In 2007 Brian Chesky and Joe Gebbia were broke and looking to raise money to make their rent in San Francisco. They decided to rent out air mattresses in their apartment to attendees of a conference because all the hotels were booked. They called their service “Air Bed and Breakfast.” In a few years, this small experiment would create the hotel industry disruptor Airbnb. The privately held company, with third co-founder Nathan Blecharczyk on board, now lists more than three million lodgings in nearly 200 countries. It is worth $31 billion, more than Hilton and Wyndham combined, and closing in on Marriott.
Leigh Gallagher, assistant managing editor at Fortune magazine, chronicles the extraordinary growth of the company in her new book, The Airbnb Story: How Three Ordinary Guys Disrupted an Industry, Made Billions … and Created Plenty of Controversy. She talked about her book on the Knowledge at Wharton Show, which airs on Sirius XM channel 111.
An edited transcript of the conversation follows.
Knowledge at Wharton: What was it specifically about Airbnb that drew you in?
Leigh Gallagher: I tend to go for topics that have what I call a “cocktail party factor” — you bring it up, and everybody has an opinion about it whether it’s good or bad or a personal experience or whatever.
This company first came on my radar in 2008, 2009. I am the editor of Fortune’s “40 Under 40” list. Every year, we get these breathless pitches from these new companies out of Silicon Valley that are “going to change the world.”
When I heard about this one, as I say in the book, I really rolled my eyes, and I said, “You know, this is an old idea. I’ve used VRBO or HomeAway.com for years. What is it with these tech companies that think they can gloss something up and re-issue it onto the marketplace?” I just sort of put that away, and then sure enough, a year or two later, they … started to catch fire.
“Everyone thought that they were completely crazy; no one thought this was a good idea.”
I had the chance to interview the CEO, Brian Chesky, at a tech conference Fortune hosts in Aspen every year. … I dug into the [company] numbers, and they just really spoke for themselves. I quickly learned I was wrong to dismiss them, and that’s when I first started looking at the company in closer detail.
Really, what drew me to it is that it’s this incredibly transformative way to travel. This incredibly social, business and cultural disruption story — it just touches so many things.
Knowledge at Wharton: What these guys did — Chesky, along with Joe Gebbia and Nate Blecharczyk starting a company basically by renting out space in their own apartment — was obviously a unique way to launch something.
Gallagher: It is, yes. The whole story around their origin takes a lot more twists and turns than most people who have read about the company know. They’ve oversimplified it to tell the story hundreds of times, but it really was purely accidental — as are many of the most interesting kinds of inventions.
Everyone thought that they were completely crazy; no one thought this was a good idea. People said to them, “I hope you have another idea. I hope this isn’t the only thing you’re working on.” Or, “People actually do this? What’s wrong with them?”
Investors wouldn’t even meet with them, or if they did, they just said, “You guys are crazy. There’s going to be a murder in one of these houses. There’s going to be blood on your hands. I am not touching this with a 10-foot pole.” And no one did. They almost didn’t get off the ground. They almost had to close up shop because people thought it was that crazy
Knowledge at Wharton: What was the turning point?
Gallagher: There were two moments, I would say. One was when they first rented out their apartment when a design conference was coming to town. They needed to make their rent. … This is in San Francisco. Two of the three co-founders — Brian Chesky and Joe Gebbia, they were Rhode Island School of Design graduates — needed to make money, and they rented out their apartment. They said, “Well, there’s lots of designers coming to town, so let’s offer them a place to stay with an air mattress, and it’ll be a whole [travel] experience. We’ll show them the city, etc.”
“Hotels charge a higher rate when there’s a big event that boosts demand. That’s basic supply-and-demand economics. Now, Airbnb absorbs all that extra demand.”
They thought they were going to get hippie backpackers, and instead, they got lots of people just like them who wanted those air mattresses. They had people sending their resumes and their LinkedIn profiles [to prove they are not security risks], so they thought, “We might be on to something.”
[The next pivot point came] when they got accepted into Y Combinator, the San Francisco start-up accelerator program. They didn’t even want to do that. They had to be pushed to applying, because they thought, by that point, they’d already launched their company. They’d been written up in TechCrunch, and they were offended that someone would suggest you would need to do Y Combinator. But [the company] would have died if they didn’t.
That program really gives a lot of advice, a lot of hands-on guidance, and co-founder Paul Graham told them immediately, “You’ve got to go to your users.” They didn’t have many users, but the few that they had were in New York City, and [visiting them] hadn’t occurred to them. They went to New York, and they really sat with their users and helped them dress up their properties with better language, better pricing and just gussied up the listings — and that was enough to turn the numbers to where they then started to catch fire.
Knowledge at Wharton: You’re originally from the Philadelphia area, and I’m sure you’ve spent many a summer weekend down at the Jersey Shore. … When you think about going to a shore location in the summertime, the majority of the properties available are people renting out their own houses. That’s been a core economic idea in beach communities for a long time. So the fact that this idea took so long to really explode in big cities is a tad surprising.
Gallagher: It is surprising. That’s why I rolled my eyes and said, “Oh, there’s all these other sites.” Well, Airbnb really was different: It was urban. These other sites, they were for beach houses or mountain towns, or they were for second-home rentals, which is a huge business. And we’ve all done that.
You know, when someone said to Brian Chesky, ‘Oh, I’m interested in your company because the vacation rental market is huge,’ he said, ‘vacation rental? Wait. You mean like the houses at the beach my parents used to rent?’ He hadn’t even connected those dots. He did not see Airbnb as a vacation rental company.
It was that it was urban; it was also that it was home sharing — renting out space while the owner or the resident was there — that was the original idea. They still do that, now, but the majority of the business is renting out a full space. But that was a really new thing, and that was definitely out there.
And they did other things, like made the profiles really reflect people’s personalities. They did a review system, which was intended to be a checks-and-balances system, to keep everybody honest. Also, I think they came along at the right time, because it was the Great Recession. People were looking for a cheap way to travel, and they just struck a chord with millennials, who were a massive market that at the time was not really being spoken to by the traditional hotel industry.
They loved this way of adventurous travel that was a bargain and just cool and neat and authentic and artisanal.
Knowledge at Wharton: The hotel industry did not really take well to having Airbnb as a rival, even though you bring up the fact that they don’t really see themselves as rivals.
Gallagher: This is a really complicated topic, and it has changed over time. In the beginning, no one would dispute that the hotel industry was very late to see Airbnb as even something they should pay attention to. In my book, at one point, a CFO of one of the biggest hotel chains was asked about Airbnb in 2013 — not that long ago — and he said, “What’s Airbnb?”
Then they came around. Originally, they had a friendly relationship, where the CEOs of a few of the big chains even went to Airbnb’s headquarters for a day of immersion. But behind the scenes, and increasingly, it has gotten much frostier. … Both sides try to say that they don’t compete with each other.
I [recently] had a conversation with Brian Chesky, and he said, “You know, this is overstated. Most people either wouldn’t travel, or they’d stay with friends and family [if they didn’t use Airbnb]. We’re not really replacing hotels.” But the data shows [that Airbnb taking market share is] increasingly starting to happen; this is a company that’s doubled [in growth] every year.
And it is competitive, especially around what’s called ‘compression pricing’ where hotels charge a higher rate when there’s a big event that boosts demand. That’s basic supply-and-demand economics.
Now, Airbnb absorbs all that extra demand, so it’s complicated, and I think that they’re going to have to find ways to coexist. I mean, the hotel industry is funding a lot of the opposition to Airbnb in certain key markets, but they know that this is something that has struck a chord with the consumer. They are not trying to deny that in the hotel industry.
Knowledge at Wharton: The other interesting thing is that people were actually willing to offer up their properties.
Gallagher: One of the transformative things — and, I think, one of the reasons why it took off — is that for the first time, if you are a millennial college grad, if you’re renting a studio apartment, you can turn that into an income stream. You could become a mini-real estate mogul for yourself, even if your only claim to real estate was a rented studio apartment.
Obviously, then you’d have to go find some place to stay, and people become [very] inventive — they crash with friends, or obviously, sometimes they go out of town, or sometimes they’re staying in the place and renting out another room.
Everyone has a friend who has made a lot of money by doing this, and has some kind of side-hobby, or gets to travel more, or gets to do whatever. Airbnb pitches it as, “We are helping the middle class stay in their homes.” That’s a very popular and very strongly worded line that they use, and it’s true. … Anyone can make extra money and do whatever they want with it.
“You could become a mini real estate mogul for yourself, even if your only claim to real estate was a rented studio apartment.”
Knowledge at Wharton: What is the relationship between Airbnb and the hotel industry right now?
Gallagher: It’s funny. On the surface, the CEOs would say they recognize that Airbnb has struck upon … this ‘home’ concept. This is something that the consumer likes, and we’re going to try to address it. Behind the scenes, hotel CEOs did not want to go on the record with me for the book, except for one — David Kong, the CEO of Best Western Hotels and Resorts. … He said, “How can the hotel industry say this isn’t a threat? Next time you’re on stage at a conference, ask the audience: ‘Raise your hand if you’re staying at an Airbnb,’ and see what happens.’
It’s really important, this notion that they are trying to adopt what works for Airbnb. One thing we’re going to see is a lot of experimentation on behalf of the hospitality industry. [In fact,] we’re already seeing it: AccorHotels has acquired onefinestay, which is a competitor in the space that does high-end home stays. It’s much more high touch, because they come in, and they change the linens and everything. … Choice Hotels has Vacation Rentals by Choice [Hotels]. This is going to be a big growth area now, and it’s thanks to Airbnb for exposing it.
Knowledge at Wharton: But how has the hotel industry reacted with their properties, specifically?
Gallagher: Even before Airbnb, the hotel industry had started making a lot of changes to try to address the millennial market, which it hadn’t really been addressing before. … Marriott, as an example, has launched a few different chains that are designed for millennials specifically.
But in terms of making tweaks directly in response to Airbnb, there are a couple of things. Some of them are doing minor things, like putting unique, different artwork in the rooms. One of the things that many of them are doing that is really helping is becoming more of a gathering place for locals in the community, because a big thing that Airbnb sells is that you can live like a local, and you get to interact with somebody who lives there who can tell you where to go, etc.
They’re trying to play that up a little more. But then they’re also trying to offer home rentals; some of them are starting to do that. That’s what I think we’ll see a lot more of. Many people envision a future where you can go to a hotel, check in at the front desk, and pick up the keys to your apartment rental nearby, as these partnerships get more and more developed. There already have been some pilot projects around that.
The other thing that’s going to change is on the rental front. People like Airbnb and similar services, but some people want a little more service. They want to be able to have things delivered to them by room service, or go to a spa, or go to a lobby bar. There’s going to be all kinds of experimentation that will allow you to stay in a home rental, but still avail yourself of some of those services, whether you have to go to a local club or whether it’s an outside firm that delivers your room service. It’s a brave new world, and both sides are converging. I think we’ll see more of that.
Knowledge at Wharton: So this is something that Brian Chesky and his other co-founders of Airbnb are very well aware of, and they understand that even with the success that they have had, adjustments will be needed as we go along.
Gallagher: Absolutely. It’s a hard company to cover from a book perspective, because they’re moving very fast. One of the big things they did, in terms of looking to the future — they looked at all the tech giants from the 1990s and saw that almost all of them are not really relevant anymore today. And they thought, “We don’t want to be that. We don’t want to be a company that was a flash in the pan, and then 10, 15 years later, people have moved on.”
One of their lessons from that was that the best companies are in more than one category. So last fall — and Amazon is their big model for this, who doesn’t want to be like Amazon? — they launched a new platform called Airbnb Trips, which offers things like experiences and services and restaurant reservations.
Soon, they’re going to add things like grocery delivery, chef services, ground transportation. They keep talking about something around flights. We don’t know what that’s going to be, but they really want to get into owning [the entire] travel experience and making it all this Airbnb, people-powered, live-like-a-local experience. … So they are definitely going forward.
Knowledge at Wharton: Do they expect to be a target of a takeover somewhere down the road?
Gallagher: Yes, but right now at a valuation of $31 billion, it’s really going to prohibit a lot of people from coming after them. Brian has a lot of thoughts about this. In particular, he really believes that the bigger you are, the more you can withstand those kinds of things, whether it’s a takeover or being in the public market. He has this theory [about company size] — [Amazon founder] Jeff Bezos helped shape this theory in him, and so did [LinkedIn co-founder] Reid Hoffman.
They’ve told him that public companies that are anywhere between $10 billion and $80 billion market cap don’t tend to do so well. It’s easy for them to get bounced around in the markets. [However,] if you’re bigger, if you have a multi-hundred-billion-dollar market cap, you can much more easily withstand anything that comes your way. It’s not easy to be a public company, but the bigger you are, the better you can take the blows of the public market.
“They loved this way of adventurous travel that was a bargain and just cool and neat and authentic and artisanal.”
People keep asking, “When are they going to go public?” and saying that they’ve been waiting so long. But I think that they really want to go public when they are as big as they can possibly be. … And I think that applies to acquisitions or other things. They are now becoming an acquirer. They just recently acquired a luxury company, and they’re going to get into that segment of the market. They’ve made some other acquisitions. I think we’ll see more of that.
Knowledge at Wharton: That just suggests another level of growth for a company like Airbnb.
Gallagher: That was a little bit surprising, maybe, to its critics, because that expansion into these types of on-the-ground, local experiences, is a doubling down on that whole live-like-a-local, person-to-person, unique, artisanal way to travel.
If they just wanted to be big, they probably could have blown out the commercial side of things and opened up the platform to many more commercial users — though they definitely have had their share of those, and it hasn’t gone very well.
Knowledge at Wharton: There has to be a level of surprise, even for Brian and his other co-founders, to see what has happened with Airbnb over the last few years.
Gallagher: Yes, it’s funny. I recently did a video interview with Brian Chesky for a Fortune article, and in it, we talked about this. He said in the very beginning, he thought, “Wow, if we’re really successful with this, someday hundreds of people might use this.”
But I think that’s also why they got into some trouble with regulators and with controversies and other things — because they didn’t expect it to be this big. They didn’t design it to be this big, or to be in these cities where people don’t like them, where it causes all this trouble and breaks all these laws. They didn’t foresee that.
When they designed the whole new product around experiences, they did that much more with eyes wide open, having been through everything they’ve been through. Recognizing that “well wow, this might get to be really big. What are the problems we can plan for in advance? And let’s anticipate the criticism.”
I don’t know that they’ll face as much criticism about the trips as they’ve had on the housing side — housing is such an incredibly emotional topic, but they definitely have learned, to your point.
Knowledge at Wharton: They have worked with the various cities where they’re encountered resistance, and the entities within cities — including, to a degree, the hotel industry — to … not necessarily ingratiate themselves, but to fit into those communities better.
“The hotel industry is funding a lot of the opposition to Airbnb in certain key markets.”
Gallagher: They have. There have been a lot of headlines around the situation in New York and San Francisco, which are two of their toughest and most combative markets. But it’s true, absolutely: They have gone in and partnered with cities all over the world. And they are not jerky guys. They’re nice guys, and that translates to the whole corporate culture, which sets up an interesting contrast with Uber right now.
But they do come from this place of [encouraging cooperation]. And a few years in, this became a real educational experience for Chesky. He thought if someone doesn’t like you, you just avoid them. Then his number two, Belinda Johnson taught him, “No, you’ve got to go face-to-face with the people that don’t like you. It’s the only way you’re ever going to come to a place of agreement.”
So that is their approach, but it doesn’t mean that it’s going to work everywhere. The opposition in some places is very political, and based around housing issues that the company has come around and changed the policy on. In places like New York, Airbnb has a policy now where you should only rent the home that you live in. There’s a neighbor complaint program, to address [any concerns]. They’ve tried to address these issues as they’ve come up.