Entrepreneurial

Is Airbnb growing too fast?

By Guest Contributor
July 1, 2011

– Connie Loizos is a contributor to PE Hub, a Thomson Reuters publication. This story originally appeared here. The views expressed are her own. –

Airbnb is on a tear. Three years after the San Francisco-based company began inviting real people to list for rent their homes and apartments, castles and houseboats, users have booked 1.9 million nights in more than 184 countries; bookings are growing an astonishing 40 percent month over month; and roughly 1,000 new properties are entered into its system each day.

The company is growing so fast, in fact, that it’s reportedly raising $100 million at a whopping $1 billion valuation — a mighty addition to the $8 million in capital it has previously raised from Sequoia Capital, Greylock Partners, and numerous individuals.

Unfortunately for Airbnb, all the hype has captured the attention of the Samwer brothers, who’ve famously created a number of successful clones. Indeed, just two weeks after rumors of Airbnb’s massive fund-raise surfaced, the Samwers’ months-old European clone, Wimdu, announced it raised $90 million.

Considering that the majority of Airbnb’s business comes from Europe, one might consider the development troubling. But Brian Chesky, Airbnb’s 28-year-old CEO and co-founder, said he doesn’t think that it “changes things much. We were always expecting some competition. We just have to grow as quickly as possible.”

The question is: how fast is too fast? For example, Chesky talks about the challenges of building what he anticipates will fast become a thousand-person organization. Airbnb has already absorbed employees through one startup, Accoleo, for which it paid an undisclosed amount. And while Chesky said he “can’t confirm (Airbnb’s) rumored ($100 million) financing,” he added that “we’re open to other acquisitions.”

Yet hiring the right people is “inherently very complex,” said Chesky — even before folding entire companies into Airbnb, which now employs 130 people in San Francisco and Hamburg and has begun training people in “batches” of 15. “The product, the Web platform – you develop a playbook that allows (the business) to scale itself,” he said. “But when you’re hiring two or three people a day, keeping the culture and ensuring that people are aligned is complicated.”

Airbnb has already gotten into hot water once for the unseemly tactics of its employees. Earlier this month, Airbnb’s contract salespeople were discovered beefing up Airbnb’s inventory by emailing people minutes after they listed their properties for rent on Craigslist. (The company said afterward that it doesn’t condone the practice. Chesky adds that all of Airbnb’s “sales efforts” contribute just 2 percent of its inventory.)

Airbnb continues to lead a full throttle dash for more customers. Last week, it launched a program that invites users to refer friends in exchange for future travel credit. The company also has its sights set on expanding into new markets. Chesky said month-long sublets are coming next, then boat rentals, then “maybe” cars.

“There wasn’t an eBay for coins, and collectibles, and antiques,” he said. “I think there will be a couple of other marketplaces, but I don’t think there will be 100 Airbnbs for cars and boats and castles.”

I might agree if the proliferation of Airbnb-type companies hadn’t already become a bit of a joke in Silicon Valley, just as Groupon clones did last year. All those me-too companies have been chipping away at Groupon’s margins ever since. Meanwhile, Airbnb isn’t as lucrative a business.

Consider that unlike the vacation-rental marketplace HomeAway, which enjoyed a successful IPO this week and that charges members a fixed annual listing fee of about $300, Airbnb doesn’t charge listing fees. Instead, said Chesky, it takes between 6 percent and 12 percent of each transaction.

If the average night’s stay costs users $106 (it does)roughly $100*, its fees average 10 percent, and people have booked 1.9 million nights through the service, Airbnb has raked in just $20 million since 2008. It’s probably fair to say they are spending at least half that per year now on head count alone, and at the rate they are hiring, they probably will need to make at least $20 million this year just to break even.

Of course, being unprofitable now doesn’t mean Airbnb can’t become a billion-dollar business. Chesky is convincing when he calls Airbnb a “global movement” that’s connecting people and helping foster real relationships. (Hosts and guests are strongly encouraged to review each other, for example, and he insists that 80 percent of the time, they do.)

Still, a quick visit to a Fodor’s forum suggests Airbnb might be wise to step off the gas before speeding into new verticals. Of the 138 reviews listed, as many are negative as positive.

Maybe that’s to be expected. Or perhaps though Airbnb has already won over investors and reporters, its users are still deciding what they think.

*CORRECTED: The figure provided me yesterday by the company — that users spend an average of $106 per night — has since been deemed incorrect and I’m told I will be updated with a new figure when Airbnb has “something substantive and accurate.” In the meantime, a $100 per night average reflects my best guess as to what the company averages per user per night, based on the inventory available through the service.

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