Disruptive and Profitable: What Makes Airbnb Different
By Lior Ronen (@Lior_Ronen) | Founder, Finro Financial Consulting
Over the last few years we’ve witnessed a significant rise in VC valuations across all stages and sectors. Since 2009 the median US VC valuation has increased 2.9x, mainly in the software sector and in early stage deals, and this is largely thanks to two worldwide macro-economic mega-trends: the gig economy and disruptive business.
Gig Economy and Disruptive Businesses
A gig economy occurs in a labor market when individuals (or sometimes very small businesses) provide small-scale business services to a large number of clients. At the moment, although freelancing isn’t new, the wave of innovative productivity apps and online tools for remote working that is flooding the market is accelerating the gig economy.
Disruptive business, on the other hand, is when you have a large number of businesses whose collective mission is to shake up a certain sector’s status quo. These businesses will come up with exciting new resources and elements to improve user experience and drive deep, fundamental change in that sector, thus creating a more efficient equilibrium.
Three significant examples of companies capitalizing on these mega trends are: Uber (NYSE: UBER), which transformed the public transportation market; Upwork (Nasdaq: UPWK), which connects freelancers with clients globally and is one of the primary platforms for SMBs (and sometimes enterprises) looking to complete projects quickly; and Airbnb, which revolutionized the accommodation market by creating a new short-term lodging subsector within it.
Airbnb Successfully Disrupted the Hotels Industry
While Uber and Upwork are already publicly traded, Airbnb is still privately held. It’s expected to go public in 2020, so it’s begun releasing selected financial information that suggests that, unlike high-profile, recently launched companies such as Uber, Lyft, Upwork, and WeWork that are losing billions of dollars a year, Airbnb is profitable on an adj. EBITDA level (earnings before interest rate, taxes, depreciation, amortization and share-based compensation). Finro’s 2018 analysis showed that Airbnb had an adj. EBITDA of almost USD 150 million.
Research company Second Measure analyzed billions of credit card and debit card transactions between 2013 and 2018 and discovered that Airbnb generated more sales in the US than Hilton (NYSE: HLT) or IHG (NYSE: IHG), as presented in the chart below:
In the same period, Airbnb’s market share increased from 3% in 2013 to 19% in 2018, while the aggregated market share for the big hotel chains dropped from 97% to 70%. This is without doubt a business that disrupted the current state of the market, so it’s no surprise that Airbnb’s revenues multiple of 6.5 is very close to the four big chains’ average and it has a much better cash to revenue ratio, as presented in the chart below:
Unlike Uber and WeWork, which lose billions every year because their operational expenses are too high for companies penetrating a new market, Airbnb uses a business model that has allowed it to make a profit from the start, even through the penetration and growth stages. It can do this because it doesn’t own or rent any real estate (unlike WeWork) and it doesn’t subsidize any transactions (unlike Uber); rather, it takes a fee whenever a customer pays a unit owner—making every deal profitable.
Airbnb is reportedly on the path to IPO, probably in 2020. It’ll be interesting to see how these advantages are reflected in the company’s IPO pricing and its projected valuation, especially against how Uber, Lyft, Upwork, and WeWork are struggling with the move from private to public market.