The Airbnb Story: How Three Ordinary Guys Disrupted an Industry, Made Billions . . . and Created Plenty of Controversy

by Leigh Gallagher

As early as 2011, Airbnb raised a mega $112 million from backers, was valued by investors at more than a billion dollars, and had booked one million overnight stays on its platform. Over the next few years, it would leave those figures in the dust: one million bookings turned into five, ten, fifty, and then one hundred forty million “guest arrivals” by the end of 2016—some seventy million of which had occurred in just the past twelve months. Its valuation jumped to $10 billion, to $25 billion, and to $30 billion, where it sits as of this writing.

It’s hard to look at any phenomenon with that kind of growth without trying to understand just why it took off. Part of it was economic: coming as it did right out of the Great Recession, it offered a way for everyday people to make money off of their homes and a much more affordable way to travel. Its first adopters were millennials, the swelling demographic that were coming into their own as apartment-dwellers, but, curiously, the average age of a host in the United States is forty-three. As incomes started to slow in recent years and housing prices in cities began to climb, anyone could monetize their home via Airbnb, even if they didn’t own it.

But Airbnb tapped into something greater than low prices and an abundance of available inventory. It offered an experience that was special and different. Even its imperfections fed into a growing desire for a travel experience that felt a little smaller-scale and more “artisanal” than staying at a standard hotel. It also opened up access to different kinds of neighborhoods than traditional tourist zones, so you could have an experience that felt more local, an advantage Airbnb heavily pushes.

What is new, though, and what Airbnb specifically has done, is to toss aside the barriers and build an easy, friendly, accessible platform inviting anyone to do it.

And one of the biggest but least discussed reasons it was so different is that Airbnb was urban. Before it, most home-rental companies focused on second homes or listings in traditional vacation or resort destinations. For all the attention paid to treehouses and houseboats on its site, most Airbnb listings are studios and one- and two-bedroom apartments, which is what makes it so appealing to so many travelers—and so threatening to hotel companies. Airbnb invited everyday people—even if your only claim to real estate was a rented studio apartment—to profit from their space, and that had a transformative impact on both those renting and those traveling.

Whatever happens, Airbnb has already had a huge and lasting impact. It has set records in how quickly it scaled, and has disrupted the notion of what it takes to lead a $30 billion company. It has redefined how we look at the space around us and how we view strangers. It has changed how we travel, opening up a new market for “alternative accommodations” that is drawing interest from dozens of upstarts as well as the biggest hotel companies. And now, Airbnb is aiming to change how we experience new places and how we live our lives at home.

“If you launch and no one notices, you can keep launching. We kept launching, and people kept writing about it. We thought we’d just keep launching until we got customers.”) They

the most successful companies always end up being the ones that participated most eagerly.

(It would be significant for Sequoia, too: that $585,000 investment is, as of this writing, worth roughly $4.5 billion.)

“product/market fit,” a holy grail, proof-of-life milestone that a start-up hits when its concept has both found a good market—one with lots of real, potential customers—and demonstrated that it has created a product that can satisfy that market.

Product/market fit is a key first achievement; without it, there is no company.

So how, exactly, does Airbnb work? The company’s business model is much like eBay’s; it connects buyers and sellers and takes a commission, what’s known as the “service fee,” politely described on the website as the fee “charged for all reservations to help Airbnb run smoothly and offer 24/7 customer support.” This is the company’s revenue. For travelers, fees range from 6 percent to 12 percent; the higher the subtotal, the lower the fee. Hosts pay a 3 percent booking fee to cover the costs of payment transfer.

Anytime Airbnb enters into a new market, it has to grow both sides, but the supply, or host side, is inevitably harder to grow. This is why almost all of the fee structure lies on the guest side. The 3 percent host-booking fee basically covers payment processing only; if anything, Airbnb subsidizes hosts with not just the fee but also its free-professional-photography policy and many other forms of coddling, from mailing out free mugs to featuring stories about some of the hosts on its website to flying certain hosts to its occasional launch events and annual conventions.

The easiest is those 140 million “guest arrivals” since its inception. Its 3 million active listings—80 percent of which are outside North America—makes Airbnb the largest provider of accommodations in the world, bigger than any hotel chain.

Two of the things Airbnb’s investors like most are its efficiency and its growth. Because it can expand in such a low-cost manner, the company has spent less than $300 million of the roughly $3 billion in equity funding it has raised, according to estimates; its sharing economy peer Uber was said to have lost $1.2 billion in the first half of 2016 alone.

“unicorn,” a private company worth at least $1 billion—though

Airbnb isn’t opposed to multiple-unit hosts in cities that are not housing-constrained—but only if the hosts are delivering what Airbnb considers to be a good experience, which it defines as a real human offering the right kind of “hostiness.” “We don’t want property managers who are going into this for the money,” Chesky says. The goal, he says, is what Airbnb’s hospitality chief Chip Conley calls “capital ‘H’ hospitality, and lowercase ‘business.’”

“At the end of the day, the reason why Airbnb is succeeding at the level that it is is not because of some magic potion or fairy dust that’s been put on some algorithm,” he told the U.S. Conference of Mayors in 2016. “It is because we’ve built a platform that allows people to interact with people and have a transformative experience.”

Lehane maintains that most cities in the world are opening to partnering, and he is quick to point out the many places Airbnb has worked with local lawmakers to update or amend existing laws to make its activities legal—most

(Lehane says that people like to “overindex” New York, but he and others point out that the platform is now so large that no one place is material to the overall company. This appears to be true: Airdna data estimates that total revenue from Airbnb hosts in New York City represents 10 percent of the U.S. total and 3 percent of the company’s global host revenue.)

Of the top one hundred markets the company has identified as important, Lehane tells me, seventy-five to eighty are “either done or moving in a good direction,” ten are “sort of static,” and the remaining ten “are always in some type of a conflict,” with four at the core: New York, San Francisco, Berlin, and Barcelona. But in those high-conflict places it’s been hard, and the common denominator, Lehane says, is the unique politics that exist. In Barcelona, the government is sensitive to the influx of tourism in its Gothic Quarter. In San Francisco, the issue is a shortage of housing layered on top of a power struggle between the city’s progressive roots and its more moderate—and moneyed—technology industry. In Berlin, which banned all entire-home short-term rentals without a permit and instituted fines of up to $115,000 for violators, there are long-standing issues around housing that go back to the reunification of Germany, now exacerbated by a refugee crisis. And New York, of course, is the epicenter of what Lehane calls the “hotel-industrial complex.”

He says that Airbnb has something that no other private-sector entity he knows of has: hundreds of thousands of engaged hosts and guests who can be an “army of change.” His solution: implement a grassroots mobilizing effort, much like the company did in New York when the attorney general first struck, but one that would be the equivalent in size and scale to a presidential campaign—and would be launched all over the world.

The second unique thing about Airbnb is its economic model. Its “base voters” don’t just believe in the cause; they make money from it. Airbnb hosts keep all the revenue that comes in the door but the 3 percent the company charges for its host fee. “These people are making ninety-seven cents on the dollar,” Lehane says. “You put all these things together, and that’s why I think we can be really politically disruptive.”

For the past few years, Airbnb has been working on forging alliances with these rental conglomerates. In 2016, Fortune’s Kia Kokalitcheva reported on the launch of a new initiative called the Airbnb Friendly Building Program, in which owners and developers of big multifamily buildings can sign up for a partnership with Airbnb. Under the arrangement, the buildings grant their tenants permission to rent space in their units on Airbnb; in return, the developer retains the ability to set certain rules around the practice, like setting hours for check-in and length of stay—and gets a share of the revenue. The booking still takes place on Airbnb, but the company says it will share data with the landlords on the kinds of transactions the tenants are engaging in and in which units. The idea plays to the landlords’ interests: their primary goal is to fill their buildings and to secure long-term leases that generate the kind of stable, predictable revenue streams their investors like to see.

If you embrace Airbnb and make it legal for tenants to share their homes—or so the pitch to landlords goes—you will have an easier time filling up your buildings, you will have a higher occupancy rate, and, since your tenants may have an additional revenue stream coming in, you will be more likely to collect your rent on time, which will boost the appeal to investors. As of this writing, landlords controlling some 2,000 units had signed on, a fraction of the potential market, but the company hopes to land some of real estate’s biggest fish.

(Over the course of my reporting, I observed a particularly telling phenomenon of New Yorkers who complained about transient neighbors in their own building but made use of Airbnb when they themselves traveled.)

But there is a reason so many millions of consumers have embraced Airbnb. It wasn’t just three guys out to break all the rules. It was a culmination of forces that were more powerful than that: an epic recession that left people with a much greater incentive to travel cheaply or to seize upon the opportunity to turn their homes into something monetizable; a general sense of fatigue with a hospitality industry that had become overpriced and overcommodified; a wave of new millennial values and attitudes that made the idea of a form of travel that was quirkier, more eclectic, more original, and more authentic not just acceptable but a way of life; and declining trust in government, especially among the middle class, and the search for individual, self-sufficient means of economic empowerment. Understanding those forces might help regulators understand why Airbnb caught on the way it did—and why its users are so ready to pick up a sword and fight for the cause.

“The reasonable man adapts himself to the environment. The unreasonable man adapts the environment to him. Therefore, all progress depends on the unreasonable man.”

“Whenever you disrupt a massive industry and you try to make room for yourself inside of that industry, the various interests are going to push back,”

“You cannot kill an idea whose time has come,”

An important way hotels make money is in so-called compression pricing: the ability to send rates way up in times of peak demand. Such nights make up just 10–15 percent of nights but are a critical source of revenue. One of the things about Airbnb that makes hotel executives cringe is that when a big event comes to town, its supply of inventory can expand instantly to meet the demand. Previously, travelers would have paid higher rates or gone as far out as they needed into the suburbs to find a reasonably priced room. Now, they can just turn to Airbnb.

Over the past few years, hotel-industry executives, some behind the scenes and others more publicly, have joined the effort to push back against Airbnb. The hotel industry’s lobbying arm, the American Hotel and Lodging Association, has been an active participant in the opposition movement against Airbnb in New York and San Francisco. Hotel-industry executives and surrogates say they have nothing against home sharing, but they draw the line at so-called illegal hotels—those units that are dedicated to rental through Airbnb—and say that Airbnb should have to operate on a level playing field with hotels: its hosts should have to abide by industry standards for fire safety, for disease prevention, for compliance with the Americans with Disabilities Act, and in paying their fair share of taxes. Their disrupter, once a cute afterthought and now a heavyweight, has gotten this big, they say, largely on being able to expand totally unchecked, and it’s not fair. So while many in the industry have clung to the belief that the two don’t compete, that argument is becoming harder and harder to make.

In 2014, Airbnb announced a partnership with the travel-expense-management service Concur to officially recognize Airbnb as a corporate-travel provider, and it has steadily built its program from there. In 2015, Airbnb launched a “Business Travel Ready” program, a credential program for entire-home listings that met certain reviews and responsiveness rates and that adhered to certain standards, like providing twenty-four-hour check-in, Wi-Fi, a laptop-friendly workspace, hangers, iron, a hair dryer, and shampoo. The pitch to hosts: they get a special logo that makes their listing stand out to a new large stream of higher-paying, professional, well-behaved guests; and they’re able to fill up empty dates or traditionally slow times on their calendar, since business travelers often book midweek and during slow seasons. “Ideal for any type of business trip,” the company’s business-travel site claims, touting extended stays, off-sites, retreats, and group trips. By the spring of 2016, the company said it had some fifty thousand companies signed up.

Despite the attention paid to the treehouses and tepees, Airbnb’s actual invention was that it was an almost entirely urban phenomenon from the very beginning, taking root with millennial travelers who were city-focused and millennial hosts who wanted to monetize their small urban apartments. While it’s expanded well beyond that, in 2015, 70 percent of Airbnb’s full-home listings were studios, one-bedroom, and two-bedroom units, according to Airdna. So for the first time, short-term rentals were no longer just the big homes in lake, beach, or mountain destinations. They were in the apartment right next door in the heart of every city around the world. That’s what made the platform grow so fast, and it’s what makes the company so threatening to hotels.

George Bernard Shaw said, ‘Success does not consist in never making mistakes, but in never making the same one a second time.’”

Airbnb is now in its ninth year of so-called hypergrowth, that vertical phase in the middle of the stick part of the hockey-stick growth chart when revenues essentially double, or come close to it, every year. Such a burst typically lasts a year, two, maybe three. Airbnb basically entered this phase in 2009 and hasn’t gotten out yet.

At some point in the process, Sequoia managing partner Doug Leone pulled Chesky aside and told him that he had the hardest job of any CEO in the Sequoia portfolio. Beyond all the routine challenges of running a technology company, Leone said, Airbnb was more global than any other: it was in almost 200 countries, so it had to have offices and people in those countries and had to figure out how to operate internationally. It is essentially a payments company, handling billions in transactions around the globe every day, so Chesky had to be concerned with all the fraud and risk potential inherent in that. It had hundreds of thousands of people staying in other people’s beds each night, providing so much opportunity for horrible things to happen, let alone everyday misunderstandings and cultural differences. Then there are the regulatory problems and the major amounts of time, attention, and public-policy resources that go into pushing back against those problems on a city-by-city basis.

The more successful Airbnb became, the more top people the founders had access to, and as it began to get bigger, Chesky started seeking out sources for specific areas of study: Apple’s Jony Ive on design, LinkedIn’s Jeff Weiner and Disney’s Bob Iger on management, Facebook’s Mark Zuckerberg on product, and Sheryl Sandberg on international expansion and on the importance of empowering women leaders. John Donahoe of eBay was a particularly important mentor, schooling Chesky on scaling operations, managing a board, and other aspects of being the CEO of a large marketplace business. In what became a valuable reverse mentorship, Donahoe also quizzed Chesky for his advice on design and innovation and on how eBay could maintain characteristics of being young and nimble. From Jeff Weiner, Chesky learned the importance of removing those managers who weren’t performing. From Salesforce.com CEO Marc Benioff he learned how to push his executive team. He also had access to an informal support group among his current-generation start-up peers, including Travis Kalanick of Uber, Drew Houston of Dropbox, Jack Dorsey of Square, and John Zimmer of Lyft, all sharing their individual lessons about everything from running start-ups to balancing friends, relationships, and other elements of young founder life.

A key principle of Chesky’s sourcing strategy was to become creative with identifying just who the experts were, and seeking out sources in unexpected disciplines.

To say Chesky is a voracious reader doesn’t quite capture it. He takes his family on vacation once a year, usually around the holidays, when his way of recharging is to ingest as many books as possible.

The most consistent observation from those who know Chesky is that he possesses this extreme level of curiosity, and what could be described as an obsession with constantly absorbing new information. “Brian’s biggest strength is that he is a learning machine,” says Reid Hoffman. “It’s a skill set for all successful entrepreneurs—the phrase I use is ‘infinite learner’—and Brian is the canonical example of that.”

Chesky is constantly taking notes. “He may not say anything after a meeting the first time he hears a new idea, but he’s always pulling up his Evernote, and if you say something interesting, he writes it down,” says Sequoia’s Alfred Lin. “By the next time you see him, he went back, looked at the notes, thought about it, talked to a bunch more people about the topic, and then formed his own opinion.” That relentless focus on learning, Lin and others say, is the main reason Chesky has been able to scale with the company.

“In a large company, you have to be fairly strong at public speaking or writing, because that becomes your management tool,” he has said.

“Maybe the people that my childhood taught me to label as strangers were actually friends waiting to be discovered,” Gebbia said in a TED talk he delivered on how the company built its platform for trust.

When asked about his goals for the company, Chip Conley told one of my colleagues that he would like to see it win the Nobel Peace Prize within ten years.

Tom Friedman who had a great quote,” he says, paraphrasing the New York Times columnist. “He said, ‘Pessimists are usually right, but it’s the optimists who change the world.’”

“If you break the culture, you break the machine that makes your products,”

The stronger the culture, he argued, the more trust there would be for employees to do the right thing and the less need there would be for formal rules and processes. And the fewer the processes and the lighter the oversight, the better the conditions for innovation.

Chesky studied some of the big and lasting tech companies, like Google, Apple, and Amazon, and came to two conclusions: the survival of a tech company depends on a willingness to branch into new categories; and the CEO has to have the discipline to put the new venture ahead of the existing business and to take the new project on personally.

By every account, Airbnb should never have happened. It was three guys who came up with a business idea quite accidentally, while looking for something else they hoped would be the next big thing. They had little business experience and remain self-taught. They did things that, by conventional business standards, would be counterintuitive: instead of focusing on growing their business as fast as they could in the early days, they showered all of their attention and resources on a tiny number of users three thousand miles away. They invested in the expensive, cumbersome service of providing individual professional photography to every customer who wanted it. They made something that was seen as odd and strange and fraught with all kinds of risks into something not only acceptable but viral. It is a rags-to-riches story on a major scale.