The valuation number is misleading. You're looking at the snapshot price of a relative small fraction of Airbnb's equity at a particular moment in time; just as 1,000,000 shares of XYZ will likely trade at a lower price than 1 share, so too might the valuation be lower for the whole company.
More importantly, these aren't common shares; they're shares with privileges attached to them, and thus command a higher value.
Finally, VC's perspective towards share valuation is different than that of a "value investor"; a VC looks at the shares as if they were options, with a limited (1x investment) downside but an uncapped upside.
These aren't my insights; they're taken from a bulleted list Andreesen twerped last night. They sound convincing to me.
This 'new valuation debunking' can also be overdone. There's never one single "valuation" - everything is dynamic, contingent on assumptions, and subject to surprising discontinuities.
The naive extrapolated "post-money valuation" number is still significant under many scenarios, and perhaps even the 'modal' (most-likely) or median scenario envisioned by the business insiders who are selling the shares.
After all, it's the exact price that, assuming a 1X liquidation preference, the venture would have to appreciate beyond for the VC to make any positive return – which is after all the whole point. It's the exit value at which the insiders take exactly the negotiated dilution, not extra dilution to protect the investors. (If the insiders' own reserve value was less, they'd likely be selling larger stakes, or the whole company.)
Generally, also, minority stakes like this have a discount to the full-company value because they're at the mercy of the majority/control stakes. (Though, preferences affecting governance also affect this.)
At such a large valuation, and such a small (5%) stake, I wonder what preferences were really offered. It looks like a raise from strength, like Facebook's pre-IPO raises – another time when armchair skeptics scoffed at the implied valuations (which in hindsight were bargains). Maybe the preferences aren't that big in such a case.
Usually, you pay a premium for large equity stakes, because they come with more practical control. (Witness every tender offer takeover ever.) The other two points are more convincing, however.
I don't think pmarca/tptacek mean the price would be lower if someone were buying 1,000,000 shares all at once. Rather, if AirBNB tried to sell 1 share, it would naturally go to the person willing to bid the most for it, and that price would be higher than the average selling price if 1,000,000 shares were released.
I think you're stating their point accurately. But what I mean is that in the usual case, the value of 1,000,000 shares is actually greater than 1,000,000 x (price of one share), because you're getting something more with those million shares: control. That said, there may be countervailing forces at work in tightly-held startups that don't apply to liquid capital markets.
Let me try to spell this out in a bit more detail. I think you know everything I'm about to say, but I want to make sure I understand it:
You'd be crazy to pay more than a few cents more than the market price for 1 share of AAPL, because that price represents the value the most marginal AAPL investor places on the stock: Offer him a penny more and he'll sell it to you. But there are investors standing behind him who think AAPL is worth more than the current price. As you need to buy out less marginal investors, the price to get them to hand over their AAPL shares will rise. Thus 1,000,000 shares will cost you more on average than one regardless of the value of control.
The same works in reverse with AirBNB: If they sell one share, it will go to the most enthusiastic investor who thinks they're a future $1T company. If they try to sell 1,000,000, they have to work their way down into those investors who believe AirBNB is a more marginal opportunity, and the average price will decline.
This is right, but isamuel is also right in that there is the separate effect of the price of control, such that in reality it's harder to say what would happen in the AirBnB case because of the interaction effects.
It would be interesting to probe into further, but the most directly applicable data is probably fairly hard to get ahold of, given that it's investment/acquisition offers not taken in lieu of the other.
It works both ways. If stock currently has 10m shares in circulation, selling 1,000,000 shares you expect to get significantly lower price per share, unless you do it very slowly on a backdrop of high demand for shares. On the other hand, if you want to buy a million shares you can expect to pay significantly higher price compared to buying one share for exactly same reason - price depends on supply vs demand.
In one case of selling shares you are inflating supply and thus dropping price, and when you are buying shares you are inflating demand thus raising the price.
OTOH, if an investor bought 0.5M shares at $x, and then said "but I want MORE shares", AirBnB could reasonably insist on a higher valuation for the next 0.5M, since the buy-side excitement is so high.
The valuation is misleading for what purpose? Pre-IPO valuations are usually quoted as an estimate of post-IPO value.
The difference between the private and public equity markets is scarcity of stock. Liquid dollars from wealthy investors chasing a small supply of transferable stock plumps valuations. Large rounds mitigate the risk that the company is selecting obscene price points.
> a VC's perspective towards share valuation is different than that of a "value investor"; a VC looks at the shares as if they were options
Value investors don't invest in IPOs - growth investors do. IPOs are marketed and bought on the basis of their asymmetric upside potential. VCs have no exclusive claim to optionality (originally a PE term).
> these aren't common shares; they're shares with privileges attached to them
VC preferred shares generally convert to common upon IPO. Valuations which make sense for privileged shares must thus make sense for the common past the IPO.
This situation reminds me of Microsoft buying a small portion of Facebook at a large valuation. In that situation, it was more about the relationship such a deal would create rather than the actual numbers behind it. By creating a large valuation with a small deal, everyone wins. The investor doesn't have to put a large amount behind it while the startup gets the glory of an impactful validation.
Glad you've taken an introductory critical thinking course. This isn't ad-hominem. Raising doubts of the validity of someone's statement based on inherent conflict of interest is a valid line of argument.
No, it would be a valid argument if the argument was "Marc Andreesen says this, therefore it must be true". It happens that Andreesen said these things, but I pointed that out because I wouldn't want people to think they were my insights.
You'll have to actually address the points themselves, sorry.
> Gather round: here we have a rare example of the North American Ivory-Billed True Ad-Hominem Fallacy in its natural habitat.
This is definitely ad-hominem, yourself.
> It is obviously possible for Andreeson to simultaneously be chief among "bubble deniers" and also correct about private company valuations.
Whatever, dude. Marc's point may be relevant for small slices of small firms, but no one has ever spent $500M on what are effectively equity call options outside of a bubble. As such, I posit in the case of AirBnB his logic is not applicable. So he's only just a bubble denier and not correct about private company valuations.
"no one has ever spent $500M on what are effectively equity call options outside of a bubble. As such, I posit in the case of AirBnB his logic is not applicable."
No one has ever seen a black swan outside of their dreams. If you see a black swan, you must be dreaming.
What do you expect him to say? "All these companies I have invested in aren't worth as much as everyone says they are"? "You guys shouldn't be investing in VC (including us) right now"?
Just out of curiosity, what could this possibly be spent on? Assuming it is going to be used to build out in foreign markets, is this mostly advertising/marketing costs? It already seems like they have a pretty good foothold in foreign markets. I can't imagine with $250M/yr in revenue they really need that $500M for hiring people. Also - how much does this leave the founders with in terms of %?
One speculation I have that might answer my first question is that they're going to spend this on lobbying and legal battles.
You don't have to spend the money or even have a plan to spend it right away for it to be useful. It has value as:
1. Rainy day fund. When the market is hot, you might as well stow some money away in case bad things happen.
2. Liquidity for existing shareholders at a good price
3. Sets a floor in valuation in case somebody tries to acquire you
4. More flexibility in acquiring other companies (who will probably want some part of it in cash)
5. Good press
Though of course maybe they also have plans to spend it. Who knows. But if people are throwing money at you at a good price, you might as well take it.
I think many people agree that's how doubleclick became a $3B acquisition. Doubleclick closed $40m in jun 97 and another $86m in 98. So they (luckily or cannily) raised a ton of money right before the dot com crash, slashed spending, and owe a piece of their success (definitely not all, but a piece) to having the financial reserves to be one of the few companies to weather the crash.
I think not (rather, it depends), if they listed the day after say receiving a wire transfer of the amount, their NAV would only be higher by the $500M, so in a sensible world, investors would be buying the cash along with other assets essentially. This wouldn't pump up the fair value, as there would be a dilution (or likely anti-dilution) aspect to the NAV of each share post the transaction.
If on the other hand, they were to find immediate use for that amount, they could justify it being put into tangible and intangible assets whose fair value is higher than book value. Though since the grandparent poster states that they already make $250M in revenue, if they are making a net profit, the cash will only be useful in the medium to long-term for expansion.
Startups are often about finding money machines. Ideally these guys are constantly asking questions like:
1) What is the lifetime value of a user?
2) What is the lifetime value of a property owner who lists with us?
Once you start to be able to define the LTV of various user types, you then look for way to trade money for users/customers. If a property owner statistically averages $1000 in profit for airbnb over 3 years, you'd be willing to buy a user like that for <$999, right? Not so fast, though. $999 is a lot of $ and 3 years is a long time. Funding like this allows Airbnb to "buy users" (thru paid channels, growth teams, etc) at a rate that would be impossible with just organic revenues/profits.
In short, imagine businesses as an engine where you put $1, and (hopefully) $1.25 comes out. Young businesses don't often have enough cash to fully take advantage of the engine they've built.
This is out of left field, but I'd use it to start a huge home cleaning business. All those homeowners need to clean rooms between guests, why let some other company take that business?
As for other ideas - what else do hotels spend money or hire people to do (cleaning was my example)? Those are the natural areas of expansion.
I'm not an expert on AirBnB in the slightest but I think that's what you would consider their competitive advantage; you make the homeowners assume the responsibilities normally reserved for the Hotel.
That way AirBnB just acts as an intermediary and doesn't need to deal with the fussy details.
Technically, most hotels do own the property they offer. Hilton, Hyatt, Starwood, Marriott, IHG, Choice, Wyndham are all brands. They sell the reputation, that the owners of a hotel building buy (i.e. franchise) and pay royalties to.
Sometimes a hotel brand owns the hotel building, sometimes a hotel brand manages the hotel, and sometimes they do both. But in the vast majority of cases, the hotel brand is in a franchising agreement with the hotel owner, and many times the hotel owner will hire a management company to deal with running the hotel itself.
This is an excellent idea. I'm often out of town for 2-3 weeks, but I can't take multiple bookings because I don't have anyone to change the linen & take out the trash.
I'd also like some way of organising the key drop-off.
A couple of companies are already doing this as a standalone service:
I don't think AirBnB or Uber's execution is good at all. They are essentially cresting a wave that is about to smash into the breakwater of legislation.
Soon both services will be either -
a. Regulated out of existence
b. Forced to comply with regulation making them a de facto hotel-like or taxi-like service eroding their entire competitive advantage.
Another example of people stating that "efficiency = deregulated market" without considering the wider reason for societal acceptance of the regulation.
I would rather have my housing area protected than have AirBnB. I would rather my daughter use licensed minicabs than unregulated services.
I was hoping they'd use it to make their listings compliant with all local taxes and ordinances, since that is likely to be quite complex in the software. But I fear y'all are right about the lawyers and lobbyists to bend the laws to their side.
I also wonder if the AirBnB host petition[1] didn't require some astroturf to get started.
I suspect they have bigger ambitions in the "sharing economy". Airbnb (and uber) have demonstrated very good execution so makes sense to place $$ with them.
Left field thought but isn't there a business opportunity to work in the draft of all of AirBnB's legal wrangling. Basically, you just let AirBnB spend all its money dealing with all the legal hassles in each city, and then come in behind them at each of those cities and compete with them.
I know they are expanding, big time. They've purchased space in Portland and already started hiring. I think they're going to try and grow before they need to. And some backup doesn't hurt.
They won't use it for anything other than to raise the value of their valuation. If they court a buyer, all of that cash in hand just raised their buying price by $500m.
enterprise value = market cap + debt - cash; don't think the additional cash would 'raise their buying price'. If they could have sold for $10B currently (assuming the valuation TPG is buying in at is what they would sell for), I'd think it would make sense to not take additional funding at the expense of giving up equity, so don't see how this would raise the value of their valuation. Thoughts?
You are correct. Besides, raising x amount of money at y valuation, doesn't mean the company as a whole is worth y. Investors typically get preferred stock, which are worth more. Marc Andreessen had a nice tweet chain about that exact topic yesterday, ending with this one - https://twitter.com/pmarca/status/457017580385873921
I've said it before: when your business model requires individuals to serve your customers in such a close personal way, something really bad is going to happen. A fire that takes out an apartment complex, a rape, a murder. The sort of thing requiring tens of millions of dollars to make it go away.
Twitter had something like $300M revenues[0] at it's IPO and, based on the opening share price, was valued at $14B[1]. That's 46x.
Still seems crazy high, but seemingly not out of line with other recent tech valuation multipliers. There are some other insights in these comments that seek to better explain the valuation.
Generally you can only recognize revenue when you are at risk for it. If you are not taking a risk by holding inventory (or guaranteeing a price before selling a service) then you are an agent, not a principal. You can only recognize the revenue that you are at risk for, the rest is "pass-through." This is addressed in the FASB ASC 605-45 (https://thegaappost.com/sec/605-revenue/605-45-principal-age...).
An example:
1) An advertising agency buys media for a client to place ads in, but their contract with the media company says they will only pay for the media if they are paid by their client. In this case they can only recognize their commissions and fees as revenue, not the cost of the media itself.
2) An ad network buys media for a client but has to pay the media company for it whether or not the advertiser pays them. They can generally recognize the cost of the media as revenue, along with their commissions and fees.
AirBnb does not take risk on the portion of the customers' payments that go to the host: if AirBnb is not paid then the host is not paid, so this part of the payment is not recognized as revenue.
I think it still is a proper P&L perspective to label this revenue. Similarities in other markets:
- a payment processor doesn't label all money flowing through the system as revenue, just their cut of it.
- a marketplace like Etsy has gross merchandise sales that tracks how much has been bought on their platform, and revenue just accounts for what they took in
Uber: small capital loss with short disentanglement arc for hosts (cars+drivers)
Tesla: orange
Airbnb: large capital loss with longer disentanglement arc for hosts (property owners)
The places most likely to reinforce the established industry are exactly the places airbnb needs to be most prevalent. I'm not saying there isn't a path through the thicket, just that I'd love to see how they are saying they can get there. .5B only buys so many politicians in so many markets. Guerilla resistance by entrenched interests with force applied by upset neighbors could easily swamp cash reserves.
Tesla only has to fight each state due to sales channels and they have a product which doesn't offend people driving in the car next to them.
Airbnb might be fighting city to city and their service providers would really annoy plenty of neighbors. With the small surge in speculative buyers who never owner-occupy, their success would come in a zero-sum game with neighbors. Your condo is worth less if there is a stream of tourists stumbling through the commons all the time.
Yeah, clearly a city with all housing rented out on Airbnb is a crappy city, and a city that bans it outright is an inefficient city. The golden mean is still probably big enough (worldwide) to make Airbnb an immensely valuable company.
I disagree. As soon as they fight the fight, and the cities lay down the law, anyone can copy their model. They will have first mover advantage, but also a bad legacy.
I can definitely see space for a company to move in and claim to follow all laws (and actually do it), and for the rest just copy AirBnB exactly. Users would just feel better knowing they are complying with laws and not annoying neighbors. They could even start now and take the high road, for example advocate for reasonable reform (allow only owner-occupiers and only 30-60 days hosting max per year). Yes, they're limiting their market, but they gain huge mindshare and free media, and they're also avoiding the (admittedly small but non-zero) risk of going down in flames.
Also, local copies of AirBnB can spring up very easily. It would be very easy to add just enough local knowledge to a product that makes it better than AirBnB. For example, you could add local attractions on the maps, local restaurants, local partners offering discounts (in a way you can't do with targeted ads). Hosts might prefer the specialized website since they won't be competing with so many nearby areas.
I think you severely underestimate the difficulty of what AirBnB has built. Two-sided marketplaces are hard. But I agree that in the long-term, the trend will be towards decentralization of marketplaces, and AirBnB will need to evolve or be displaced.
But one of them actually makes something. For Tesla the issue isn't what they are selling, but how. For AirBnB and Uber, the issue is what (and even for Uber, that's really only an issue for UberX).
this is what has been on my mind the whole time this Airbnb thing has been making the rounds. I really don't think this is a good idea - and is doomed to fail. That's so much money too...
It seems somewhat surprising to me that Airbnb, which doesn't own a single property, is somehow worth more than the entire Hyatt chain, which owns more than 500 properties and employs 75,000 people. I guess I just don't understand how valuations work...
If I were Airbnb, and I had an extra $500M of cash, I'd be looking into getting hotel licenses, and/or using my data about the real estate market to purchase property.
When valuations get this high the dilutive impact on the founders is actually pretty low. $500m at a $10b pre-money valuation, means they only sold 5% of the company, which is a much smaller dilutive impact that even a typical seed financing.
The valuation number is misleading. You're looking at the snapshot price of a relative small fraction of Airbnb's equity at a particular moment in time; just as 1,000,000 shares of XYZ will likely trade at a lower price than 1 share, so too might the valuation be lower for the whole company.
More importantly, these aren't common shares; they're shares with privileges attached to them, and thus command a higher value.
Finally, VC's perspective towards share valuation is different than that of a "value investor"; a VC looks at the shares as if they were options, with a limited (1x investment) downside but an uncapped upside.
These aren't my insights; they're taken from a bulleted list Andreesen twerped last night. They sound convincing to me.