Airbnb faces the COVID crisis: Will it survive?
Bernardo Montes de Oca
June 12, 2020
  |  

Airbnb faces the COVID crisis: Will it survive?

Bernardo Montes de Oca
June 12, 2020
  |  

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Today, we talk about traveling. Before all of this happened, chances are we used Airbnb to find a place to stay, and we discovered that some of those options were great and others, well, not so much. 

But, regardless of personal experiences, one thing is certain. Airbnb revolutionized how we traveled, and not only that. Airbnb, along with similar platforms, shook up local economies and the real estate market. 

People listed anything and everything, from small, cramped rooms to luxury homes. So, Airbnb’s social impact is bigger than most people think. 

Airbnb itself isn’t any stranger to controversy. The past years have brought criticism and backlash, from local and national governments alike. This latest crisis has only aided in putting the company to the test. 

Layoffs, controversial refunds, and a shaky IPO, Airbnb is going through turbulent times. Will it come out on top?

An air mattress in the middle of a living room

First, let’s do some quick history. 

Joe Gebbia and Brian Chesky shared an apartment in San Francisco and needed some extra cash to pay rent. They noticed their living room was empty so, they jazzed it up, put an air mattress in the middle, and offered breakfast. 

It was, in their own words, a bed and breakfast. Sorry, it was an airbed and breakfast. 

And, it worked. The first guests paid $80 a night! Hey, San Francisco is expensive. 

Along with Nathan Blecharchzyk as CTO, they launched Airbedandbreakfast.com in 2008. It offered short-term stays to those who couldn’t find hotel rooms in crowded cities like San Francisco and New York. To help promote the platform, they even turned to politics and cereal. But, it failed to catch on

Even when they reached what seemed to be the final version, interest was still lackluster. And it was a good idea: find a place and make a reservation in only three clicks. It sounds great, right? Well, investors weren’t convinced. In fact, 15 investors passed on the idea! I wonder how they feel now. 

But there was one guy who did: Paul Graham, from the Y-combinator program. He decided to take them under his wing, providing cash and training, in exchange for a slice of Airbedandbreakfast

The founders used the new funds, around $20,000, to fly to New York to stay with hosts and write detailed reviews and even taken professional photographs to help with the advertising. 

Then there was the name: Airbedandbreakfast just didn’t sound right. So, they changed it to Airbnb, which marked a new era. 

A chaotic one because people started noticing Airbnb and, most importantly, using it. In fact, 2009 was so chaotic that Chesky moved out of his place because it worked both as an office and a rental place.

They reached 10,000 users and 2,500 listings and such numbers finally drew the attention of investors. In April of that year, Y Investors and Sequoia Capital invested $615,000. 

After this, the platform only kept growing, and by 2010, Airbnb reached more than 700,000 bookings, 80% of which came after the investment. With such success, and only then, did investors really say: hey, Airbnb might be worth a shot. 

So, in their second round of funding, Airbnb obtained $7.2 million, which valuated the company at $70 million. Not bad, given that they started in 2008. 

Airbnb says: hello, world! 

2010 was a good year: Airbnb won awards, open its first international office in London and reach 10 million nights booked. They secured more than $112 million in funding and the operations had grown so massive, other international offices followed in places like Barcelona, Milan, Paris, and Sao Paulo.

In 2013 alone, the number of listings increased by 250,000.  

Airbnb was all over the world. In fact, it even became one of the first U.S. based companies to operate in Cuba, after the Obama administration eased restrictions on the Caribbean country

By 2015, the company had garnered serious funding. In its Series E-1 round, investors shelled out $1.6 BN against a valuation of $25.5 BN. 

Aided by such funds, it started absorbing the competition. They acquired rivals Accoleo and CrashPadder in Europe, then bought companies that worked at hyper-local levels, with valuable data such as mapping and restaurant guides. This way, Airbnb was consolidating itself as one of the main choices for short-term rentals.

But it’s not all a fairy tale, because there’s an unavoidable phenomenon that comes with having hundreds of thousands of guests and hosts. Problems, and pretty serious, at that. Complains poured: trashed apartments, theft, racism, some guests were held at gunpoint and prostitution. Yeah, prostitution. There was even a nationwide scam with last-minute rental changes. 

So, in order to deal with these issues, which go back as far as 2012, Airbnb implemented actions such as Host Guarantee funds, change in policies and, they went as far as redesigning their entire image to garner a feeling of belonging anywhere

But prostitutes and theft weren’t the biggest issues. And that’s saying a lot. 

The challenge was the cities themselves. All over the world, local and national governments applied more stringent measures against temporary rentals. 

Take New York, for example, it’s one of the biggest Airbnb destinations but still, the local government threatened to shut down the platform. Other cities have made it illegal for owners to rent apartments for more than 30 days without being present. Even San Francisco, where Airbnb was born, saw a citizen initiative to limit the platform. 

This situation isn’t only in the U.S.; citizens in Barcelona and Paris have openly spoken against the platform. 

And the reason is quite clear. Aiming at tourism, hosts have spiked prices up in a matter of a few years and have made entire cities unaffordable for locals, especially the middle class

Yet, to counterpoint, it has become a source of income and jobs, both direct and indirect, in those cities. So, it’s not black and white. Which is why some cities have struggled to come up with reasonable solutions. And though the company was growing, there were some ups and downs. 

The famed IPO

You can find Airbnb anywhere, maybe not in North Korea, but everywhere else. Internally, though, numbers were changing. 

Q3 of 2019 saw double the losses of 2018, with a considerable increase in marketing of about 60% more than 2018 and this wasn’t good, because it had long been known that Airbnb planned to launch an IPO in 2020. Chesky, however, assured everybody that the company was profitable

And it’s not that “no profit would mean no IPO”, because many companies have gone public while not having profit, such as Uber and Lyft. 

But here’s an interesting nugget of information: recent years have seen the highest number of IPOS from companies that aren’t profitable since, when? Take a guess. That’s right, since 2,000, right before the dotcom bubble burst. Just a fun fact.

Chesky was pretty evasive about the whole thing; this is what he said in an interview with CNBC when asked about funding and the IPO. 

“We don’t need to raise money, and so we haven’t been in a rush (to go public).” 

All he did was hype about 2020 and the climatic opening. But that IPO, along with everything else, had to be put on hold. 

The now and the future

So, we all know what has happened in the past months. Let’s just go over some numbers: 80% of lodging reservations around the world have been canceled. The WTO predicts that tourism will drop, in a conservative scenario, about 60% all over the world, if not worse.  

Most Airbnb markets saw reservations drop 90%. Some hosts had all reservations from April, May, and June canceled

So, what has Airbnb done to deal with this situation? First, it has come to grips with reality. It’s valuation, formerly at $36BN has been lowered internally at around half. Chesky announced that revenue is expected to be $800 million less than last year. 

In order to deal with this situation, the company managed to raise two rounds of funding, each at an estimated $1BN. 

Where would this money go? Part of it, $250 million to be precise, will go to a fund for hosts. This sounds like a lot, but, it’s only to cover a percentage of cancellations

As far as the IPO, there are no signs of it happening anytime soon and experts agree it would be the wrong time to go public

Then come the layoffs. By mid-May, Airbnb fired 1900 employees, 25% of its staff; the decision did not come easy for Chesky, who took the high road, in the eyes of many. In his letter to those affected, and the rest of the company, he was very clear: this wasn’t the employees’ fault. This was beyond what many could comprehend. 

So those affected will receive 14 weeks’ pay plus one more week for each year labored, get to keep their computers, and have help in the process of searching for a new job

As for high executives, they have reduced their salary by 50% and Chesky will not receive his salary for the next six months

When it comes to a reservation, it gets tricky here. Airbnb sent out communications detailing the refund process, which was conditioned between dates, and in most cases would apply for a full refund. The process seemed easy, but many guests say it’s actually very difficult. Hosts come up with excuses and conditions that are impossible to fulfill, like getting medical certificates or letters from employers stating that it’s impossible to travel

This leads us to the hosts: big and small, they’ve seen a complete halt in their income and many of them have said that the policies around this crisis haven’t been geared towards their benefits as the refunds didn’t consider them at all. The backlash was such, Chesky had to take to social networks to issue an apology and take more actions which included the $250 million fund

But these are actions that cannot compensate for the financial impact this crisis has generated and in fact, it could reshape the way we see temporary rentals and cities themselves. Remember all those locals affected by rising housing costs? Well, some experts believe that they are the key to the future of housing as empty apartments geared towards tourism might become “normal” apartments again

And this isn’t good news for Airbnb, though Chesky has stated repeatedly that travel will return, and that it will be different. To him, local and hyper-local reservations will be the norm at first, leisure travel will far outnumber corporate travel and Airbnb will be there, with newer, stricter cleaning policies.

The World Tourism Organization partially agrees with him as it estimates that travel will eventually bounce back by the end of the year, as borders gradually open. But this might not be enough. Airbnb has a lot against it: it has had to funnel a lot of its investment to cover costs, governments resist its presence and the future of travel is still up in the air. 

So, eventually might never come. But, will another platform replace Airbnb? Perhaps. So, you should start decluttering your living room. 

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