It has been a tumultuous year for Airbnb, but the home-sharing company is back on the upswing. In the early days of the pandemic, prospects looked grim for the home and vacation rental company. Yet through the perseverance and ingenuity of Airbnb’s co-founder and CEO Brian Chesky, the company performed a massive turnaround. It reported a third-quarter profit this year, despite profitability seeming improbable only a few months earlier. Airbnb is on track to IPO in December 2020, capping off a year full of market-defining public offerings.
The Pandemic Crippled Airbnb
The pandemic forced the San Francisco-based company to enter into survival mode in late March. Booking levels went into free fall and employee layoffs suddenly became a real possibility. In the second week of March, for example, bookings in Europe fell 80% year-over-year. As Airbnb board member and former American Express CEO Kenneth Chenault described the situation to Chesky: “This is going to be bigger than 9/11 and 2008 combined. This is your defining moment as a leader.”
On top of the severe drop in bookings, hosts were angered by the company’s refund policy in the early days of the pandemic. Airbnb offered guest refunds for cancelled reservations and waived their cancellation fees. However, similar relief was not offered to Airbnb hosts. A number of hosts had to sell their properties or put them on the traditional rental market to make ends meet.
The Company Responded
To survive, Airbnb temporarily scaled back its ambitions to expand. It had planned to become a broad travel company instead of solely a rental platform. Leading up to 2020, Airbnb had been looking for expansion opportunities and taking on riskier projects. These included releasing television programs, allowing people to book experiences such as wine tastings, photography tutorials, and painting classes, and adding hotels to its portfolio. Airbnb responded to drop in bookings by refocusing on its core roots—the home-sharing business.
Due to the unprecedented decline in bookings in March, Airbnb needed cash quickly. In April, private equity firms Silver Lake and Sixth Street partnered to provide a $1 billion loan. The five-year facility came at a steep 11% interest rate. The deal also gave Silver Lake and Sixth Street a 1.25% stake in the company. In addition, Airbnb was provided with another $1 billion of debt from a consortium of banks and other investors.
Airbnb borrowed money, cut executive pay and reduced marketing expenses. Nevertheless, prospects still looked gloomy for the company. On May 5th, Chesky faced the dreaded task of announcing his plan to lay off 1,900 employees. The layoff of 25% of the company’s staff sent shockwaves through the 12-year-old company.
New Booking Trend for Airbnb
As the summer months approached, Chesky noticed a newly emerging trend in booking activity. There was an uptick in demand for homes outside of cities, with reservations extending over periods of many consecutive weeks. Meanwhile, people were steering away from larger hotel chains. From June through late September, customers spent more money on Airbnb than on reservations through Marriott International, InterContinental Hotels Group, or Hilton Worldwide Holdings.
Airbnb plans to go public through a traditional IPO this December. Although Airbnb originally toyed with the idea of going public in 2019, it delayed those plans. In contrast to Airbnb’s traditional IPO structure, many tech companies that have gone public in 2020 have relied on alternative capital raising methods to go public.
IPOs Versus Direct Listings
Companies Palantir and Asana opted for direct listings. These enable a company to sell existing shares to the public but do not involve offering new shares. Meanwhile, special purpose acquisition companies (SPACs) have been wildly popular. Companies such as Nikola, Virgin Galactic and DraftKings have chosen to go public by performing a reverse merger with an SPAC. SPACs, also known as blank-check companies, are companies formed with the intention of raising funds. The funds will go toward eventually acquiring a target company through a reverse merger process. The transaction results in the formerly private target company becoming a public company.
During the summer, Airbnb had been approached by billionaire hedge fund manager Bill Ackman, who wanted to do a deal with his $4 billion SPAC, Pershing Square Tontine. Ackman argued that a SPAC deal would provide Airbnb certainty over the valuation well ahead of going public. In contrast, traditional IPOs typically price just a few days before opening on public markets. Airbnb turned down the proposal, and filed confidential paperwork with the Securities and Exchange Commission (SEC) in August to go public.
A New Hire from Apple
In another positive sign for the company, Airbnb announced the hiring of former Apple Design Chief Jony Ive. In addition to being tasked with redesigning Airbnb’s website and app, Ive will help the home rental firm develop catchy future products. Ive has signed on for a multi-year collaboration with Airbnb in his vaguely-defined role. As it strives to put the darker days of the early pandemic behind it, Airbnb’s business looks robust heading into the end of year and 2021.