CHAPTER 26

Airbnb, San Francisco, December 2020

The filing put an end to early-stage talks Airbnb had held with Bill Ackman, a hedge fund manager who had raised $4 billion through a special purpose acquisition company.

Since Palihapitiya’s initial attempts to buy Slack with his SPAC, blank check firms had surged in popularity. By late August, eighty-two blank check vehicles had raised more than $33 billion to use in buying private companies and taking them public, exceeding the entirety of 2019’s volume, when just fifty-nine companies raised $13.6 billion. Helped in part by Palihapitiya’s evangelism, the trend also betrayed a realization on the part of market participants that SPACs might play a role in the broadening disruption of the IPO process that had been ignited by Spotify’s direct listing.

Even Bill Gurley had come around. He recognized that what had once been a vehicle for marginal companies to enter the public markets had become a viable option for popular venture-backed companies. On August 23, four days after Airbnb alerted the public to its IPO filing, Gurley published a post on Above the Crowd, his blog, “Going Public Circa 2020; Door #3: The SPAC,” extolling the virtues of SPACs.

He set the stage with some context. “If you are looking past or through Covid—and why not, all of Wall Street is—the topic du jour in Silicon Valley is Special Purpose Acquisition Companies, or SPACs. SPACs are all the rage, and everybody and their brother have either raised one or are talking about raising one.” The post came with a roundup of links.

“Historically they have been a kind of back-door way for a company to go public, and as a result have historically had a sub-standard reputation,” Gurley wrote. “But in light of where we are in 2020, especially with regard to the degrading efficiency and sky-rocketing cost of capital through the structurally broken IPO process, SPACs may emerge as a legitimate third option for helping Silicon Valley companies efficiently and cost-effectively transition into the public markets.”

Gurley was encouraged, he said, to see that the increased SPAC issuance had led to greater competition among SPACs and better economic terms for the companies they targeted. It was this rosier picture, an improvement on the massive first-day pops again taking place, that made the vehicles an attractive option for companies looking to go public. Gurley couldn’t resist reminding readers about the broken IPO promise, brandishing Ritter’s data to show that through the first half of 2020, IPOs had been underpriced by 31 percent, leading to $7.8 billion in proceeds that he positioned as a transfer of wealth from companies to investors. SPACs, on the other hand, had several things going for them. They were quick, potentially cheaper than IPOs when the underpricing was considered, allowed a company to raise primary capital, and gave a company much more control over the price it received.

“The bottom line is that SPACs are a very [legitimate] path to the public markets,” Gurley wrote. “I fully expect to see high profile companies walk through Door #3.”

In early October, Reuters reported that Airbnb was considering selling stock at a valuation north of $30 billion, suggesting that the company and its bankers expected it to be able to garner a stock market listing price above its 2017 funding round. As the month progressed, markets rose and then fell, testing their September lows. The IPO market quieted down, and investors began to look toward the U.S. presidential election. In the last few days of October, Airbnb announced a stock split, telling shareholders that they would receive two shares for every share they held. The split—a procedural step and page out of the IPO playbook that sought to make the shares more palatable for retail investors—took the value of Airbnb’s shares from $69.76 at the end of September to $34.88.

Airbnb prepared to publicly release its securities prospectus as the election came into focus. When President Donald Trump refused to concede in an election in which millions more citizens cast a vote for Joe Biden, the company delayed. Only on November 16 was the document released publicly, formally kicking off Airbnb’s IPO process. The company could now begin official conversations with investors. The investors, in turn, could begin to place orders with Airbnb’s bankers.

Investors dug into the filing for the first glimpse of how the business had fared during the pandemic. Guests and customers booked 146.9 million nights and experiences in the first three quarters of 2020, down 41 percent from the same figures in 2019. Bookings slumped 67 percent in the second quarter. In all, Airbnb suffered a net loss of $697 million through the first nine months of 2020, more than twice its loss during the same period in 2019.

The prospectus also showed how successful the Go Near campaign had become, and the effect of the company’s actions to cut its marketing budget and lay off staff. Airbnb turned a profit of $219 million in the third quarter of 2020.

The company planned to list on the NASDAQ, sticking with its direct-listing-inspired choice even after pivoting to the traditional IPO.

With Airbnb’s results showing that the company had weathered its existential crisis and come out the other side, much of the drama was drained from the upcoming IPO. Morgan Stanley, fresh off its role advising on the $2 billion emergency fundraising, commanded the upper left-hand corner of the banking list. Goldman got second billing, ahead of nearly three dozen other underwriters.

In conversations with investors, the Morgan Stanley bankers explained that they would be requiring investors to input their orders into a recently developed order-entry system. The success of Unity’s offering and Goldman’s marketing had persuaded Morgan Stanley that it needed to have something similar. Over the course of several months, the bank designed a system it called Alps.

Hosted on the same platform where Morgan Stanley clients went to read research reports, the system acted much like Goldman’s, except for one thing. Unlike Goldman’s, which kept the orders contained to just a few key people inside the investment bank, Morgan Stanley’s didn’t attempt to keep the order book hidden from its salespeople or bankers.

It was a philosophical difference, and it meant that the Morgan Stanley salespeople would have more information to share with clients who had questions about what others were bidding. Whether that would have an impact on the IPO price remained to be seen. The firm’s bankers argued that a closed system didn’t work, and that investors needed to hear feedback. The choice also meant that Morgan Stanley wouldn’t risk alienating investors with a system that kept information from them.

As Morgan Stanley introduced the company to investors, it was also in charge of handling Airbnb’s directed share program, the stock that Airbnb set up for hosts to buy. Those who wanted to participate would have to set up a Morgan Stanley account and place their orders through the bank’s system. Over less than two days, more than twenty thousand hosts placed orders to buy the stock before Morgan Stanley had to cut off participation. While the bank had done similar programs for Uber drivers and General Motors dealers, its systems couldn’t handle the volume of the Airbnb orders. A reliance on call centers was one of the bottlenecks.

Morgan Stanley searched for other options, even reaching out to archrival Goldman Sachs. They also tried Fidelity, but ultimately came up short. The bank began a massive project to update its systems to handle millions of orders, betting that in an age of democratization, other companies would want the option to offer a slice of their IPOs to affinity groups or customers.

Airbnb heard from all manner of customers and investors who wanted to get in on the IPO, including Chesky’s dentist. A carpenter in Maine said he wanted to participate because he fixed up three houses so they could be available for Airbnb. He figured something must be going on with this company.

On December 1, Airbnb amended its prospectus to say that it planned to sell 57 million shares at an initial range of $44 to $50. The midpoint of the range represented a 35 percent increase over the value of the shares from the end of September. Two or three days later, after several meetings over Zoom, Morgan Stanley received some helpful feedback. One investor who had met with Chesky passed on word that they were “starstruck” in the meeting. It was an early sign to the bankers that Airbnb’s stock was likely to rocket higher.

On December 7, Airbnb updated its prospectus to show that it now expected to sell shares in the range of $56 to $60. The enthusiasm that Morgan Stanley bankers had detected a week or more ago was coming through in the orders investors were entering into the bank’s order system. Two days later, on December 9, it came time for Airbnb to price its shares. DoorDash, an app allowing people to order takeout food for delivery that had just gone public and seen its stock pop 85 percent earlier that day, was fresh in the minds of executives and bankers.

Executives including Chesky and Stephenson gathered on Zoom with Morgan Stanley’s bankers to talk through the pricing. Some of the bankers used virtual backgrounds with slides from the Space of One presentation. Morgan Stanley’s Alps system showed order size and price for hundreds of investors who wanted in on Airbnb’s IPO. Over the course of the roadshow, Airbnb had met with thirty to forty investors in one-on-one meetings, and about a thousand investors in total. The order book showed institutional investors willing to buy shares up in the $85 to $90 range.

But Airbnb wasn’t dogmatic about the price, or taking every dollar off the table. After some back-and-forth, the group settled on an IPO price of $68. It was 45 percent higher than the midpoint of the initial range, which, depending on who was talking, showed either that the initial range was too low or that the company was aggressively pushing the price higher. Everyone agreed that having data about price and size allowed the company to move the IPO price a few dollars higher.

At some point, someone made the call: “Look, this is actually high enough.”

The next day, Morgan Stanley opened a Zoom call for Airbnb executives and employees who had worked on the IPO as John Paci, the bank’s IPO trader, worked with the computers at NASDAQ to open the stock. At 10:10 a.m., the NASDAQ put out a trade indication showing that Airbnb might open at $139, already double the IPO price. Shortly after, Chesky appeared on Bloomberg Television. Anchor Emily Chang asked him what he made of that early price indication. “We just got an indication on your opening price. Shares indicated to open right now at one hundred thirty-nine dollars a share, which is more than double what you priced at,” Chang said.

At the mention of the stock price, Chesky’s eyebrows quickly shot up and his eyes got round.

“Are you at all concerned about froth? What do you think about that number and the potential that you’re leaving billions of dollars on the table?” Chang continued.

“That’s the first time I’ve heard that number,” he said. “That is… that’s… you know, when we…” He gave a quick chuckle. The CEO was almost speechless. “In April, we raised money, it was a debt financing, that price would have priced us around thirty bucks. So, I don’t know what else to say… it’s… that’s, that’s a very… that is… I’m very humbled by it.”

He quickly gained control and continued. “We know that we are on a very long journey. We’re going to be very, very focused, obviously today is a very special day for everyone, but the higher the stock price, the higher the expectations, the harder we will be working, obviously.”

By 1:02 p.m., the stock looked likely to open at $157. Then the price dropped. During this time, Airbnb executives watched Paci juggling orders and phone calls with various investors. The frenetic scene—with Paci cradling multiple phones to his ear—reminded at least one Airbnb executive of an earlier era of Wall Street.

“What you think a guy like that looks like and how they act, and he’s still got the four phones on his shoulders, and it felt like you had walked back like twenty, thirty, forty years, right?” one of the people who had watched Paci said. “All this stuff is high-tech, and still here’s a guy on the floor with the phones and he has to release the stock, and it’s held. It held multiple hours because there’s such a disproportionate buy side versus sell side, so we had an enormous number. The retail interest was enormous.”

At 1:38, Airbnb shares finally opened at $146, a 115 percent increase over the IPO price.

Airbnb’s Lehane raised his hands in the air.

By the time Airbnb was done trading that day, the shares were at $144.71. The price valued Airbnb at over $100 billion.