CHAPTER 24

Airbnb, San Francisco, March 2020

Over the following weeks, Airbnb’s board started meeting more regularly, gathering on Sundays to prepare for the coming week. Directors including Lin, Jordan, and Chenault put the IPO plans aside and focused on helping the management team shore up the business. At the top of the list was raising more money.

The company wasn’t yet in dire need of cash—it had the multiple billions it had entered the pandemic with, as well as the $1 billion line of credit. Stephenson’s calculations suggested that Airbnb’s rate of burning cash would put it dangerously short by the end of the year. The company was also set to lose something like $150 million from the cancellations it had allowed.

It still had to think about hosts. The company had acted quickly to offer guests penalty-free cancellations, and now it was time to consider the hosts, who were set to lose more than $1 billion. But how much should Airbnb raise? Stephenson and his team figured that the company probably needed an extra $1.5 billion to cross the chasm and live to see another day. The models put it right on the edge. No one wanted to be forced to go back to the market for more money at a later date, making $2 billion a conservative estimate.

On March 19, CNBC broke the news that Airbnb was fielding “significant” offers from investors including venture funds, private equity investors, and even sovereign wealth funds. Ron Conway, an early investor, and a frequent advisor to Chesky, spoke to the news network for its story. He confirmed that he had been referring them to Airbnb’s management team.

“Those investors are calling me saying, I hope Airbnb is raising right now because if they are, I want a seat at the table,” Conway told CNBC. “They’re saying, Coming out of this downturn, it’s going to be companies like Airbnb that will be huge, huge market performers.”

Not surprisingly, Airbnb executives agreed with Conway’s observation. By some of the investors’ estimates, Airbnb was worth roughly two-thirds or less of what it had been valued at in 2017. The company’s executive felt that at some point, a vaccine would be developed, and travel would rebound. Airbnb would be well placed to take advantage and shouldn’t settle for overly onerous terms.

Board members were less sanguine. Some wanted the company to move faster to take advantage of the investor interest, which, though still in its early stages, appeared to the Airbnb representatives to be robust. Airbnb executives got helpful financial advice behind the scenes from Lin, who had been the CFO at the online shoe website Zappos before getting into venture capital. Lin felt good about Airbnb’s prospects and urged the management team to bide their time. The board met that week to review its options.

The company was getting offers that ran the gamut from a straight equity infusion all the way to straight debt. In all, Airbnb fielded about thirty offers of one sort or another. One option was a convertible bond that used earlier convertible transactions for Spotify and Uber as a template. The debt would turn into equity at some discount to the IPO price. Many of the investors saw an opportunity to make an investment in the home-sharing site at fire-sale prices, figuring that Airbnb’s need for cash would give them leverage.

Chesky was almost offended at some of the offers, according to a person who spoke with him around that time. The CEO viewed many of them as bets that Airbnb would struggle rather than as a show of support for the company’s management team at a difficult time. Some investors even considered demanding a pledge from Chesky to add a member of the management team to help the first-time CEO navigate the pandemic. He was opposed.

Chesky was adamant that he didn’t want to take a bad deal if he could help it. “In a great way, Brian’s instinct was, ‘I don’t want to accept these terms,’” the person who spoke to him said.

By March 22, when Airbnb’s board met again, directors and the company’s management team agreed that it was time to move forward with some of the investors.

On Monday, March 23, the company proactively sought out deal partners. A person close to the board put a call in to Sixth Street, the credit-investing arm of TPG Capital. Sixth Street was among a growing class of investors who made their money in the private credit markets, using money raised from public pensions, sovereign wealth funds, and wealthy individuals to make risky business loans to companies that had once been made by banks. The industry had blossomed after rules passed in the wake of the financial crisis discouraged national banks from making similar loans.

Sixth Street was used to the rough-and-tumble world of corporate debt markets more than it was to the venture capital industry that prided itself on being loyal supporters of management teams.

But Sixth Street had billions of dollars it wanted to put to work, and Airbnb was on a list it had created of about fifty pandemic-era targets. Sixth Street had been trying to get through to the company but wasn’t getting much traction. CEO Alan Waxman, a former Goldman Sachs partner who had gone to the University of Pennsylvania with Ludwig, put a call in to his old friend. When Sixth Street got the call from Airbnb, its executives sprang into action.

One of the first things Waxman did was call his colleagues at TPG. Sixth Street was in the process of separating from TPG, which was already an investor in Airbnb, and Waxman didn’t want to anger his colleagues elsewhere at the firm. Sixth Street quickly heard back that it could move ahead.

Later that day or the next, Sixth Street executives contacted bankers at both Goldman Sachs and Morgan Stanley to let them know that they were working on a deal. Over the following days, Sixth Street shared an initial term sheet with Airbnb’s bankers. Due in part to the close relationship between Waxman, Ludwig and other bankers at Goldman Sachs whom Waxman had worked with, Sixth Street focused its initial efforts on working through that investment bank.

After several days of going back and forth with Goldman bankers, Sixth Street had a more formalized term sheet. The investment firm proposed a $1 billion term loan and another $500 million of higher-interest debt with warrants. The warrants, a type of financial instrument that converts into stock at an agreed-upon price, would give Sixth Street a potential upside on the deal. It would also allow the lender to lower Airbnb’s interest payments.

With a formal term sheet ironed out, Waxman brought in private equity firm Silver Lake Partners and co-CEO Egon Durban. Durban and Waxman, among other finance types, were waiting out the pandemic at their vacation homes in Hawaii, just down the road from each other near Kuki’o Beach on Hawaii’s Big Island. After quarantining for two weeks, the two men and others in their industry had been socializing in person. Goldman Sachs banker Gregg Lemkau was there. Billionaire tech founder Michael Dell and Spotify CFO Barry McCarthy owned properties on the Big Island too.

Waxman reckoned that adding a partner like Durban, who brought his own industry contacts, could only increase the chances of Airbnb accepting his terms. Durban had already considered an investment in Airbnb. In mid-March, Goldman’s Nick Giovanni had asked Lemkau, who had a close relationship with Durban, to call the Silver Lake executive to see if he would consider an investment in Airbnb. Both bankers had helped sell Skype to Silver Lake in 2009 and then assisted Durban in selling it two years later. They reunited in early 2020, when Silver Lake invested $1 billion into Twitter. When Lemkau called Durban and asked him to consider it, Durban started laughing. “We just had Investment Committee,” Durban told Lemkau. “I just told my firm that’s exactly the kind of thing we’re not going to invest in. We’re not going to invest in one of these money-losing or money-burning companies right in the middle of a pandemic.”

“Look, I totally get it,” Lemkau countered, “but I’ve known you long enough. And I know you love iconic founders. You backed Michael Dell. You backed Ari [Emanuel]. You backed Jack Dorsey at Twitter. Brian Chesky is that guy. You’ve got to at least think about it.”

A few days later Durban called Lemkau back and told him he would consider it. Durban and his Silver Lake colleagues could see that there would be attractive investment opportunities in travel companies that would eventually bounce back after being pummeled by the pandemic.

Initially Durban and his Silver Lake colleagues considered a convertible debt deal that Goldman was putting together. The growth team led by David Trujillo at TPG, which already owned a small stake in Airbnb, and Dragoneer Investment Group had emerged as two among a small group of investors willing to pony up cash for a convertible bond. But by Friday, March 27, Silver Lake was leaning against it.

That day, Waxman called Durban about his deal. This one would be straight debt, secured by a promise from Airbnb to repay it at favorable terms, plus some warrants that would act as a bonus if Airbnb came back from the brink, Waxman explained. “Is this something you’d be interested in?” he asked Durban.

Later that day, Durban texted Waxman to tell him he was in. He had been convinced by the deal’s lower risk parameters. It was much safer than Silver Lake’s usual strategy of buying an equity stake, and even preferable to the convertible deal that others were putting together.

On Saturday, March 28, Goldman’s bankers introduced the investor group to Krishna Rao, Airbnb’s global head of corporate and business development. The parties got to work finalizing a term sheet. On Sunday, Sixth Street and Silver Lake signed a nondisclosure agreement and began what would have to be a quick due diligence process.

Stephenson had set a deadline of April 5, when the board would meet next, for best and final bids to be submitted.

As Airbnb fielded various offers, the company had split its bankers into two work streams. Goldman Sachs’s bankers doubted that Airbnb could raise straight debt at attractive terms, especially with Bank of America’s credit line, which limited the company’s options. The bankers continued talking to TPG and Dragoneer about the convertible bond. Morgan Stanley, on the other hand, thought it could get a debt deal done. The firm’s leveraged finance bankers had found success arranging bond deals for technology companies without any profits, like Airbnb, and thought they could raise money from the same institutional investors who would take a position in the company’s stock. As stock investors, they were betting on growth and Airbnb’s eventual profitability. Morgan Stanley thought it could persuade them to make a similar wager on debt.

If they could pull it off, the terms would be better than anything Goldman would be able to come up with. The Morgan Stanley bankers worked on various debt deals and stayed close to Chesky and his management team as they evaluated the offers.

Intent on making sure Goldman Sachs and Morgan Stanley didn’t work at cross-purposes, Airbnb executives made it clear that if one of the structures was chosen, the other bank would still get paid.

Airbnb was already leaning against the convertible. From executives’ point of view, the structure faced the same problem as a straight equity infusion—it would have forced them to reprice its equity at the bottom of the market. They wouldn’t know how many shares they would have to issue when it came time for the conversion. If the pandemic extended and Airbnb had to go public at a $20 billion valuation, for example, the convertible might become equity at a $13 billion valuation, leading a large number of additional shares to be issued and diluting existing shareholders. TPG had also angered some at Airbnb in an earlier funding round when they added a provision at the last minute that was widely considered to be unfriendly to the company.

Giovanni encouraged the executives to take the convertible note deal. In his view, the company needed the money, and it was a decent deal. Goldman was “like, ‘Go, Go, Go,’” one person recalled. Airbnb wanted to exhaust the debt talks first. The team slow-walked Goldman while Durban, Waxman, and Chesky got to know one another and worked through the deal’s details.

Airbnb’s executives were also dealing with operational issues. In late March, the company suspended marketing to save $800 million in costs. Chesky, Gebbia, and Blecharczyk, the three founders, agreed to take no salary for the next six months, while other senior executives took a 50 percent pay cut.

On March 30, Airbnb unveiled several initiatives, including a $250 million fund to compensate hosts who had lost out on rental income for visits scheduled on or before March 14, for stays through May 31. The company still hadn’t lined up rescue financing.

At some point in the first days of April, Sixth Street and Silver Lake realized that they needed to be talking to Morgan Stanley, because its bankers were already working on other debt transactions. Morgan Stanley was trying to raise a less expensive debt deal with institutions like Fidelity, T. Rowe Price, BlackRock, and Pimco.

As luck would have it, Durban had spent his early career at Morgan Stanley and knew its bankers well. Durban reached out to Grimes, and Morgan Stanley began offering feedback on the term sheet.

The bankers liked what they saw in the Sixth Street/Silver Lake deal but foresaw a problem. The warrants that Waxman’s team proposed would relegate the debt to a more junior position than the Bank of America–led credit line. If the credit line was outstanding, Bank of America wouldn’t let Airbnb take on more risky debt. It was already threatening that it wouldn’t give Airbnb an extension on the line without better pricing and tougher loan terms. The lender didn’t know how long the pandemic might last, how deep the resulting economic slump might be, or how Airbnb would fare.

After some thought, the Morgan Stanley bankers came up with a creative idea. If they could close out the credit line, that would free up Airbnb to raise the debt from Sixth Street and Silver Lake. Once Airbnb raised that $1 billion, it would need to raise another $1 billion of more senior and safer debt from institutional investors. It would mean much cheaper financing for Airbnb, and Morgan Stanley’s bankers thought that they could do it. If the company’s business rebounded, it could pay off the debt a year or so later after only paying a small amount on the total loan.

Airbnb’s executives felt it was too good to be true. Airbnb didn’t want to give up the security of the credit line unless they could be sure of raising a total of $2 billion. They gave Morgan Stanley bankers an ultimatum.

“We’re not going to say anything today,” one executive told Grimes, “but you’ve got to get Silver Lake locked in, and Sixth Street for a billion, and you guys have to be damn confident you can get the next billion with no warrants from the institutional market.”

Over the following few days, Stephenson met with Durban, who was now leading the talks on behalf of him and Waxman. The two men developed a good rapport. Stephenson’s finance team crafted at least one presentation to give the investors an understanding of Airbnb’s finances—the remaining cash on hand, the $1 billion credit line, and various revenue projections, depending on when the pandemic receded and global travel picked back up.

On April 3, Waxman, Durban, and Chesky met over Zoom to hammer out the details. Durban and Grimes negotiated an annual interest rate to Airbnb of more than 10 percent. The investors would also get warrants equal to about 1 percent of the company. The warrants would convert at an $18 billion valuation, a discount of more than 40 percent from the previous valuation set in 2017 and lower than Airbnb’s internal estimates. The day before, Chesky told employees that the company’s internal estimate was $26 billion.

The Sixth Street team strung together a bunch of all-nighters. Waxman often appeared on Zoom calls wearing a backward baseball cap. In one call, the Sixth Street CEO’s daughter came into the picture and flashed bunny ears behind her father’s head.

On Sunday, April 5, Airbnb’s board held a call to evaluate the two competing investment options. Goldman presented the convertible bond deal it had worked out with TPG and Dragoneer. The bankers viewed the deal as an attractive option for Airbnb, because it would put money in the bank at a time when the pandemic was crushing travel companies. Airbnb needed the money. However, the convertible would have required Airbnb to sell a larger portion of the company for a lot less than many of the insiders thought it was worth. It meant serious dilution to Airbnb’s existing investors, management, and employees.

Some board members expressed surprise that Goldman put it forward as a good deal. “Can I buy that deal?” one of the board members said. Others snickered.

The Morgan Stanley bankers presented their financing package, including the Sixth Street/Silver Lake deal, the closing of the credit line, and the raising of $1 billion in additional debt. It was an easy choice for the board to make. They would vote in favor of Morgan Stanley’s transaction if the bank could close the credit line and raise the extra $1 billion over the next week.

The bank had pulled off something that Goldman Sachs and some Airbnb executives didn’t think was possible just days earlier. “All three of those pieces had to come together to kill the bad convertible plan,” one of the people involved in the negotiations said. “They had no choice. You’d have to do the diluted convertible if you had no other choice.”

On Monday, April 6, less than a month since the official start of the pandemic, Airbnb announced that it had secured $1 billion in emergency funding. Chesky complimented Sixth Street and Silver Lake and thanked them for their support. Both Waxman and Durban offered statements in the same press release praising the Airbnb founders. Terms weren’t disclosed. “Alan was great on the structuring thing, but Alan is not really a tech investor,” one of the people involved in the deal later said. “Egon’s a great CEO/founder whisperer. You needed both.”

Throughout that week, Morgan Stanley’s bankers raced to line up investors for the additional $1 billion in debt, ultimately pulling together a group of more than twenty that included BlackRock, Fidelity, T. Rowe Price, and Eaton Vance Corp. Silver Lake and Sixth Street also participated in the deal, with Sixth Street cutting a $250 million check for the right to receive payments ahead of its other investment.

Airbnb announced the completed deal on April 14, bringing an end to a month of uncertainty and countless discussions and evaluations about emergency funding. The company now had an extra $2 billion on hand and the confidence that went with it.

When Airbnb announced the transaction, Chesky offered a public statement that hinted at how he’d been talking about the pandemic internally. The CEO had been using nautical analogies in his weekly Zoom town halls with employees. The CEO likened Airbnb to a ship heading into a tempest—employees needed to do what they could to batten down the hatches. If they succeeded, the company would be able to weather the dark clouds and heavy winds and emerge into brilliant sunlight on the other side. “All of the actions we have taken over the last several weeks assure that Airbnb will emerge from the storm of the pandemic even stronger, regardless of how long the storm lasts,” Chesky said.

Morgan Stanley’s success raising the debt and the deepened relationship between Chesky and Grimes was enough to push Morgan Stanley ahead in the horse race over who would lead the company’s eventual IPO. “It flipped,” one of Airbnb’s management team said. “We got this great deal and then actually Morgan Stanley comes back in, more in the lead, over Goldman as being our primary banker, or our most lead banker for the IPO.”

Goldman Sachs’s bankers were surprised that Morgan Stanley had been able to pull it off, and at least one grudgingly admitted that they might not have thought as creatively as they needed to about solving Airbnb’s problems.