
Airbnb’s Battle to Stay Private - thedogeye
https://www.bloomberg.com/news/articles/2018-02-06/inside-airbnb-s-battle-to-stay-private
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nora4
AirBnB is such a great business. No significant competition for now among
startups. Primary (initial) market is different from the incumbents (hotels)
and it can gradually chip away from their market share too.

It also has better network-effect than say Uber (which has per-city network
effect but no significant global network-effect) and less competition than
latter. The "moat" is super strong and the leadership (Brian, Joe et al.) seem
to be really good.

I'm so in awe of their prospect. My only misgiving is that they rejected my
application (which proves no one's perfect after all - as they seem to also
make hiring mistakes:P)

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RandallBrown
Is VRBO/HomeAway not a significant competitor? It's owned by Expedia, so it
has a pretty huge backing.

I usually check both AirBnB and HomeAway when I'm looking for a rental and
don't see any reason to be loyal to one over the other. (AirBnB has a better
website/app, but the whole experience is pretty similar.)

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itaris
This is the first time I've heard of either VRBO or HomeAway. I assume they
have a much smaller presence.

~~~
chasedehan
VRBO has been around since 1995. My parents had their vacation condo listed on
there for a long time. The reason you don't hear about them is that they
weren't controversial with sharing out rooms and didn't invest in pretty
design.

I really think they dropped the ball when Airbnb moved into the space

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jonknee
Interesting bit about what Airbnb has been doing with all their raised VC...

> The addition of Tosi in 2015 was a signal for Wall Street to pay attention
> to the company. He was eager to create new, cash-generating ventures at
> Airbnb, people familiar with his work said. He quietly built a hedge fund
> within the company’s finance department. He used a portion of capital from
> the balance sheet to buy stocks, currencies and fixed-income securities,
> mimicking the treasury fund he ran at Blackstone. The side project
> represented 30 percent of the company’s cash flow last year and made about
> $5 million a month for Airbnb, the people said.

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fnbr
What? That's absolutely wild. Is this typical? How does it compare to what,
say, Alphabet's treasury does?

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tbrock
Yes. This is very typical. What do you think Apple does with the hundreds of
billions on its balance sheet? It’s not sitting in a savings account earning
interest.

Sure Apple uses some cash to build factories and technology but has an
internal hedge fund invest the majority of it.

Same goes for Google, Microsoft, etc.

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tarsinge
So in the end companies use their cash to invest in each other? I have a hard
time wrapping my head around the economic impact but it doesn’t look very
healthy to me (or is it?)

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PeterisP
It kind of makes sense from the investor's perspective.

Let's say that I've invested 100m in Apple, and that's the amount I wish to
have invested. Apple does not need cash at the moment and is currently
reinvesting it in other companies. The alternative would be for them to
redistribute money to shareholders - say, I'd get 20m back, and could reinvest
it in other companies myself. But there's a big difference - if _I_ 'd do it,
the 20m would get taxed; if Apple does it directly, then it's not.

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Retric
Stock buybacks are a much better approach than simple dividends from a tax
standpoint.

I invest in Apple get say 1%. Over next 20 years Apple buys back 50% of it's
stock. I now own 2% of Apple without paying any taxes.

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moccachino
Hm.. You still own 1% of Apple right? Otherwise, what happens at the end of 20
years when a 100 investors each buy 1%?

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Retric
Apple can only buy stock when someone sells it.

Consider there are 100 shares and you own 1 of them. Now Apple buys 1 share
from someone that sold it, that means there are 99 shares and you own 1 of
them. Repeat until Apple buys 50 shares, there are 50 outstanding and you own
1 share. Now, apple does a 1:2 split so there are 100 outstanding shares and
you own 2 of them post split.

It's true that the people selling stocks have to pay capital gains. However,
they always need to do that when selling shares to anyone.

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kelnos
Before I say what I'm about to say: I know nothing about Airbnb's finances
(aside from what's mentioned in the article) and I have no idea if it actually
does or does not make sense for them to go public this year from the
standpoint of the success of their business.

However, in a general sense, I believe that any company that provides their
employees equity as a part of compensation has a moral obligation to get to a
point where they can provide liquidity to those employees. It seems the
founders and some early employees of Airbnb were able to cash out some of
their shares in previous VC rounds, but that likely leaves the bulk of
employees holding options or stock in a position of hanging onto something
they aren't sure they'll ever be able to cash out.

Obviously there needs to be a balance of priorities: going public in a
situation where the stock price will likely tank or the business will fail
before employees can sell will of course not help anyone. But ignoring the
fact that you have a ton of employees depending on some sort of liquidity
event (even if it's just a company-initiated stock buyback) is IMO unethical.

Not saying that's definitely what's happening here at Airbnb, but the article
sure makes it smell that way.

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joeblau
If these companies were profitable from the beginning, some sort of profit
sharing mechanism could compensate for providing a financial reward. The
challenge is that these businesses are setup to lose money until they get to
some "scale" not profit margin. The scale goal leads founders to raise tons of
Venture Capital and even VC's like Bill Gurley says that the constraint of
profitability has been relaxed across the industry[1].

Bill says it's 10 or 100 times easier to lose 40 million to make 100 million
than it is to run a profitable company to 100 million. If you extrapolate that
out, there is no incentive from the majority stake holders (VC's) to IPO until
they are ready.

[1] -
[https://youtu.be/-cxK1YQfMXA?t=1165](https://youtu.be/-cxK1YQfMXA?t=1165)

~~~
kelnos
Sure, but I expect not all companies can be run profitably from day one, or
even close. Some markets also benefit from network effects, so prioritizing
profit over growth can lead to your eventual failure.

Arguably the excessive availability of venture capital makes it a lot easier
to go the growth/scale route, and to do so on someone else's dime, and this
_encourages_ people to ignore the idea of building a profitable business from
the beginning. And that sucks, but if you're trying to enter a market where
the norm is to run at a loss in order to gain scale, you probably aren't going
to be successful avoiding VC money and charging higher prices, unless you can
differentiate yourself as a premium product, or something.

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thisisit
The linchpin for a lot of technology companies staying private has been
Softbank. As they highlight in this article:

> The Japanese firm _dumped billions of dollars_ into Uber, WeWork Cos. and
> other highly valued tech startups in the last year.

I wonder where are these guys getting so much money to "dump". And once all of
this is over what will they really be remembered for?

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aianus
> I wonder where are these guys getting so much money to "dump"

They invested in Alibaba early. One of the best VC investments of all time.
$58 billion return.

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tanilama
30% of alibaba stock right? That is much more than 58 billions now...

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acconrad
The interesting thing I read from reddit was that 30% of Airbnb’s cash flow
last year came from an internal hedge fund holding currencies, equities, fixed
income. This hedge fund was set up by their ex-CFO, so it's an interesting
model for generating income. They take money from guests immediately, but do
not pay out to hosts until the guests check in, this delay can be up to many
months in advance. This gives them time to invest those assets how they see
fit.

The danger here is that 30% of their cash flow is the result of an incredible
bull market, so what happens to Airbnb when we hit a recession?

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paganel
> so what happens to Airbnb when we hit a recession

Probably the same thing that happened to GE Capital, which almost managed to
capsize GE itself.

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gandutraveler
So as per article, Tosi's internal hedge fund contributed to $60m ($5m per
month) of Airbnb's $93m annual profit?

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aetherson
Well, $60M of revenue to Airbnb's $2.1B revenue, and of that revenue, $93M was
profit.

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cobookman
Why would VC's give Airbnb such much idle cash. 5.3 Billion in cash reserves
is ~56 years of their current earnings.

Couldn't VC's take some of that money and invest elsewhere and get better
returns on the cash than it sitting unused in a company?

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isubkhankulov
i think youre under estimating the battles Airbnb is fighting in most of its
largest markets

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cobookman
Sure, and if they need more money they can go to VCs. However Im suprised VCs
will give them all the cash up front. Figured it'd be something like, "Hey
I'll commit 1Billion in cash to your needs, however I'm currently holding it
in a mutal fund myself. Let me know when you need it"

