Way before Airbnb convinced homeowners to open their homes up for strangers, it was just an idea by two struggling gentlemen who needed to make rent. The success of Airbnb is a modern-day feel-good story that shows how a simple concept executed well can make anyone a millionaire.
Since launching in 2008, Airbnb has grown immensely, catering to over 750 million travelers worldwide. With over 150 million users recorded, it is considered one of the highest-valued start-ups in the global sharing economy, surpassing Hilton Hotel revenues in 2018.
As of 2019, estimates showed that Airbnb accounted for 20% of the whole vacation rental industry. In 2020 Airbnb’s total revenue was in the $20 billion range. The success is undeniable; however, it was not smooth sailing for the company at the beginning. There were a lot of false starts, rejection, and some business model flaws.
Despite these issues, Airbnb has become one of the leading urban rental platforms in the world. Here’s how the company founders managed to turn a ‘rent-an-air-mattress’ idea into a billion-dollar company.
2007: How Airbnb was born
Roommates Joe Gebbia and Brian Chesky had met at Rhode Island School of Design. As cliché as it sounds, the two designers were struggling to make rent. Fortunately, a San Francisco Design Conference in October 2007 gave them a way to make a few extra bucks, and the idea of Airbnb was born.
The two men decided to take advantage of the hotel room shortage by buying three air mattresses and renting out their living room. The business plan was simple; offer an alternative, comfortable bed and breakfast place for desperate conference participants. The idea did pretty well.
They designed a simple website called airbedandbreakfast.com. The website is simple, consisting of a blog and a map. There wasn’t a booking link or any contact information for potential guests to get in touch with the hosts. The guests had to look for contact information online to book a room.
Gebbia and Chesky managed to get three people who paid $80 each to sleep on the air mattress despite the website flaws. The bookings allowed the pair to meet their rent obligations. The experience made them realize that it could be a viable business endeavor for them. Conferences and other big events happened frequently, and hotels and other mainstream accommodation would always be in short supply.
However, Gebbia and Chesky had no start-up experience whatsoever, so they enlisted an old roommate, Nathan Blecharczyk (a Computer programmer), to help them build a business.
Initially, they worked on a roommate-matching service for four months. They abandoned this idea when they realized that there was a site called Roommates.com that was already operating. They went back to working on their Air Bed and Breakfast idea and launched the website.
2008-2010: Some false starts, rejection, and eventual takeoff
2008: Early Growth & Lack of Investor Confidence
Gebbia and Chesky needed money to kickstart their business. Blecharczyk worked on the site and redesigned the platform so that booking would only take three clicks. In March, they officially launched during the SXSW Conference and only had two bookings; one of them was Chesky.
This didn’t deter them because they knew there was a market for the idea. Air bed and breakfast offered something different compared to what hotel chains and other listing sites like booking.com, Priceline, and Vrbo were offering.
The Airbnb business plan had a lighter cost structure compared to competitors in the industry. How? By partnering with homeowners who would rent out their empty rooms in exchange for money. The company would make money by charging a percentage of the total amount on each transaction.
This type of cost structure would cancel out the need for the new business to incur operating costs such as acquiring buildings for accommodation and managing staff.
The trio was also hoping that the appeal for users would be access to an affordable bed and breakfast that felt like home. The country was in a recession, and people were looking for ways to spend less while traveling.
The idea was revolutionary because, up to this point, hotel chains and other vacation rentals were the go-to for travelers. Airbnb was offering a home-sharing experience that included extras like city tours.
Re-launching and re-launching
Despite their confidence in the business model, there were still a few more issues to iron out. One of the significant issues was figuring out how to get guests and hosts at the same time while expanding in different cities.
They shopped around for funding, meeting 15 angel investors who rejected the idea. Everyone thought they were crazy, and the business model was too risky. How could they guarantee the safety of the hosts or the travelers? There were too many loopholes for lawsuits.
The founders decided to fund the business using other means. They started using their credit cards and ended up with thousands of dollars in debt. Eventually, companies stopped giving them credit, and they were quickly running out of money.
In August 2008, they re-launched the website for the third time. This version of the website included a home page equipped with a search bar. It also had a section for listings, reviews, a payment system, and customer service. However, they still could not get people to book or to list their homes.
In November, the Democratic National Convention in Denver created a shortage that boosted sales. They tried to get the word out via the media, but all the news outlets they approached refused to write about them. Instead, they talked to bloggers who willingly wrote about the business. Eventually, CNN and the New York Times picked up the story, and they managed to get about 80 bookings.
However, this mild success was short-lived because after the event was over, they got no bookings at all. They were back at the starting line, but they were facing many challenges, unlike the first time.
Firstly they were thousands of dollars in debt and could not seem to secure any investor. They had tried to launch three times, and despite the national press, they had very few bookings. In fact, months would go by without a single customer. Lastly, one of the co-founders was getting married, and his fiancé didn’t want to live on the west coast. The future of the company was uncertain.
The lack of investors pushed the founders to think outside the box to raise capital. They bought cereal and used their design backgrounds to create some limited edition election-themed cereal boxes. The aptly named them Obama O’s and Cap’n McCain. They sold their cereal for $40 and raised $30 000 to help sustain their business and pay off some debts. The ship was sinking slowly, and they needed a big break. Fortunately, it arrived in 2009 in the form of the Y Combinator mentorship.
2009: Y Combinator and a Big Break
Fortunately, their big break came in the first quarter of 2009. The founders met Paul Graham, who owned Y Combinator, a San Francisco start-up accelerator program. He encouraged them to apply for the program despite their resistance. It turned out to be a great decision.
They received $20 000 in funding from Y Combinator in exchange for a stake in the company. They spend their time in the program working on perfecting their product. In March, they shortened their name to Airbnb, which was significantly catchier.
This was a turning point for the company. Things began to pick up slowly, and Airbnb started gaining traction in New York and San Francisco. The company searched for new offices to accommodate the expansion. They were getting new listings and bookings weekly.
Chesky embarked on a campaign to gather first-hand data about the guest’s experience by exclusively staying at Airbnb listings. He would stay with as many hosts as possible to see the kind of experience the guests would get from their listings. This allowed Airbnb to troubleshoot the areas that needed improvement.
The data showed that while the number of listings was growing, the bookings were still lagging. Paul Graham played a huge role in getting the ball rolling. He noticed that most Airbnb’s users were in New York City and advised the founders to visit New York and figure out how to make the idea more appealing.
Establishing key resources: The photographers
Gebbia and Chesky flew to New York and booked 24 listings to try and figure out where the problem was. It turns out that the hosts were not presenting their listings in a way that made them appealing to the target market.
The photo quality was terrible, and the product descriptions left a lot to be desired. It was pretty clear why few people were booking. The listings did not give potential customers an idea of what they were paying for. The pair used part of the $20 000 to improve the property listings on the website. They revisited the property descriptions and pricing.
However, the most significant improvement they made was to the photos. They rented a $5 000 camera and took professional pictures of as many listings as they could. By the end of that month, bookings had almost tripled, and the revenue from New York listings had doubled. They used this approach in every city where they had a presence. Eventually, this led to the establishment of the Airbnb photography program, which launched in 2010.
Airbnb’s value proposition and the big break
After New York, the pair were confident that their business model was profitable. They had an obvious target market; millennials. The idea struck a code with college graduates and students who could turn their rented apartment into an income stream by becoming hosts.
On the flip side, Airbnb appealed to the millennial traveler who wanted to live and interact with the locals in their visiting area. It was a new and cool way of authentically experiencing a new city. Traditional hotels were failing to capture the interest of this particular demographic, who seemed not to be taken by the idea of room service and luxurious amenities.
In addition to these facts, Airbnb solved a real-world problem; the lack of hotel rooms when events occurred in urban cities. Hotels would always charge higher rates when there was a big event in the area. Airbnb would absorb the extra demand for accommodation.
Gebbia and Chesky presented this business model to investors on the West Coast and still got rejected. Not everyone was impressed, but some investors saw that two designers were running the company. The two founders finally got a big break in April 2009 when they received $600 000 in a seed round from Y Ventures and Sequoia Capital.
2010: The Airbnb Photography Program, Craigslist Hack & Major Investors
With the $600 000 investment, they were able to launch the Airbnb Photography Program. This initiative allowed all Airbnb hosts to book a professional photographer who would take pictures of the listing for the website.
The program was not cheap, but Gebbia and Chesky believed it would have long-term benefits. They had a first-hand experience on how enhanced listings could triple the number of bookings. So hiring freelance professional photographers was a key resource that was worth investing in.
One move that contributed to Airbnb’s growth was its unauthorized integration with Craigslist’s platform. Instead of spending a lot of money on marketing using the traditional channels, Airbnb figured out a way to boost traffic to their site without heavy lifting.
They identified Craigslist as the best platform to help them grow. Craigslist had a huge user base, unlike Airbnb, so they figured out how to integrate their website with Craigslist. This integration redirected traffic to the Airbnb website. So if someone placed an ad on Craigslist, the Airbnb bot would pick it up and send that person an email with an advertisement about Airbnb.
This was a brilliant plan. Access to Craigslist’s massive user base meant that Airbnb could advertise their superior listings to more people. Immediately there was an influx of bookings and listings. Hosts who made the switch to Airbnb ended up making more than they were on Craigslist because people were drawn to the better-looking listings. Airbnb used Craigslist as one of their primary marketing strategies along with word of mouth, Google Ads, and events like music festivals, concerts, and the World Cup.
In November, Airbnb received another cash injection of $7.2 million from Greylock Partners and Sequoia Capital. The company also announced that they had reached 700 000 nights booked through the website. 80% of those books had occurred between May and October 2009.
Airbnb had finally managed to gain significant traction. It was only a matter of time before the industry noticed how disruptive Airbnb would be to the established yet stagnant market.
Airbnb’s Business Model Canvas: The Early Days
At this point, Airbnb’s Business Model Canvas looked like this:
2011-2014: International Expansion, More Fundraising, and War with Local Government
2011: Expansion, Launch of Airbnb Social Connections & Host Guarantee Program
By 2011, Airbnb had expanded to 89 countries and had reached 1 million nights booked on the platform. The company won the break-out mobile app award at SXSW, signaling a triumphant return after its dismal launch in March 2008.
2011 was a good year for Airbnb. In July, they raised $112 million in financing and received a valuation of over $1 billion. They also managed to rope in more notable investors like Hollywood star Ashton Kutcher. The company continued to expand and established an office in London in October 2011.
Airbnb began to report bookings that exceeded industry giants like Hilton Hotels. There was no avoiding it; Airbnb was now mainstream. However, there was one flaw in the business model; safety risk for both users and hosts.
Inviting a stranger into your home was not without risk. Reports of damage to properties and robberies started to surface. There were safety and vetting issues in the business model that Airbnb had to address. Reviews and comments were not inspiring enough trust among users.
They came up with Social Connections to combat the inherent trust issues among the user and the hosts. Social Connections is an optional feature that allows listings to show the guest which of their friends or social media contacts have used a particular host.
The Social Connections program used the social media site Facebook to facilitate this feature. Any Airbnb user could search for a host-based on specific characteristics they had in common with the host. This went a long way in providing additional safety for the users and the hosts.
Host Guarantee Program: Enhancing Customer Relationships
To address the issue of property damage or theft, Airbnb introduced the Host Guarantee Program. The policy offered insurance worth $50 000 for Hosts whose homes were damaged or victims of theft. The program quieted the negative press the company had received after a woman reported that a guest had trashed her home.
Airbnb went a step further and established a 24-hour customer hotline where hosts or guests could get quick responses from Airbnb. They also doubled their customer support unit to handle the volume of customers who needed assistance.
This quick response to problems allowed Airbnb to expand rapidly all over the globe. The company went on a shopping spree in 2012, acquiring numerous companies that would help them enhance their services.
Notable mentions include:
- The London-based rival CrashPadder added six thousand international listings to Airbnb’s existing inventory.
- NabeWise, a city guide that collects information for specific locations. This allowed Airbnb to offer local recommendations to travelers.
- Localmind is a location-based question and answer platform that allows users to post questions answered in real-time by locals.
2013: The War with City Authorities Begins & Backlash Due to the ‘Airbnb Effect.’
2013 began a years-long war for Airbnb against local city authorities that is still ongoing. When the idea for Airbnb was born, it overlooked the fact that the business was dipping its toes into the housing market.
This market is governed by local authorities that have regulations in place against short-term rentals in some cities. There is also a tax issue that the Airbnb business plan didn’t account for. Many towns had laws that required vacation rentals to pay a hotel or tourist tax.
Airbnb expanded rapidly because the company didn’t have to follow any health, safety, tax, and zoning regulations. Unlike hotels and other vacation rentals that had to comply with these rules.
From the start, Airbnb argued that it was not breaking any local or state laws because it served as a middle-man between hosts and guests. It was a platform just like Vrbo and Booking.com that facilitated a transaction. It should not have the same regulatory responsibility as Hilton or Marriott Hotels.
Airbnb argued that the onus was on the host, responsible for complying with all the city regulations and paying the relevant taxes. The local government authorities did not accept this position. The most contentious battles arose between the New York State Attorney General and Airbnb.
Eventually, the company decided to negotiate with the local authorities in the various cities. They came up with Voluntary Collection Agreements that mandated Airbnb to collect and deliver taxes from its hosts.
This was not the end of the war, and Airbnb would clash with city authorities often. The company was constantly cited as a significant factor in the increase of property values in urban areas. They were accused of pushing out long-term renters and increasing housing shortages in the cities. A claim Airbnb denies to this day.
2014: New Partnerships & a New Logo
2014 saw more growth for the company. They ventured into new territories where the strategy was always to start by developing the supply side (hosts) first. They found that homeowners took some time to get used to the idea of opening up their homes.
So they used the same tactics as they had in New York. In France, for example, Airbnb noticed that although people were using the service when they traveled to the country, there was slow acceptance of the service within France.
They set up a team to physically travel to France to figure out how to popularize the service. The group engaged the few users that were already using the service and found out what was going on. They discovered that people were still uncomfortable with the idea of hosting a stranger or staying with one. They decided to embark on an aggressive marketing strategy that included throwing parties, info sessions, setting up info booths, and posting flyers. This was similar to what they had done in New York, and fortunately, the strategy worked.
Partnership with Handybook & Concur
That same year they launched the new company logo and announced plans to bring some key partners into the business; home cleaning services. They partnered with Handybook to provide discounted cleaning services for hosts.
The idea for this partnership was to improve the guest’s experience while removing the cleaning burden from the hosts. Airbnb would charge the guest a non-refundable cleaning cost. They trailed the program in San Francisco and expanded to New York and Los Angeles.
Eventually, Airbnb officially adopted the program to standardize the cleanliness of the homes on their website.
In an additional bid to improve the user experience, Airbnb partnered with Concur. This service made it easier for business travelers to categorize their Airbnb bookings as business expenses. The year ended with Airbnb increasing its Host Guarantee Policy to $1 million.
2015: Product Launches and More Partnerships
In 2015, Airbnb partnered with Deutsche Telekom, the parent company of T-Mobile. The partnership’s purpose was to pre-install Airbnb’s app on mobile phones in 13 countries. They included a 30 Euros voucher as an incentive for users who registered on Airbnb using this app.
Airbnb also released the following products:
- An official iPad app and AppleWatch app.
- Price Tips, a pricing recommendation tool for hosts.
These partnerships and product launch further solidified Airbnb’s position in the industry. Up to this point, industry giants like hotels and lodges were not paying attention to Airbnb. However, that soon changed.
Competition with the Hotel Industry
When Airbnb started, the hotel industry paid little attention to it. The relationship between Airbnb and giant hotel chains was friendly at the beginning. Airbnb was absorbing the hotel industry’s leftovers during big events.
However, it soon became apparent that the hotel industry had underestimated the impact Airbnb would have on the market as a whole. Many hotels developed plans to try and mimic what Airbnb was doing by changing that catered to the millennial market.
These changes included launching hotel chains that were designed for millennials. Other hotels added community-centered activities where guests could get an authentic local experience just like Airbnb. However, some hotels did the bare minimum and only tweaked their decor to attract younger guests.
These efforts came too late. Airbnb already had a foothold in the market and was poised perfectly for a hostile takeover. A 2015 article titled“Is It Too Late to Fight Back Against Airbnb?” pointed out the various ways Airbnb was going to cause trouble for the hotel industry. Their website was far more superior to most of the big hotel chains. They had extra features that fluidly integrated the whole experience for the guest.
A user could easily use the map function to check out the surrounding area. Additionally, their listing presentation was superior and could be viewed seamlessly on any device. They had also begun to expand into the luxury market by offering luxury houses on their listings. Airbnb was offering something that hotels could not, a unique urban holiday experience at every level.
Although both still refuse to acknowledge that they are competing, the numbers tell a different story. A report by the Hotel Association estimated that hotels were losing $450 million in direct revenues per year to Airbnb. Airbnb had become a threat to hotels.
Airbnb’s Business Model Canvas: Expansion and Establishing Dominance
At this point, Airbnb’s Business Model Canvas looked like this:
2016 – Present: Becoming An Entire Hospitality Brand
2016: Airbnb launches Experiences
In a bid to become an entire hospitality brand, Airbnb launched Experiences in 2016. According to the Airbnb website, this service is meant to give guests
“… [a] one-of-a-kind activities designed and hosted by locals. Unlike a typical tour or workshop, experiences go beyond the activities themselves. They offer a deep dive into the local host’s world through their passion. Hosts offer their guests special knowledge, unique skills, and inside access to local places and communities that guests couldn’t find independently. This creates lasting connections and treasured memories.”
Airbnb had begun solidifying its position as a hospitality brand. As of 2019, the Airbnb experience has grown to offer over 50,000 experiences.
2017- Present: Becoming a Hospitality Brand
The following years would see the company develop its services to cater to many guests and hosts. In 2017, Airbnb acquired Luxury Retreats, which offered high-end homes and premium vacation homes for short-term rental. It was Airbnb’s most expensive acquisition to this date. This acquisition was in line with the vision of merging the original home rental idea with the convenience of staying in a hotel.
In 2019, they acquired HotelTonight, an app that helps guests’ book last-minute hotel reservations. It is this concept of creating an entire hospitality brand that drives Airbnb’s expansion initiatives.