It all started because two aspiring designers needed money to pay their rent. It was October 2007, and Brian Chesky and Joe Gebbia were sharing an apartment in San Francisco. There was an international design conference coming to town. The two noticed that on the conference’s Web site, all the hotels that were listed were sold out. The thought occurred to them that they could make extra money by renting out space in their apartment to people attending the conference. They proceeded to pull out a couple of air beds they had in a closet and said to each other, “This is it. We’re going to be the air bed and breakfast—at least for the weekend.” They quickly designed a Web site, put it up, and filled the three spots they had available in their apartment. They figured they’d get a couple of guys in their twenties who decided to attend the conference at the last minute. They ended up with three people who broke all their assumptions—about the business, the market, everything. The first person was a guy from India, who just couldn’t believe they put up a Web site offering space in their apartment. The second was a 35-year-old woman from Boston. And the third person was a 45-year-old father of five from Utah.
This experience got Chesky and Gebbia thinking there might be a bigger opportunity here. They made good money, about $1,000, renting their space for the conference. They also got to meet three amazing designers in the exact same field they aspired to enter. They also started thinking about the feedback their guests had provided regarding staying in their apartment. They had liked the social element of the experience. Instead of being in a sterile hotel, they got to stay with other designers who knew San Francisco and were eager to show them around. And they saved a little money to boot.
Initial Business Model
Chesky and Gebbia started talking to friends and family about their idea. They knew if they wanted to formulate a business they’d need programming help, so they approached a good friend and expert programmer, Nate Blecharczyk, who agreed to sign on. The next big conference was South by Southwest in Austin, Texas, in February 2008. South by Southwest is an annual film, music, and emerging technologies conference. Chesky and Gebbia wanted a more robust site than the quick site they put up for the design conference in San Francisco. So they worked night and day to build the site and get it up. The business model at this point was simple. Air Bed & Breakfast, as it was now called, was a way to help people find housing, at a private residence rather than a hotel when attending a conference. Air Bed & Breakfast didn’t accept money. Similar to Craigslist, people would simply exchange money when they met each other during their stay. Their own revenue model wasn’t worked out in that they weren’t quite sure at this point how to charge for the service.
There was one interesting twist to their Web site at this point that differentiated themselves from two sites, Couch Surfing and Craigslist, which were providing a similar service. On Couch Surfing you saw a photo of the person you’d be staying with. On Craigslist you saw a photo of the place. On Air Bed & Breakfast, you saw the person, the place, and it focused strictly on conferences and events. So the social element was stronger. At least you’d be staying with someone who was attending the same conference or event you were attending.
Iteration 1—Motivated by Using Their Own Service
Encouraged by their reception at South by Southwest (they hooked up 30 to 40 people), Chesky and Gebbia tried a third conference, in April 2008, and this time decided to use their own service. They picked a place to stay, and their host offered to pick them up at the airport because his girlfriend was making them a Vietnamese dinner. Things were going great until the host turned to them and said something like, “OK, where is my money?” The mood changed and Chesky and Gebbia realized that exchanging cash in person is awkward. It felt a little shady and they realized that they couldn’t have people all over the world exchanging money in this manner. Air Bed & Breakfast had to handle the money. This was also the revenue model they were looking for. They would take a transaction fee for facilitating payment through the site. Handling the money this way would also improve the user experience.
They realized something else during the April 2008 event. People started saying things like they’d love to use the site next month when they’re in London, but they weren’t attending a conference or event. So they started thinking, “Maybe this is bigger than conferences.” At that point, there was no way to list a room for rent other than for a conference or event. The site was set up for conferences and events and once the conference was over, the opportunity to list in the location of the conference was taken down.
These two insights—Air Bed & Breakfast should handle the money and the site is bigger than conferences—transformed the company. The business model quickly iterated to Air Bed & Breakfast handling the payments and broadening beyond conferences and events.
Iteration 2—Motivated by Joining Y Combinator and Interacting with Users
In early 2009, things were going well but not great for Air Bed & Breakfast. The team, consisting of Chesky, Gebbia, and Blecharczyk, the programmer who became part of the team just before South by Southwest, joined Y Combinator. Y Combinator is a start-up incubator, located in Silicon Valley, which in exchange for about 6 percent equity in a start-up provides a small amount of seed-stage funding and three months of intense mentorship. It’s run by Paul Graham, a very experienced investor, and entrepreneur.
At that time, the majority of business Air Bed & Breakfast was getting was from New York City. Graham told the Air Bed & Breakfast team to go to New York City, rather than sit in California, and get to know their customers. So they started shuffling back and forth from California, to attend Y Combinator events, to New York City, to meet their customers. They set out to meet every single one of their users in New York City. They took pictures of their customers’ places. They hosted parties for their customers to talk about the service. Two things started to happen. First, booking in New York started to go up. Apparently, their customers appreciated being asked for their feedback and started talking up the service. Second, every time they went to New York they used their own service. They started realizing that many things they thought about their service were not as good as they thought they were. They’d try to book a room on their Web site and think, “This is annoying.” They also realized that the pictures of the rooms for rent needed to be bigger. They’d look at the small picture of an apartment listed on their site and then actually go to the place and think “Wow, this place is beautiful—I would have never known from the small photos.” As a result of their experiences as customers of their own business, they put a lot of effort into redesigning the site.
Spending time with their users caused the Air Bed & Breakfast team to think about a piece of advice that’s often given to start-up entrepreneurs. Often, entrepreneurs who are trying to build a big business are told to not try to visit or speak to users one-on-one because it “doesn’t scale.” The thinking is that if you want a million users, you can’t get out and talk to everyone, so it’s best to develop systems to interface with customers. Paul Graham, their Y Combinator mentor, told them to talk to users anyway. He said that while they were still small was the opportune time to meet users and learn from them. Looking back, the Air Bed & Breakfast team now thinks that meeting users in New York City in the spring of 2009 was the fundamental thing that changed their company for the better. Not only did they talk to their users, they booked rooms with them, slept in their homes, hung out with them, and picked their brains for hours on end for advice. It shaped their business, shaped the design of their Web site, and shaped the policies of their company. It goes back to a basic Paul Graham quote, “Make something people want.”
Iteration 3—Meeting Barry Manilow’s Drummer
At this point, the summer of 2009, the business model was set, or so the Air Bed & Breakfast team thought. The site was redesigned, the revenue model was in place, and the firm’s business model had established a clear niche— namely, Air Bed & Breakfast helped people find spaces in people’s homes while on a trip, and helped people who had rooms or other spaces to rent find travelers to rent to. Then, while on a trip to New York City, the Air Bed & Breakfast team met a guy who had a beautiful apartment across the street from Carnegie Hall in New York City. It turns out he was Barry Manilow’s drummer, an individual who was traveling with Barry Manilow several months a year while Manilow was on tour. He loved Air Bed & Breakfast’s service but didn’t want to rent out a room or two occasionally; he wanted to rent his whole apartment for several months a year. That was an idea, and an entire market, the team had never considered. So they redesigned their site again to add the ability to rent an entire house or apartment, on a weekly or monthly basis. This type of rental arrangement is now a large part of Air Bed & Breakfast’s business.
The Air Bed & Breakfast team recently changed the firm’s name to Airbnb. In July 2010, to get to know his users even better, Chesky moved out of the three-bedroom apartment where the company started and announced he’d be “living on Airbnb” until the end of the year. He used his own site to book rooms in the San Francisco area for two to three nights a piece, and moved from place to place for the rest of 2010. In November 2010, the company raised $7.2 million in Series A venture capital funding to fund global expansion, hire staff, translate their service into multiple languages, and offer additional payment options.
On February 24, 2011, Airbnb announced a milestone: Since its launch, one million nights had been booked through its service. It now has bookings available in 170 countries. Here is a set of fun stats related to this business (as of February 2011): Longest single reservation: 200 nights; Most expensive listing: $10,000 per night; Most reservations by a single guest: 28; Number of marriage proposals between guest and host: 1.
In hindsight, each of the iterations of Airbnb’s business model seems obvious. How could the founders not know that facilitating payment was an obvious revenue model or that some people would be interested in renting their apartments or homes for weeks or months rather than just days at a time? But in fairness Airbnb’s entire business, in hindsight, is obvious. Why didn’t someone start it before Chesky, Gebbia, and Blecharczyk did? This is the magic of entrepreneurship. With hindsight, eBay, Facebook, and even Walmart, use obvious business models to serve customers in ways that create value for them. While it’s easy to look backward, it’s more difficult to look forward.
Not all business models follow Airbnb’s path—some coalesce more quickly, others take longer, still others never come together at all. It’s a judgment call on the part of a firm’s founders. In Airbnb’s case, it’s fortunate that the founders didn’t stop and say, “We’re done,” after iteration 1, iteration 2, and probably iteration 3. Instead, they kept engaging, watching, listening, and remaining open to change—actions that are typically required for a business model to be successfully developed.
Reference: Entrepreneurship, Successfully Launching New Ventures