With Airbnb’s IPO, I thought the time was right to take a look back at the past decade (Greylock led Airbnb’s Series A in November 2010) and reflect on what I learned from the journey. This essay is based on a Greymatter podcast episode, which you can listen to here:
How Greylock Invested In Airbnb
Ironically, I missed my first opportunity to invest in Airbnb. The very first time that someone reached out to me about Airbnb, he described the business as, “It’s renting couches. Everyone has couches, and now you can rent them.” I replied, “That sounds really interesting. You should go do that.” But in my mind, I thought, “That doesn’t sound interesting at all.”
Couchsurfing is a bad product experience. There’s no privacy, and it’s just one step up from offering someone a sleeping bag in your backyard.
In contrast, picture renting an apartment on the Seine in Paris. I might even prefer that to the Four Seasons, because of the location and having a place to myself. That’s the power of what Airbnb actually did. But that wasn’t explained to me. So when various other people tried to reach out to me about Airbnb, I told them, “I’ve already heard all about it, and it’s not a good fit for me.” Oops.
Finally, one of Airbnb’s angel investors, who’s very smart and whom I respect a lot, reached out to me and said, “Hey, you should really look at this. These are really good founders and I think this is an interesting space.” This time, I said, “Look, here’s the way the space was pitched to me,” and I explained why I didn’t think much of couchsurfing. The investor listened, and told me, “Yeah, it’s about so much more than that.” That’s when I realized I might need to change my view of the company. (This experience led me to update my investing playbook. Clearly I had made a mistake. My conclusion was that I should have realized that the first person who pitched me on Airbnb wasn’t a great consumer internet investor, which means I should have realized that he might not describe the opportunity accurately. Further, when additional people kept mentioning Airbnb to me and praising the founders, I should have asked myself how a smart, capable person would refine the idea.)
After that conversation, I called around to learn more about Brian, Joe and Nate, and I got really strong references. That’s when I agreed to meet them. They came to Greylock’s offices on a Sunday to meet me. Literally two minutes into the pitch, I told them, “Look, I’m going to make you an offer to invest. Let’s make the rest of the session a working session.” At the end of the session, I asked them to come back the next day and present to the entire partnership.
What happened in those two minutes to convince me? Part of the entrepreneurship game is deciding what league to play in. There’s the junior league, the varsity league, and then there’s the big leagues. Generally speaking, as investors and entrepreneurs, you want to go after ideas where, if you succeed, it transforms an industry or even the world. Those two minutes showed me that Airbnb’s founders wanted to play in the big leagues.
Of course, a lot of work took place before those two minutes that went into my decision.
As is my usual practice, I’d checked references on the founders before I met with them. If I’m going to find out that a set of founders lack integrity, don’t behave like partners, take on unacceptable risks that might harm their customers or society, or simply aren’t the kinds of people I want to spend a decade with, I want to know those facts before I start down the path of evaluating that investment. And if the reference checks come back positively, then if I believe at startup is a good opportunity, I can lean in right away.
The other reason I could decide so quickly is that I really know networks and marketplaces. There are a few people who know as much as I do on that topic, but there probably aren’t any that know more.
When the Airbnb founders walked me through their model, how the hosts were also guests, how their community was developing, and what they’d learned from different markets like Barcelona and New York, it showed me that they were on top of Airbnb’s key business challenge, which is to build powerful marketplace dynamics. Their marketplace was still very small, but it seemed like it was en route to becoming something big. That’s what convinced me that they could achieve an epic outcome.
The story continued to take unexpected twists and turns the next day after the Greylock partner meeting.
One of the things that I love about Greylock is it’s a very clear-headed organization. For example one of the key things Greylock learned from its 55 years of investing history is that many of its best investments drew a mixed reaction at the partner meeting, with some partners concluding, “This is absolutely critical and important,” and other partners arguing, “I think this is a mistake. This is going to be a drag on the portfolio, this is going to be a waste of time.”
That was exactly how the partnership reacted when I brought in Airbnb.
A central reason why I joined Greylock was David Sze, who was my most helpful board member at LinkedIn. David, who was my primary recruiter at Greylock, looked at me after we debated the deal and said, “Every venture capitalist has to have a deal that they can fail on. Airbnb can be yours.”
I was taken back. “Whoa,” I thought, “Here’s an experienced VC, who invested in LinkedIn and Facebook, telling me that my very first deal is a loser.” But I had enough conviction to believe, “I think I’m right. I think David’s wrong.”
Then other partners like James Slavet supported the idea, thinking it was actually pretty interesting. So I got the license to put a term sheet down, and we made the investment.
Now here’s an interesting coda to that story. it took years for Airbnb’s metrics to really start accelerating. For a long time, when you looked at the graph, it was almost like a classic exponential “hockey stick” curve, where it’s flat for a long time, then hits the bend and takes off.
Well before Airbnb hit the bend, David came to me and said, “You were absolutely right and I was wrong. What did you see about Airbnb that I didn’t see?” One of the things I love about David and about Greylock as a culture is the commitment to truth. David was very blunt with me that he thought the Airbnb investment looked like a mistake, but he was also always constantly thinking about it and how to help.
I told David, “All of the risk factors you pointed out, like political opposition, the chance that guests cause problems, they were all accurate. But I thought that if this actually works, it can have a global impact and generate virtually uncapped returns.”
Part of the reason that Blitzscaling opens with the Airbnb story is that it demonstrates how when you win a winner-take-most market with strong network effects, it can be not just industry-transforming, but world-transforming. I believe Airbnb is going to be a different kind of company, with a different kind of product and service, that will become a different kind of platform for launching businesses that go well beyond replacing hotel rooms. The reason I got into tech investing is to back companies that could have that kind of massive impact.
There’s plenty of times when I get pitched a really interesting e-commerce investment that could clearly generate a 5X or 10X return, something that seems predictable and reliable, led by high quality entrepreneurs. I have great partners who do those kinds of deals, but that’s not how I invest. My investments tend to be the kind that could be zero, but if they succeed, could be huge, and my experience with Airbnb is one of the big reasons I adopted this approach.
The Power of the Design Mindset
One of the central lessons I learned from the Airbnb founders, which I now try to convey to other entrepreneurs I work with, is the power of the design mindset. One one level, the design mindset is similar to the engineering mindset, in that it seeks to frame and understand a problem, and then solve that problem. When I first heard the founders talking about the fundamental importance of design for Airbnb, I thought they were talking about the problem-solving mindset, which I felt I already knew pretty well. But they were actually thinking much more deeply about every aspect of the customer experience.
For example, when a guest walks into a new apartment for the first time, what are the most important factors that affect their first impression?
The Airbnb founders pointed out that in real life, the very first thing someone does is to look out the window. If you look out a dirty, grungy window, you’ll think you’re in a dirty place. Thus, it’s important that hosts keep their windows clean. But the design mindset doesn’t stop there. It asks, “What else could you do to make the window convey a better first impression? Maybe you can’t change the view, but can a window treatment better frame the view?”
They approached the entire Airbnb experience with that design mindset, not just the Airbnb website. They wanted to improve the experience, whether they were “responsible” for it or not.
You can hear about the extremes to which they went to accomplish this in the debut episode of Masters of Scale. The founders realized that one of the biggest factors in the guest experience was the quality of the photographs showing off the rooms and apartments in the marketplace. To improve that quality, Brian and Nate went door-to-door and photographed the apartments themselves. This handcrafted approach wasn’t scalable, but it allowed them to figure out whether their instinct about the importance of photography was correct, so that they could build a more automated solution later on.
Airbnb and the Covid-19 Pandemic
While I’ve learned a lot from Airbnb over the past decade, this year has been particularly packed with challenging “learning opportunities.” No business I know of had a playbook for a global pandemic of this magnitude. Airbnb had to figure out a path forward from first principles. Fortunately, its leaders are what I’ve called infinite learners, who calmly took in the radically changed circumstances and asked themselves, “Okay, what do we need to do?”
The first challenge to navigate was how to deal with the immediate impact of travel restrictions and lockdowns. Millions of travelers had already paid for Airbnb stays that they would no longer be able to use; clearly, they would want their payments refunded. But the millions of hosts who were counting on those payments to help them pay rents and mortgages would want those payments to stay in their accounts. From an economic standpoint, Airbnb could have found a way to divide the pain between the guests and hosts. The legal agreements with guests and hosts would have allowed the company to do this, and doing so would have saved Airbnb hundreds of millions of dollars. However, this course of action would have cost the company something even more important–the trust of its guests and hosts.
Instead, Airbnb’s leadership made the difficult decision for the company itself to take a significant part of the financial hit, even if that wasn’t legally required. The company refunded the guests’ payments and provided partial payments to hosts to cushion the economic blow. This was a double whammy–not only was Airbnb forgoing its share of those guest payments, it was reaching into its own pockets to pay its hosts.
This decision had immediate and painful consequences. Even though the company had been on track for an IPO, it retrenched and laid off 25% of the team. To honor the Alliance it had made with those former employees, Airbnb waived the usual vesting cliff so that they could exercise their stock options, and provided generous severance packages. The company also complemented this financial support with emotional support. Rather than making the laid off employees’ last day a Friday, Airbnb extended their tenure to the next Monday, so that all employees could spend that day saying goodbye. In addition, the company redirected its recruiting team from hiring new employees to helping former employees find new jobs. Certainly Brian played a key role as CEO, but the entire company came together for this effort, and it’s something they can take pride in.
The broader lesson is that when tough times come, it’s very easy for companies to turn inwards and just say focus on their remaining employees and customers. But in this case, there was a recognition on the part of Brian and the rest of the team that what really matters is the overall network, which includes employees, but also includes hosts and guests. The most important thing is to preserve the health of the network, because a great company is a community, not just a business.
This kind of leadership is remarkable enough, but the story of Airbnb during the Covid-19 pandemic is even more remarkable because the company found a way to adapt and come back.
Once the initial crisis management was complete, the question Airbnb asked itself was, “How do we adapt to this new world?” One of the company’s big advantages here is that its community of hosts is essentially a network of mini-entrepreneurs who were also using every ounce of their ingenuity to answer that same question. What emerged was a dramatic change in the business mix. International travel cratered, but as countries adopted social distancing and businesses asked their employees to work from home, those employees realized that they could still travel domestically, albeit by car and for shorter distances. Suddenly, people were leaving cramped city apartments for long-term stays in more spacious accommodations in the country.
The flexibility of the network made it much easier for Airbnb to adapt than traditional hotels. New hosts in new areas came online, and the ability to rent entire apartments suddenly became even more appealing than staying in a hotel with hundreds of strangers.
Today, Airbnb is thriving, and when effective vaccines are broadly available, it will no doubt adapt to those changed circumstances as well.
One Silicon Valley saying that is not as appreciated as it should be is that many of the best companies are led by missionaries, not mercenaries. It’s usually more fun to tell the stories of the mercenaries–the stories of swashbuckling mercenaries tend to be more risque and entertaining than those of earnest missionaries. But the most amazing company journeys tend to involve companies with a deep mission of improving the human ecosystem. Part of the delight and joy that I get as an entrepreneur and investor achieving a mission that really is serving humanity.
The majority of my investments fall into the “humanity mission” category. For example, I’ve invested in different aspects of autonomous vehicles with Aurora, Nuro, and Nauto, which are trying to make driving a much safer endeavor. Of course they are part of a capitalist system, and of course they’re trying to build huge, valuable businesses. But that aspect of their nature is part of what helps them get to scale; building valuable businesses allows them to compound their growth, hire more employees, serve more customers, and advance their missions.
Airbnb’s mission of social connection and belonging is deeply embedded in the company and culture. So I’ll leave you with this last anecdote, about something I thought Airbnb did better than any other company I know, including LinkedIn and PayPal. To reinforce Airbnb’s mission and make it concrete to all team members, the company modeled all of its conference rooms on real Airbnb properties around the world. Every time the team held a physical meeting (something I hope we can get back to soon) the conference room itself was a vivid reminder of the core experience.
It’s critical to make the right business decisions, but it’s also critical to remember that the mission is what justifies your effort to transform the world. That missionary spirit is one of the enduring elements of the Airbnb story, and it’s something we should all seek as entrepreneurs and investors.