COMMENT: In 2019, WeWork’s valuation was slashed by 90% as it tried to launch an IPO. This year might hold a similar fate for Airbnb, but for very different reasons.
WeWork co-founder Adam Neumann never stood a chance. The co-working giant and its founder were everything everyone loved to hate. Landlords scoffed at the upstart who presumed to reinvent office buildings. Silicon Valley looked down on a New York real estate operator trying to pass itself as a tech company. Media analysts mocked the WeWork’s unusual financial metrics and relished the details of Neumann’s unforced errors. And the general public cheered as a paper billionaire fell from grace.
Airbnb is different. Its individual “landlords” are delighted by the opportunity to generate hospitality income from residential space. Tech investors love that the company owns no inventory and signs no leases. They also appreciate Airbnb’s San Francisco roots and its affiliation with Y-Combinator, a start-up accelerator where “real” tech companies such as Stripe, Dropbox and Reddit also spent time. And more than anything, Airbnb’s results spoke for themselves: For several quarters, the company made money.
Airbnb has been at odds with city governments from day one
But it might never do so again. There are multiple reasons to believe that the home-sharing giant’s best days are behind it. As the company gears up for a public listing in 2020, investors and reporters might not be as optimistic about its prospects as they once were.
Airbnb has been at odds with city governments from day one. Cities have been struggling to respond in a timely manner to the erosion of their regulatory power. Over the past 12 months, they’ve intensified their efforts. Toronto recently passed a law that requires all home-sharing hosts to register with the city and limits the number of nights and room they can list. Referendum voters in New Jersey, a popular Airbnb base for visitors to Manhattan, supported new initiatives to restrict home-sharing.
The mayor of Paris, Anne Hidalgo, is at odds with the International Olympic Committee over the latter’s new sponsorship-partnership with Airbnb. In London, planning permission is already required for renting out homes on short lets for more than 90 nights a year. And London Councils, a cross-party organisation, recently called for stronger government regulation.
The political headwinds are fanned by local unions and hotel lobbying groups, as well as by Airbnb’s acts of omission. In November 2019, five people were shot dead during a Halloween party at an Airbnb-booked house in California. The incident brought to the fore Airbnb’s limited ability to vet its properties and the consequences for local communities. In the wake of the shooting, Airbnb announced that it would start to verify all of the 7m listings on its platform.
Meanwhile, the capital markets seem to be more wary of feeding tech unicorns with additional capital. Private venture investors are sitting on more than $250bn (£190bn) of committed capital, but will likely act more conservatively over the next 12 months, if only to pretend that they learned a lesson from WeWork’s failed IPO. And US public investors seem ever-optimistic but have shown little faith in recently listed, money-losing unicorns such as Uber, Lyft and Peloton.
All of the above pale in comparison to Airbnb’s biggest challenge: intensifying competition. Hotel giants such as Marriott and Accor are also increasingly active in the space, mostly through the acquisition of smaller Airbnb competitors. Online travel agents such as Booking and Expedia have been expanding aggressively into the home-sharing market. According to one estimate, Booking now lists as many private homes as Airbnb.
This explains why Airbnb slid back into the red in 2019 after turning a profit in 2018. The company is facing large, sophisticated and well-capitalised competitors that are forcing it to ramp up its customer acquisition costs and fight to retain its existing hosts and guests. The company still has plenty of cash, but it will need more to fend off Booking, Marriott, et al.
Will investors be willing to pour more money into the company? Quite possibly. Will they be willing to do so at or above Airbnb’s latest $35bn valuation? Less likely. In 2020, Airbnb might show the world the limits of being a tech company: Not owning or leasing your inventory is a great way to make hay before competitors show up. But once they do, having a monopoly over specific locations might still be the best business of all.
Dror Poleg is the founder of Rethinking Real Estate and co-chair of the Urban Land Institute’s Technology and Innovation Council in New York
