If you believe in overnight success, I must disappoint you. We should all better prepare for a long and hard journey. Still interested in how to start a startup? Learn about Airbnb’s secrets and apply them to your journey.
The long and hard growth story of AirBnB shows how much hustling is needed when building companies.
Actually startups take off because the founders make them take off. — Paul Graham
You might think that AirBnB is another example of famous ‘overnight fortune? Be disappointed. It isn’t! There simply is NO such thing as overnight success.
AirBnB’s founders went through a fucking hard time and didn’t see a spark of success for almost 2 years. Actually, it’s almost in all cases like that. If you look more closely, you realize that they have been around for years until their breakthrough and the founders have carried on when every ‘normal’ person would have given up 10 times.
Let’s look at the number of guests they have booked a room on their platform.
You see that almost nothing happened for the first two years. And they actually started in fall of 2007, while the graph began in 2008. The official launch was in August 2008!
They literally had no traction at all for the first year!
The message that you can take from this is: Don’t believe in overnight successes, but commit yourself for a long ride! Airbnb needed 4 years until it really took off. And you usually don’t get rich quickly with a world-class startup. On average, it takes a unicorn startup 7 years until an IPO or an exit. The Whatsapp story of selling your company for +1B within 18 months is an outlier story.
P.S. The following case is meant to serve as an inspiration as well as illustrations for startup success principles. I concentrate on the things they did well and dug up metrics to help you see how a successful company is started and grows.
How it all started
It all began in 2007 when Brian Chesky and Joe Gebbia, 2 wantrepreneurs, couldn’t pay the rent on their flat in San Francisco anymore. Out of necessity, they came up with the idea. As there was another busy conference week in San Francisco that caused hotels to be completely booked out, they came up with the idea to rent out their beds, sleep in the living room and offer fresh breakfast in the morning to bring in a bit of cash.
Driven by some kind of entrepreneurial instinct, they built their own small site instead of just putting their offer on Craigslist. The results were quite remarkable: apart from 3 guests who paid $80 each, people from all over the world asked when their service would be available in their country!
Brian and Joe felt that they were onto something and began a relentless pursuit of this concept over the following next years.
After getting their friend Nathan Blecharczyk who is a techie on board, they forged (which was called ‘Airbed and Breakfast’) and aimed to take advantage of the shortage of hotel rooms during fairs and trade shows. As a start, they launched they service shortly before the Democratic National Convention.
However, their start was anything but easy!
They didn’t make any money for a while and maxed out their credit card lines. Instead of giving up and taking jobs, they used tons of credit cards and even created a remarkable range of Obama and McCain-branded cereals during the presidential election days (‘hope in every bowl!’).
Though they made $30.000, they still didn’t get any traction with their company and started to live off leftover cereals (unsurprisingly, they call this time an “absolute low point” now).
During this period, they were constantly discouraged. Most people thought that their idea was crazy. “Why the fuck would anyone pay for staying on the couch of a total stranger!?”
And people were convinced that only tech guys could create excellent products. Because Brian and Joe have both a design background, nobody believed in them either!
Some investors they were introduced to rejected their idea with a now famous series of blunt emails.
Lesson learned: Never overestimate investors! They may have seen a lot, but they don’t have a fantastic edge in knowledge. These guys are only making educated guesses in an environment that’s super uncertain. Getting cash from them doesn’t mean that your success is safe, and getting rejected by them doesn’t mean that your business is crap.
Everything lightened up when they made it into Y Combinator, the world’s first and best accelerator. Paul Graham (it’s founder) thought that their idea was shitty, but recognized that they were indeed truly committed entrepreneurs.
When they told him about the cereals story, he and his team of partners at YC were in. After a three month program, they finally raised a substantial seed round from Sequoia Capital and Y Ventures.
However, getting real traction did not work out yet.
Brian made a lot of publicity by leaving their 3-room apartment (which also was their office) and only lived in AirBnb hotels for 3 months, but it didn’t lead to a real breakthrough.
Joe, Nate and Brian didn’t lose their courage and searched for the reasons. When they looked at an especially poor-performing area (New York), they finally tracked down a big problem.
Most listings only featured poor mobile cam photos which gave potential guests no idea what they were buying. Based on this insight, they guessed that professionally photographed places get more bookings and as it turns out, they were right.
Instead of searching for an efficient solution, they flew to NY and visited hosts with a rented camera themselves! Their hypothesis turned out to be true when their revenues in NY doubled the next month. Hosts with professional photos got 2-3x as many bookings.
As soon as you know what to fix, fix it quickly and consistently.
As they found out that listings on AirBnB needed professionally looking images, they made it their number one priority to increase the number of professionally photographed listings.
Again, focus on one metric and key thing!
Their top metric started to create a scalable model. Today, AirBnB contracts an army of freelance photographers who take photos of AirBnB listings without any charges for the hosts.
As it became much more trustworthy and visually appealing, the platform finally took off! During the next year, they grew 800% and ‘expanded’ to 89 countries.
AirBnB’s story is interesting because it tells us several things.
#1: Don’t just ask people what they want, see what they’re doing.
Designers operate by the premise ‘don’t just ask people what they want, see what they’re doing’. Note that they didn’t interview people and act on their responses.
They conducted an ‘experiment’ and assessed how users reacted to a change of their site. Interviewing is an essential part of the Customer Development process, but tracking user behavior gives you more reliable data.
It also shows what the famous Y Combinator mantra ‘do things that don’t scale’ means. According to Brian, they just started with the perfect experience (getting a guy into your house who takes great photos for free!) and then worked backward.’
If they had begun by thinking about scalable solutions, they might have just sent their hosts email with courses on taking photos which hardly would have yielded the same results!
#2: Identify ONE key metric.
Another thing we see is it can be extremely effective to identify a core metric that really matters for your business.
And it doesn’t have to be the most obvious one!
If Brian and Joe just decided to focus on ‘bookings’ that wouldn’t have told them anything. By choosing ‘number of photographed’ listings, they could come up with concrete measures and could track their impact easily.
#3: Hiring is critical for building a great company culture.
The AirBnB guys had learned from companies like Zappos that having a great company culture gives startups an important edge.
A fundamental aspect of building a culture is hiring. Corporations tend to think that they can change the behavior of people by defining some guidelines or giving incentives, but it doesn’t really work that well.
Behaviours and motivation of people is a result of their values, and that is something beyond your reach. Personal values can change, but they can’t be modified by you as an employer! The consequence from that is only to hire people who have the values you want to build your company on.
AirBnB took that to an extreme!
They looked for 6 months and interviewed hundreds of people before they hired their first engineer. In their mindset, it was not just a question of efficiency but a crucial step that would determine their company’s DNA.
What’s crucial for them is a personal identification with their mission.
At his first interviews, Brian asked people if they’d take the job even if they had only one year left to live. Later he recognized that this was kind of creepy and changed it to ten years.
If anyone would rather go traveling, be with the family or start their own company, Brian told him or her to do that instead!
I keep repeating countless times that passion is essential for any founders or team members. Here you see how one can act on this insight.
#4: Onboard new team members by making them early adopters of your product or service.
Each new team member get’s a paid trip in his first week. It’s about making that AirBnB-experience that the founders believe in!!
People often say that money loves speed, but that’s not true when it comes to building your team. A small but dedicated team can be an extremely competitive edge. While a team with wrong values and motivations might fail even if its members are highly committed and competent.
You can see that in the Case of Rocket Internet.
#5: Don’t act irrationally when competitors threaten you.
In 2011, they tried to clone AirBnB and conquer the European market extremely quickly. After creating a company called ‘Wimdu”, they hired hundreds of people in just one month!
The AirBnB guys were terrified that the European market would be covered before they could gain a foothold there. Still they didn’t want to buy their competitor.
Side note: That’s what Ebay did back then to ‘save’ the German market and acquired the German copycat of Ebay created by the Samwer Brothers that later launched Rocket Internet.
AirBnB’s whole company was based on missionaries while buying Windu would have meant bringing 400 mercenaries in!
In the end, it was a good decision.
Despite all of the money that Rocket Internet put into Wimdu, AirBnB is a clear market champion in Europe now, while Wimdu is not doing particularly well.
What this story shows is that a great team and excellent customer support are the 2 competitive edges that you can have even as a first-time founder startup.
When a corporate or a company like Rocket Internet will decide to clone your business, they can throw X-times the money at the table that you could ever raise. You can’t beat them regarding cheaper services or more marketing! What they won’t be able to do is create a great customer experience and a team’s inspiring conviction around a core belief.
Maybe they could if they wanted, but It’s not in their mindset. Just listen to the lingo that the leaders of Rocket Internet are using: Oliver Samwer is famous for saying things like ‘the time for the Blitzkrieg must be chosen wisely’ and ‘We must take 100% of the market’. What do you think will happen if you tell your team ‘our competitors are our enemies, burn down their castles and destroy every single one of them!’. Do you think that they will provide great service to any civilians in that war?
I don’t like using war language anyway. Isn’t it bad enough that people’s lives are at stake?. Why on earth would we in the West use this war language at all? I know it’s powerful and brings across the message, but it’s disgusting.
Sorry, I needed to get this off my chest. Please don’t use war language!
#5: Create a movement. Welcome to “Sharing Economy”!
To give you a deeper understanding of how startups work, let’s take a look at the business model. AirBnb co-created a powerful global movement.
The sharing economy.
It means that startups allow people to offer goods and services. In the case of AirBnB, it’s flats. In the case of Uber or Lyft, it’s car rides that are done anywhere from a to b.
Note that these companies don’t offer any capacities themselves. They act as a mediator. AirBnB doesn’t ‘own’ any of the places that can be rented at their platform — apart from a few apartments which they use as ‘test labs’.
They only have a very loose contract with the people who actually own what’s being sold. This fact allows them to avoid a lot of risks that traditional providers must face: when a hotel stays empty, they have to pay their team members anyway. AirBnB only owns their hosts money when they receive an actual booking. A hotel needs to maintain their buildings; AirBnB leaves that to their hosts etc.
That’s what allows them to be cheaper than traditional service providers and makes them quite lucrative. It’s a robust approach to business.
This model has led to a big debate about whether the sharing economy is connecting people and allowing them to earn money more comfortable or if it’s just selling everything and playing out desperate amateurs against professionals to create dumping prices.
No matter how you judge it, it is clear that these companies are disrupting existing industries and will change the face of many services over the long-term.
#6: Create a marketplace.
AirBnB is a marketplace which typically follows the “winner-takes-it-all” principle — partly to the dynamic that many sellers will only list their offers on the biggest sites, and many buyers will start their search at the largest site because there are the biggest offers. This fact makes their industry quite competitive.
At the same time, they have only limited possibilities to beat similar competitors regarding pricing, because they are a marketplace and can’t control the prices that people charge.
Though AirBnB is considered a very innovative company, they make money in a relatively old-fashioned way. At each transaction, they charge fees to both the booker (6-12%) and the host (3%).
#7: Help both hosts and guests to have great experiences.
A big challenge for Airbnb is customer activation. Getting users to make a booking. It’s being assumed that only around 14% of all registered users ever book a room (as indicated by first reviews that people make), but the more users book, the more likely they are to book again. Once they are ‘hooked’ on the service, they become a constant source of income.
To do that, AirBnB must overcome the fundamental challenge of building trust.
When people book a hotel, they can be sure that certain standards apply. However, any listing on AirBnB could potentially be a swindler or a lurking rapist! As you might imagine, anyone who is actually worrying about this will never book a single night. On the other hand, if people are afraid that the room they rent might be destroyed or used as a meth lab, they’ll never become a host.
Providing lovely photos was a first step to giving people a better feeling about the uncertain deal they were making. Furthermore, AirBnB introduced a considerable identity verification process for both guests and hosts (which is so extensive that it pisses people off again). Furthermore, hosts and guests can write public reviews about each other.
#8: DEAL with a crisis with common sense. Don’t shy away.
Sadly, bad things happen — especially at platforms with the size of AirBnB. When they didn’t react to an early disaster, the AirBnB team learned the hard way that they couldn’t just dispose of such stories with a lukewarm apology.
The concerned host just shared her story in a personal blog post, which was widely shared. A massive wave of indignation swept through the digital community, threatening their brand considerably. As a result, AirBnB introduced a $50,000 damage guarantee for its hosts which is now $ 1.000.000. Plus AirBnB keeps informing the public about a team of investigators they have built to track down fraud and misuse.
#9: Combine classical marketing insights with funky technical stuff to grow.
What they did was allow people to put their AirBnB listings automatically on Craigslist as well, thereby drawing traffic from both platforms (and saving their hosts some efforts).
The interesting thing is that Craigslist neither allowed nor supported it, so they had to create an integration bot which could somehow complete the standard forms. This was far from trivial – there were so many technical details involved that no traditional marketer could have done it!
There are also rumors that AirBnB unofficially wrote to Craigslist users and gave them cheerful recommendations of their own platform though that was never confirmed…
#10: Use a referral program to grow.
The second thing is a widely used and classic method – a referral program. The basic idea behind it is simple. You create a standardized referral system that either gives the new or the existing user a reward if a signup occurs.
One of the first companies to use this tactic was Paypal resulting in millions of users. PayPal granted both the new and the existing user $10 each for each new signup.
AirBnB created a similar system that granted both users $25, but it was hard to find and underutilized at the beginning. To fix that, the team implemented the lean startup method and systematically improved it.
The result of their efforts: they increased their bookings by up to 25% in some markets! Sadly, referral programs have become extremely common and the times when millions of peoples were excited that they could get $10 with a simple click are over. Never expect your referral program to be a ‘hack’ that changes everything!
Lessons to be learned from AirBnB
- Great entrepreneurs don’t mind hustling: As Steve Blank once said, luck is not a decisive factor in the long-term. Great entrepreneurs create what looks like ‘luck’ by going countless extra miles and still showing up when everyone else is gone because the job feels too hard. The AirBnB guys are one of the best examples of that out there.
- A great company culture can be a competitive edge: It will keep your team motivated and will help you to create a great customer experience, which is one of the keys to scaling a small company.
- Hiring is essential for building a great culture: As the AirBnB founders keep saying, your first hires will make up your company’s DNA! Don’t compromise here to avoid the effort.
- Don’t overestimate investors: Being rejected or accepted by them neither means that your faith is sealed.
- Don’t ignore bad user experiences: It’s fatal in the sharing economy, but it can also fuck up each other business models in the long term. When your user’s houses start to burn, your team can either turn them into evangelists or haters based on the effort you make (and the outcome).
- AirBnB’s first pitch deck – Check out the first pitch deck that the AirBnB guys used here.
- Morgan Brown: Airbnb: The Growth Story You Didn’t Know – A great history of AirBnB that really shows how fucking hard these guys had it at the beginning. If you still believe in ‘overnight successes’, check this out.
- Alexia Tsotsis: Airbnb’s Brian Chesky On Expansion Efforts: We Use Our Community To Figure Out What’s Next – a video interview with Brian where he talks about AirBnB’s data-driven way of strategizing.
- First Round Review: How Design Thinking Transformed Airbnb from a Failing Startup to a Billion Dollar Business – the full story of how AirBnB finally managed to figure out how to grow.
- Jason Bosinoff: Hacking Word-of-Mouth: Making Referrals Work for Airbnb – A great case study of how they planned and implemented their referral program using lean startup methods.