Airbnb Picks Up the Pieces

Airbnb’s bookings were decimated by COVID-19 in the first half of 2020. I recap the highlights from the May 22nd interview with Brian Chesky by Kara Swisher in the below post. Chesky is energetically transparent as he describes the events that unfolded around him and the tough decisions that he had to make. Swisher does a good job of helping Chesky unpack the dramatic and still unfolding events. I suspect that Airbnb’s COVID-19 strategy will be a business school case study for years to come.

Initial domino falls, aftermath of laying off 25% of Airbnb staff, life/people lessons learned

  • As Chesky worked through the S1 in preparation for a mid-year IPO, the China business tanked and Europe would fall next

  • After the major round of layoffs, he allowed employees two weeks to absorb news. Despite being in literal DEFCON 5 mode (my words not his), Chesky was patient enough to know that he had to allow employees time and perspective

  • Chesky says about 90-95% of the people in his life were solid and there for him when he needed them

  • He didn’t feel like he was in a panic. He became oddly present & optimistic. Have to be optimistic because others will follow you. How do you maintain the optimism in this tough time? He relied on his co-founders and board for support. Is there a psychological term for this almost out-of-body experience?

Tidal wave of guest refund requests as COVID-19 cripples the global economy

  • As COVID-19 spread across the world like invisible wildfire, understandably, guests wanted to cancel trips and requested refunds on deposits. Chesky describes it as a very sudden wave of refunds

  • Hosts did not want to grant refunds - hosts had discretion on setting refund policies, which in normal times make sense since the properties are their assets

  • Chesky made the decision based on “principle” - minimizing moral hazard and preempted host refund policies in favor of guest interests. He understood that many guests would still travel if not granted refunds or so they claimed. He also looked at the policies of hotels and airlines as a comparison

  • However, in this fog of war, Chesky says that mistakes were made. He says he made the right decision, but he did not have a plan to help hosts offset the impact on their cash flows. But Chesky made it right after the backlash from hosts. In short, Chesky leveraged his existing balance sheet and essentially crowdsourced from other stakeholders including employees (employee driven) and investors to create a host relief fund

Shelving the IPO & Pivoting Towards Fundraising

  • Scenario planning for the raise. Cash follows revenue and Chesky would soon face a major cash crunch if he did not bridge. Chesky had to understand how much cash he needed to raise. Faced the choice to raise money now or wait to raise money during a recovery with better terms. Difficult to know when the bottom was going to hit and how low the bottom could go. His team modeled no travel for 18+ months

  • Trade off between debt and equity. Ending up going with ~ $2B debt with warrants that do not dilute existing equity very much. Debt is good if the company will grow fast

Divest/Reinvest Decisions in the time of COVID-19 - a hold, buy, sell strategy

Through an “audit” Chesky had to understand if there were any tailwind opportunities & bright spots in the business. Interesting to note that European domestic travel - as defined by in country travel - has almost completely recovered

  • Airbnb online experiences was an unexpected hit. Sounds like Airbnb experences were trudging along based on Chesky's description, but online experiences took off

  • He notes how there is strong demand for domestic stays where guests only need to travel via car in a 2 hour drive. Guests are looking to decamp for an extended period of time. Airbnb is now marketing monthlong stays on their landing page

A fun penguin oriented Airbnb experience.

Pausing initiatives - Do they add to the bottom line or are they extraneous & distracting in this time of crisis? Keep in mind that because of demand shock, Chesky has to layoff a significant share of workers, so something must go

  • Paused the new transportation products (airlines offering to combine bookings)

  • Paused content strategy - an Airbnb magazine an excellent idea in normal times

  • Paused the development nice to have “features”

  • Paused the loyalty program for guests - a must have in normal times to keep up with competitors, but not necessary

  • Paused Hotels - putting hotels onto the platform - e.g. Hotel Tonight

  • Reduce scope of existing business lines

  • Reduced the “luxe” ($1-2K a night staffed properties) - more a resource allocation than a demand issue

Final Thoughts

There is no easy way to layoff employees, but how you treat people matters. In Chesky’s open letter to laid-off employees, he mentions how he is allowing employees to keep their laptops so that they have a tool to find gainful employment. A clever, low or no cost way to build goodwill with departing employees.

The burden faced by professional airbnb hosts, many of whom are highly levered should not be overlooked. For more on that, read the recent WSJ piece - "A Bargain with the Devil."

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COVID-19 upended human interaction in 2020. Most if not all in-person events scheduled after COVID-19 took hold in North American were cancelled. As the world grappled with the deadly disease, technol