Sharing Economy: No Airbnb IPO Likely Anytime Soon
For Airbnb, It’s Better to Stay Private
Airbnb, the California startup that is challenging the world’s major hotel chains, has recently raised an additional $100 million to finance its growth and announced its hopes to become profitable by next year. Airbnb is one of the most effective examples of the sharing economy, of which the secret to success is explained in three words: trust, efficiency, and value. But don’t expect an Airbnb IPO (initial public offering) anytime soon.
By connecting owners and vacationers, the California-based Airbnb has become the world’s largest proprietor and one of the most aggressive companies representing the sharing economy.
While $100 million may not sound like much, Airbnb tends to have easy access to funds; it scored a fundraising record of $1.5 billion just last summer.
The latest fund injection still maintains Airbnb’s value at $25.5 billion (against $13.4 billion in October 2014), which suggests that unlisted technology companies, such as Airbnb, may have difficulties convincing investors to buy shares, given the frequency with which the optimistic valuations change. Indeed, some investors suggest that Airbnb will need a few more years of activity before the actual value of the business comes even close to the current valuation.
Yet on paper, Airbnb has enjoyed an attractive performance.
In the third quarter of 2015, Airbnb reported revenues doubling to $340 million thanks to some 2.2 billion reservations. In addition, there were more new “active” rental spaces since the beginning of the year, thanks to a more intense marketing effort.
For the full year, Airbnb’s management said it expects revenue of $900 million, compared with a previous estimate of $825 million. Airbnb anticipates an operating loss of $150 million, according to The Wall Street Journal, though it also expects the semblance of a profit in late 2016. (Source: “Airbnb Raises $1.5 Billion in One of Largest Private Placements,” The Wall Street Journal, June 26, 2015.)
Until recently, 2016 looked like it was going to be the year the California-based company went public on Wall Street in response to market demand for exciting offerings. The main obstacle to Airbnb’s stock is its own success; it can afford to operate without the need to raise cash in the markets through an IPO.
The independence afforded by the sharing economy model also allows it to avoid regulatory constraints and pressure from investors, as the company continues to sharpen its strategy. However, that very sharing economy approach makes Airbnb susceptible to higher security risks than a traditional hotel service company, including a potential IPO delay due to the resurgence of the terrorism threat.
Airlines, luxury good, and hospitality companies have all lost points in the world’s main stock exchanges in the wake of the November 13 ISIS attacks in Paris. The downing of a Russian jet in Syria by the Turkish air force has doubtlessly raised the stakes in the war on ISIS, doing the travel industry no favors in Europe, where so much of the Airbnb providers and users are based, and beyond.
For now, Airbnb continues to live in its haven of independence. Going public would force it to adopt a more formal security policy. How can Airbnb ensure the safety of its guests and hosts against rising tensions across borders?
True, unlike sharing economy darling Uber, Airbnb does not have to deal with angry taxi drivers and their lawyers in capitals all over the world, which means it has fewer constraints holding it back from filing papers before the Securities and Exchange Commission. However, the Paris attacks have changed this.
Airbnb has 1,500 employees, but it’s worth several times more than the Accor Hotel Group (PA:AC), owner of Novotel, one of the most popular hotel brands in the world, that needs 180,000 employees to function. Airbnb’s revenue could reach $10.0 billion and its profits could hit $3.0 billion by 2020, says Fortune, enthralling investors. (Source: “Here’s how Airbnb justifies its astonishing $24 billion valuation,” Fortune, June 17, 2015.)
The sharing economy has its advantages for Airbnb but also raises concerns.
Airbnb is another example of the sharing economy, which does away with labor and other assets to focus on the service and maximization of existing assets. Airbnb does compensate property owners, its hosts, for damages of up to $800,000 and monitors tenants’ profiles, which has helped growth.
Airbnb, the “hotel chain” that doesn’t own hotels, has some direct rivals, including HomeAway, parent company of its namesake site and Homelidays, which already trades on the NASDAQ. However, its main targets are the big chains, such as InterContinental, Hilton and Marriott. Because it doesn’t own assets, it cannot ensure much less manage security arrangements, something that hotels in many parts of the world do.
Nevertheless, the sharing economy approach makes it the company more vulnerable, even if it offers the winning proposition of unbeatable prices. In the U.S., the price for a hotel room for a night compared to an Airbnb rental can be 30% or even 50% higher. In Paris, Airbnb rentals charge an average $103.00 a night, versus $171.00 for an actual hotel room.
Indeed, authorities on both sides of the Atlantic want to strip the “sharing” component from the sharing economy model, further regulating this activity through special taxes. The enhanced terrorism threat has just given those authorities more ammunition. Meanwhile, the hotel industry will likely try promoting itself against Airbnb, exploiting perceptions of a security vulnerability.
Airbnb and other sharing economy-based services for travelers like HomeAway tend to attract many travelers who choose longer stays, while hotel chains more easily cater to short stays. In this sense, Airbnb has created a new market, as it caters to travelers who would never have left home in the first place if an expensive, stuffy hotel was their only option.
The sharing economy is a concept that has not yet been fully analyzed from a legal and regulatory point of view; it’s uncharted territory that has created new opportunities. Until the regulations and obligations are addressed—as the terrorism and security issues will bring to light—a company like Airbnb is in a better position to thrive without going public, yet.
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