Airbnb reportedly raising $1B at $24B valuation(businessinsider.com)
businessinsider.com
Airbnb reportedly raising $1B at $24B valuation
http://www.businessinsider.com/airbnb-reportedly-raising-1-billion-at-24-billion-valuation-2015-6?op=1
102 comments
Is YC incrementally losing it's value to startups with every class that starts (and grows)?
Would you rather have the deal that Airbnb got from YC or the deal that the next three kids with a gleam in their eye will get from YC?
Airbnb vintage YC deal: Here's $15k for 7% of your company. Also, welcome to the club! Nobody has heard of us, but we're still a club.
Next YC deal: Here's $120k for 7% of your company. Also, welcome to the club! People have heard of us! You now have social permission to tap the resources of several hundred companies, some of which are worth billions of dollars. You're a mortal lock on raising a round subsequent to Demo Day at a valuation which will make angels weep while happily investing. You have preferential access to every connection which matters in Silicon Valley, including top-tier VC firms, a pool of interested employees, potential acquirers, and vendors who you need good relations with. Comes with one free TechCrunch article, too!
Would you rather have the deal that Airbnb got from YC or the deal that the next three kids with a gleam in their eye will get from YC?
Airbnb vintage YC deal: Here's $15k for 7% of your company. Also, welcome to the club! Nobody has heard of us, but we're still a club.
Next YC deal: Here's $120k for 7% of your company. Also, welcome to the club! People have heard of us! You now have social permission to tap the resources of several hundred companies, some of which are worth billions of dollars. You're a mortal lock on raising a round subsequent to Demo Day at a valuation which will make angels weep while happily investing. You have preferential access to every connection which matters in Silicon Valley, including top-tier VC firms, a pool of interested employees, potential acquirers, and vendors who you need good relations with. Comes with one free TechCrunch article, too!
> Next YC deal: Here's $120k for 7% of your company. Also, welcome to the club! People have heard of us! You now have social permission to tap the resources of several hundred companies, some of which are worth billions of dollars. You're a mortal lock on raising a round subsequent to Demo Day at a valuation which will make angels weep while happily investing. You have preferential access to every connection which matters in Silicon Valley, including top-tier VC firms, a pool of interested employees, potential acquirers, and vendors who you need good relations with. Comes with one free TechCrunch article, too!
Sigh.
YC has a lot of cachet and no doubt opens certain doors, but founders should never drink too much Kool-Aid. For all of the wonderful things YC provides, the success of YC startups basically follows the same power law distribution you see across the Valley and no founder should delude himself or herself that being part of a "club" guarantees success in today's market.
Just look at the experience of the founder of Dating Ring (YC Winter 2014)[1]:
And so we focused on growth. For a year, my cofounders and I worked 100-hour weeks, all major holidays and weekends. We gave up social lives and had one of the most impressive graphs at the crazy 78-company Demo Day YC hosted – 60% MoM revenue growth, with 25k in revenue for March.
We had more press and name recognition than any other company there, and my pitch was named as one of the top 8 by TechCrunch.
Out of the 500 investors there, only one invested.
[1] http://advice.datingring.com/fundraising-while-female/
Sigh.
YC has a lot of cachet and no doubt opens certain doors, but founders should never drink too much Kool-Aid. For all of the wonderful things YC provides, the success of YC startups basically follows the same power law distribution you see across the Valley and no founder should delude himself or herself that being part of a "club" guarantees success in today's market.
Just look at the experience of the founder of Dating Ring (YC Winter 2014)[1]:
And so we focused on growth. For a year, my cofounders and I worked 100-hour weeks, all major holidays and weekends. We gave up social lives and had one of the most impressive graphs at the crazy 78-company Demo Day YC hosted – 60% MoM revenue growth, with 25k in revenue for March.
We had more press and name recognition than any other company there, and my pitch was named as one of the top 8 by TechCrunch.
Out of the 500 investors there, only one invested.
[1] http://advice.datingring.com/fundraising-while-female/
Read a little more carefully. He didn't say YC guarantees success, nor does he believe that. (I'm one of his cofounders, and this came up).
You're correct that patio11 didn't say that but I think it's helpful to remind people that the power law still exists. It's really easy to fall into the trap of survivorship bias and I'm sure there are plenty of folks out there who would benefit from being reminded that "... no founder should delude himself or herself that being part of [YC] guarantees success ..."
A denial worthy of a top flight attorney. He implied that by this paragraph:
"You're a mortal lock on raising a round subsequent to Demo Day at a valuation which will make angels weep while happily investing. You have preferential access to every connection which matters in Silicon Valley, including top-tier VC firms, a pool of interested employees, potential acquirers, and vendors who you need good relations with. Comes with one free TechCrunch article, too!"
So we have:
"mortal lock"
"make angels weep"
"preferential access to every connection which matters"
"top tier VC firms"
"one free TC article".
"You're a mortal lock on raising a round subsequent to Demo Day at a valuation which will make angels weep while happily investing. You have preferential access to every connection which matters in Silicon Valley, including top-tier VC firms, a pool of interested employees, potential acquirers, and vendors who you need good relations with. Comes with one free TechCrunch article, too!"
So we have:
"mortal lock"
"make angels weep"
"preferential access to every connection which matters"
"top tier VC firms"
"one free TC article".
What an oddly noisome comment.
Nice SAT word (I didn't learn that at the school that I attended).
You find being called a top flight attorney offensive?
You find being called a top flight attorney offensive?
As a Level 15 message board arch-nerd, I love that word, because it's a sort of two-fer: it suggests "noisy", which is really what I'm getting at, but actually means "annoying" --- "noise" and "annoying" having apparently different roots.
I felt like my response was dispositive. I'm telling you straightforwardly that's not what he meant, and I have good reason to believe I'm right. Your rebuttal actually ignored the substance of my comment and instead launched into a tedious semantic tea-leaf-reading exercise.
"Noisome" seems like the right word. :)
I felt like my response was dispositive. I'm telling you straightforwardly that's not what he meant, and I have good reason to believe I'm right. Your rebuttal actually ignored the substance of my comment and instead launched into a tedious semantic tea-leaf-reading exercise.
"Noisome" seems like the right word. :)
You only need 1 investor - so long as they have enough cash for your needs and fall under the "good/adds value" category. To me, that should equal a hurrah rather than a sigh.
In a past life, I built a company with backing from a single investor. If you're going to go down the path of building a company that requires outside financing, you can never assume that a single investor has "enough cash" to meet your future needs.
Your investor could be a billionaire and there are still countless reasons he or she might not be able or willing to provide additional financing. Just a handful: legal problems, health problems, travel, divorce, death.
Your investor could be a billionaire and there are still countless reasons he or she might not be able or willing to provide additional financing. Just a handful: legal problems, health problems, travel, divorce, death.
You don't drink the kook-aid. You take advantage of every advantage.
The problem is that many of the things founders assume to be advantages really aren't, or they're not as a significant as believed. In business generally, a lot of people overvalue and place too much emphasis on "advantages" that don't directly influence the metrics that matter, like sales, cost of customer acquisition, churn, etc.
Being in the YC family is clearly a meaningful advantage for many/most startups.
You're entitled to believe whatever you'd like, but if you want to make a convincing argument that being a part of YC is a meaningful advantage, you'll have to explain why, as I previously noted, the success of YC startups basically follows the same power law distribution you see across the Valley.
"You're a mortal lock on raising a round subsequent to Demo Day at a valuation which will make angels weep while happily investing."
While I concede your greater point, you're really overstating this part of it.
While I concede your greater point, you're really overstating this part of it.
My ex-ante expectation of a YC company in the current class raising successfully conditional on them being a going concern as of Demo Day is > 95%. With regards to valuation, I was joking -- the discursive market for it was the "angels weep" wordplay but it belatedly occurs to me that for people whose primary association with the term "angel" is "angel investor" that is less obviously intended to be a joke than it is with the rest of us.
[deleted]
To be fair, most of those benefits were there early on. Everyone in the industry definitely knew about YC already when I started (S07). All major angels/VCs were reachable through the network already. Valuations were good (for back then).
But the network effect does make the club worth more.
But the network effect does make the club worth more.
[deleted]
Competition to get "the next YC" deal is much greater now than it was back when "nobody has heard of us but we're still a club" but did provide value. [1]
If you don't get into the club and haven't passed the filter (which almost certainly has become more difficult) then you don't have anything.
[1] Also the resources are most certainly stretched much thinner than they were "back then". Even though there are more resources to tap.
If you don't get into the club and haven't passed the filter (which almost certainly has become more difficult) then you don't have anything.
[1] Also the resources are most certainly stretched much thinner than they were "back then". Even though there are more resources to tap.
I assume that the money is going to Airbnb ads on TV (and on airline seatbacks, and on Facebook, and everywhere else). When you have a model that works and is proven profitable on a unit basis, it makes sense to cram as much money as possible into distribution channels to make sure that it gets in front of everyone.
When you have a model that works and is proven profitable on a unit basis, it makes sense
...to IPO. In the normal world.
...to IPO. In the normal world.
Post Sarbanes-Oxley, it never makes sense to IPO, ever. You incur costs of several million dollars for compliance. Meanwhile, the ostensible purposes of an IPO (to provide liquidity for shareholders, and to provide access to public capital markets for the company) have had other solutions crop up. There's now an active secondary market for employee stock of private companies, and the vast majority of the money that would go into the public markets is now managed by the same large investment firms that do these late-stage private rounds.
I remember back when I was a countercultural libertarian hacker, we had a saying: "The Internet treats censorship as damage and routes around it." Well, the financial markets treat regulation as damage and route around it.
I remember back when I was a countercultural libertarian hacker, we had a saying: "The Internet treats censorship as damage and routes around it." Well, the financial markets treat regulation as damage and route around it.
Post Sarbanes-Oxley, it never makes sense to IPO, ever.
Let's go with, maybe, "Pre-SOX, you could reasonably IPO on revenue in the tens of millions with a valuation in the hundred of millions. SOX decisively removes that option. We now have economically viable alternatives to IPO, for high-growth tech companies, at valuations into minimally 'the tens of billions of dollars.' It may make sense to IPO if one is not a high-growth tech company or one desires a valuation higher than 'tens of billions of dollars.'" (Context: Uber is $25 ~ $50 billion, Microsoft is ~$375 billion.)
Let's go with, maybe, "Pre-SOX, you could reasonably IPO on revenue in the tens of millions with a valuation in the hundred of millions. SOX decisively removes that option. We now have economically viable alternatives to IPO, for high-growth tech companies, at valuations into minimally 'the tens of billions of dollars.' It may make sense to IPO if one is not a high-growth tech company or one desires a valuation higher than 'tens of billions of dollars.'" (Context: Uber is $25 ~ $50 billion, Microsoft is ~$375 billion.)
The a16z deck posted a couple of days ago made a great point relating to this. In the past, an IPO would allow everyone to participate in the upside (e.g., 1000%+ growth of the Microsofts and Oracles). Now, the ones reaping the rewards are the private equity groups. By the time they unload companies on the public markets, most of the upside is gone.
https://a16z.com/2015/06/15/u-s-tech-funding-whats-going-on/
https://a16z.com/2015/06/15/u-s-tech-funding-whats-going-on/
>>it never makes sense to IPO, ever
Except private financing rounds are incredibly costly long term, and post-IPO you have access to debt financing that is an order of magnitude cheaper. Financing is, after all, just money you pay for money to do things sooner, hopefully to make more money. When you look at it from that angle, you want that money to cost as little as possible. There's a reason revenue is considered the cheapest form of financing, I'd say 6% debt financing is the next cheapest for a large company.
Except private financing rounds are incredibly costly long term, and post-IPO you have access to debt financing that is an order of magnitude cheaper. Financing is, after all, just money you pay for money to do things sooner, hopefully to make more money. When you look at it from that angle, you want that money to cost as little as possible. There's a reason revenue is considered the cheapest form of financing, I'd say 6% debt financing is the next cheapest for a large company.
I'm pretty sure debt financing is available to private companies. My wife works in impact investing, they do a number of debt deals and bridge loans to private portfolio companies.
Debt financing is available to everyone, but the question is how much and at what cost? Correct me if I'm wrong, but I am under the impression that the terms are much better for public companies.
I've only become familiar with the Sarbanes-Oxley Act, but can you or someone elaborate on why this prevents companies from IPOing?
Sarbanes-Oxley (SOX)'s primary provisions only apply to publicly-held companies. One survey estimated that the average Fortune 500 company spent $4.1MM on SOX compliance in 2004 alone. Much of the cost of compliance is static, so a domestic company with ~$1BB/yr in revenue and domestic company with $100MM/yr in revenue could both spend $1MM on compliance, even though this represents a much more significant chunk of revenue to the smaller company.
The costs of compliance (both financial and the operational overhead of having controls in place) can be put off by delaying an IPO and the requirement to make public financial statements.
The costs of compliance (both financial and the operational overhead of having controls in place) can be put off by delaying an IPO and the requirement to make public financial statements.
If AirBnB hypothetically decided to never IPO, what incentives does an investor have in investing? Does the private AirBnB need to issue dividends? Genuinely curious about how this would work.
Sell to a later investor in a private financing round. A number of these late-stage rounds include cash-out provisions that apply to early investors as well as founders and employees.
The financial industry has basically taken the public markets private. There's nothing that says that all stock markets must be public, and in fact the history of stock exchanges has several instances of this in the past. The NYSE started out as a direct agreement between 24 brokers in 1792; it was regulated in 1817 to prevent abusive trading, and then grew dramatically in the mid 1800s with the invention of the electric telegraph. By 1865, a number of brokers were getting fed up with regulation, and so they established what became American Stock Exchange by trading stocks on the curb outside the NYSE. It was regulated in 1908. I predict that we're witnessing the birth of another stock market, or maybe it's already been born and I'm not enough of a cool kid to know about it.
The financial industry has basically taken the public markets private. There's nothing that says that all stock markets must be public, and in fact the history of stock exchanges has several instances of this in the past. The NYSE started out as a direct agreement between 24 brokers in 1792; it was regulated in 1817 to prevent abusive trading, and then grew dramatically in the mid 1800s with the invention of the electric telegraph. By 1865, a number of brokers were getting fed up with regulation, and so they established what became American Stock Exchange by trading stocks on the curb outside the NYSE. It was regulated in 1908. I predict that we're witnessing the birth of another stock market, or maybe it's already been born and I'm not enough of a cool kid to know about it.
> Sell to a later investor in a private financing round.
But what incentives would those later investors have?
Public company stock is valuable because it provides the owner a dividend stream, control of the company as well as ownership of the company's assets; I wonder how an AirBnB, for example, that never went public would provide value to shareholders.
But what incentives would those later investors have?
Public company stock is valuable because it provides the owner a dividend stream, control of the company as well as ownership of the company's assets; I wonder how an AirBnB, for example, that never went public would provide value to shareholders.
Truth: best to raise when you can, not when you need.
Does that scale into the billions, though?
Absolutely. Once you raise, you're practically praying for the economy to tank. All of your poorly funded competitors go away and everything gets way cheaper (primarily, labor).
Does this hold if you're selling a luxury good like holidays?
I'm sure there are exceptions but very few. And not that one. A well-capitalized player could go a long way towards sewing up the entire market.
Consider it like FB buying instagram. Company is playing around with a small amount of equity as a % of total value. Having some liquidity in the bank for a rainy day is a good thing in a bubble. As is investing it in a way that will increase an eventual IPO value. So in either the upside or the downside here they have options to use the money that likely will move the needle on valuation.
Apparently, it just did.
If by 2020 they expect to earn $3 billion a year... then it would take 8 years to get your money out at this valuation, correct? And that projection is 5 years away, they currently aren't profitable, and the $3 billion projection doesn't include taxes, interest, or depreciation.
I'm not saying this won't work out but on the face of it, those numbers don't seem great. Who is going to shell out $1 billion for that? I sure hope that institutions like pension funds etc aren't getting pulled into this because of repressed rates of return on "safe" fixed income investments, because this has the potential to end badly.
I'm not saying this won't work out but on the face of it, those numbers don't seem great. Who is going to shell out $1 billion for that? I sure hope that institutions like pension funds etc aren't getting pulled into this because of repressed rates of return on "safe" fixed income investments, because this has the potential to end badly.
No, you're thinking about this all wrong, the valuation is due to all the physical assets they own.
More seriously, these kinds of valuations send a powerful signal that physical property ownership should be viewed less and less as an asset to a company and more as a burden.
Since AirBnB shifts the property ownership over to their room network, shifts up and down in the short-term rental market hurts them and provides a buffer to AirBnB. Traditional hoteliers have to keep maintaining empty rooms in the event the industry picks back up, or build more rooms if the industry is at a high. On the flip-side, AirBnB can be sensitive to local regulations and property owners might simply decide to not have their place up for rent, making availability a slight risk.
To put this valuation into perspective, Marriott International has a Mkt Cap of $21.5B They're the 3rd largest hotel group on the planet and own something like 125,000 rooms.
Airbnb claims 1,000,000 listings, but owns none. Makes money only off of the service fees (6-12%) and credit card processing (3%).
Looked at another way, this valuation says to the hotel industry "having professional employees and facilities is eating into your bottom-line", because AirBnB simply doesn't have to assume those costs.
Prediction: regular hotel rooms will start showing up AirBnB within 5 years.
More seriously, these kinds of valuations send a powerful signal that physical property ownership should be viewed less and less as an asset to a company and more as a burden.
Since AirBnB shifts the property ownership over to their room network, shifts up and down in the short-term rental market hurts them and provides a buffer to AirBnB. Traditional hoteliers have to keep maintaining empty rooms in the event the industry picks back up, or build more rooms if the industry is at a high. On the flip-side, AirBnB can be sensitive to local regulations and property owners might simply decide to not have their place up for rent, making availability a slight risk.
To put this valuation into perspective, Marriott International has a Mkt Cap of $21.5B They're the 3rd largest hotel group on the planet and own something like 125,000 rooms.
Airbnb claims 1,000,000 listings, but owns none. Makes money only off of the service fees (6-12%) and credit card processing (3%).
Looked at another way, this valuation says to the hotel industry "having professional employees and facilities is eating into your bottom-line", because AirBnB simply doesn't have to assume those costs.
Prediction: regular hotel rooms will start showing up AirBnB within 5 years.
You have to look at the terms before making that judgement. It seems very unlikely that it's a straight equity deal.
You could imagine a preferred offering with a 1x liquidation preference and some modest return, for example. The details really matter here.
You could imagine a preferred offering with a 1x liquidation preference and some modest return, for example. The details really matter here.
Yes, that very well may be true, but you do have to consider the fact that they cannot go public, or it would be difficult to do so, at a price below $24B. So whatever "special treatment" late stage investors get, they do make it much hard for themselves to realize a successful IPO exit.
Or they are hoping that the company will IPO one day and be worth 100+ billion in which case they will have quadrupled their money.
Consider a few things before calling the market crazy:
Total revenue to date: around $2B.
Revenue in millions Y by Y since 2011: 40,180,250,450,850 - See the growth?
Total money spent to reach nearly $2B in aggregate revenue: $2.5B
We do not know their cost of customer acquisition. We do not know their marketing spend. We do not know the median lifetime value of customers. We are not sure what other options users think/know they have.
For a business pulling in $1B in yearly revenue, raising $1B is not necessarily significant.
Total revenue to date: around $2B.
Revenue in millions Y by Y since 2011: 40,180,250,450,850 - See the growth?
Total money spent to reach nearly $2B in aggregate revenue: $2.5B
We do not know their cost of customer acquisition. We do not know their marketing spend. We do not know the median lifetime value of customers. We are not sure what other options users think/know they have.
For a business pulling in $1B in yearly revenue, raising $1B is not necessarily significant.
This is the funny math that got Groupon in trouble when it IPO'd. You can't count revenue as the main metric. You have to look at costs & profits.
Any bootstrapped business will tell you this - but somehow everyone forgets it when it's VC money.
Any bootstrapped business will tell you this - but somehow everyone forgets it when it's VC money.
P&L is not a useful metric for growing startups.
If the lifetime value of an Airbnb customer exceeds their marginal cost (including COA), Airbnb should buy customers all day long.
I strongly suspect Airbnb's marginal returns are fantastic. Their model seems highly profitable on a unit basis.
If the lifetime value of an Airbnb customer exceeds their marginal cost (including COA), Airbnb should buy customers all day long.
I strongly suspect Airbnb's marginal returns are fantastic. Their model seems highly profitable on a unit basis.
I'm not saying it is or isn't - what I'm saying is you have to realize that revenue ≠ profit and failure to do so gets you something like what happened to Groupon.
Does that revenue figure include the percent paid to the hosts with each booking?
Their take is nowhere near $1 billion in annual revenue.
It would imply they're taking a thousand dollars in sales or so per listing per year at this point. That would more than require every listing be sold out at all times.
It would imply they're taking a thousand dollars in sales or so per listing per year at this point. That would more than require every listing be sold out at all times.
> It would imply they're taking a thousand dollars in sales or so per listing per year at this point. That would more than require every listing be sold out at all times.
I don't follow.
Their take is ~10%, so $1,000 of revenue for them requires $10,000 in annual bookings. If every listing is listed 100% of the time, that would imply an average rate of $27/night. (Highly unlikely.)
I don't follow.
Their take is ~10%, so $1,000 of revenue for them requires $10,000 in annual bookings. If every listing is listed 100% of the time, that would imply an average rate of $27/night. (Highly unlikely.)
Seems incidental to me that money is technically going to their bank account(s) while the payments are being processed.
Actually, it is near $1B. Their gross is in the billions.
Revenue, not bookings. These numbers (if correct) would represent 15% of bookings.
If airbnb can't become a successfully profitable company based on their current revenue and trend, there is a serious problem with the VC model. It's like watching the sub-prime loans just keep on going because no one have any understanding of what is going on.
In my mind this is part of an absolutely absurd game where a little groups of tightly knitted VCs leech onto each others successful investments to pump up some crazy valuations which they can then use to make even bigger.
There will be a correction to this sooner or later and it's going to be affecting alle the other already undervalued tech companies out there.
In my mind this is part of an absolutely absurd game where a little groups of tightly knitted VCs leech onto each others successful investments to pump up some crazy valuations which they can then use to make even bigger.
There will be a correction to this sooner or later and it's going to be affecting alle the other already undervalued tech companies out there.
When choosing between immediate profitability or faster growth, the smart decision is typically faster growth, as that leads to much greater profits down the road.
Remember when the HN crowd thought that Facebook could never be profitable because they were making the same tradeoff?
Remember when the HN crowd thought that Facebook could never be profitable because they were making the same tradeoff?
Facebook is one example. Not exactly enough to establish a new approach to business making.
When discussing multi-billion dollar web startups in the consumer space, there are only so many examples to draw from.
Yes and Facebook is probably one of the only of those who started with growth rather than looking for profit that has in fact become profitable. But they still haven't managed to make the amount of money back that was invested in them.
According to CrunchBase, facebook has raised roughly $2.1B totally (including their IPO, which accounted for $1.5B of that). [0]
In 2014, facebook totalled roughly $3B net income [1]. So they made dramatically more money back in the last year than they raised totally and will probably continue to do so.
[0] https://www.crunchbase.com/organization/facebook/funding-rou...
[1] http://investor.fb.com/secfiling.cfm?filingID=1326801-14-7&C...
In 2014, facebook totalled roughly $3B net income [1]. So they made dramatically more money back in the last year than they raised totally and will probably continue to do so.
[0] https://www.crunchbase.com/organization/facebook/funding-rou...
[1] http://investor.fb.com/secfiling.cfm?filingID=1326801-14-7&C...
Multi billion dollar startups are so rare that trying to mimic them is a fools errand. It's the same logic from people that say, "Bill Gates dropped out of college, and look how rich he is!"
When a company is growing, it's not the p&l that matters. It's the contribution margin (CM) (revenue less _all_ variable costs - including those "below the line", like SG&A, that scale with your customer base) that matters. It can make financial sense to spend tons of cash (all you generate and then some through outside financing), as long as you're spending less to acquire and keep customers than they'll spend with you. It can be hard to tell, even for a good investor, if a company's true CM is positive, and my guess is that many fast growing companies have zero or negative CM. I'd guess that Airbnb's is quite positive.
Sure but that doesn't change the fact that they don't need the money, they could do it with their own current revenue and still be in the lead.
This to me looks more like a for investors to milk the value of an AirBnB that is doing quite well already and doesn't need those money.
This to me looks more like a for investors to milk the value of an AirBnB that is doing quite well already and doesn't need those money.
Why does Airbnb feel the need to raise such a large funding round instead of going for an IPO?
Because much like Twitter's scenario, they're not worth nearly as much in the public market as they are today in the private market. Their numbers today won't support that hyper valuation. So they'd have a celebrated IPO, raise $2 billion or so, and their stock would promptly crater as the first few quarterly results rolled in.
The public market is going to look at HomeAway's $3 billion valuation and $446 million in sales, and wonder why they're paying 8 or 10 times more for Airbnb, when the actual financial results are far less.
They also can raise this billion at a tiny dilution, while not acquiring the intense scrutiny that goes with being public. Twitter for example has been under a challenging microscope since they went public. It's painful to flesh out your business model on the front page of the New York Times.
The public market is going to look at HomeAway's $3 billion valuation and $446 million in sales, and wonder why they're paying 8 or 10 times more for Airbnb, when the actual financial results are far less.
They also can raise this billion at a tiny dilution, while not acquiring the intense scrutiny that goes with being public. Twitter for example has been under a challenging microscope since they went public. It's painful to flesh out your business model on the front page of the New York Times.
From a conversation on just this topic a day ago https://news.ycombinator.com/item?id=9728648
The ability for private equity to support businesses before they go public has become absurd.
Agreed, and it's bad for would-be competitors because they can't identify weaknesses in incumbents, and can't argue for their alternative being better as there are no data in the public sphere, not to mention leaving small retail investors out in the cold.
PS Great username.
PS Great username.
This is a bubble waiting to burst. There's too much money being invested with no real and direct oversight, and that's when capital misallocation happens.
That's some runway. I'd love to know what that $1B goes on for a business that produces software and hosts it on commodity servers? Acquisitions? World wide advertising campaign? Liquidity for original investors?
A year ago airbnb was a site I'd heard of because of HN. Now friends all over the UK are familiar and use it. Phenomenal growth, off the back of such a simple idea.
Kudos for executing it!
A year ago airbnb was a site I'd heard of because of HN. Now friends all over the UK are familiar and use it. Phenomenal growth, off the back of such a simple idea.
Kudos for executing it!
It might not be that much of a runway. I'm not sure how many employees Uber has but Crunchbase says between 1k and 5k. If that is close to the top estimate and their cost per employee is near 200k then a billion dollars may end up being less than a year of runway when you factor in marketing costs and anything else.
For people questioning the valuation,
There is already a public company that is very similar to airbnb called Homeaway. They are profitable with a 3 billion dollar market cap. It doesn't seem far fetched to me to say airbnb is an order of magnitude more valuable than homeaway based on number of listings and mindshare I see online.
There is already a public company that is very similar to airbnb called Homeaway. They are profitable with a 3 billion dollar market cap. It doesn't seem far fetched to me to say airbnb is an order of magnitude more valuable than homeaway based on number of listings and mindshare I see online.
How about Expedia then:
$5.7 billion in sales. $400 million profit. Solid, consistent growth. $15 billion market cap.
Airbnb might achieve those metrics - ten years from now.
Or, going on the order of magnitude premise, it implies Airbnb is worth half as much as Priceline.com:
$8.4 billion in sales. $2.4 billion profit.
This is a fantasy valuation for Airbnb, that is pulling forward returns from far into the future. Airbnb seems to have an excellent business, and they may grow into that valuation one day - that day is not nearby.
$5.7 billion in sales. $400 million profit. Solid, consistent growth. $15 billion market cap.
Airbnb might achieve those metrics - ten years from now.
Or, going on the order of magnitude premise, it implies Airbnb is worth half as much as Priceline.com:
$8.4 billion in sales. $2.4 billion profit.
This is a fantasy valuation for Airbnb, that is pulling forward returns from far into the future. Airbnb seems to have an excellent business, and they may grow into that valuation one day - that day is not nearby.
Sorry to be picky but pulling into a current valuation all the future profits is the point of a valuation. The value of a company stock today is all of expected returns from stock ownership (ie dividends and capital) for the life of the company. If not then I would but the stock from you and just wait for it to survive longer than the timeline you valued it at.
But airbnb has a long way to go to be Expedia / Priceline size. Mostly it needs to stop relying on 75% borderline illegal listings !
But airbnb has a long way to go to be Expedia / Priceline size. Mostly it needs to stop relying on 75% borderline illegal listings !
No, pulling into the current valuation all the future profits is not the point of a valuation. If you did that, there would be no return to ever be had for the investors.
Under that premise, Facebook should have been valued at $200 billion at their IPO (or even earlier).
Google should have been worth $300 billion at their IPO in 2004.
Apple should be carrying a $20 trillion market cap using that calculation, pulling all of their future profits into their present valuation.
Investors do not normally reach a valuation for an investment today, based on profits ten years from now, with the expectation that the price paid today is equal to what the profits in ten years will justify. That's a recipe for not yielding any returns for ten years.
The point of a valuation is to invest capital into a company based on speculation of future returns to be yielded based on future profits, not to pay for all of those future profits with your investment today. The value is determined by the near-present estimation of what the business is worth, and with a potential bias elevating the valuation. The investor return comes from all of those future profits not being priced into the current valuation.
Under that premise, Facebook should have been valued at $200 billion at their IPO (or even earlier).
Google should have been worth $300 billion at their IPO in 2004.
Apple should be carrying a $20 trillion market cap using that calculation, pulling all of their future profits into their present valuation.
Investors do not normally reach a valuation for an investment today, based on profits ten years from now, with the expectation that the price paid today is equal to what the profits in ten years will justify. That's a recipe for not yielding any returns for ten years.
The point of a valuation is to invest capital into a company based on speculation of future returns to be yielded based on future profits, not to pay for all of those future profits with your investment today. The value is determined by the near-present estimation of what the business is worth, and with a potential bias elevating the valuation. The investor return comes from all of those future profits not being priced into the current valuation.
The entire idea of valuation is to indeed capture the value of current and future profits- it's just that the value of future profits is reduced in proportion to how far away they are.
Investors lose the value of the money invested for the amount of time that it is invested in exchange for future rewards, which are discounted the further out they are.
I don't know where those numbers came from.
Investors lose the value of the money invested for the amount of time that it is invested in exchange for future rewards, which are discounted the further out they are.
I don't know where those numbers came from.
An investor earning a return generally requires that present value does not account for all of the future profits. The parent I replied to claimed the exact opposite, that a valuation is based on all future profits.
For the investor ideally none of the future profits are captured in the present valuation. It's the battle between that position, and the company's desire to get as much capital for its equity as possible, that reaches the valuation.
For the investor ideally none of the future profits are captured in the present valuation. It's the battle between that position, and the company's desire to get as much capital for its equity as possible, that reaches the valuation.
Maybe what he meant is: If the future profits of AirBnB were known perfectly now, then their valuation should be the present value of all future profits as otherwise there is an arbitrage opportunity.
Since the future profits are not known perfectly, investors assume some risk, so the valuation is lower than the present value of all future profits, so that investors get rewarded for assuming this risk.
Since the future profits are not known perfectly, investors assume some risk, so the valuation is lower than the present value of all future profits, so that investors get rewarded for assuming this risk.
That first paragraph is what I meant. But the second paragraph is not quite how I understand it.
The risk is entirely down to the accuracy of the estimation of future profits. If there are only two VCs in the market and they both estimate the same cashflow, rational economics says they will both out bid school other down to the last cent of Present Value.
Of course that is not a realistic scenario, but I just want to be clear, and maybe folks were not implying it, but there is no "reward for risk taking". There is only a difference in estimated cashflow and a market that does or does not have high competition.
The more competition, as in SV VC world it seems, the closer a VC must pay to the estimated future cashflow. Which in cases of Uber or airbnb is frigging vast or nothing.
I think nothing to be quite honest but that's another post.
The risk is entirely down to the accuracy of the estimation of future profits. If there are only two VCs in the market and they both estimate the same cashflow, rational economics says they will both out bid school other down to the last cent of Present Value.
Of course that is not a realistic scenario, but I just want to be clear, and maybe folks were not implying it, but there is no "reward for risk taking". There is only a difference in estimated cashflow and a market that does or does not have high competition.
The more competition, as in SV VC world it seems, the closer a VC must pay to the estimated future cashflow. Which in cases of Uber or airbnb is frigging vast or nothing.
I think nothing to be quite honest but that's another post.
> If there are only two VCs in the market and they both estimate the same cashflow, rational economics says they will both out bid school other down to the last cent of Present Value.
Is this true in the presence of other investment opportunities. Suppose I estimate the present value of AirBnB's future profits as $30B plus/minus $10B, and I'm given a chance to invest at a $25B valuation. I also estimate the present of Dropbox's future profits as $30B plus/minus $1B and I'm given a chance to invest at a $25B valuation. Are you saying that I should be indifferent to which investment I choose?
Is this true in the presence of other investment opportunities. Suppose I estimate the present value of AirBnB's future profits as $30B plus/minus $10B, and I'm given a chance to invest at a $25B valuation. I also estimate the present of Dropbox's future profits as $30B plus/minus $1B and I'm given a chance to invest at a $25B valuation. Are you saying that I should be indifferent to which investment I choose?
Well no, but that does not change the game in whichever bid you do choose to participate in (and let's assume you will participate in at least one bid somewhere, and that bid will also have competitors)
At some point you will compete for the asset, and you and your competitor will have estimates of future cashflow and you will logically be willing to go down to the last cent before giving up (well the last cent, discounted etc etc)
The point is, profit is not a right of investment.
At some point you will compete for the asset, and you and your competitor will have estimates of future cashflow and you will logically be willing to go down to the last cent before giving up (well the last cent, discounted etc etc)
The point is, profit is not a right of investment.
But the game investors play isn't "choose a company/asset class to invest in, and then compete with other bidders". While I'm competing with the other bidders I can take my money and invest it elsewhere.
So if we're really competing over the last cent an investor would logically think "my expected profit on this investment is now low enough that it makes more sense to take my money and buy government bonds instead, which offer the same expected profit but lower risk".
So if we're really competing over the last cent an investor would logically think "my expected profit on this investment is now low enough that it makes more sense to take my money and buy government bonds instead, which offer the same expected profit but lower risk".
I see your point now. I respectfully suggest that the valuation of a company is intended to represent the discounted summation of future cashflow, and in a highly competitive marketplace that valuation is intended to reach the summation of those market place participants who estimate the cash flows to be the highest (without presumably deliberately intending a loss to themselves)
I cannot see any other way to price it (well lots of ways to estimate future cashflow and even define cashflow) but there is not some agreed amount of discount for risk out there. Yes people will always want such a discount, and can walk away. But the discount does not start with a figure and work downwards. It's only a discount in hindsight as it were.
Imagine if you will a hotel in NY that has one room, 100 USD per night and is going to be knocked down in 100 days time. I would only expect to pay a maximum of 10000 USD to buy the hotel. Any more would be obviously foolish. Present value plays some part but mostly estimated occupancy drives the expected cashflow.
But also if I demanded a discount for the risk that the hotel might not pay back my investment, there is likely to be some other investor who has a different view on the Hotel scene in NY. Especially for the "ultimate in boutique experiences". No one will pay more than 10,000 but how close we come is (should be?) determined entirely by investors estimates.
I do not think that the main driver of valuation is that between VCs and the founders. That is admin work. The driver of the price paid by a VC is how much other VCs are willing to pay instead.
That seems a good thing to me.
Thank you for the comments - good to think these through.
I cannot see any other way to price it (well lots of ways to estimate future cashflow and even define cashflow) but there is not some agreed amount of discount for risk out there. Yes people will always want such a discount, and can walk away. But the discount does not start with a figure and work downwards. It's only a discount in hindsight as it were.
Imagine if you will a hotel in NY that has one room, 100 USD per night and is going to be knocked down in 100 days time. I would only expect to pay a maximum of 10000 USD to buy the hotel. Any more would be obviously foolish. Present value plays some part but mostly estimated occupancy drives the expected cashflow.
But also if I demanded a discount for the risk that the hotel might not pay back my investment, there is likely to be some other investor who has a different view on the Hotel scene in NY. Especially for the "ultimate in boutique experiences". No one will pay more than 10,000 but how close we come is (should be?) determined entirely by investors estimates.
I do not think that the main driver of valuation is that between VCs and the founders. That is admin work. The driver of the price paid by a VC is how much other VCs are willing to pay instead.
That seems a good thing to me.
Thank you for the comments - good to think these through.
Hmm, not really. It kind of depends on how effective a marketplace we think the VC world is. We cannot complain it is overheated and bubble like, and then say it is leading to valuations less than its true value.
So, from my small knowledge of these things there are three means to value a publicly listed stock - (discounted) free cash flow, (discounted) dividend returns and earnings multiple. All of which assume you have perfect future knowledge of the total returns to holding the given asset and allow you to then price the asset today.
So using your example, let's say it is Google's IPO day and they are selling x shares at a total value of 10bn (whatever it was). If you have a copy of the FT from 2015 and it says google has made 300bn dollars in dividend payments to date, and then ceased trading for the Lulz -then you can confidently price the discount on those dividend payments (what you get for buying the asset) and then pay upto that amount in the IPO. Your profit comes from knowing the true value of holding google stock until 2015 as opposed to every other investors knowledge (who probably were a lot more conservative)
If everyone had that copy of the FT, then the price of the stock would on IPO exactly match the (discounted) return from the dividend payouts (well there are a lot of caveats here)
If another copy falls through time and says "oh, 300bn, we meant 30bn" then your estimate changes again.
So, in an ideal marketplace, all the participants know all the future events to come, can then workout current asset price and then pay upto that amount for the asset.
The only profit investors can make is if a) the market is unfair (barriers to entry, reduced knowledge etc) or b) by thinking they have more accurate estimates of future then the rest of the market (ie time wormholes near FT newspapers)
So - there is simply no way a competitive market will leave a gap between the current price and the "what everyone agrees will happen in the future" price. That's the definition of an unfair market.
Either way, airbnb is getting compared to companies like Ezpedia, but using their discounted cash flow and saying it is like airbnb is not taking into account the enormous legal and regulatory hurdles they are facing.
So, from my small knowledge of these things there are three means to value a publicly listed stock - (discounted) free cash flow, (discounted) dividend returns and earnings multiple. All of which assume you have perfect future knowledge of the total returns to holding the given asset and allow you to then price the asset today.
So using your example, let's say it is Google's IPO day and they are selling x shares at a total value of 10bn (whatever it was). If you have a copy of the FT from 2015 and it says google has made 300bn dollars in dividend payments to date, and then ceased trading for the Lulz -then you can confidently price the discount on those dividend payments (what you get for buying the asset) and then pay upto that amount in the IPO. Your profit comes from knowing the true value of holding google stock until 2015 as opposed to every other investors knowledge (who probably were a lot more conservative)
If everyone had that copy of the FT, then the price of the stock would on IPO exactly match the (discounted) return from the dividend payouts (well there are a lot of caveats here)
If another copy falls through time and says "oh, 300bn, we meant 30bn" then your estimate changes again.
So, in an ideal marketplace, all the participants know all the future events to come, can then workout current asset price and then pay upto that amount for the asset.
The only profit investors can make is if a) the market is unfair (barriers to entry, reduced knowledge etc) or b) by thinking they have more accurate estimates of future then the rest of the market (ie time wormholes near FT newspapers)
So - there is simply no way a competitive market will leave a gap between the current price and the "what everyone agrees will happen in the future" price. That's the definition of an unfair market.
Either way, airbnb is getting compared to companies like Ezpedia, but using their discounted cash flow and saying it is like airbnb is not taking into account the enormous legal and regulatory hurdles they are facing.
$1B seems crazy and i am wondering why a website (more or less) could be evaluated at $24B. But i love AirBnB and i hope they disrupt all the tourism business. AirBnB is hopefully the future of travel.
Website is not evaluated. Business they make using that particular website is. There is a difference... while making airbnb website can take you 3 months with a good team of devs... building business of this magnitude will take years
Of course, i know that. Also they do a lot in every country, they advertise, they help people, but still, they don't produce goods. They have a lot of customers.But they are still "just a website" after all.
They broker transactions. The "good" they produce is the marketplace. eBay is just a website, they also broker transactions to create a marketplace.
Producing goods is often not as profitable as owning the market and taking a cut of every transaction.
It's weird that a web business with an actual revenue stream gets such a lot of flack for a high valuation. They aren't Facebook or Instagram, they are a monopoly and will make stacks of cash. But does make me think there's a market big enough for a few smaller players here...
>They aren't Facebook or Instagram,
Facebook is different. Facebook actually had/has a ton of revenue.
>they are a monopoly and will make stacks of cash
Airbnb is not a monopoly, there is a lot of competition for space.
Facebook is different. Facebook actually had/has a ton of revenue.
>they are a monopoly and will make stacks of cash
Airbnb is not a monopoly, there is a lot of competition for space.
I disagree with the comments here; they are orders of magnitude bigger than their nearest competitor. And that difference will only get larger. I think Facebook will succeed through acquisitions in the future and you can think of facebook.com as not relevant for everyone under 20.
There is very rarely a reason to go elsewhere unless you want a hostel or hotel. AirBnB the brand is a virtual monopoly, I think even the founder virtually confirms as much in his How to start a startup talk... here is the text and a link.
Q: One more question, the question is, in this particular situation with Airbnb, a lot of people think it is not necessarily a technology company, but more of a marketing company.
Brian Chesky: Good question. I will answer the question with a story.
Alfred Lin: Let me preface that question with a series of questions. Do you today have propriety technology?
Brian Chesky: Yes.
Alfred Lin: Do you have a moat?
Brian Chesky: Yes
Alfred Lin: Do you have network effects?
Brian Chesky: Yes.
Alfred Lin: Do you have pricing power?
Brian Chesky: Yes
Alfred Lin: Do you have a good brand?
Brian Chesky: I think so .
Alfred Lin: Are you a monopoly?
Brian Chesky: I am not going to answer that one
<audience laughs>
https://clip.mn/video/yt-RfWgVWGEuGE
There is very rarely a reason to go elsewhere unless you want a hostel or hotel. AirBnB the brand is a virtual monopoly, I think even the founder virtually confirms as much in his How to start a startup talk... here is the text and a link.
Q: One more question, the question is, in this particular situation with Airbnb, a lot of people think it is not necessarily a technology company, but more of a marketing company.
Brian Chesky: Good question. I will answer the question with a story.
Alfred Lin: Let me preface that question with a series of questions. Do you today have propriety technology?
Brian Chesky: Yes.
Alfred Lin: Do you have a moat?
Brian Chesky: Yes
Alfred Lin: Do you have network effects?
Brian Chesky: Yes.
Alfred Lin: Do you have pricing power?
Brian Chesky: Yes
Alfred Lin: Do you have a good brand?
Brian Chesky: I think so .
Alfred Lin: Are you a monopoly?
Brian Chesky: I am not going to answer that one
<audience laughs>
https://clip.mn/video/yt-RfWgVWGEuGE
Plenty of competition in that market. I have used 3 different services. Airbnb does not benefit from network effects the same way that facebook does.
A monopoly, are you kidding?
I've already seen Airbnb ads on TV, and it's not like they're a hardware company or some place like Zipcar where they need the capital to buy more machinery or equipment, so what is this really going towards? They're still operating at a loss, so how is this going to get them further out of the red, unless they expect to be operating in the red for a while?
Another tangential question I have is - where does YC fit now for startups? We're seeing all of these billion "Unicorn" companies coming up, and YC has grown from a handful of companies in a class to over 100 - can the next YC class really expect to earn the same esteem as the older ones? Is YC incrementally losing it's value to startups with every class that starts (and grows)?