Airbnb, marketplaces

Assessing Airbnb’s Billion Dollar Round

Airbnb is the premier online marketplace for short-term rentals. The Wall Street Journal reported that the company is raising a $1B round on a $24B valuation – approximately 26x this year’s projected revenue. That would make Airbnb more valuable than Marriott International, which is valued at ~$21B. How can we make sense of this seemingly crazy valuation?

Here’s how I think about it:

Timing: Smartphone penetration and social media growth have enabled consumers to grant each other temporary access to their under-utilized physical assets by removing key friction points to asset owners and potential users. In other words, these key Internet trends have unleashed the “sharing economy.”

Market Size: Airbnb is competing in a massive market. Nobody knows exactly how big this market is. Beyond vacation rentals (an $85B market), Airbnb has enabled people living in cities to rent out spare rooms or entire apartments, creating a market that didn’t even exist seven years ago. Going forward, Airbnb will eat into parts of the hotel industry as well as other low-utilization-to-asset-value sectors. I estimate Airbnb’s total addressable market to be between $500B-$600B. It’s incredible to think that not-too-long ago Airbnb’s founders thought the total market was under $20B.

Business Model: I love online marketplaces because the economics are amazing. Marketplaces often command +60% gross margins and +20% operating margins. Moreover, as an online marketplace, Airbnb is asset-light and does not hold any spare-room inventory. Unlike hotels such as Marriott or Hilton, Airbnb is unconstrained by real estate and can add thousands of rooms in a matter of weeks rather than months or years. Airbnb’s +1M listings are more than Marriott’s 700K rooms. On a per room basis, the valuation starts to look more reasonable.

Competitive Advantage: Airbnb has created a very defensible company by building a global – and somewhat fanatical – community through its trusted service. Online verification techniques, a $1M host guarantee, and a secure payment platform have all helped build trust throughout its customer base. Airbnb also creates a continuous stamp of approval since each additional review is another valuable datapoint that fosters further trust among members. This, in turn, generates powerful “network effects.” What’s particularly unique about Airbnb’s network effects is that supply and demand are often one and the same, creating overlapping network effects. Guests are often hosts, and vice versa. From a competitor standpoint, this dynamic is incredibly difficult to break and even more difficult to replicate.

Team: Lastly, Airbnb’s founding team is just so tenacious and creative. This may be less important when we are talking about billion-dollar companies than those at the seed or Series A level, but it inspires confidence going forward (they still have much to execute). This blog by Fred Wilson about Airbnb’s founders designing cereal boxes and then selling them to keep their business afloat back in 2008 sums up their abilities quite nicely.

I put together a short investment recommendation on Airbnb last month. The deck highlights and expounds upon some of the points I’ve mentioned above. I definitely think Airbnb is a phenomenal company, and if it maintains its growth trajectory, it could very well be worth ~$24B – in fact, $24B is what I thought Airbnb was worth in my upside scenario. But that doesn’t mean I’d invest in Airbnb this late in the game. Separating a great company from a great investment is arguably one of the most valuable lessons I’ve learned at Columbia so far.

In case you’re interested, I’ve shared the deck below. Please note the context has slightly changed over the last few months, but I think the main takeaways still stand.

front end, programming

Humbled by Code

A few weeks ago, I started a 3-month intensive full-stack programming course at General Assembly. Full-stack is simply a fancy way of saying I’m learning web development and design (the “front end”) as well as server, application, and database programming (the “back end”).

I thought the first few weeks would be pretty straight forward. It’s been anything but. My mind has been stretched in many ways: first, by learning a lot of vocabulary and new syntax; second, by applying object-oriented and functional “paradigms” that string together disparate actions into a coherent body; and third, by thinking in a very explicit, step-by-step way so that the machine I’m working on can interpret my instructions. I’m amazed how tough this is for me, even though I’m writing very basic code.

So far, I’ve been exposed to primarily front end languages: JavaScript, jQuery, HTML, and CSS. Hard-core programmers don’t even consider HTML or CSS as code, but it looks like code to me when I’m writing it. I didn’t really know what either was before I started this course, but it’s pretty simple: HTML is used to “structure” a web page, while CSS allows a developer to “style” the page. Neither is particularly difficult to grasp, but manipulating pages and making them look good is both a skill and an art.

JavaScript, on the other hand, is a programming language. Many people confuse JavaScript with Java, but aside from sharing a similar name, they are pretty different. JavaScript is the language that powers the web: it enables webpages to have functionality. If a user clicks on something on your webpage, what happens? That’s JavaScript.

Front-end languages

It’s been fun learning JavaScript as well as jQuery – a library that simplifies writing JavaScript. JavaScript is considered one of the “lighter” programming languages to learn – and doesn’t carry the gravitas of learning something like C++ or Java – but it’s deceivingly simple. From what experienced programmers tell me, JavaScript has its quirks, but these quirks – when wielded properly – can produce powerful programs. In fact, according to a recent Bloomberg article on code, JavaScript is the world’s most-used computer language. Here’s what basic JavaScript looks like:

Simple JavaScript to create a sliding menu bar
Simple JavaScript to create a sliding menu bar

I struggle quite a bit when using JavaScript to manipulate the CSS and HTML of a page. Nonetheless, I’m astounded that in three weeks I’ve managed to write several programs, including:

  • A stopwatch
  • A calculator
  • A To-Do list
  • A game called ‘Snake’
  • A game of ‘Tic Tac Toe’

I won’t post these programs since I’ve received plenty of help from my instructors, peers, and online material. The code I wrote is also plain awful and riddled with bugs, so I don’t feel comfortable sharing these just yet. But as I continue to get better with programming, I look forward to sharing some of my projects on here.

Back to coding.