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.