CHAPTER 25
Airbnb, San Francicso, August 2020
Even with its $2 billion in additional cash, Airbnb was still vulnerable to the pandemic economy. Worldwide reservations had plunged. As April came to a close, results showed that in the last two months cancellations had outpaced new reservations. Chesky realized that the world wasn’t going to return to the way it had been before the start of the pandemic. Airbnb would have to reduce or eliminate some of the side projects that weren’t yet contributing meaningfully to the company’s financial results. Chesky and others began to finalize a plan to focus on the core operations of home-sharing.
Rumors began to circulate on online message boards that the company was going to announce layoffs, perhaps as soon as Tuesday, May 5, when an all-hands meeting was scheduled. One poster who identified as an Airbnb employee on the website Blind asked the community on Monday evening how to go about informing their family about being laid off. When Chesky joined the meeting via Zoom the next day, he did announce layoffs. Nearly two thousand: 25 percent of the company.
The news came with an internal memo that the company later posted to its corporate website. Noting that it was the seventh time that he had addressed his employees from his home, Chesky showed more compassion and humanity than many corporate executives announcing layoffs. He used the word “love” several times to express his feelings for the people who were being laid off and did his best to explain how he’d come to his decision.
There were “two hard truths,” he wrote. No one knew when travel would pick up again, and when it did, it was going to look different. To brace itself, the company needed to get more focused, jettison or pause pet projects, and get leaner in its core operations.
It halted projects in transportation and Studios, the programming project started the previous year. Investments would be paused in Hotels, a way to get hotel rooms onto its platform, and Luxe, travel packages that featured stays at top-tier properties and came with an around-the-clock concierge.
Chesky’s memo talked about how the world needed connection more than ever. He expressed his thanks to all who worked at Airbnb and said, “I have a deep feeling of love for all of you.” “To those who are leaving,” he wrote, “I am truly sorry. Please know this is not your fault. The world will never stop seeking the qualities and talents that you brought to Airbnb… that helped make Airbnb. I want to thank you, from the bottom of my heart, for sharing them with us.”
Airbnb agreed to pay health insurance for a full year for those who were getting fired. And it dedicated a part of its website to help employees find new jobs. If employees opted in, they could list their names and job functions on the website to potentially make it easier to be found by other companies looking to hire.
Chesky’s memo also hinted at something that was just dawning on him. Despite the massive drop in reservations, he noticed a new trend in the searches customers were doing on Airbnb’s website. Instead of looking at international or cross-country vacations, city dwellers were turning to the platform to find houses in rural locations that were a short drive away. And they were looking not for a weekend, or a week, but a month or more at a time.
Searches tended to show up as actual reservations a couple weeks later. If Airbnb could just harness the city-escaping trend and convert those searches into new reservations, it might be the pivot that could pull the company back from the abyss. Executives began to work on what they took to calling a Go Near campaign. They made changes in the search algorithms of the website to deliver more long-term and whole house rentals. Other employees worked to quickly line up partnerships with national parks and other outdoor destinations to reflect that COVID-fearing travelers wanted hikes, not museums.
Those plans were put on pause after May 25, when white Minneapolis police officer Derek Chauvin killed a Black man, George Floyd, by kneeling on his neck for over nine minutes. Floyd’s death ignited protests across the United States. Like the rest of the country, Airbnb employees were upset. The company paused the Go Near plans and hosted a series of internal conversations for employees.
On June 11, Airbnb finally announced its Go Near campaign. By then, the number of people using its website had already begun to rebound. In North America, the number of users was back to levels last seen in 2019.
As Airbnb shifted its business focus, its bankers at Morgan Stanley watched the markets and thought once again about an IPO. The actions that the Federal Reserve had taken in March and April to buoy markets worked, providing a floor under the turmoil and setting the conditions for a remarkable bounce back.
President Donald Trump’s government had sent out a first round of stimulus payments, and retail traders stuck at home were plowing the extra money, as well as income they weren’t spending on going out or traveling, into anything that looked like it could be a good bet. The traders drove up the price of bitcoin in addition to turning their attention to the markets.
In early June, a series of IPOs told the bankers that the market was looking past the pandemic and that maybe, just maybe, Airbnb could debut by the end of the year. On June 3, Morgan Stanley bankers took Warner Music public at $25 a share in what was the biggest deal of the year. The IPO price settled at the higher end of a range that the company had disclosed in its securities offering. The stock rose 8 percent the following day, a modest gain but enough to signal that the market was open to buying IPOs again.
After Warner Music closed its first day of trading, JPMorgan and Goldman Sachs bankers priced the IPO for ZoomInfo Technologies, a cloud-based provider of marketing and sales leads that became the largest technology listing of the year when it sold more than 44 million shares at $21 apiece. The number was above the price range, itself already revised upward. The following day, ZoomInfo surged 62 percent on its first day of trading.
On Monday of the following week, bankers for online car buying website Vroom sold the company’s shares for $22 apiece, more than the range of $18 to $20. When Vroom opened for trading the following day, the shares surged higher. They ended the day up more than 117 percent.
The Morgan Stanley bankers had seen enough to know that Airbnb could once again think about an IPO. Claassen sat down with Grimes to talk about how they could position Airbnb, a travel company, during a pandemic. The bankers leaned on their presentation from the previous year and channeled Chesky’s own thinking. He’d already begun to think about how inspiring it could be if a travel company like Airbnb went public in a pandemic.
In mid-June, Claassen and Grimes decided that Grimes should make the most of his relationship with Chesky and deliver the pitch in a one-on-one setting. This time they framed their pitch to appeal to Chesky’s interest in the hero’s journey. Earlier that month, the founder had spoken on a podcast about his interest in The Hero with a Thousand Faces, a 1949 book by Joseph Campbell. Campbell suggests that personal narratives involve a hero who must overcome a challenge. In the process of his rising above it, a part of the hero dies, and a new version of him arises. Chesky had often thought of travel in similar terms—travelers take a trip, move through a series of experiences, and return home changed—but now he was thinking in terms of the pandemic and his own hero’s journey.
One evening, Grimes sent Chesky a link to his personal Zoom meeting room. The two men were soon plotting the best way to bring Airbnb back from the brink and into the public markets. The Morgan Stanley bankers had put together a short presentation that Grimes now used in his discussion with Chesky. Superimposed over photos of iconic Airbnb properties—one was an underground home carved out of the Swiss Alps—the bankers had written just a couple of sentences of text on each slide. On the left of the slide, white text described a common narrative about IPOs. On the right, set apart with words in red, the text showed how Airbnb was in a class by itself, or a Space of One.
One slide read:
Usual: Company goes public when short term results are strong
Space of One: 21st century Airbnb goes public during worst travel downturn in a century.
Another:
Usual: Success narrative based on price relative to last raised round
Space of One: Success narrative based on doing the impossible, IPO of a travel/shared experience company in a pandemic.
Usual: Focus on first four quarterly results attracts short term investors focused on IPO immediate returns
Space of One: Going public with uncertain short term can only attract long term investors by definition.
A fourth slide suggested that the company should “surprise the market with truly secret filing and fall unveiling shortly before launch, retake control of narrative.”
The slides weren’t fancy, but they delivered a clear message. The time for Airbnb to be bold had once again arrived, even in the middle of a pandemic. Chesky liked what he was hearing. He went back to talk with his team and came back to Grimes a few days later.
On June 14, Chesky sent Grimes some data indicating that travel was trending up again. Google Trends showed that people were searching for trips closer to home and seeking out Airbnbs along the way. The next day, Chesky and Grimes agreed that Airbnb should restart its IPO process. Over the next few weeks, Airbnb and Morgan Stanley worked on the IPO plans in secret.
When the company closed its books for the second quarter, the financial data showed that it had gone through $1.2 billion in cash over the previous year, depleting more than a third of the cash it had had on hand at the end of March 2019. The biggest portion of the drawdown was in the first quarter, when the pandemic took hold and the company had to reimburse travelers for canceled travel plans.
But the business had begun to rebound. On July 14, Airbnb announced on its website that on a single day in the previous week, guests booked “more than 1 million nights’ worth of future stays at Airbnb listings around the world,” the most since March. Fifty percent of those bookings were for destinations within three hundred miles of the home of the person doing the booking. But the news wasn’t all good—slightly more than half of the nights were for stays costing less than $100.
“Because short-term rentals are typically entire homes, guests get more space for their money and more control over their environment, including private entrances and amenities such as kitchens and swimming pools,” the company said in the post. “Combined with the availability of entire homes within driving distance for travelers and the Airbnb Enhanced Clean protocol for ensuring clean, sanitized accommodations, Airbnb’s short-term rentals are recovering because consumers see them as a safe, healthy and responsible way for guests to travel.”
On July 15, Chesky announced the departure of Greg Greeley, the president of the Homes business, at an all-staff meeting. Greeley, who had joined Airbnb from Amazon two years earlier, was replaced by Catherine Powell, a Brit who had been head of the Experiences business. Powell would now oversee the Hosting vertical, a newly created position overseeing Homes and Experiences.
“If we’re going to get back to our roots, we must get back to great hosting,” Chesky said.
The same day, he announced the company’s triumphal return to the ranks of those companies considering an IPO before year-end. “When the market is ready, we will be ready,” he wrote in an internal memo. “We were down, but we’re not out.” One week later, he spoke at a Reuters event and said that the company was “looking at everything” for going public, including a traditional IPO, a direct listing, and a special purpose acquisition company.
As Airbnb executives thought once again about the public listing, they realized that the pandemic had put their plans in perspective. Gone were the ambitions to become the first direct listing on the NASDAQ. Instead, the company focused on surviving the pandemic and using the public markets to raise money and give employees a way to cash in on their deferred pay.
“At some point, we had to have a breather and step back to what our priorities were,” said Stephenson. “Our priorities were supporting our stakeholders, not a confetti cannon celebration of wealth, and not about IPO invention. It got a little hard that people got wrapped around us inventing the new IPO. I’m like, ‘Well, that’s just not the most important thing for me to do.’” Stephenson was receiving texts from Bill Gurley asking to know if Airbnb was still planning on a direct listing. Other people called to advocate for Airbnb doing something different than a traditional IPO.
At the end of July, Airbnb moved to ditch the direct listing. Having raised $2 billion in debt, the company would now need to raise equity to pay off that debt. Before Airbnb could move forward, it had to prepare the board for the change. Directors had already approved plans for a direct listing, so if they were going to switch, their fiduciary duty required them to give the new idea a proper review. Morgan Stanley bankers came in and gave a presentation showing the pros and cons of the direct listing and a traditional IPO.
As the board and senior executives deliberated, they coalesced around three strengths of a traditional IPO over a direct listing. One, an IPO would allow Airbnb to communicate more information to potential shareholders who may have had a good idea of Airbnb’s growth prospects before the pandemic and now had little idea how to model an uncertain future. If it went the IPO route, Airbnb could share models and projections with its bankers, who would then inform the analysts about the company’s prospects, who would inform investors. This was the “discount on discount” theater that so annoyed McCarthy, but Airbnb saw its benefits.
Two, the company could pick its investors in a traditional IPO. While a direct listing left the choosing of shareholders up to market dynamics—those who paid the most would get the shares—a traditional IPO would preserve Airbnb’s ability to pick its shareholder base.
Three, Airbnb would be able to pick its price. Morgan Stanley provided data showing that stocks either pop, get momentum and rise quickly, or lose momentum and sink deeply. There was very little in the middle. Company executives knew that they wanted the shares to rise on the first day and figured that they might be willing to price them a few dollars cheaper. Doing so would reward their IPO investors and provide momentum to the stock by allowing shares to trade higher in the days after the IPO. Airbnb would forgo the direct listing.
Shortly thereafter, bankers for Morgan Stanley, Goldman Sachs, and Allen & Co. met on Zoom to once again kick off the company’s IPO process. They started planning a day to brief Wall Street research analysts on Airbnb’s numbers, and began to map the sequence of securities filings and investor meetings for a December listing. Over the next month, company executives and their bankers rewrote the IPO prospectus. While there was a mostly completed prospectus from before the pandemic, the experience of the past year had crystallized executives’ understanding of Airbnb’s core mission and had helped them understand what made the company different from other lodging companies. The text began to morph from what had been a document telling investors about the kind of company Airbnb would become to one more focused on what Airbnb already was.
Chesky took an increasingly hands-on role in drafting the document, viewing it as a way to communicate Airbnb’s values and business philosophy to a broader audience. The Airbnb CEO created a special font to be used in the document, which he named Cereal, after the “Obama O’s” and “Cap’n McCains” breakfast cereal gimmick that the company had used to get through a tough patch early in its life.
“In a three-hundred-page document, one hundred eighty pages of that are the guts of those details,” one person said. “But how it gets wrapped and how it gets articulated, I think that is what got a little more solidified and clarified.”
On August 19, Airbnb confirmed reports that it had filed confidentially with the Securities and Exchange Commission to sell its shares to the public. It had not yet decided how many shares it would sell, and added a boilerplate note of caution that its IPO would be dependent on the SEC’s review of the submission.
While some commentators thought that the company had picked a “terrible time” to enter the public markets, NYU professor Aswath Damodaran, an expert on corporate valuation and a frequent commenter on initial public offerings, told Bloomberg the following day that the company had gotten “the timing right.” The company was in a good place because the market was favoring companies like Airbnb with small demands for capital, he said, and the company’s competitors in the hotel industry had been “handicapped” by the pandemic.
In late 2019, Airbnb had told the world it would go public in a year. It was on track to meet its deadline. But its decision now to confirm the confidential filing ran counter to one aspect of Morgan Stanley’s Space of One pitch, which suggested that the company keep quiet about the filing until it was time to make it public later in the fall. Airbnb could control the narrative and provide protection against facing negative press reports if it couldn’t get its IPO done before the end of the year, the bankers argued. Airbnb took control of the narrative anyway.