Airbnb: A Company Built on Breakfast Cereal

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What is Airbnb?

If you didn’t know already, Airbnb is an extremely successful app/website that lets homeowners rent their bedrooms, homes, and apartments. When these all get put on Airbnb, the homeowners must classify them by price, location, number of bedrooms, whether it is a whole house or just a room in a house with other people in it, and so on…

images from the app

This makes it easy for travelers to search for the kinds of rooms in a city they want to go to. They can choose the price they want to pay, the days they will be staying, and other details and then the app aggregates all the places that meet the traveler’s needs. You could think of the app as like a “travel agent” or an advertising platform that connects people with extra rooms to travelers from all over the world.

Map of rooms available (Source: Airbnb.com)

Since 2008, Airbnb went from being a company that rented 3 air beds in an apartment, to a company that counts over 500 million guests, 150 million users, rooms in over 100,000 cities and a value estimated at $38 billion (in 2019). At this point it can be classified as one of the most successful tech businesses in the world. This kind of growth would be totally unattainable for the traditional hotel industry because if they want more rooms in a city, they need to build a brand new hotel and hire lots of new workers. With Airbnb, as soon as demand goes up, more people with an extra room or house will come sell their space on Airbnb and make money. If demand goes down again, they can stop selling on Airbnb and rent the traditional way.

 

So how did Airbnb go from an ugly website renting 3 air-beds to supplying more rooms than the Top 3 largest hotel companies in the world all combined? How did these two guys make the whole world comfortable with living in the houses of strangers in unknown cities?

The Story

The story of Airbnb is the definition of entrepreneurship. It all started with 2 guys who lived together, Joe Gebbia and Brian Chesky, who decided one day to quit their jobs with the intention to work together on “The Next Big Thing”… Well, from there, two things happened that they never could have predicted. First, the next month’s rent on their home was suddenly increased by 25%. Second, they learned about a big design conference in their hometown, but when they saw the advertisement for this big event, they saw at the bottom it said, “all hotels were sold out”. From there, Joe suggested they let people stay in their own house on the airbeds they had in their closet.

 

Shortly after that, they started the website Airbedandbreakfast.com (now called airbnb.com) and asked for $80 to let people stay in their house. After promoting their website and three airbeds, they felt it was a success and they loved doing it so much that they decided to keep working on airbedandbreakfast.com.

(Hey English learners, if you didn't know.. This is an Airbed.)

Some time later, they tried this again at a convention (a meeting) for Barack Obama in the city of Denver, Colorado. When the convention happened, there were only 30,000 hotel rooms in the whole city, but 100,000 people came to attend. There was a big problem. So Joe and Brian used their credit cards to startup their site again, but this time people all over the world noticed them and their website went from 0 rooms to over 800 rooms in 4 weeks!

After that, they started to meet with investors. They called 20 investors, 10 replied to them, only 5 met with them, and 0 wanted to invest… (I’m sure all 20 of these investors are very sad today that they couldn’t predict how big of a winner Airbnb would become!)

At this point, they had used their credit cards to pay for the business costs and were tens of thousands of dollars in debt and Airbnb wasn’t making money yet … They really needed a way to make some quick money. They thought their first success (where Airbnb went from 0 rooms to 800) happened because people were excited about the political convention, so they tried to find another way to make money from politics. They came up with another crazy idea; to sell political breakfast cereal… for $40 a box!

 

Left: Obama O's ............... Right: Cap'n McCain

They sold over 800 boxes and earned around $32,000. This cereal let them pay off their debts and it also got the attention of a startup investor, Paul Graham. Paul helped start an investment company called Y-Combinator, a company that specializes in financing startups.

Image of conference at Y-combinator with young entrepreneurs

He was their first investor, but don’t assume that this rich guy immediately thought renting out your own room or house to other people sounded like a good idea. He thought it was really strange. In their first interview together he said, “You mean people actually use this? That’s weird”. So it wasn’t actually the business idea that sold Graham, it was their hard work and creativity in selling the cereal. If they could sell cereal for $40 a box, they could probably make Airbnb a winner too. With Y-Combinator’s help, they raised over $600,000 from investors. As time went on, people saw you could really make a good amount of money from Airbnb and now there are millions of listings

 

What Did We Learn?

Airbnb wins because it brings supply and demand together in a way that would be impossible for the traditional hotel industry. This is for two reasons A) hotels are expensive to build and B) most travelers like to vacation at about the same time every year. That means sometimes lots of people need hotel rooms (demand is high), and other times very few people need hotel rooms (demand is low). Hotels can’t easily and cheaply make extra rooms and they can’t do anything with their buildings when demand is low. When demand is low, hotels are still paying for all the extra rooms. Airbnb doesn’t have this problem. They don’t have hotels and workers. They let homeowners rent out whatever they have, and if demand is ever too low, these homeowners can do other things with their place, like rent their space the traditional way.

Airbnb wins because it is efficient. A person can now advertise their extra space to travelers from all over the world, and travelers can also search easily for the kind of place they want to stay. In the past, this kind of connection was impossible, too expensive, or just a waste of time.

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