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What exactly did VCs subsidize here?

acdha 3y ago
A common pattern in this type of company is that they’ll take less of a cut for their services than they’d need to actually pay their bills to keep the price customers pay competitive and to attract hosts (or drivers in the case of Uber, etc.). That’s not an invalid growth strategy but it has two risks: 1. It can give a misleading impression of how loyal customers are. People stayed in Airbnbs a lot when they were cheaper than hotels but since prices went up after Airbnb started needing to show profits, it’s really common for people to stay in a hotel at the same or lower price. 2. The bigger long-term risk is that it encourages building the wrong type of company. If you have barrels of VC money sloshing around, it is really tempting to hire a ton of people and compensate them like you’re old Google - after all, you need to expand rapidly and that needs the best executives and tons of staff, right? Unfortunately, that can make it easy to forget what industry you’re in and a certain class of investor wants to believe that doing something on the internet means it’s now a high-margin industry. Airbnb is much better than most of their cohorts in that generation of business and they used the pandemic wisely to make some much needed cuts to their overhead, but what we’re seeing now is affecting the supply side: in a competitive market consumers aren’t willing to overpay for lodging and with everyone involved paying the full overhead costs that means being a small-time hotelier is not very profitable. That doesn’t mean doom but it means everyone should have more realistic expectations for profit margins – the hotel industry tends to be 5-10% except at the high-end where it might be 15%, so there’s money there but it’s not a Google/Facebook ad revenue kind of margin.
- danielfoster 3y ago
  Thanks for this explanation. I know the standard model of VC subsidies to lower prices and gain market share. Airbnb is probably keeping its service fees lower than it can afford to or spending too much in other areas to grow faster using VC money. However VCs aren’t subsidizing Airbnb rentals like they are Uber rides. I’m a host myself and VC funding plays no role in what I charge. It’s mostly a function of market forces.
  - acdha 3y ago
    Yeah, I think Airbnb has far better prospects than Uber/Lyft/DoorDash because they have a much stronger balance sheet and a bit more of a moat against competitors. The car/delivery services have the problem that most of their customers live in the area so someone doesn’t need to compete globally before they can undercut them (here in DC, multiple neighbors have commented that the taxis are both cheaper and more dependable now so they only use Uber when traveling), whereas Airbnb’s reputation does help travelers pick them over random websites in unfamiliar locations.

A common pattern in this type of company is that they’ll take less of a cut for their services than they’d need to actually pay their bills to keep the price customers pay competitive and to attract hosts (or drivers in the case of Uber, etc.). That’s not an invalid growth strategy but it has two risks: 1. It can give a misleading impression of how loyal customers are. People stayed in Airbnbs a lot when they were cheaper than hotels but since prices went up after Airbnb started needing to show profits, it’s really common for people to stay in a hotel at the same or lower price. 2. The bigger long-term risk is that it encourages building the wrong type of company. If you have barrels of VC money sloshing around, it is really tempting to hire a ton of people and compensate them like you’re old Google - after all, you need to expand rapidly and that needs the best executives and tons of staff, right? Unfortunately, that can make it easy to forget what industry you’re in and a certain class of investor wants to believe that doing something on the internet means it’s now a high-margin industry. Airbnb is much better than most of their cohorts in that generation of business and they used the pandemic wisely to make some much needed cuts to their overhead, but what we’re seeing now is affecting the supply side: in a competitive market consumers aren’t willing to overpay for lodging and with everyone involved paying the full overhead costs that means being a small-time hotelier is not very profitable. That doesn’t mean doom but it means everyone should have more realistic expectations for profit margins – the hotel industry tends to be 5-10% except at the high-end where it might be 15%, so there’s money there but it’s not a Google/Facebook ad revenue kind of margin.

danielfoster 3y ago
Thanks for this explanation. I know the standard model of VC subsidies to lower prices and gain market share. Airbnb is probably keeping its service fees lower than it can afford to or spending too much in other areas to grow faster using VC money. However VCs aren’t subsidizing Airbnb rentals like they are Uber rides. I’m a host myself and VC funding plays no role in what I charge. It’s mostly a function of market forces.
- acdha 3y ago
  Yeah, I think Airbnb has far better prospects than Uber/Lyft/DoorDash because they have a much stronger balance sheet and a bit more of a moat against competitors. The car/delivery services have the problem that most of their customers live in the area so someone doesn’t need to compete globally before they can undercut them (here in DC, multiple neighbors have commented that the taxis are both cheaper and more dependable now so they only use Uber when traveling), whereas Airbnb’s reputation does help travelers pick them over random websites in unfamiliar locations.