Airbnb is losing money at the speed or light and
that will only get worse over the coming months. What is the financial future
of Airbnb?
Airbnb allows renting of a room online. It’s a
very simple platform to connect prospective travellers with room owners. Airbnb’s entire
value resides in being an escrow. They provide a
layer of trust and handle payments.
For this simple activity of listing rooms and holding transactional payments, Airbnb takes a fee from 20% – 30% of the booking.
As
a traveller, you want to have Airbnb as a middleman
every single time as you do not want to send cash directly to a stranger in
advance.
As
a room owner, you want to have Airbnb as middleman as
they give you a minimal guarantee and somebody to sue if the property is
damaged after the guest leaves.
The two closest businesses are hotels.com and booking.com. They are similar to Airbnb though they rent hotel rooms instead of private rooms. Booking hotels through hotels.com and booking.com makes sense, more so when it comes to business travel or for large hotel chains with customer accounts. These platforms have a bit more focus on searchability, ratings and a seamless booking experience that Airbnb or even regular hotel sites do not have.
As Airbnb grows and gather more
and more customers, hotels will start listing on Airbnb and Airbnb will then
have to adjust its experience to cater to hotels.
On the revenue front, Airbnb makes US$ 3 billion per annum while hotels.com and booking.com each make up to four times this revenue.
Commission is 20-30% per booking. A bit less sometimes for hotels due to (large) deals with (large) hotel chains. Pretty much all of it is operating margin. It’s a tech company, a simple website. There are no costs like real estate or machinery or physical goods or storage or shipping. It’s all profit hence they’re all very profitable business. More importantly, while hotels.com employs only 500 employees, Airbnb employs 15000 employees – a single company running a single website!
Airbnb’s strategy has been to
burn as much VC cash as possible and hire as many employees as possible – A
standard strategy to inflate valuation and raise even more money. Remember as a
thumb rule, every dollar of VC funding you use now, you will get five in the
next round. The fact is, there is nothing for these 15k people to do. Experts
say that Airbnb could operate just as well (probably better actually) with a
third of that, or go lean with as little as one tenth if the situation required
it.
The
coronavirus has cut Airbnb revenues in half. It’s unknown how long it will last
but could be years. Airbnb
will be haemorrhaging money at an unprecedented rate. Their fixed costs are
simply too high. Airbnb will have to cut the fat sooner or later. Meanwhile
middle level employees are reportedly being hired with offers in excess of
$400k. It’s going to be a rough awakening for employees. Forget about any
bonus. Half of the offers were imaginary money in illiquid shares. It’s hard to
estimate what shares might be worth at this stage if anything, without knowing the fine print. They’re likely
to never materialize, between VC shenanigans against common employee shares,
probable lay-offs soon and any prospect of IPOing in the coming years down the
drain.
Twitter used to have 4000 employees many years ago.
Most of which were doing nothing and notably self-reporting to be playing
Ping-Pong in the office waiting to cash on their shares… a typical case of a
company inflating headcount to inflate a future IPO, which of course the market
didn’t buy. They had to reduce expenses in the following years while increasing
revenues. The headcount was frozen for years and it’s hardly bigger now
than it was back then.
Rest
assured. Airbnb is a solid business that is at no risk of disappearing. They
are burning money for the sake of VC growth and valuation. Can they afford to
employ evermore thousands of people for up to a half a million dollars each?
Expect a reality check as most unicorns playing the VC game get sooner or
later.
What if
Airbnb were to run out of cash? It’s not a problem because they will be able to
get more very easily. The business is extremely solid and sustainable as
explained. The brand is strong and well established worldwide.
The
only downside is unbelievably high fixed-costs (workforce) in the face of all
travel revenues grinding to a halt from the coronavirus. This means a couple of
bad years to go through, easily withstandable with cash reserves, debts and
cost reductions, in some combination thereof.
There
are hundreds of billions in cash sitting idle in the world with nowhere to
invest in. Equities are crashing. Bonds have near zero returns. Cash has
negative interest.
Airbnb
needing few billion dollars in cash is a godsend for an investor on a 5-10
years horizon. It is ripe for an hostile takeover from a Vulture Venture
Capitalist. Get as much control as possible, lay off one third of the company,
freeze headcount for 2-3 years. It will be printing money soon enough.
Alternatively, it could be financed by debt. Banks like Softbank, JP Morgan,
Goldman Sachs can arrange corporate loans in that order of magnitude. They do
that regularly when financing factories for the oil or car industry for example.
Banks are less invasive about how the company is run and don’t try to take it
over.
The future of Airbnb depends on how greedy VC and owners are really (normally they are always ruthless by nature). If Airbnb still has billions in cash from their last funding, the company can withstand a bad year or two doing nothing. If not, the company might re-raise money from a VC and it’s likely to impose strong terms to cut the workforce. Either way, the board might self-seize the opportunity to cut the workforce by one third anytime. Lower running costs, no loss of productivity raises a better outlook both in the short and long term.
