S-1 Journal

The 10 Questions
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Every S-1, decoded through the same 10 questions.

From Bookings Down 72%
to a V-Shaped Recovery Without Leaning on Ads

In April 2020, Airbnb’s bookings fell 72% year over year. It was the month travel stopped across the world under COVID.

And yet — in the summer of 2020, Airbnb staged a V-shaped recovery. Even after sharply cutting marketing spend (brand + performance) from $1.14B in 2019, users came back on their own. And they came back differently — long-term stays (28 days or more) surged to 24% of bookings, and travel shifted toward nearby, suburban, and outdoor destinations.

Airbnb has 4 million hosts and operates in more than 220 countries, with 825 million cumulative guest arrivals since its founding. It owns not a single property. It is a company that supplies an enormous number of “rooms” in the form of hosts’ own homes.

What the S-1 presents is the picture of a company whose bookings fell 72%, that came back without leaning on advertising, and that went public on a V-shaped recovery.

Ten questions. We lay out only what the S-1 says.

Question 1

What is this company, really?

A marketplace that connects hosts (people who rent out rooms) and guests (people who stay).

The keyword the S-1 returns to again and again is “belonging.” Chesky’s letter places “Connection and belonging” at its center, and writes that the root of why people keep coming back to Airbnb is “a greater sense of belonging.”

The mechanism is simple. Hosts list their rooms and properties on Airbnb. Guests search and book properties around the world. Airbnb takes a service fee (it does not own the properties).

And Airbnb owns not a single one of the enormous number of “rooms” it supplies this way.

The world’s largest lodging platform that owns no property — that is what Airbnb really is.

Question 2

What does it compete on?

Airbnb competes in three distinctive ways.

People come even without ads

The most striking number in the S-1 is this one.

“

During the nine months ended September 30, 2020, approximately 91% of all traffic to Airbnb came organically through direct or unpaid channels.

AIRBNB S-1 (NOV 2020) — BUSINESS, OUR COMPETITIVE STRENGTHS

In other words, only 9% came through advertising. Users search for “Airbnb” directly or arrive from a bookmark. While Booking.com and Expedia pay enormous sums for Google ads, Airbnb’s brand itself has become a distribution channel.

Even after sharply cutting marketing spend during COVID in 2020, users came back on their own by summer. It was the moment that proved customers come even without leaning on advertising.

A network effect at global scale

As hosts grow, guests gather; as guests grow, more hosts join — the classic two-sided marketplace structure. In Airbnb’s case, 4 million hosts are spread across more than 220 countries. Wherever you go, there is an Airbnb.

Replicating this network is extraordinarily hard for a new entrant. Airbnb’s moat is neither code nor design, but the number and distribution of its hosts.

The flexibility of owning no property — proven by COVID

The pandemic devastated urban hotel demand. But for Airbnb, bookings in suburban and outdoor areas surged.

The S-1 puts it this way: “There are several areas of our business that have shown resilience, notably, domestic travel, short-distance travel, travel outside of our top 20 cities, and long-term stays.”

A hotel chain holds fixed assets, so even when demand moves, the buildings do not. An Airbnb host can offer a property wherever demand exists. Precisely because it holds no fixed assets, Airbnb could follow demand.

A brand that needs no ads, a global network, and the flexibility of owning no property — three pillars.

Question 3

How big is the market?

The market Airbnb lays out comes down to three numbers.

Airbnb’s 2019 GBV (Gross Booking Value) was $38 billion.

In other words, in a $3.4 trillion market, Airbnb is capturing just 1.1%.

The S-1’s implication is clear: Airbnb stands at the very entrance (1.1% penetration) of this $3.4 trillion market.

It turned analog “travel and lodging” into a digital platform.

Question 4

Who actually uses it?

Airbnb’s “community” is a two-sided marketplace.

The typical host is not a hotel operator but an individual — people renting out a spare room or a property they own. Airbnb writes that it has paid hosts over $110B since its founding.

Airbnb adapted naturally to shifts hotels could not handle. 4 million hosts and 825 million guests moved across the entire network as demand moved.

The shape of travel after COVID

The data on “new travel” proves Airbnb’s flexibility. The share of long-term stays (28 days or more) surged to about 24% of bookings, short-distance travel (within 50 miles of the origin) recovered, non-urban bookings grew rapidly, and the average booking value rose as length of stay extended.

Airbnb adapted naturally to shifts hotels could not handle.

Question 5

How does it make money?

Airbnb’s revenue source is simple.

Every time a stay is booked, Airbnb takes service fees from both the host and the guest. The fee rate varies by listing type, region, and booking duration.

Of the roughly $38 billion in 2019 GBV, Airbnb’s fee revenue was about $4,805 million (a 12.6% take rate). The GBV breaks down into $31.3B in host earnings, $5.3B in service fees for Airbnb, and $1.4B in taxes — closing to $38.0B (cleaning fees are included in the host’s share).

Airbnb owns no property. It incurs no construction or lease costs. The main variable cost items are only payment processing and customer support.

This is why, even under COVID, it could return adjusted EBITDA to positive in the seasonally strong third quarter (detailed in Question 6). It is the textbook platform structure: fixed costs do not rise as bookings grow, and they can be cut when bookings fall.

A structure where fixed costs do not rise as bookings grow, and can be cut when bookings fall.

Question 6

Are the numbers healthy?

You can see COVID’s destructive power. But look at profit, and a different picture emerges.

Start by laying out the numbers.

What stands out is that adjusted EBITDA for the third quarter of 2020 (standalone) was a positive $501M (versus $314M in the prior-year quarter).

Anomaly: revenue down 32%, yet why did profit turn positive?

The reveal has three parts: it laid off about 25% of employees (roughly 1,800 people), sharply cut marketing spend (brand + performance) from $1.14B in 2019, and paused investment in new areas (transportation, content) while scaling back Hotels and the like.

In other words, it was a structure in which “cut marketing and cut headcount, and you can return to the black in a seasonally strong quarter.” COVID forced that to be proven.

No full-year profit since founding

That said, the S-1 states it plainly: “We have incurred net losses in each year since inception, and we may not be able to achieve profitability.”

But this is the figure for the third quarter alone, the most seasonally strong. For the nine months of 2020, cumulative adjusted EBITDA was –$230M. A full-year GAAP profit has not yet been achieved.

A company that holds both “the muscle to turn a Q3 profit” and “no full-year profit” at once.

Question 7

Who runs it?

Airbnb is run by three co-founders.

Brian Chesky (CEO, co-founder)

An industrial designer and graduate of RISD (Rhode Island School of Design). In 2007, unable to pay rent, he inflated three airbeds in his apartment and rented them to travelers — that was the origin.

The letter attached to the S-1 from Chesky is extraordinarily candid for a CEO.

“

We started writing this letter in March. Then the pandemic hit. When borders closed and travel stopped, our business declined by nearly 80%. We had to put our IPO on hold, and I don’t think many people expected us to go public this year.

AIRBNB S-1 (NOV 2020) — CHESKY’S LETTER

He delayed the IPO and, to survive, borrowed $2.0 billion — a CEO who writes that candidly is rare.

Joe Gebbia (co-founder)

A classmate of Chesky at RISD. He led the early product design. As of the S-1, he heads Airbnb.org (the social-impact arm) and Samara (an architecture design studio).

Nathan Blecharczyk (co-founder, Chief Strategy Officer)

A Harvard CS graduate and engineer. He single-handedly built the early site. He is the engineering linchpin.

The founding DNA

Two of the three are designers (RISD), and one is an engineer (Harvard CS). A founding-team ratio of “two designers + one engineer” is unusual for a Silicon Valley startup. You can read an obsession with product detail as built into the founding DNA.

A company that started from three airbeds grew to 4 million hosts and 220 countries — and the three have kept directing that scale-up.

From three airbeds to 4 million hosts across 220 countries.

Question 8

Who controls it?

Airbnb has a multi-class share structure.

Class B carries 20 times the votes of Class A — a dual-class design that concentrates voting power in the founders and early shareholders.

The three founders together hold about 43% of the voting power. Broadened to insiders as a whole (directors, executive officers, and 5% holders), the group controls 49.0% of economics and 58.8% of votes after the IPO (per the S-1/A). The high-vote Class B is designed so that insiders keep a majority of the votes even after the IPO.

Class H (host stock) — unprecedented for a platform company

The S-1 discloses that 9.2 million Class H shares have already been issued to a Host Endowment Fund (contributed in November 2020). These are non-voting shares used for the economic support of hosts.

A platform company giving shares to its supply side (hosts) — this is a design with few precedents. Airbnb became a platform company that built its supply side, the hosts, into its capital structure.

Founder control persists after the IPO, with an unprecedented design that hands shares to hosts.

Question 9

What is it afraid of?

Here are the five things Airbnb itself says it worries about most.

The next pandemic

“The COVID-19 pandemic … have materially adversely impacted and will continue to materially adversely impact our business, results of operations, and financial condition” — placed at the very top of the S-1’s risk factors.

Travel is the industry most vulnerable to public-health crises. If another wave comes before a vaccine spreads, it will again take a devastating hit.

Short-term rental regulation

“Laws, regulations, and rules that affect the short-term rental and home sharing business may limit the ability or willingness” (of hosts to rent) — New York, Paris, Barcelona, Tokyo. Cities around the world are beginning to regulate Airbnb-style short-term rentals.

The reasons are rising housing prices and neighborhood friction. A movement toward caps on rental days, registration requirements, and fines is spreading globally.

Brand risk from safety incidents

The risk factors warn that “negative publicity could damage our brand and thereby harm our ability to compete effectively.” Airbnb’s brand rests on “trust.” It is the risk that a single serious incident undermines trust in the whole.

Host attrition

“If we fail to retain existing hosts or add new hosts … our business, results of operations, and financial condition would be materially adversely affected.” The 4 million hosts are not Airbnb employees but independent individuals. Migration to other platforms, tighter regulation, or simply quitting because it is a hassle — any reason reduces supply.

Continuous losses since founding

“We have incurred net losses in each year since inception, and we may not be able to achieve profitability.” In the S-1, Airbnb itself states that it has not produced a full-year profit since founding.

Pandemic, regulation, safety incidents, host attrition, continuing losses — five fears.

Question 10

What becomes of the money it raises?

Note: This analysis draws only on the facts in the S-1. The final IPO price, the listing date, post-listing share performance and trading demand are not in the filing and fall outside its scope.

The IPO plan is this.

The $2B already borrowed at high interest

The most dramatic number is the emergency borrowing of April 2020.

It borrowed $2.0 billion through a term loan led by Silver Lake and Sixth Street (First Lien + Second Lien), on the following terms:

• Interest at LIBOR + a spread (First Lien 7.5% + LIBOR / Second Lien 10% + LIBOR, roughly 7.5–11% effective)
• With warrants attached (granting the lenders rights to acquire additional shares)
• Silver Lake and Sixth Street as the lenders

It is an interest rate unthinkable for an ordinary loan. To survive COVID, Airbnb took on $2 billion of debt (of which the $1 billion Second Lien carried an effective rate of about 11%).

The S-1 describes the backdrop in Chesky’s letter: “we significantly reduced our expenses and raised $2 billion in debt,” and the company was “faced with the difficult decision to let many of our employees go.”

What the IPO money is for

The uses are general corporate purposes; working capital, operating expenses, capital expenditures; and potential acquisitions.

No allocation to a specific project is spelled out. The posture is “raise it for now, and the company decides how to use it.”

Not a stopgap, but a recovery-proving IPO

Airbnb’s IPO carries a strong sense of proving to the market that it “came back without leaning on advertising, from bookings down 72%.” Unlike loss-stage companies for which raising money was urgent, Airbnb is a company that “became able to go public precisely because it staged a V-shaped recovery.”

Repaying the high-interest emergency borrowing and entering a real expansion phase — the moment that opened capital-market access for that was the December 2020 IPO.

A company that “became able to go public precisely because it staged a V-shaped recovery.”

In closing

Beyond the ten questions

What Airbnb is selling is not merely “the world’s largest lodging platform that owns no property.” 4 million hosts, more than 220 countries, 825 million cumulative arrivals, $110B in cumulative host earnings — and with 91% of traffic organic, the brand itself functions as a distribution channel. It is a company that supplies an enormous number of “rooms” while owning not a single one.

But that company saw bookings fall 72% year over year in April 2020, and it has not achieved a full-year profit since founding. To survive, it borrowed $2 billion at high interest and laid off about 25% of its employees. As short-term rental regulation tightens in cities around the world, its 4 million hosts are independent individuals who could throttle supply at any time.

Even so, in the summer of 2020, with marketing spend cut sharply from $1.14B in 2019, it staged a V-shaped recovery, and standalone third-quarter adjusted EBITDA grew from $314M in the prior-year quarter to $501M (the nine-month cumulative was –$230M). COVID forcibly demonstrated a platform structure in which “cut marketing and cut headcount, and you can return to the black in a seasonally strong quarter.” These are the facts Airbnb lines up in its S-1.

The S-1 returns again and again to “Connection and belonging.” The market expects “a new shape of travel beyond COVID.” At the intersection of the two, Airbnb sells stock. It is the moment a company that came back from bookings down 72% goes public, proving its recovery.

Source: All facts are drawn from Airbnb, Inc.’s S-1 (accession 0001193125-20-294801, filed 2020-11-16), together with the company’s IPO roadshow presentation and factsheet where noted.