Tag: travel

Airbnb and the Problem with Later Stage Investing in Today’s Environment

A couple of months ago several news sources reported that Airbnb was raising $1B at a $20B (pre-money) valuation. This article on TechCrunch sums up the story pretty well.

I have a lot of respect for Airbnb as a business and the tremendous growth of the company in just 7 years. Airbnb currently boasts 1M+ listings across 34,000 cities and 190 countries. Though still a private company, revenue estimates for 2014 were said to be over $400M w/ yoy growth of 65%. Not bad for a company many famously passed on (including Fred Wilson) or wrote off as completely absurd. I’m confident the founders and early investors will be handsomely rewarded when the company eventually goes public.

I do, however, have concerns with the current massive round that Airbnb is raising. And it’s a concern I believe should be shared by many of today’s unicorns and, in particular, their later stage investors. If I were a prospective later stage investor in Airbnb’s $1B round, I would not invest at this stage and at that valuation. My thoughts can be summed up in three points:

  • A $20B valuation overinflates the true value of the business, which by my analysis is closer to ~$10.2B. This high private valuation will hinder returns for later stage investors—it’s a problem I think many of today’s later stage investors in unicorns are going to face. The infographic in this Forbes article shows a similar story with one of the more recent unicorns to go public: Box.
  • Airbnb has important competitive advantages in terms of network effects and customer captivity—they may even have a bit of a regulatory advantage thanks to their scale. The problem is that Airbnb has nothing that will allow it to be a complete “winner-takes-all” business. At the very least, it will have to share TAM with its most direct competitor, HomeAway, not to mention all the major hotel chains that have been around for decades.
  • There are a number of unknowns that make Airbnb a risky business to invest in including: macro-economic tourism and vacation trends, the decentralized nature of regulation and an uncertain cost structure that is likely to erode margins. Some of these unknowns could be very detrimental to Airbnb’s growth and continued success as a business.

For a more in-depth analysis of the investment opportunity, I’ve put together an investment recommendation deck below:

Travel & Transportation Ecosystem

The history and evolution of the travel and transportation industry is really quite fascinating. How we arrived at today’s mix of companies (both the incumbents and insurgents) is a story of technological innovation, savvy business positioning and a macro trend around increased travel and connectivity.

In today’s world, the range of different companies is quite impressive. On one end of the spectrum, you have the traditional, asset-heavy giants. In airlines there is United, Delta, American Airlines and many more. In hotels, Starwood, Hilton, Hyatt, and others dominate the scene. And in car rentals, Hertz, Avis, Enterprise and others have long been staples of ground transportation. Seeing the challenges that lie ahead, many of these travel/transportation behemoths are moving towards an asset-light approach and beefing up their digital and mobile offerings. Starwood for example has sold off nearly 85% of its properties in the last decade. They are moving more towards an approach that relies increasingly on a franchise / management fee model. Similarly Starwood has also invested heavily in their mobile app, which has paid off. In recent years, mobile bookings have increased 300% yoy and mobile revenue is a growing portion of total revenue.

In addition to the traditional players, you also have the .com darlings of the late 90s and early 2000s. These companies are particularly well represented among the OTAs. Oribitz and Expedia for example rose to prominence by helping consumers find and compare various booking options across the various legs of their vacation journey. Many of these companies have gone on to do quite well—though increasing competition has threatened earnings and growth. In addition to the OTAs, travel discount sites (such as Priceline) and review sites (such as Trip Advisor) were also largely born during this era and continue to do quite well.

Finally, there are the emerging companies of today that have successfully taken advantage of increased mobile connectivity, macro trends around the shared economy and advances is geo-location technology. In the taxi cab world, Uber, Lyft and others have built unicorn valuations in eye-popping speed. In vacation rentals, HomeAway and Airbnb are leading the charge to provide sellers with liquidity and renters with cost-effective options in those two-sided markets. And in mapping, Google Maps and Waze (acquired by Google), have greatly enhanced mapping capability. Not to mention the rise of ride sharing companies (Via, Sidecar, etc.) and parking services (Luxe, Zirx, etc.) which are just getting started. In the coming years, vertical cloud saas companies will only further enhance the options that consumers have today.

All in all, it’s a really interesting time to be in travel and transportation. I’ve put together a map of the travel and transportation ecosystem below. It’s certainly not all-comprehensive by any means, but it provides a general overview of these various players and trends. Hopefully it’s a useful guide to navigating the various sub-categories and players in the industry.

Travel & Transportation Ecosystem