<br /> For decades, Cathryn Blum has been a film location scout in San Francisco, helping productions from James Bond to Top Gear make use of the picturesque west coast city.

Now in her mid-sixties, she decided a decade ago to start taking less work. To make ends meet, in 2010 she became one of the very first hosts on Airbnb, renting out the spare room and bathroom in the home she affectionately calls the “nest.”

But now, as the coronavirus pandemic ravaged Airbnb’s business, hosts such as Blum have borne the brunt of the uncertainty and disruption.

Even if she wanted to, current San Francisco health restrictions forbid Blum from renting out her spare room while she herself is staying in the house. If business doesn’t return early in the new year, she’s worried she will be forced to move, no longer able to pay her mortgage. Blum says she hasn’t hosted any guests since February.

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Her experience illustrates the precarious situation Airbnb faces as it prepares to go public in one of Silicon Valley’s most anticipated initial public offerings. The company’s shares are expected to begin trading on Thursday.

As one of the iconic businesses of the last decade, Airbnb’s decision to list its shares is a significant moment for America’s capital markets, especially given the preference of many Silicon Valley companies for private funding. Indeed, the company’s chief executive Brian Chesky had avoided a listing for years.

The decision to list now is also an important test for the travel industry given the tumultuous year it has faced as a result of the pandemic and because of what it says about expected consumer habits once the worst is over. With vaccines now starting to be rolled out, investors are trying to decide whether people will resume their pre-pandemic habits or whether the lockdown and health crisis have changed attitudes to travel.

Even as Airbnb attempts to paint a rosy picture of its business during the pandemic, the company has had to scale back its ambitions, focusing on a core home-renting business whose growth was already slowing. Ultimately, Airbnb will be relying on investors to put their faith in its business at a time of crisis — a trial whose outcome could affect the lives of millions.

“I hope that it comes back,” says Blum. “Otherwise I’m not sure what’s going to happen to me.”

Hosts & Housing

Airbnb’s founding story has become the stuff of Silicon Valley lore. In 2007, two of its co-founders, Chesky and Joe Gebbia, rented air mattresses to three visitors during a San Francisco tech conference, allowing them to make their rent for the month and spawning the idea for the business.

The company had multiple false starts. At one point, the founders sold novelty John McCain and Barack Obama-branded breakfast cereal to pay off their credit card debt. In 2008, they were accepted on to Silicon Valley’s prestigious Y Combinator program, giving up 6 per cent of the company for $20,000 in funding.

The business started with a simple idea: travellers would pay discounted rates to stay in the spare bedrooms of local “hosts.” Airbnb bore little of the costs associated with traditional hotels while taking a cut of the fare for acting as a matchmaker.

After the 2008 financial crisis, the company came to represent the so-called sharing economy, which turned personal property into new sources of income.

Airbnb’s founders sold investors on the idea that city dwellers welcome extra cash from travellers searching for seemingly authentic experiences. After emerging from Y Combinator, the company won early backing from Sequoia Capital, which led its seed round of funding and a subsequent financing in 2010.

“That vision was just tremendously compelling,” says Reid Hoffman, a partner at Greylock Partners, which invested alongside Sequoia in 2010. “This should exist in the world, and I think these guys are the ones who will bring it.”

The company’s detractors have taken a less romantic view. Over time, they say, the typical Airbnb host has changed from the mom-n-pop with a room to spare, to “professional hosts” managing several properties.

Only 21 per cent of Airbnb’s active listings are for spare bedrooms, according to data from Transparent, a research firm specializing in short-term rentals. More than half of all listings are managed by hosts with at least two properties on the platform. Six per cent control more than 100 listings, and some over a thousand.

“It’s the wholesale conversion of thousands and thousands and thousands of units to full-time tourist accommodations that agitates people and that agitates legislators,” says Dale Carlson, a strategic adviser who has co-ordinated opposition efforts against Airbnb in San Francisco, backed by the hotel industry and some housing groups.

The chief concern — echoed by city officials across North America, Europe and Asia — is the supposed impact on the affordability of local housing.

“A reasonable reading of the available evidence suggests that the costs imposed on renters’ budgets by Airbnb expansion substantially exceed the benefits to travellers,” concluded a 2019 report from the Economic Policy Institute, a Washington based think-tank. It drew on studies conducted in cities such as Boston and New York that found parallels between growing Airbnb activity and increased rent for locals.

Intervention can greatly reshape Airbnb’s presence in a city. After tighter rules on hosting were implemented in San Francisco in 2018, the number of available listings on Airbnb plummeted, from more than 10,000 to just over 5,000.

Across Europe, city leaders are seeing the pandemic as a unique opportunity to reduce Airbnb’s presence. Earlier this year, Lisbon’s mayor announced a plan to rent 2,000 empty Airbnb properties on five-year leases, offering them to essential workers and students as subsidized housing.

Airbnb has disputed claims it harms communities, instead pointing to its own figures suggesting Airbnb activity greatly increases spending in areas that typically miss out on tourism revenue. Airbnb said US$100-billion in “direct economic impact” — money earned by hosts, or spent by visitors — had been spread across 30 countries.

In its IPO prospectus, the company said it had come to agreements — or had conditions imposed upon its business — in around 70 per cent of its top 200 cities.

It insists it doesn’t rely on any of them too heavily: no single city, it says, accounts for more than 2.5 per cent of the company’s overall revenue.

Airbnb’s business flourished as it struck deals around the world, fuelling questions about when the company would go public.

By 2016, it had begun producing positive cash flows, unlike some Silicon Valley companies such as Uber that relied on private capital to fund operations. The company surpassed more than US$1 billion in revenues, growing 80 per cent from 2015.

Chesky preferred to tinker with Airbnb’s business while avoiding the glare of the public markets. His decision to remain private reflected a growing consensus in Silicon Valley, where executives sometimes waited a decade or longer before taking their companies public. But it also drew the ire of employees and other shareholders, who had grown eager to profit from Airbnb’s soaring valuation in private markets.

The tensions came to a head in 2017 as duelling factions within Airbnb argued over the merits of an IPO.

By the end of 2017, Airbnb said it would be profitable for the year, without accounting for interest, taxes, depreciation and amortization. Bankers estimated Airbnb could achieve a valuation upwards of US$40 billion in an IPO the next year, according to an investor, about US$10 billion higher than where private backers valued the company in a recent funding round.

However, Chesky and some investors such as Alfred Lin, Sequoia’s representative on Airbnb’s board, resisted going public in 2018.

The decision meant Chesky would have more breathing room to work on ambitious projects, such as the “Experiences” business where hosts offer cooking lessons and other local activities. In early 2018, Chesky released an open letter outlining an “infinite time horizon” for the company.

“I think history will show it was kind of a poetic decision because they didn’t have to go through the pandemic trauma the way Expedia and Booking.com have,” says Ron Conway, a prolific investor in tech startups and early backer of Airbnb. “He saved his shareholders having to go through that.”

Travel upheaval

The first warning signs over the coronavirus emerged from China where, by mid-February, Airbnb had been forced to suspend all bookings in Beijing.

By March it had grown into an existential crisis. In that month, and the next, there were more cancellations than bookings. In April, the worst month of the crisis, gross bookings were down by 70 per cent globally.

“It was that moment when we realized the world’s going to change,” Chesky told the Financial Times in May. “Travel is going to change, and it’s probably never going to be quite the same as it was.”

He moved to secure emergency funding, raising US$2 billion in debt and equity from private investment firms Silver Lake, Sixth Street Partners and others. The new investors said they were drawn to the beleaguered company due to the “fundamental and enduring” appeal of the travel industry.

In May, Chesky held a video conference with his now-remote staff to tell them the company would be laying off 25 per cent of its workforce — around 1,900 jobs — as part of a rapid effort to cut costs. The company halted almost all marketing, and pulled back on projects it saw as being outside the core home-sharing business.

“(Focusing) on a smaller number of priorities is almost always a good thing for a company,” says Hoffman. “And so I think it’s a good thing for Airbnb as well.”

It was around this time the company saw new patterns emerging that suggested a path to recovery, thanks to millions of people shifting to remote work.

“It made my mountain retreats feasible for people from the city to come and actually live there and work there,” says Mat Fogarty, a host with two properties in the Sierra Nevada, a mountain range about four hours east, by car, from the San Francisco Bay Area.

Guests now stay for at least a month, he says, at a rate higher than what he would be able to charge traditional rental tenants.

Airbnb says his experience has been replicated around the world: domestic travellers escaping to drivable destinations for many weeks at a time. In May, as short-term bookings fell dramatically, long-term stays on Airbnb increased compared with the same month last year.

Increasing competition

Ahead of its flotation, Airbnb has been billing itself as a company ready to bounce back from coronavirus. Or, if needs be, endure it for even longer.

It argues that its business has proven more resilient than others in the travel sector. RBC Capital Markets notes Airbnb continues to grow faster than its key competitors, Booking.com and Expedia, and while all three businesses were decimated by coronavirus, the hit to Airbnb’s revenues and gross bookings was less severe.

But the long-term impacts of Airbnb’s COVID-19 struggle may not yet be fully apparent. Its relationship with its hosts has been put under strain, with complaints over policies — such as forcing hosts to refund guests due to COVID-related travel bans — the subject of a class-action lawsuit in the U.S.

“We are talking about billions and billions of dollars that did not get to hosts,” says Enrico Schaefer, a lawyer at Traverse, a Michigan law firm which is leading the case. In March, Airbnb set up a US$250 million fund for its hosts to cover around 25 per cent of what hosts lost in bookings, but admitted in an open letter that “we could have been better partners.”

Meanwhile, competition is creeping up, particularly in mature markets such as the U.S. and U.K. where, according to Transparent data, there has been a “steady trend” of hosts starting to use other channels as well as Airbnb.

“A lot of people are kind of picking up on the importance of not putting all your eggs in one basket,” says David Jacoby, co-founder of Hostfully, which provides software for managing listings on multiple sites.

In the U.S., according to Transparent, 34 per cent of the homes listed on Airbnb can also be booked elsewhere. Hosts with multiple listings, Jacoby says, often use Airbnb as a way to attract new customers, but switch to different platforms when seeking their repeat business.

There are also questions about whether Airbnb can successfully introduce new products beyond its core home-sharing business, a must if the company is to get close to the US$3.4-trillion total addressable market it is suggesting to investors.

Within that calculation, Airbnb says its Experiences product — which offers guided activities such as cooking classes or sightseeing — accounts for US$1.4 trillion of potential bookings. Since launching Experiences in 2016, however, Airbnb has yet to share meaningful data on its performance.

“Experiences is not material yet and still very early days,” note analysts from trading firm Susquehanna International Group. They add that despite the company’s acquisition of HotelTonight in 2019, the strategy Airbnb has for building its presence in hotels was absent from the prospectus and roadshow presentation.

“That’s the big question,” says one person involved in the IPO. “What do you envision the longer-term growth rate to be?”

Still, Airbnb’s debut — which many observers thought would almost certainly be pushed back into 2021 — will cap a remarkable turnaround. Airbnb’s IPO pricing of US$56-US$60 per share would, at the top of that range, give the company a market capitalization of US$42 billion — a sharp improvement on the US$18 billion value implied at the time of its emergency pandemic funding.

If Airbnb does go on to resume its ambitions to reshape the travel and tourism industry, Conway says Chesky will have earned the right to be spoken of in the same breath as other defining Silicon Valley entrepreneurs, such as Facebook’s Mark Zuckerberg and Google’s Larry Page and Sergey Brin.

“These guys have unbounded ambition,” he says. “Chesky is definitely in that bucket, and his dream is for Airbnb to control the travel experience end to end.”