Brian Chesky: The 'Sharing Economy' and Its Enemies
The cofounder of Airbnb on how an idea to rent space on air mattresses turned into a Web business that has hotel chains fuming and politicians suspicious.
By Andy Kessler
Jan. 17, 2014 7:00 p.m. ET
San Francisco's Radius Cafe is one of those places where "local" is the rule—all the food is sourced within a 100-mile radius of the restaurant. So it's a touch ironic to meet there with Brian Chesky, the hoodie-wearing 32-year-old co-founder of Airbnb, whose game plan is global.
Airbnb is a Web service that lets travelers book couches, beds, rooms, houses, boats and even castles on a nightly basis. In six years Airbnb has become a company valued at $2.5 billion, with 500,000 properties available in more than 190 countries—a stand out in what is often called the sharing economy. Airbnb could do to hotels what Amazon has done to bricks-and-mortar bookstores. By year's end, Airbnb says it will have booked more overnight stays than the Hilton and InterContinental hotel chains.
As might be expected, hoteliers and hospitality-industry regulators are suspicious of the Airbnb model. In October, New York state sued the company for violating a law passed in 2010—just when Airbnb was picking up steam—barring private citizens from renting an entire apartment for less than 30 days.
"I want to challenge the status quo, but in a way that's constructive," Mr. Chesky says. "There were laws created for businesses, and there were laws for people. What the sharing economy did was create a third category: people as businesses. . . . They don't know whether to bucket our activity as person or a business."
That the New York lawsuit was issued from Albany hit Mr. Chesky close to home: He grew up just outside the city, the son of social-worker parents. To hear him tell it, disrupting the hospitality industry—let alone working on the Web—couldn't have been further from his ambitions growing up. Back then he was a fidgety doodler. His interest in art led him to the Rhode Island School of Design, where he majored in illustration, later switching to industrial design.
"Industrial design teaches empathy," Mr. Chesky says. "Basically you have to put yourself in the shoes of the person you are designing for and you have to experience the end-to-end system." His mother just wanted him to have a job with health insurance.
In 2004, Mr. Chesky moved to Los Angeles to work as an industrial designer with a small firm. Three years later he quit, packed up an old Honda Civic, and drove to San Francisco to crash with a college friend, Joe Gebbia, who had recently quit his graphic-design job. "I realized I didn't want to walk in someone else's path," Mr. Chesky says. "I wanted to create a path of my own." He also had a more immediate challenge: His share of the rent was $1,150, and Mr. Chesky had $1,000 in the bank. His roommate was not in much better shape. "How the hell were we going to make rent?"
The jobless designers were aware that within two weeks the 2007 Industrial Design Society of America conference was being held in San Francisco and that hotel rooms would be scarce. Mr. Gebbia had three air mattresses and suggested turning the apartment into an "air bed and breakfast."
Within three days, they had a rudimentary website up and booked three guests: a 35-year-old woman, a 30-year-old from India, and a 45-year-old father of five, each paying about $70 a night for several nights. "I thought we were going to get a bunch of young L.A. dudes, 23-year-olds," Mr. Chesky recalls. No matter. That month's rent problem was solved, and Messrs. Chesky and Gebbia thought they might be on to something.
In early 2008, the two men added an engineer, Nathan Blecharczyk, and focused on South by Southwest, a media and music festival in Austin. They launched a lite version of the website for the gathering: no online payments, no reviews, no bookings, no search function. "We got 50 people to list their homes and we ended up getting just two people to book a room," Mr. Chesky says, "and I was one of them."
The rest of 2008 was spent adding more robust website features that make Airbnb easy to use. Steve Jobs had famously insisted on a maximum of three user clicks to get a song on the Apple iPod. Airbnb adopted that mantra: three clicks to a booking.
How did they support themselves while hoping that business would pick up? "You know those binders you put baseball cards in? We put credit cards in those," Mr. Chesky says, running up $2,000 or $5,000 credit limits until they stopped working and moved on to the next card.
For over a year, "no one invested in Airbnb," Mr. Chesky says. "Really well-known angel investors turned us down. . . . 'How many hippies are there?' they would ask me. One famous investor was drinking a smoothie and just got up and walked out mid-pitch."
The break came in 2009 when Airbnb was accepted by Y-Combinator, the best-known startup accelerator in California. It gave them $20,000 and three months to refine the Airbnb model.
To attract significant venture capital, they needed traction and revenue to become "Ramen profitable" as Mr. Chesky puts it. In other words: "If we could live on only Ramen, how much money would we need?" He pasted a fake revenue graph on their bathroom mirror with a "Ramen line" at $1,000 a week.
To figure out what Airbnb required, the partners would fly to New York—which had quickly become the focus of the business—every weekend and stay in rooms booked through Airbnb. They learned quickly that they needed high-quality photos of the apartments and that Airbnb needed to be more closely involved in coordinating the handling of door keys and hiring cleaning services. Once the Airbnb experience improved, Mr. Chesky says, visitors from around the world would "go back from where they came from. Then they would become hosts." The Airbnb network rapidly expanded. In March 2009, Sequoia Capital invested $600,000.
Initially, Airbnb charged 5% for every transaction; now it takes 12%—3% from the host and about 9% from the guest. The private company doesn't release data. But if you figure 60,000 bookings a night—the average, according to Mr. Chesky—at a lowballed $50 per booking, then Airbnb is making well more than $100 million in annual sales. The company has 700 employees.
Staying in a stranger's home—either renting the whole place or just a bedroom—isn't for everyone. And the model hasn't been without problems. A home in Glendale, Calif., listed in recent months on Airbnb as an "entertainer's outdoor paradise" turned into a party house, with police shutting down six parties since October, even using helicopter spotlights. In 2011 a guest burglarized a San Francisco apartment, stealing valuables and the owner's passport. In 2012 a renter reportedly used a Stockholm apartment as a brothel.
Reviews by hosts and renters solve most problems by tipping off one group about problems with the other. "A two-sided transaction requires a reputation system," Mr. Chesky says. After the uproar from disappointed hosts, in May 2012 Airbnb instituted a $1 million "host guarantee" of quality, underwritten by Lloyd's of London.
But by far Airbnb's most significant obstacle has come from those who want to protect the status quo—hotel companies and governments collecting lucrative occupancy taxes that they say Airbnb and its hosts avoid paying. New York is Airbnb's most lucrative market, and the company's battle with Attorney General Eric Schneiderman is no doubt being watched closely by his peers across the country.
The city's 30-day minimum for apartment rentals is "a very gray law," Mr. Chesky says. The law was intended to crack down on slumlords who run illegal hotels in apartments. But since half of Airbnb's New York bookings involve entire apartments, they technically run afoul of the law. The law's passage four years ago brought out some 500 Airbnb supporters as protesters at City Hall, and the company met with city officials, most of whom had never heard of the company, Mr. Chesky says. "They met with us and said 'We've worked on this for four or five years, we're not rewriting the law and going through another four or five years.' That's when I realized we probably had a problem."
Four months ago, Mr. Schneiderman subpoenaed data on all of Airbnb's 15,000 New York hosts. In pursuing Airbnb, the attorney general may be protecting New York's 14.75% occupancy and sales tax, but he's also not disappointing the city's 30,000-plus unionized hotel workers.
Mr. Chesky insists that he has the same "endgame" as Mr. Schneiderman, and that the company is happy to cooperate with any investigation. But he adds that what happened in New York "didn't feel like an investigation, it felt like a fishing expedition."
The typical way things have played out with the New York AG's office in recent years is for companies to become the target of loudly trumpeted lawsuits that are then quietly abandoned when the company agrees to pay a substantial settlement. "We're trying to work toward a resolution," Mr. Chesky notes. "That's probably all I can say." Airbnb quickly filed a motion with the New York Supreme Court to block Mr. Schneiderman. The outcome is pending.
Airbnb argues that rather than taking away income from the city, its users bring a significant amount of business by encouraging visits by tourists who might not be willing or able to afford the city's daunting hotel rates. Mr. Chesky says that "62% of hosts in New York depend on Airbnb to pay their rent or mortgage."
The sharing economy is still so new, Mr. Chesky says, that his company is lobbying cities around the world to account for it. Sometimes Airbnb loses: Berlin passed a law that, beginning this year, requires a permit for short-term rentals, or hosts are forced to pay a stiff fine. The law won't kill Airbnb in Berlin, but it will impede the free-flowing nature of the business.
'We're not against regulation, we want fair regulation," Mr. Chesky says. "We're trying to help take this from an activity that existed under the table with Craigslist and bring it out of the shadows. We want to work with cities to streamline the process for hosts to pay occupancy taxes," he says. "People ask, 'Why don't you just pay the tax?' Well, it turns out that in cities like New York, you can't just pay the tax, you can't just send them a briefcase of money, you have to change the laws first. Onerous licensing and permitting are designed for large corporations"—not for Airbnb users.
"I want to live in a world where people can become entrepreneurs or micro-entrepreneurs and if we can lower the friction and inspire them to do that, especially in an economy like today, this is the promise of the sharing economy," says Mr. Chesky. For regulators, he has a request: "Don't kill something wonderful before knowing what it is."
Mr. Kessler, a former hedge-fund manager, is the author, most recently, of "Eat People" (Portfolio, 2011).
