Airbnb’s rocky path: Learning from hard failures and building strong company culture to scale rapidly – Part 1
Note: Since this is a long session, we have divided it into two blog posts. Link to the second post here
A group of entrepreneurs taught a class at Stanford called “Technology-enabled Blitzscaling” and this is Freshteam’s attempt to present the key learnings/takeaways based on the lectures.
In this class, Reid Hoffman, Executive Chairman and co-founder of LinkedIn, interviews Brian Chesky, co-founder and CEO of peer-to-peer lodging service of Airbnb, on how the idea came about (it’s quite a story!) and how Chesky and his team built a strong company on the bedrock of a solid culture.
The story is written in the first person.
Brian Chesky’s road to Airbnb
Brian’s mom: I chose a job for the love (for it) and I made no money. So, you should choose a job for the money.
Brian: Well, I’m going to art school.
Brian’s mom: Oh my God! You chose the only path in life that’s gonna pay less than a social worker ‘cause you’re gonna be an artist and get paid nothing. If you do that, make sure you don’t move back home and live in my basement. Make sure that you get a job one day and if you get that job, make sure that that job has health insurance. (Jokingly) I chose a job for the love and I made no money, so you should choose a job for the money.
And this was like a grand ambition for my parents.
I went to Rhode Island School of Design (RISD) and took a course in Industrial Design. The school had a profound impact on me where they said I could change the world because I could redesign anything you want.
I met one of my co-founders, Joe Gebbia, at RISD.
Joe: Brian, I think my neighbor and I are gonna start a company together.
Joe was trying to convince me to go with him to San Francisco and do the startup with him. We didn’t have any big ideas though. One day, I just went into work and quit my job (which came with health insurance) as an industrial designer. My roommates thought I was having an early-life crisis and that I needed intervention.
I took an old foam mattress, rolled it up in the back seat of an old Honda Civic and set off to San Francisco with $1,000 in the bank. When I get to San Francisco, Joe tells me that my share of the rent was $1,150.
Airbnb is born
There was an international design conference in San Francisco that particular weekend and on the conference website, all the hotels were booked out. We thought the designers needed a place to stay and we needed money to pay their rent. So what if we just created a bed and breakfast for the design conference?
We didn’t have any beds but had three inflatable air beds and called it “The Air, Bed and Breakfast”. That’s where “Airbedandbreakfast.com” comes from – It’s just air beds!
So, we ended up hosting three people from around the world: a 35 year-old woman from Boston, a 45 year-old father of five from Utah and a 30 year-old from India. The reason we started doing this was because we thought it was funny, cool and helped us make money.
There’s something that happens, though. When somebody lives with you, it’s kind of like the arc of a friendship gets contracted from a year to a day. In other words, if you were to meet somebody, maybe here at Stanford or in the real world and you get to know them, how much time does it take to like invite them over to your house and have dinner with them? It might take months, even a year.
During the guests’ stay at their place, we realized that we had contracted this year-long friendship into a couple days. One of the guests invited me to his wedding while the woman moved from Boston to San Francisco. We realized we were onto a bigger idea there.
We brought in Nathan “Nate” Blecharczyk as the tech guy and this was the core idea: that you could book somebody’s home the way you book a hotel room, anywhere in the world. That was basically the start of the Airbnb story.
But, there was no flash that this idea was going to be huge. In fact, we started building a roommate matching website because we thought there would be no takers for the Bread and Breakfast idea. We spent about a month on this until they realized somebody had already built “roommates.com”. Why the hell didn’t we check that before?
We went home for Christmas and people were like, “What are you workin’ on?”
Brian: I’m an entrepreneur.
Brian’s mom: You’re actually unemployed.
Brian: No, I’m actually an entrepreneur.
And that’s also when I learned when you’re starting out, the difference between being unemployed and being an entrepreneur is in your head (mindset). In my head, I was an entrepreneur. The more we thought about it, the more we thought we should do it.
We ended up launching at South by Southwest in 2008. The whole idea was if you are going to a conference and you don’t have a lot of money, you could sleep in someone’s home on their air bed. We built the second version of the website – we had two customers and I was one of them.
Reif Hoffman: I didn’t know you had a roommates idea until now. I started something called SocialNet, which had dating, professional networking, activities and roommates…
Brian: That’s amazing. We didn’t think that the Air and Bed Breakfast thing was the big idea. We thought it would help us pay the rent, which would let us think of the big idea. We thought the big idea had to do something with social networking. The crazy little idea that we thought no one else would do became the big idea. There are a couple of lessons there:
- All these really good or big ideas often sound like stupid ideas. Somebody once told me in the early days, don’t worry about anyone stealing your idea. If it’s any good, everyone will dismiss it. And that was exactly the truth.
- A lot of these ideas are you solving your own problem. And, they’re not some life-changing problem but a nuisance.
The bumpy dirt road
Reid: Tell us a bit about the early days. You really had to hustle to keep it going.
Brian: So, we’re one of the companies that launched many times. We kept doing launches to get a lot of press. If you launch and no one notices, you can actually just keep launching. The first launch was at the design conference with just three people, the second one was Air Beds and Conference (we had two customers and I was one of them) and the third one was at South by Southwest.
One of our guests said he wants to go to London but that he had no conference to attend. Then we were like – Why does it have to be for only conferences? And, we didn’t have a payments system then. Also, we had a rule. You had to have an air bed. So you had to inflate an air bed and put it on your mattress. So, we said – Okay, you may use a real bed.
And, the final thing was payments. We may very well be the first website where you could actually book with somebody else and pay them directly. Ebay and Etsy were around but they directed you to PayPal. But we wanted it to feel like you’re booking a hotel and that you never leave Airbnb.
It seemed insane that you would be able to pay somebody else, do a booking with them and be attached to a reputation system. We were like it’s a bit too crazy, a little too scary, we didn’t know if we were allowed to do that and we weren’t sure if it would work but we decided to do it anyway.
In the summer of 2008, we ended up designing the final version of the product. We had a three-clicks-to-book-it-button. I remember hearing the story of Steve Jobs where he wanted to ensure he was always three clicks away from a song on his iPod. And, we said that you should be three clicks away from a paid booking. We created a home page with a search bar, listings, reviews, payment system and customer service and that’s exactly the product you see today. That was the third version of the product. We kept redoing the product.
At this point, we got introduced to a whole bunch of investors, probably 15 angel investors via email. We were trying to sell 10% of our company to raise $150,000 at a valuation of $1.5million. About 6-8 of them didn’t respond to our emails and 7-8 replied, of which half of them said that our company didn’t fit their investment thesis or that the market wasn’t big enough with one person saying that they weren’t excited about travel as a category.
We met a few more investors who passed on us. The low point was that I met Mike Maples, Founding Partner of Floodgate, I went without a deck because I just decided to show him our website. But when I was with him, our website didn’t work. I sat with him for an hour and I didn’t know what to say. I tried to explain the concept to him but he had no idea what I was talking about. It was pretty embarrassing.
Always have a deck as a backup.
Hitting the rock bottom
Both Joe and I got a lot of credit cards and we went into thousands of dollars in credit card debt. Companies stopped giving me credit cards. We had this basic idea that people should talk about us but we had this chicken and hen problem, which was how do you get guests without homes and how do you get homes without guests at the same time? And, how do you do that on a travel website because you have to focus on all the cities at the same time?
We thought of doing some events and we thought of the Democratic National Convention, a high profile event in 2008. Barack Obama was coming to Denver. There was an 80,000-seat football stadium and there were 27,000 hotel rooms and we thought we had an opportunity there.
Media publications rejected our idea and refused to write about us. So, we thought – why don’t we get somebody to write about us? We got bloggers to write about us first and then the local newspapers and CNN and New York Times picked our story up. We got some traction but we were still in debt. We got 80 bookings (or perhaps, less) for the Democratic National Convention and we got 1 or 2 bookings for the Republican National Convention and the following weekend, we got no bookings.
We hit rock bottom. This was the scene:
- We were almost a year into business.
- We’re tens of thousands of dollars in credit card debt.
- Every investor has turned us down.
- We’ve launched thrice.
- We’ve got national press but almost no customers every single day.
- One of my co-founders decided to move to Boston. He was getting engaged and his fiancee wasn’t interested in living on the west coast.
- It was unclear if we were staying together as a founding team.
Becoming a cereal entrepreneur…
We were desperate and one day at around 1 am, Joe and I think that since the air beds aren’t working, maybe we should sell breakfast. Everybody needs to eat. So, we made a Presidential-themed breakfast cereal (Barack Obama cereal) and called it Obama O’s- The Breakfast of Change. We also created a John Mc Cain-themed cereal called it Cap’n Mc Cain’s – A Maverick in Every Bite.
We literally hand-crafted our own cereal boxes. I hadn’t been eating at this point. So, I was starting to get a little delirious. General Mills refused to print unlicensed presidential-themed cereal boxes and the medium-sized cereal companies wanted a non-refundable cheque for $200,000. An alumnus of RSID said he could print them 1,000 cereal boxes for free but wanted a royalty fee.
We said yes! But what we received were just pieces of cardboard. What we had to do to fund the company was giant origami – fold cardboard boxes, pack cereal in them and sell them for $40 a box. We hand-numbered each box and called it limited edition. And, we ended up selling $30,000 worth of cereal. That’s how we funded our company!
Now, we have a core value – “Be a Cereal Entrepreneur!” I know it’s a bad joke but this is how we started.
… only to become a cockroach!
It was November 2008. We were back to almost being broke. One of my mentors said, “I hope this is not the only idea you’re working on.” My mom said she would send me money and that I needn’t have strangers living in my house. People were worried and I started wondering about the decisions I had made in my life to get there.
So, I could tell you, I didn’t feel successful or smart or talented at this moment. I felt like the world was against me.
I had sleepless nights and was very worried about what I’m going to do. Some recommended that we go to Y Combinator.
Us: But we’ve already launched. We’re way beyond that.
Them: You’re dying.
Us: Okay, I guess we’re not beyond anything if we’re dying.
We met with Paul Graham of YCombinator and he thought it was a terrible idea. At the end of what we thought was a terrible interview, Joe hands Paul a box of Obama O’s. Paul thought we’d got him this stupid box of cereal.
Joe: This is how we funded our company.
Paul: If you can convince people to pay $40 for a $4 box of cereal, maybe you can get strangers to stay in strangers’ homes.
(He also liked us ‘cause we said we were cockroaches.)
Paul: It’s an investment nuclear winter and the only people that will survive are cockroaches and you’re a cockroach.
Me: Thank you!
That was actually the nicest thing and the only compliment I got in six months. I called my mom and said: Mom! I’m a cockroach! I got in!
The turning point
That’s how we got into YCombinator and that was a turning point for us.
Reid: YCombinator itself didn’t change the numbers. What did you do to change the inflection of the company?
Brian: There were two things:
- The first thing that YCombinator did was create a structure for us to work on it full-time and live together. We were all kind of working on it but everyone had other things going on in their lives. And, I think the enemy of a startup is everyone else’s life (like going on vacations and to conferences). Paul Graham used to say, “Startups don’t die. They just fade away.”
When we lived together, we decided we’d go to bed at midnight, wake up at 8 am (all seven days a week) and just focus on work. This created a serious rhythm for us.
Paul Graham gave us a series of advice that changed our business forever.
The most important single piece of advice he (Paul Graham) gave was it’s better to 100 customers that love you (who will tell others about you) than a million customers who like you.
All historical movements have grown this way. The general wisdom is I need to build some app and need millions of people using it and they get to like it enough to share. That’s totally the wrong way to think about it.
So, we decided to do things that don’t scale. To get 100 people to like you, you need to meet them and understand their problems. During YC days, we commuted from Mountain View to New York. Joe and I would go door to door and we would meet with everyone of our hosts. We lived with them, wrote first reviews and took photos of their homes, before the era of iPhones and people found it hard to transfer pics to their computers.
The hosts loved our idea when we said what if at the push of a button, a photographer appears and clicks pictures of your home. They were shocked to see that the company’s founders were also photographers. They also hand-delivered cheques to their hosts.
It’s super easy to create something a single person loves, especially if it’s a service. Then, you go person by person and once you have 100 people, figure out how to scale that.
Airbnb’s big win
By April 2009, we had 100s of people that loved us. People started booking. It became clear to us that it was a real business. Paul Graham asked us to be Ramen-profitable by Demo Day (the end of YC) where everyone presents to investors.
Given that Sequoia Capital had put out this deck titled “R.I.P. Good Times”, signalling an economic downturn.
Paul Graham said that there may not be any investors at Demo Day. Can you imagine that? He said we could defer a batch. We thought we can’t defer and that we’re going to die. He also told us that if we’re profitable, we would never need to get funding.
So, we decided to be Ramen-profitable (profitable enough to live on Ramen noodles). I thought that’s okay cause that would be more than I was living on.
By April 2009, we were Ramen-profitable. And, Sequoia Capital invested $600,000. It was a huge legitimization event for us as they had invested in LinkedIn, Google and PayPal. I think at that point, at that moment, the product-market-fit happened.
And then it went from building a product to building a company.
Airbnb builds a network
Reid: You had this initial community in New York and you got to know your customers well. You understood photography was key to unlocking the marketplace. How did you start moving to other cities then?
Brian: So, the really unexpected great thing about our business was we were truly a network (the phrase “network effect kind of gets bastardized and it’s unclear if it means anything any more). New York was the big city we launched in and we launched anywhere that had Internet access and there was Google Maps.
We were a travel product in New York where our hosts were in New York but travelers came from all over the world unlike let’s say, Uber, where the drivers and riders were in New York. Airbnb’s customers would travel to New York, San Francisco and they’d go back to their city and spread the idea. Some would go from being a guest to a host. The network grew naturally.
Some of the other things we did to grow the network:
- Targeted events: Targeted the Democratic National Convention (built D.C. through the inauguration of 2009). Focused on music festivals, concerts, The World Cup and the Olympics. Events and PR were probably the main ways we bootstrapped.
- Craig’s list: We built this one-click post-to-Craig’s-List-tool, which allowed hosts to distribute their post to Craig’s list to get more distribution at the single click of a button.
- Google advertising
The main way we grew was word of mouth and PR. We tried to partner with event companies but partnerships in early-stage companies never work because there’s so much red tapism and paperwork that by the time you’re done, you’re dead.
We found that the more absurd the idea, the more the media would write about it. A provocative idea was good to get the word out.
We went to cities and educated the hosts. We conducted meet-ups of 10-20 hosts where we called it turning on a market. In smaller cities, it was a novel idea to meet with the company founders unlike the scene in San Francisco.
The one thing we didn’t realize then was that they’d get excited to meet us, thought we were reasonably nice people and told their friends about it. Their friends got onto Airbnb’s network. After meeting us, we noticed the hosts were more engaged, we’d photograph your homes, give you tips and these markets started getting turned on (Boston to London to Paris). We kept having some funny Obama Os’ type of stunt to get people to continue to talk about us and we religiously focused on making sure our customers loved us.
Airbnb’s starry design
Reid: A couple of things that you guys do differently than all the other consumer Internet companies… Because you and Joe are designers, you have an attention to design, that’s much more intense. You have this concept of seven-star design…
Brian: On the Internet, especially most marketplace businesses (think YouTube or Uber), the paradigm is five stars. The bar to do five stars is really low. A five star might have been nice enough for other people to book it but we wanted to build a product where people love it so much that they want to tell others about it.
Travel has the impact to transform your life. We thought what if we build a product where you book an Airbnb but you didn’t leave five stars and instead emailed the company asking for a sixth star? When we design products, we imagine the customers expect a five-star experience (as a given).
5-star Airbnb experience: They give you the address, you get to the house, you knock on the door, they’re there to receive you and let you in. Anything worse than that, you start to leave.
6-star Airbnb experience: They pick you up at the airport so that you don’t need to travel on your own and knock on their door.
7-star Airbnb experience: The hosts send you a limousine, there’s food that you like and there are magazines on the topics you like.
8-star Airbnb experience: You get to the airport. And, you see an elephant walk by the terminal and there’s a parade in your honor.
9-star Airbnb experience: You get to the airport and the moment you step off the plane, there are 5,000 screaming 13-year-old girls and boys holding signs. I call it the Beatles check-in when the Beatles came to the US for the first time in 1964. The crowd follows you and does a press conference in the front yard of your Airbnb home.
10-star Airbnb experience: When you get to the airport, there’s a little card with your name on it and you realize that’s your ride. But you realize the person dressed in a limo suit is Elon Musk and he just takes you to space.
Obviously, I’ve exaggerated to make a point.
The whole point is when you just need to find 100 people who love your product, they expect a five-star experience. But you need to build something that’s more than what they expect. When you play the scenarios all the way up to a 10-star experience, working towards a six-star doesn’t seem so bad.
We do this to almost every frame of the experience such hiring people.
I told somebody from the executive team at Disney about our product and he thought we meant the house (the hosts’ homes). At Airbnb, we have historically called the technology (website and apps) as the product and we suddenly found it weird. Technically speaking, the product is whatever the customer’s buying. They aren’t buying our application, which is just a storefront for communication.
They are buying more than the house (the host), the experience of hospitality and the idea of belonging. We realized early on that we’re an online-to-offline business. We kind of started the sharing economy, the next wave of the Internet. There was a wave of the Internet (things online such as Amazon) followed by another wave of connecting together (Facebook and LinkedIn) after which came the Internet going back to the real world (Airbnb).
Applying design thinking to everything
Reid: As a bridge to getting how you design culture, I think it’s worth sharing as to how you also apply design thinking to office.
Brian: I consider myself to be a designer by trade. Steve Jobs used to say, “Design isn’t how something looks, it’s how something works.” When you are hit with that realization, you imagine almost everything needs thought and design. You don’t just design a website or an application, you design an organization, buildings and everything. You don’t have to pull everything out of a box and plug it in.
Your company needn’t look like other companies. Not everything should be reinvented (management and HR systems) but there are some basic things that might be your core that you need to reinvent.
We decided we needed to reinvent the space we work in. Our core competency was showing cool space around the world and so, we better have a cool office space. People spend more time at the office than at home, so it was important that they were comfortable and happy. This is more of an afterthought for most companies and we wanted it to be a competitive advantage for us.
We had 100 ideas to reinvent our office space but I’ll tell you one of them. When you walked into one of the offices we had, there were photos of our homes in the lobby and people felt it was awesome. I thought there’s got to be a better way than this.
One day, while walking home, I passed by a furniture store, which was all lit up. I thought it would be funny to have a meeting in the showroom. Next day, I took someone there for a meeting and we hung out in the dining room of the furniture store. And, we thought what if all our meeting rooms were modeled after apartments on our website? And, we did just that.
It doesn’t cost a lot of money because the furniture people buy for their homes is cheaper than office furniture. We have tens of thousands of people who come for an office tour every year. Our office has become a huge competitive advantage in hiring.
Most companies are gray with drop ceilings and cubicles. You have to put your product in the building. People need to be immersed in the world they are working in.
Here you go for the second part of the post.
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