of that cohort goes up 50%.

Airbnb, in year two, drops to 30% something. Hopefully, they are able to get back up to 50%. But at least so far from the data we've seen, their cohorts do not get more valuable over time. It makes it so that you have a lot less of a cushion when you decide to deploy performance marketing dollars to grow when that's the case.

My next one is about reviews. They’ve gotten very far. We've extolled the system over and over again to build this trust-based network, but they still have a crazy amount of host consistency and quality issues. I think it's a thing that's holding the marketplace back. You have to hunt through a listing like crazy through several listings to find somewhere decent. You have to scroll deep into each listing to do it.

I don't actually look forward to browsing Airbnb to find somewhere to stay because it's becoming more and more of a chore. They've tried it with Plus, but Plus ended up being pretty meaningless just like Superhost, which I think is the Airbnb equivalent of winning the participation award. Yay, you're Superhost. You held two people that didn’t give you terrible reviews. Congratulations. I just think that the company relied heavily on reviews will save us for everything, but it hasn't been a silver bullet in making it easy and enjoyable.

David: Most reviews are meaningless. There are some that are helpful.

Ben: It hasn’t been the hammer that's solved every nail of giving you confidence when you're looking for a place to book, to book it. One thing that I wanted to call out that wasn't in the S1 that I think could be pretty damning—and I really would like to know the numbers—is host churn. They talk about revenue for the host. I really do think it's getting worse and worse to become a host over time as the company is subsidizing less and less things with investment dollars, is thinking less and less like a startup, is trying to be more profitable, and I think that that's going to be an issue for them, long-term too.

David: Yes, I'd be curious about that too.

Ben: That's it for my playbook.

David: Great. I think you covered all my [...] there too.

Ben: All right. Value creation and value capture. This section has two components. The first is literally the name of the section. Are they Craigslist at capturing the value in the world, or are they Google who does a very good job of capturing the value they create? Then lastly, how do you compare the value they created for the world to any value destruction that they've had? I don't think Airbnb is that interesting to discuss. Do they effectively capture the value they create? I think so. I think the more interesting ones to focus on here are negatives for the world versus positives for the world.

We spend a lot of time on the positives of the world. The thing that I think goes a little bit less discussed at Airbnb—and it comes in waves, sometimes it's a hot topic, sometimes it’s not and is dumped into the regulatory issue—is the impact on housing supply and housing prices. Because housing prices, especially at the low end of the curve, are extremely sensitive to small changes in supply.

I was digging into this. There's a good Harvard Business Review article that basically says, I think this is a quote, “This means that, in aggregate, the growth in home-sharing through Airbnb contributes to about one-fifth of the average annual increase in U.S. rents.” They actually found this to be a causal relationship. And they say that “because of Airbnb, absentee landlords are moving their properties out of the long-term rental and for-sale markets and enter into the short-term rental market.”

I have no ability to rule on this. I'm not here to arbit whether this is more value destructive than it is creative. I think there are lots of think tanks doing lots of work on that. But I will say this is a company whose brand potentially may have meaningfully outrun its net global impact in terms of netting the negative impacts against the positive impacts.

David: You're not putting in a betting market placement on the Nobel Peace Prize happening anytime soon?

Ben: I don't know how that's decided, so I shouldn’t bet on it. I think it's worth making the point that Uber is condemned as this massively evil company and yet created a way for millions of people to earn a living. Airbnb is extolled as a wonderful brand that had many hosts around the world ring a bell and create a nice video to open the IPO this morning. That's largely consistent with their brand, and yet there's a lot of potential value to it.

David: What this comes down to—and I don't know that they would have seen various parts of it—who's this playing on the platform? I think for people that own their homes, that live in the homes, that are renting them out—either renting them out while they live there to help with income, or renting them out while they're on vacation. It's hard to see much value destruction from that. They live there, they would live there anyway. This is helping them make money.

Where this gets really different and gray is property managers and people taking housing stock off the platform purely to become hotels, essentially.

Ben: Yup, well put.

David: The question is, what is the percentage of each of those use cases of supply on the platform? I don't know. I've seen estimates as high as over 50% is more the hotel use case removing housing stock, but this is one where everybody who's waving a datasheet has an opinion here and has a horse in a race.

Ben: Other than the Harvard Business Review article I found, there are two sources that have very detailed reports on this. One is Airbnb, and the other is an extremely liberal labor-focused funded think tank. You're like okay, who else...

David: New York City has fought on this for a long time against Airbnb. New York City has lots of housing commissioners and has lots of data on this since. I don’t know if I’d trust that either. The point is, there's no doubt that a large portion of the supply on the platform is property managers, and how much that is, I don't know.

Ben: Before we go into our grading section, we'd like to thank Perkins Coie, the official legal sponsor of season 7 of Acquired. I talked about this yesterday and I have our standard read in front of me. But I do want to continue to say here on our last couple of episodes, my personal experience with Perkins the company, any attorney that I've worked with there—particularly in the Seattle office—has just been exceptional. The work itself has been great. The service along with it has been awesome.

Real thought partners who don't just tell you, here's how people do it in the docks and that's what you should do, but like, here's why you might think about that. If you wanted to give on this, here's the thing that I think might be more important for you and not you. They truly council in every sense of the word. I just wanted to personally say, I've had a great experience. If you want amazing representation with all your bases covered, Perkins is a great, great choice.

Back to what I have here. They work internationally so folks should know. The Acquired audience is now 50% international, outside the US. Available to many of you and other geographies, much like Airbnb.

David: We’re building the Airbnb a podcast here, I love it.

Ben: That's right. They work with startups to the Fortune 50. They work on everything from corporate formation to IP to company financings. They even work on IPOs like this one. I'm not saying they worked on this one, but they work on IPOs. I think they would be an excellent partner. You should consider using them. To learn more, you can visit perkinscoie.com. If you want to hit us up at acquiredfm@gmail.com or drop either of us a note in Slack, we're happy to introduce you too. David, grading.

David: How do we decide we want to grade this one? Do we want to do the same as DoorDash yesterday for the use of capital along the way?

Ben: Collectively, how good of a use of capital was it for the company and the investors to go after this business opportunity in this way?

David: There's nothing to say here. This is the greatest use capital of all time. It's 100% A+. How could you not say that investing $585,000 in the seed, having this company build this product and thing with such amazing cash flow and business dynamics that are generating cash, and have that be worth whatever Sequoia is going to make today? Then all the other capital that went in along the way too.

Ben: What did they raise to date before Before the Silver Lake round?

David: Before the Silver Lake round, I believe it was around $2.5 to $3 billion that they have raised.

Ben: Comparable to DoorDash, but only a third of what Uber had raised.

David: Exactly. This is like the capitalist dream here.

Ben: Yeah. The question that I sort of have similar to my DoorDash one yesterday is, let's ignore current valuations and current share prices, and just think about that total $3 billion-ish that's gone in. Let's play it out long-term. Does the business (at some point) have enough power that it generates persistent differential returns? And is this business a cash-generating machine that in the long-term will return lots of cash to the business and its shareholders? I think so.

I have reasonable confidence that despite a lot of my reservations around slowing growth, around increasing competition, certainly around valuing this company at $100 billion right now. Unlike DoorDash who’s falling so close to the radar, I don't feel like the end state is sort of a boom or bust. I feel like there exists an end state that they can be a very profitable business even with a reasonable amount of competition in the market.

I think there exists a steady-state for this business where they don't need to spend as much on R&D, they don't need to spend as much on sales and marketing, and they're able to spit off cash for years and years and years. I'm not in A+ territory, but I am certainly in a territory when you think about it through that lens.

David: I like that a lot. To me, doing the research, thinking about this, and talking to people—it’s just so clear, this is eBay here. That's what this is. They have the same type of network effect, same dynamics, same cash flow dynamics—this is eBay. A capital [...] business. I agree. I think it's a good point to be an A, not an A+.

An A+ would be yes, and they’re already because let's be honest, there's no excuse that this company hasn't already been generating tons of cash. This company does not have the right size of structure right now. They're doing things like the film studio, Places, Experiences, the airline, and building units in people's backyards. It’s nuts. You strip out all that cost and this company—at an efficient operation—would already have been generating hundreds of millions of cash flow.

Ben: I will be very, very interested to see how that evolves with the changes that they've made to bring in more heavy hitters to their management team. They now have a CFO that has been out there for almost a couple of years. The CFO was the CFO of Amazon's worldwide consumer retail. They've really buffed up the management team with capital allocators. Depending on how they all work together, I think there's real potential here to lean out the business while still growing and realize the great profitable dynamics it could have. Man, what a season.

David: What a season.

Ben: Should we do some lightweight carveouts here on the way out the door?

David: Yeah, let's do it. This has been a great season, by the way.

Ben: Dude, it has.

David: We have some highlights.

Ben: Pinduoduo.

David: Epic Games.

Ben: SpaceX, was that in this one?

David: No, that was in the last season, I think. Epic though, our Epic episode was epic. The NBA. NBA was so much fun. I loved DoorDash yesterday.

Ben: That’s fun too. Unlike DoorDash’s, I will only have one carveout this time. It's much lighter weight. It's a Spotify playlist. I actually have no idea who made it, but it's Star Wars lo-fi hip-hop. It’s covers of all Star Wars music in a lo-fi hip-hop style. It was just phenomenal work and research music. We’ll put that in the show notes for anybody who wants to chill and jam can.

David: I can't wait for you to send me your links for your carveouts and sources so I can start listening to that one.

Ben: You got it.

David: My carveout, I mentioned earlier that we've been more tied to San Francisco because of Jenny’s job. People may know—I think I’ve said it on the show—my wife Jenny works for San Francisco Ballet here in San Francisco, which is one of the premier world-class best ballet companies in the whole world. It has been a very interesting year for the live performing arts when your business consists of packing auditoriums full of 3000-4000 people and having world-class artists perform in front of them while touching each other as part of the art form. That's been a roller coaster. SFB is doing great. Thankfully, they have wonderful donors, wonderful audiences.

What they did, The Nutcracker is the big part of the ballet season every year, and it's the holidays and Christmas. What they did is they've created a digital Nutcracker experience. It was actually written up in The New York Times. It's really cool. It's a recording of The Nutcracker. I've seen SFB’s Nutcracker dozens of times probably at this point, but it's a different experience to watch it online because the camera zooms in. It's a different experience, and they have a cool digital, virtual opera house tour, and experience around it. We’ll link to it in the show notes. If you need some virtual holiday tour, check it out. It's very cool.

Ben: That’s awesome. We’ll totally do that. For folks who don't know—as we start to wind down here—we have been codifying the playbook section from each episode in some written bullet points. We email those out now after posting each episode. If this is something you want, you can sign up to receive those playbooks at acquire.fm. If you join the Acquired Community Slack at acquired.fm/slack, you'll also automatically be signed up for those. It’s a great way to have something a little bit more shareable, tangible, and reference-able if you're thinking about applying any of those playbook themes.

As always, if you love Acquired and you want to hone your craft of company building, you should join the community of LPs. You'll get the LP show where we dive deeper into the fundamentals of company building and investing, in addition to our monthly LP calls where we talk with so many of you directly including Book Club. Actually the last three, we've talked to the author for each one. Hopefully, we'll have a fun one to announce early in the New Year as our next one. You can become an LP for seven days for a free trial. You can exit out at any time if you want. It's risk-free at acquired.fm/lp.

LP subscriptions make great gifts for the Acquired fan in your life. You can figure that out on your own. It’s a little tricky to kind of go through, so feel free to drop us a note at acquired.fm@gmail.com if you want instructions for how to gift the LP subscription.

On that note, we said this yesterday, we want to say it again. We feel very strongly that financial hardship should never keep anyone from being an LP. We want as diverse a group as possible, and people of every life stage and every life experience. Please shoot us a note acquired.fm@gmail.com and just introduce yourself. We're happy to help you out if finances are a constraint.

Lastly, if you weren’t subscribed and you like what you hear, you should. If you liked this episode and you have a friend that you want to send it to—perhaps an Airbnb host, a guest, fan of the company, or bear or bull...

David: Any type of farm animal.

Ben: You’ve been looking to get your parents into Airbnb or into Acquired. You're like, what episode can I send my parents that really would get them into it? This is a great one. The Oprah one was great for me to share with my grandma. This is another great one that I think a lot of people will understand. Consider this your opportunity to share the gift of Acquired this holiday season.

David: We have some holiday joy happening here.

Ben: No kidding, no kidding. Everyone, have a wonderful Christmas, Hanukkah, New Year’s—whatever it is that you celebrate—with or without family, or perhaps with folks on Zoom. We will see you next year.

David: Yeah. Although, we're going to have a little special. We have a special little holiday present for you coming next year. Not next year, next week.

Ben: Yeah, let’s not announce it. It’s outside the bounds of our official season here, but we're excited to get this one at the end of the year.

David: Some holiday fun.

Ben: On that note, thanks so much, everyone. We'll see you soon.

David: We’ll see you soon.

Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

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