BILLIONAIRE BRANDS: CASE STUDY 4 - HOW AIRBNB DISRUPTED THE HOTEL ECONOMY

22 August 2016

According to Shasta Darlington from CNNmoney, hundreds of thousands of fans are descending on Rio for the Olympic Games, but many aren't checking into hotels.

Instead, they're crashing on couches and renting rooms, or even entire homes, from local residents to cut down on costs. Travelers who seek out hotel alternatives are generating significant income for people who might not otherwise benefit from the summer games.

For the first time ever, home-sharing company Airbnb has become an official Olympic partner by providing "alternative accommodation."

"Listings are spread out across the city, which that means we are also spreading out the economic impact in neighborhoods that are not tourist destinations," Leo Tristao, Airbnb's Brazil manager, told CNN in an interview.

There are currently nearly 40,000 listings scattered throughout the city -- double what was available two years ago.

Airbnb projects host income will be $25 million during the Olympics, which run from Friday August 5 to Sunday, August 21.

How did the Airbnb phenomenon start?

Introduction

Airbnb Inc., originally called AirBed & Breakfast, takes its name from the inflatable air mattresses co-founders Brian Chesky and Joe Gebbia rented out to strangers in their San Francisco apartment one night in October 2007 so they could afford to pay rent.

The pair decided they were onto something, and brought on a third co-founder, Nathan Blecharczyk  to help them build an online marketplace connecting home and apartment owners with an extra room to rent to travelers looking for a low-priced alternative to hotels.

The business initially turned off investors, including Y Combinator founder Paul Graham, who called it a "terrible idea" despite accepting them into his start-up incubator because he liked the founders.

A Slow Start…

Airbnb began to blossom into a vast online database of lodging choices, letting users rent everything from treehouses in California to an 18th century windmill in France to bohemian beach houses in Rio.

Venture capitalists got on board, pumping in $800 million and driving its valuation past two of the largest publicly-traded hotel chains, Wyndham Worldwide Corp. and Hyatt Hotels Corp.

Hotel owners are part of a coalition of groups now trying to stymie the start-up’s expansion, arguing the site’s loosely-regulated short-term rentals pose a risk to public safety, impede residential zoning laws and squelch the supply of affordable long-term rentals.

New York’s attorney general, Eric Schneiderman, claims nearly three-fourths of Airbnb rentals are illegal and has vowed to take action against people who violate local laws by renting out multiple rooms on the site.

In other places like San Francisco and Portland, the company has succeeded in pushing through new regulations that formally regulate short-term rentals and set up a system for registering hosts and paying cities taxes.

In April 2014, the company closed on an investment of $450 million by TPG Capital at a valuation of approximately $10 billion.

In March 2015, Airbnb raised a new round of funding which placed the company at a $20 billion valuation.

In February 2011, Airbnb announced its 1 millionth booking since its inception in August 2008. Then, in January 2012, Airbnb announced its 5 millionth night booked internationally through the service. In June 2012, the company announced 10 million nights booked, doubling business in 5 months.

Of these bookings, 75% of the business came from markets outside of the continental United States. By October 2013, Airbnb had served nine million guests since its founding in August 2008. In December 2013, the company reported it had over six million new guests in 2013, and nearly 250,000 properties were added in 2013.

Early Growth

“Pure, Unadulterated Hustle” in the Face of Initial Resistance.

As they were starting out in the summer of 2008, the founders needed a way to raise money.

They bought a ton of cereal and designed special edition election-themed boxes, released that fall—Obama O’s and Cap’n McCain’s, which they sold at convention parties for $40 a box. They sold 500 boxes of each cereal, helping them to raise around $30k for Airbed & Breakfast.

Still, the site did not gain much traction initially, and the founders resorted to living off of leftover Cap’n McCain’s (the Obama O’s sold out)—a time they refer to as a real “low point.” This low point did not last for long, however, as the following spring they had dinner with Paul Graham.

Despite recognizing the start-up’s potential, Graham admits to having some initial doubts, explaining “I thought the idea was crazy. … Are people really going to do this? I would never do this.”

Nevertheless, Airbed & Breakfast soon joined Y Combinator’s 2009 winter class, receiving another $20,000 in funding. They renamed the business Airbnb, and soon received another $600k in a seed round from Sequoia Capital and Y Ventures.

Not everyone was as impressed with Airbnb’s business model, however, and the young start-up was also notoriously rejected by Fred Wilson and Union Square Ventures—a decision Wilson now admits wasn’t a good one.

Wilson claimed in 2011 that "Union Square kept a box of Obama O’s in their conference room to remind themselves not to make the same mistake again." It also serves as an example of an early stage start-up doing everything necessary to get off the ground.

As Wilson explains: “Whenever someone tells me that they can’t figure out how to raise the first $25,000 they need to get their company started I stand up, walk over to the cereal box, and tell this story. It is a story of pure unadulterated hustle. And I love it.”

But it wasn’t just Airbnb’s business model that posed a concern. When Gebbia and Chesky—both of whom are Rhode Island School of Design alums—were initially seeking funding for their start-up, potential investors didn’t know what to make of a company with two designers, despite the fact that Blecharczyk, with a solid background in tech, had already signed on as an engineer.

Chesky explains that it was hard for many in the Valley to see the company’s potential because, “they thought we just made things pretty.”

Yet it was most likely this design background that helped Airbnb to find such innovative, unexpected solutions - like the limited edition presidential cereal campaign - to the very real problems that all early stage start-ups face.

It is this ability to innovate that informs much of Airbnb’s growth strategy.

It’s unclear exactly when Airbnb implemented what’s become their most famous growth hack, but there is evidence of the Craigslist platform hack as early as 2010.

Overcoming the Competition

Though the start-up worked hard to distinguish themselves from the more impersonal, scam-filled super platform, Craigslist had one thing that Airbnb did not—a massive user base.

Airbnb knew through both market research and their own experience that Craigslist was the place where people who wanted something other than the standard hotel experience looked for listings - in other words, Airbnb’s target market.

In order to tap into this market, Airbnb offered users who listed properties on Airbnb the opportunity to post them to Craigslist as well - despite the fact that there was no sanctioned way from Craigslist to do so. Though fairly straightforward in hindsight, the execution was anything but simple, as explained by writer and entrepreneur Andrew Chen.

The benefits of the Airbnb/Craigslist integration were numerous. Not only was it the sheer volume of potential users accessible via Craigslist, but the fact that Airbnb listings were far superior to the other properties available—more personal, with better descriptions and nicer photos—made them more appealing to Craigslist users looking for vacation properties.

Once those Craigslist users made the switch, they were more likely to ignore Craigslist and book through Airbnb in the future. Not only that, but those with properties listed on Airbnb ended up making more money on their listings, which kept them using the service as well.

Relaunch and Rebrand

Only July 16, 2014, Airbnb officially relaunched their site and mobile apps with an entirely new look and feel. This rebranding was the result of a full year of brand study, for which they collected user research, interviewed guests and hosts in more than a dozen countries, and brought in London-based Design Studio for additional assistance.

Their research also delved into competing brands, and, according to Design Studio’s Paul Stafford, they found that too many tech companies rely on “cold, corporate blue.” But with the company’s new focus on international expansion and becoming a more inclusive hospitality brand, it seemed like the appropriate time to tackle the branding issue.

After conducting intense research into their own brand as well as others, Chesky claims he was able to distill it all into a single concept - belonging.

He explains, “Airbnb is about belonging anywhere. The brand shouldn’t say we’re about community, or our international [reach], or renting homes—it’s about belonging."

As always, we'd love to hear if you have any comments, questions, or suggestions.Otherwise good luck with launching your next wave of trend driven innovations!

Want to find out how the WeWork brand is Transforming Office Life?

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