Why Airbnb Will Succeed on the Public Markets
Healthy financials and a viable business model, we might see a successful tech startup IPO after all
When embattled co-working giant WeWork imploded after their botched attempt for an IPO, the public sentiment on tech unicorn IPOs plummeted even further. With Uber and Lyft facing uphill struggles even after their billion-dollar IPOs, it prompted Softbank CEO Masayoshi Son to admit that he’s “embarrassed” over his failed equity bets, especially since he said then-CEO Adam Neumann gave him a ‘Jack Ma’ feeling.
Though Son’s foresight may have been revered by many in the tech startup and investment scene, there was one he missed that could have allowed him to recoup his losses—not just in the financials but his reputation as well.
Meet Airbnb, a decade-old startup worth about $31–$38 billion with a stake in fellow hospitality unicorn Oyo. Brian Chesky, the current CEO, and his team embarked on the startup journey in 2009—which then cemented itself into the history of startups and became an excellent example of ‘hustle’.
It was undeniably inspiring. Airbnb was spun out of a market opportunity: when there were conventions, hotels nearby were fully booked. They laid out airbeds and charged $80 a night to capture those that were not fortunate enough to get a hotel room. Yet, that small success was short-lived, and they launched again before the Democratic National Convention in Denver, which was met with people thinking that they will never go mainstream.
As one commenter on TechCrunch puts it: “Pray that this remains underground, that’s the only way it can survive.”
“Pray that this remains underground, that’s the only way it can survive.”
Even the success from the convention was short-lived too, and shortly after, Chesky and his team started selling cereals after landing themselves in credit card debt.
Their story saw them shooting to fame, landing themselves in Y Combinator and the rest was history.
It was not just Masayoshi Son that missed out on the Airbnb opportunity—even if he did invest, he would have come in at a unicorn valuation. When Paul Graham at Y Combinator tried to convince Union Square Ventures co-founder Fred Wilson to invest, he passed, which is also why he has a box of Chesky and team’s famous cereals to remind him of the mistake.
Unfortunately, Son has no cereal and certainly no pie in Airbnb. As Airbnb’s financials and outlook shows, it is going to be an eternity of regret.
When Chesky announced on CNBC that they are expected to go public in the next year—despite not being “in a rush”—the media went into a frenzy. Wall Street is getting tired of tech unicorns performing poorly on the public markets and public investors are also tired of seeing S-1 filings showing a financial hemorrhage every second.
It is this sour market sentiment that came to wipe out WeWork’s valuation.
Airbnb came as an exception: there were neither “community-adjusted EBITDA”s nor selling of “happiness”. Unlike Uber and WeWork, which slapped technology on top of existing markets, Airbnb seemingly carved out a market on their own, easily becoming a powerhouse in their own sector—even NASDAQ calls Airbnb’s IPO “2020’s most-anticipated”.
And rightfully so.
It is a behemoth with tremendous statistics to boast: 500 million bookings, 6 million listings, presence in 191 countries and 100,000 cities. However, those are not what that gives the company its highly positive outlook.
In this analysis, we’ll take a look at why Airbnb is poised to make a big splash in the market, regardless of whether they are doing an IPO or direct listing.
“We’re Not In a Rush”: Healthy Financials and a Full War Chest
Those are the statements of Airbnb executives like Nathan Blecharczyk and Brian Chesky. Unlike WeWork who had to go public and raise billions for their bottomless war chest, Airbnb has healthy cash flow and positive EBITDAs—something you rarely see in the era of tech unicorns today.
How much money does Airbnb actually have? Reportedly, it stands at $3 billion in cash, with an untouched $1 billion line of credit. The San Fransisco-based company did not have the same insane cash burn that most tech unicorns have — as Observer puts it, Airbnb has “shown an ability to grow revenue, while acquiring a big market share in recent years”.
Airbnb is also putting their money to work: they even have an “internal hedge fund” that reportedly generates at least $5 million per month. While a conservative stance towards cash management is always favourable, a young company like Airbnb having their own cash-generating fund is amazing by many metrics.
Unlike Lyft and Uber who have no clear path to profitability, Airbnb has already proven themselves that they are able to turn cash into profit.
An Actual Tech Company
As Chesky puts it: “We now realize that it is not that they aren’t a tech company, it is that tech companies live on a continuum.”
“We now realize that is not that they aren’t a tech company, it is that tech companies live on a continuum.”
WeWork could not whet the appetite of public investors due to their extremely high margins. Their business model involves renting space from landlords, renovating them and then releasing them out to tenants. To attract tenants, they have to sell at a price very close to their cost.
In contrast, Airbnb gets to enjoy high trading multiples due to their really high margins, as compared to real estate counterparts to WeWork like IWG.
As much as WeWork tries to convince themselves that they are a ‘tech company’ (in their S-1 filing, WeWork used the word “tech” 123 times), they are still considered to be a real estate firm by the public.
One argument for WeWork is that with aggressive growth comes aggressive spending. Companies like Uber and WeWork are out on the hunt for market supremacy rather than profitability, and it is serendipity that led them to their state today. Billions of dollars from investors like Softbank were meant to accelerate any expansion plan, disregarding burgeoning losses.
WeWork bled so much that they needed an infusion from public and retail investors. Unfortunately, that was simply impossible.
Who’s Competing with Airbnb?
Ride-hailing giants Lyft and Uber are direct competitors at home ground, with both of their business models almost identical to each other. As such, they had to step on the pedal: it was their company and reputation on the line. Mounting losses also added pressure to creating an IPO—unfortunately, their performance is much to be wanted.
Airbnb, on the other hand, is a home-sharing giant compared to rivals like HomeAway, VacayHero, and HouseTrip. Airbnb’s global presence far outweighs any of them and most, if not all, of its competitors are behind Airbnb in terms of releasing an IPO.
The only competition left will be indirect competition from booking sites and aggregators like Booking.com ($BKNG) and Expedia ($EXPE).
Will Airbnb go for an IPO?
Like how Chesky said, an IPO is usually done when a company needs cash—Airbnb is not in that position. They already secured enough funding from private investors and a $1 billion line of credit from financial institutions is more than enough.
Instead, they might follow in the footsteps of music-streaming unicorn Spotify, who directly listed onto NYSE in 2018.
This way, Airbnb can avoid the high costs of an IPO: massive fees are given to bank underwriters like Goldman Sachs or Morgan Stanley. Yet, a direct listing would give Airbnb no new funding. There’s also no need for a reputation boost, so why would they even go public?
Employees holding equity in the startup are getting desperate, prompting several employees to write a letter addressed to Chesky and his team, begging for the company to go public as soon as possible.
Internal pressure from 6,000 employees is fanning the desire for a public debut. One of the biggest motivations seems to be giving those employees the option to cash in their shares in full: going for an IPO would dilute their holdings due to new share issuance.
Airbnb’s outlook has given its public market debut one of the most anticipated in startup history. Airbnb has had major success since its launch with strategic acquisitions like last-minute hotel-booking app HotelTonight and business travel marketplace Urbandoor.
The never-ending growth—with positive cash flow—is one to be amazed by. Revenue continuously grows as they busy themselves in expanding their hotel, experiences and tour businesses. Airbnb is even venturing into flight space, hiring former Virgin America CEO.
The only problem would be swinging market conditions, which many analysts forecasted. Regardless of how conditions are, Airbnb can easily debut in the public markets without much resistance any day. With sound financials, profitability, scalability and deserving trading multiples, Airbnb is undeniably a startup for the history books. From its startup journey to its public market journey, the home-sharing giant will always remain an excellent example of entrepreneurship.