Not the first time this has been remarked here, but wow at these companies just continuing to raise more and more money over and over. When does it stop?
I mean, I don't fault Tesla because I know exactly what they're doing: enormous capital expenditures like factories and stores.
What does a website platform need $850 million more for?
Classic reasons are
1: They are spending more than they are earning (to keep growing)
2: They want to spend more than they are earning (to grow faster)
3: Existing investors want to sell some or all of their shares
4: They don't need the money but the deal is too good to turn down
5: The investor can make a real difference to the company
6: They want to acquire something
I'm guessing 1 with a bit of 2, 3 and, absolutely, 4.
If the business is fundamentally unprofitable then they will keep needing to raise money to survive. If the market prices for companies like this drop then they will struggle to raise again and the business will need to be restructured (or growth slowed) to be cash flow positive.
I'm guessing they are still in land grab phase and spending as fast as they can to extend globally and within existing markets. $850 million is a lot of money, but it's easy to spend when you have the world to spend it on, and the battle is not won, not at all.
Maybe a step towards frictionless travel from the moment a person thinks about going to place X to the moment the person is at place X.
Frictions exist in transportation (maybe buying an airline), booking (many countries don't have electronic payment and catering to the underbanked might turn out to be profitable), or downright hosting (buying a hotel chain).
The last option might seem counterintuitive as Airbnb is competing with hotel chains but, technically, hotel chains are businesses still generating revenues which are not going to Airbnb. These revenues are thus up for grabs by Airbnb increasing its market share either by winning it as Airbnb or buying it and making profits owning a hotel chain and slowly chipping at it.
In other words if the goal of Airbnb is to kill hotels, it might as well make a profit off of them -by owning them- while it does.
Anti "synergy" stuff, but I think it can also be looked at from another perspective: maybe Airbnb doesn't have the cachet Marriott/Starwood/Hilton/Accor/Ibis hotels have in some countries. It can make money off of these hotels as Marriott/x/y/z in these countries, and as Airbnb in countries where the Airbnb brand is widely accepted.
I'm just guessing; I don't know anything about how any of this stuff works.
> What does a website platform need $850 million more for?
Like others have commented, at least some of this money will be used to pay off initial investors with a nice profit. It's a kind of pyramid scheme, really, that ends with an IPO.
> at least some of this money will be used to pay off initial investors
This is almost certainly NOT happening.
No sane company sells prefs with 1x liquidation preferences to pay back investors at, relatively speaking, 0.05x. When companies want to help early investors out they facilitate a secondary transaction. These $850MM are, in all likelihood, going straight to the balance sheet.
The money being invested by new investors is being exchanged for shares of the company. Rather than creating new shares, at least some of these shares are likely coming from existing investors who bought them at a lower price at an earlier time.
I'm not sure thats entirely true typically a late round of funding will be some combination of folks taking money off the table and new stock.
There's nothing very "typical" about a 850M raise at 30B. But Groupon infamously raised "Like, A Billion Dollars" of which only about 15% went into the company.
" Ponzi scheme (also a Ponzi game or aPonzi)[1] is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned through legitimate sources." --Wikipedia
"The greater fool theory states that the price of an object is determined not by its intrinsic value, but rather by irrational beliefs and expectations of market participants.[1] A price can be justified by a rational buyer under the belief that another party is willing to pay an even higher price.[2][3][4] In other words, one may pay a price that seems "foolishly" high because one may rationally have the expectation that the item can be resold to a "greater fool" later."
It may drop briefly initially, but as we saw with Linked-in, Facebook, or Google, zillow, if the fundamentals are strong, prices will keep rising. No free lunch shorting these.
Lobbying, I would assume. Airbnb has met a lot of legal opposition lately. They are dealing with regulations in jurisdictions all over the world. I guess that takes a lot of cash.
Google in total spends $16M in the US for lobbyists in the US and they want self driving car litigation. This seems like it would be used for more than lobbying .
I'd say Google at least wants self driving car legislation, and could later go as far as saying they might need it too. (...where "might need" > want >>> like).
The company has very closely aligned its image with this technology, and indeed I'd say it currently is one of those moonshots that they are betting heavily on. Which of course factors into markets gauging their P/E where it currently sits.
Here in Australia city and state hospitality organisations are very vocal in opposition to airbnb. The usual argument is why should they be paying to meet licensing/safety requirements when airbnb hosts can rent out their home without regulation. I'd guess 90%+ of these premises are standalone homes.
In my city the local council just announced plans to limit a property to 42 nights of airbnb per year, or face significant fines. Not sure it'll stick.
One could argue that swaying property owners in every metropolitan area of the world, and threatening the hotel industry is a greater obstacle than legalizing self-driving cars, which is almost unanimously agreed to be the future and in a market with many other players (every automobile company). There are few major competitors to AirBnB other than long-vested players who own expensive land and historic properties. Much of it will be used under the banner of local outreach.
One problem with that approach is that lobbying is not a one-time investment the way factories are. Every few years a new wave of politicians comes out, frequently building their platform around criticism of their predecessors and their corrupt, cozy deals with megacorps.
Is AirBnB just a vehicle for moving cash from venture industry to lobbying industry the way music startups are vehicles for moving cash from VCs to labels?
I think, from an accounting perspective, you could theoretically capitalize the expense over the term of office in the same way you capitalize the factory costs over the life of the machinery and facility.
I cannot say I have ever met an accountant would would dare try it, but suffice it to say the field of accounting has a more nuanced view of "one time expenditures" than you might be imagining.
Accounting standards have pretty strict requirements when it comes to intangible assets. There is a whole list of criteria that development costs need to meet to be capitalized, and that is for actual products. The problem with lobbying as an asset would be valuation: its impossible to actually measure the fair value of it. As well, it probably would not meet the definition of an asset at all since economic benefits are not probable.
I think that if the bribe has a contract attached, written or verbal, (which seems to be the current supreme court test for corruption here in America), then the valuation would be the fair market value, or, conversely, be a pre-payment for services not yet delivered so the income wouldn't be realized on the politician's end until time passes in their term of office. From the briber's perspective, they'd have the asset of debt on unrealized income for services not yet rendered, and like all debt, that has a simple value (and if the politician becomes honest, then the debt is written off like all other debts you'll be unlikely to collect).
Suffice it to say that the realities of doing business internationally are complicated. One complication is that companies wanting to do business worldwide will, with probability 1, be asked to pay bribes. The US considers bribing officials to be anathema and will essentially exercise universal jurisdiction with respect to the act if committed by a US person or entity.
There exist laws in the US which are utterly non-enforced, and there exist laws in the US which are enforced vigorously, with extreme prejudice. The Act is, like most, somewhere in the middle.
That's just two competitors that Airbnb is squaring off against, and you're wondering why they'd want more capital?
Priceline.com just keeps expanding, getting bigger and bigger, making more and more money, accumulating more and more cash, when will it stop? What exactly does a web site like Priceline.com need $3.4 billion in cash and $2.6 billion in net income for? Those questions make as much sense as wondering why Airbnb would want to raise $850 million.
How about if Airbnb wants to acquire the next Homeaway for $3.9 billion in cash + equity? Or they want to buy the next Kayak for $1.8 billion in cash? Or if they want to buy Zillow? Why not? Those are perfectly valid business expansion opportunities and they're expensive.
In my view, valuations and fundraise are based on what the company is going to do and growth trajectory it is on. It'd be a mistake to assume (as I see a lot of commentators here wondering why a software company needs $850M) that Airbnb will forever be a booking platform for shared rooms or continue to do what it does today.
Of course, there is no disclosure yet about what they wish to do with this capital and it may become clearer in next few months. The reach Airbnb has today could get it into growth areas such as Airline tickets, B2B, advertising or possible acquisitions. Also, being a full stack company, cost of operations, support, lobbying etc. would also be a factor for more capital.
Sounds like this is the problem: you don't know exactly what they are doing. That doesn't mean it's not justified, and of course it doesn't mean it is :)
Yes, I really wish there were fewer top comments on Hacker News rehashing "I can't believe a software company raised so much money!"
It's not that these valuations are above criticism, it's just there's rarely any real dialectic reasoning involved. I rarely see a comment from someone with a deep, nuanced understanding of the industry and market criticizing the funding round. It's just the usual incredulity that these numbers are big, which is not a sound basis for debate.
I'd like to see honest criticism of these funding rounds (or honest defense) from people who have a great deal of knowledge on the subject.
Those of us that were in the tech business between 1998-2001 are well aware it's precisely the people claiming "deep nuanced understanding of the industry" that drove the entire community off a cliff with mindless fundraising and valuations wholly unsupportable by common sense, or any other kind of sense.
Clearly the market is different now, but basic economic laws of nature don't get repealed. The reason a valuation question is the top comment on all these stories is because the valuations appear, objectively, to have no basis in a realistic assessment of the future discounted cash flows of the business in question.
Your first paragraph is not really responding to what I actually said.
Let me repeat for you: these valuations are not above criticism. I just want to see better reasoning involved than literally balking at big numbers. It comes across as the same hysteria that drives the valuations up in the first place, just in the opposite direction.
It's really not a lot to ask to simply elevate the caliber of discussion. For example, I could respond to your second paragraph by stating that it is very difficult to claim what an objectively good valuation is without a understanding of what Airbnb's future plans are. Expedia's market cap is on the order of 17B. We have incomplete insight into Airbnb's plans for future markets.
See? That isn't so difficult. I'm not blindly attacking or defending the valuation, I'm reasoning about it instead of saying, "These numbers are big so I can't see how they possibly need them!"
Reasoning from whom? The interested parties won't tell the truth. In the cited period 1998-2001 Greenspan warned of "irrational exuberance", though he did not exactly do everything he could to stop the bubble either.
In reality, opinions from anonymous engineers who know what is being sold may be the best you can get.
Also, very few people on HN have seen the decks, metrics, or long term plans that the investors saw.
Obviously nobody can see the future, so it's totally reasonable to assume that said decks, metrics, and long term plans are total bullocks, but hey, at least they exist, and someone saw them.
A fairly simple DCF[1] based on public numbers. First the basic numbers.
From public data[2] in 2015 AirBnB did at least $360M in revenue, expecting to hit $900M by the end of that year. They never disclosed if they did hit that number, but lets assume they did.
So, 2015 Revenue is $900M.We'll assume a 8% yearly growth rate over the next 10 years. With a terminal growth rate of 4% after that.
I think we can accept 6% as a discount rate - The rate we'd otherwise get
just shoving our money in a stock market index.
and based on those numbers, we get a valuation of $19774.14 Billion.
to get a $30B valuation in this analysis they'd have to have 14% YoY growth
for 10 years. Which I think is unrealistic.
Thank you. This is the sort of reasoning I was looking for.
Now, I'd counter your argument here by stating that it appears Airbnb had over 100% growth in 2015, and Expedia and HomeAway had 24% and 20% growth respectively.[1]
Given that, is it unrealistic to assume the market can support 14% YoY growth (or higher) for the next ten years?
Why is this criticism of these funding rounds not honest?
It's a phenomenon thats seems to defy obvious business logic much like credit default swaps without owning the underlying asset, no doc mortgages, underwriting student loans for degrees fields that can't possibly pay them back ad infinitum.
The phenomenon of companies remaining private and unprofitable for close to a decade and continuing to raise astronomical sums of money is not exactly a field filled with experts. Its unchartered territory. There are no people with deep knowledge of this bewildering business strategy.
It's not rehashing when its a new news item is it?
Managing an infrastructure of peer to peer rental for >500,000 units worldwide seems like a reasonably hard task.
You're comparing apples to oranges here.
Arguably the value of the property Airbnb is a defacto manager for is higher than 500,000 cars, but they also need to expand.
Trust me, I'm totally on board with the unicorn hate here, this seems ludicrous, but I also don't know what is going on at Airbnb, so I try to think about why this might be a good investment, rather than why it might appear ludicrous :)
I'm going to bet they will be opening local offices / retail points around the world. Help less tech savvy folks list on Airbnb as well as serve as a "check in desk" to pickup keys
Cheaper, a simple locker system (nicely AirBnb theme). When renting, you get a code via text, enter it and a small locker opens up with the key. When done, you can deposit the keys in there.
You could even put up a computer next to it where you can search for immediately free rooms, pay and get the key right away, or just one friendly local guide standing around ready to answer tourist question about the city.
Put it in a convenient central location that's safe (airport, central train station).
Unless you have considerable expertise in Airbnb's core and peripheral markets, I don't think it's fair for you to say what is and is not possible for a company to need (putting aside the fact that "need" is used in the normative sense here).
What does a website platform need $850 million more for?
1. I'm sure their staff costs are massive. They have offices around the world, yet the one they hire most for is in SF, one of the most expensive places in the world.
2. I'm also sure there's a fair amount of pet projects going on which are not essential or even important to the business. If you look at their departments page [1], you see they have a whole lot of departments, some of questionable impact on the business. I also heard they also have their own machine learning group that they are looking to grow. This and a whole lot of other things that you'd expect in cash-printing tech giants like Google or Apple but not startups like Airbnb.
3. They even recently launched their own in-house design studio [2]
So yea, $850m is a lot of money but given their expenses I'm sure it'll be gone in no time.
And since you made the comparison with Tesla: Look at Twitter. Where is their money going? They compare to AirBnb as AirBnb compares to Tesla. Their product is a glorified website that displays 140 character messages. They have raised about $750m in VC, 2.1b in their IPO and their quarterly revenue is about 600m. As Peter Thiel said, there must be "a lot of pot smoking going on"...
1) Lobbying. Uber has it easier because politicians are more apt to use their service since it's convenient, but a politician is frequently charging his or her stay to the taxpayer so who cares what a nice hotel costs. They may not be as strong an advocate for Airbnb so they'll need to be bought.
2) Buying up competition. Look at what HomeAway did before their IPO.
A million bucks doesn't get you very far. I've worked at a start-up that builds robots for 3 years now and I underappreciated just how much money it takes to run a company.
That cool million would pay for what.. maybe 5 or 6 engineers for a year when you account for the cost of salary, a building to work at, resources to work with, benefits, etc.
Not that $850m isn't kind of wild for a pure software company. But a million isn't a lot of cash.
A million may get you 5-6 interns for the year if you include cost of rent and upkeep, along with all other business related costs. Doesn't get you far at all.
If you're running a company that requires 5-6 interns, at what point do you decide to, I don't know, make money?
The fallacy that you have to build to enormous proportions before you make a penny in profit seems only to exist in SV. That's why people question it. The vast majority of business elsewhere try to make money ASAP. Some of them even grow quite large.
The idea is that some business models are more capital intensive than others to implement (like establishing a two-sided market place or building something tangible like electric cars).
Yup. The company I'm was was self sufficient after its first few years. Grew slowly and organically. Funding has only been to speed up that growth once our products were proven.
You are underestimating the value generated by purely bypassing government regulations. Anyone can create an Uber like app. Stopping government is an entirely different ball game.
If you want to know which country or the city is worst and corrupt see who have banned Uber or surge pricing. Same goes with AirBnB.
Knowing who is corrupt needs to be more narrowly defined. You will know who is worse when it comes to rent seeking, but not necessarily other types of corruption.
I mean, I don't fault Tesla because I know exactly what they're doing: enormous capital expenditures like factories and stores.
What does a website platform need $850 million more for?