By Alex Wilhelm
Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
Airbnb’s recent moves in the wake of a global travel slowdown are interesting and worth understanding in chronological order. What it details is a company spending heavily today to keep up its future health. Demand will return to the world travel market in time — how much, no one knows — and Airbnb wants to be a well-liked participant in the return to form.
Building off our last look at the company, we should understand how Airbnb intends to not only survive, but come out the other side of the pandemic with enough user trust to get back to work
An IPO promise
In September of 2019, Airbnb promised the world that it would begin to trade publicly in 2020. At the time, the company was running deficits per media reports, but it was growing, had reached enormous revenue scale and was running low on time. After raising billions in cash and debt and markets trading for rich multiples, Airbnb was ready to shed its youth and join the ranks of mature companies with publicly listed shares.
Then COVID-19 began to crop up in December and January, first in China, but later punishing one travel market after another.
For a company that had swapped 2018 profits for 2019 losses as its spend rose, Airbnb was now being squeezed twice; it needed to show growth and a path to profitability if it wanted to go public at a price it would like, right as the market it needed to grow inside of was shrinking.
The company closed out 2019 about where it expected. After anticipating revenue between $4.6 billion and $5 billion in 2019, the San Francisco-based company wound up smack in the middle with $4.8 billion of sales in the year. So despite recurring deficits, Airbnb had the sort of scale that a company worth a little over $30 billion should have. Worth about 6x its trailing revenues with more growth expected ahead, Airbnb was likely looking forward to a valuation bump when it began to trade publicly.
But as the global travel market began to collapse, Airbnb had a choice to make: Try to force an IPO in 2020 or take financial hits to help others and try again later.
In mid-March, the company said that it would “provide reservation cancellations without charge for stays booked in specific areas.” Initially dealing with stays through April, the policy was later extended to stays booked through the end of May. That worked out to nearly three months of possible refunds, a blow to both its Q1 and Q2 revenues.
But it was still the right thing to do, an intelligent if expensive way to help preserve user trust; Airbnb needs the same folks who had to cancel their 2020 trips to come back and use its service when we can all get on planes again. And those folks, if they were stuck with a huge bill for a stay they couldn’t make, might not come back to Airbnb.
Letting its users cancel, however, only dealt with one side of its two-sided marketplace. Airbnb hosts, the folks who provide the spaces that users book on the company’s platform, were incensed at the cancellation policy. With what appeared to be more anger at Airbnb than the external issues actually forcing change, hosts were angry about lost revenue. Airbnb had to do something to lower the temperature, so, with an apology and a $250 million fund, the unicorn tried to make things right with its hosts.
Summarizing, then, Airbnb was planning on debuting on the public markets on the back of its size and growth in spite of recent losses. Instead, the global market for travel collapsed, Airbnb decided to take the hit of letting users cancel and paying its hosts for trips that didn’t happen. Even with a slashed marketing budget saving it $800 million, Airbnb was in effect paying out for its falling revenue.
This cannot have helped the company’s cash position or near-term IPO chances.
With an eye on keeping its marketplace stoked with future demand, Airbnb took on more cash. It was expensive. First, Airbnb lowered its internal valuation. Then, the company raised $1 billion in fresh cash, paying a coupon of over 10%, along with warrants that “can be converted into shares with a valuation for the company of $18 billion,” according to the Wall Street Journal. Recall that Airbnb’s last equity round, its 2017 Series F, valued it at over $30 billion.
Airbnb had told the WSJ that it had $4 billion in “liquidity” in late March.
That purse could grind down quickly with the company not yet laying off staff (that we’ve heard of; Airbnb hasn’t ruled out cuts), allowing cancellations for dates through the second month of Q2, and paying out to hosts stuck with no guests. So adding $1 billion to its checking account was smart, even if it was expensive capital.
If Airbnb can begin to show signs of recovering towards the end of Q2 or perhaps the start of Q3 2020, it can likely take on more capital at slightly better terms; its most recent $1 billion came with terms that probably felt a bit foreign for a company used to being fêted.
Today Airbnb is still in the trough of its life, what its CEO Brian Chesky called a “once-in-a-century crisis.” The company “will bounce back,” the executive said. It is paying for that future by spending today.
Trust is expensive to maintain, but it’s probably even more expensive to try to buy back.