Airbnb Is Inc.’s 2014 Company of the Year

Admit it. When you first heard about people renting rooms in one another’s homes over the internet, without much more than a friendly email exchange to break the ice, you thought it was a crazy idea. Maybe a little creepy. After all, it’s one thing to participate in the so-called sharing economy by pushing some buttons on your phone and watching a sleek black Uber vehicle roll up. It’s another to show up at a stranger’s home and nestle in for a few days–or hand your house keys to some guy from the internet.

And yet the founders of Airbnb–Brian Chesky, 33; Nathan Blecharczyk, 31; and Joe Gebbia, 33–have convinced many, many strangers to do just that. So far, about 20 million of them; 10 million in 2014 alone. This year, their website surpassed 800,000 listings worldwide, which means they now offer more lodging than Hilton Worldwide or InterContinental Hotels Group or any other hotel chain in the world.

Seven years ago, they were guys with a website, three air mattresses, and ambitions that to many people sounded silly, naive, and reckless. Since then, they have revolutionized the way people think about travel, displaced the hospitality industry’s established players, and generated billions in revenue for themselves and their hosts.

Airbnb has changed many people’s lives for the better, as entrepreneurs have long tried to do. What makes this company so noteworthy this year is that it has moved beyond building a disruptive business to battling entrenched interests. Airbnb is hardly alone; after all, this is the year that the U.S. Supreme Court declared internet television startup Aereo’s business model illegal, and regulators from Dallas to Germany slapped back at car service operator Uber. Airbnb has also repeatedly found itself and its hosts on the wrong side of the law.

Airbnb’s cavernous office features conference rooms modeled after actual Airbnb listings.

Some might find it unsettling for Inc. to champion a company that continually disregards the rules. But that is often the cost of disruption. Not all laws are equal. Some make sense in a 21st-century context, some are vestiges of outdated regulatory regimes, and some are simply reflexive protectionism. With a few notable exceptions, prohibitions on economic activity between consenting adults do not long stand. Legislators and regulators may move slowly, but they are unlikely to completely block activities that people want.

Arguably, this shift is already happening. Cities have started to legalize (and tax) Airbnb’s activities. The company, in turn, is altering how it operates. Elsewhere in this issue of Inc., XPrize CEO Peter Diamandis and AOL founder Steve Case predict that the future will belong to innovative companies that improve life for billions of people, and, in the process, come to terms with governments and other incumbent powers. Chesky, Blecharczyk, and Gebbia have the innovation part covered. If they can now evolve Airbnb from renegade into corporate citizen, then the future really is theirs.

When you step off the elevators at Airbnb’s gleaming headquarters, which it has occupied since 2013, you see three massive and strange photographs: a plump young guy yawning awake in bed, a woman brushing her teeth with her hair in a towel, and a skinny bald guy raiding the fridge.

These are pictures of the three original Airbnb guests, the ones who stayed with Gebbia and Chesky in their San Francisco apartment on Rausch Street in 2007. The office is full of this kind of nostalgia. There’s even a small company museum, where boxes of Obama O’s and Captain McCain’s, the novelty cereal the trio sold in 2008, are displayed under glass, along with a manifesto Chesky wrote in 2012. (“You now have the keys to this new open world … a world with communities of people just like you.”) Nearby, a display explains how Airbnb named its custom brand colors in 2013–the founders dubbed their distinctive shade of pink “Rausch” after their original address. The company seems determined to use all 170,000 square feet of the office to remind you that they were once just a small outfit, the founders renting their apartment out just as their hosts do today.

Chesky wants to meet in “Rausch,” the conference room modeled after that original apartment’s living room, right down to the red-velvet Jesus statue on the mantel. He leans forward impatiently on the microsuede loveseat.

Maintaining a narrative around its humble beginnings is a key marketing strategy for the 10 billion dollar company.

“Airbnb is about so much more than just renting space,” says Chesky. “It’s about people and experiences. At the end of the day, what we’re trying to do is bring the world together. You’re not getting a room, you’re getting a sense of belonging.” In other words, a stranger is just a friend who hasn’t slept in your spare bed yet.

It’s a radically hopeful notion, one that sounds equal parts beautiful and absurd.

Back in 2007, the idea barely got off the ground. Chesky and Gebbia, newly graduated from the Rhode Island School of Design, were sharing an apartment in San Francisco, struggling to pay the rent. Both had the startup bug but failed to come up with anything mainstream. Then they had an idea. A design conference was coming to town, and they decided to rent out air mattresses on their floor to visitors for $80 a night. They called and emailed every major design firm in San Francisco, asking if anyone else had a room for rent. They built a web site, airbedandbreakfast.com, to connect hosts and guests. They even persuaded conference organizers to email attendees about it, linking to the site.

The result was a near total failure. They convinced those three nice people from the elevator portraits to stay. But after contacting the city’s entire designer population, only three other San Franciscans agreed to open their homes.

They knew people were hesitant about hosting strangers. But why? How could they get them to at least try? They decided to approach the challenge like a supply-and-demand problem. They set their sights on SXSW Interactive in Austin and then the 2008 Democratic National Convention in Denver. After diligently calling and emailing Craigslist subletters and anyone they could find involved with the convention, they signed up hundreds of hosts. The New York Times and CNN reported on the phenomenon, raising their profile.

By the time of the convention, Blecharczyk, a gifted computer engineer who had been Gebbia’s roommate before Chesky, had joined the team. Working together, the three improved the site and advertised their room-sharing service to the world via Facebook and email blasts. Between August and December 2008, they managed to sign up a couple thousand listings in 576 cities in 67 countries. But once Obama-mania left Denver, their revenue (a 6 to 12 percent cut of each rental, same as they charge today) puttered along at about $200 a week. They’d gotten people to open up their homes, but, without the engine of a big conference powering demand, few people were staying in them.

Desperate for money and ideas, they applied to startup incubator Y Combinator in 2009. Founder Paul Graham gave them pivotal advice: Travel to New York City. The city was popular with tourists, short on cheap hotels, and overflowing with starving artist types. And it was already the company’s most popular market. It was an opportunity for the founders to learn from some of the earliest, most successful Airbnb hosts.

“We’d email the hosts and say, hey, we’d love to send a professional photographer,” Gebbia says. “Then we’d show up.” Armed with a rented Nikon and many questions, Chesky and Gebbia photographed the apartments and tried to learn everything they could about their hosts’ lives and their relationships with Airbnb. Based on what they learned, they’d send changes back to Blecharczyk in San Francisco, who would make the improvements to the site as fast as he could. And the high-quality photos they took of the apartments helped move listings.

The founders have the innovation part covered. If they can evolve from renegades to corporate citizens, the future is theirs.

At the same time, the social landscape was shifting. People were sharing their most intimate thoughts, moments, and photos via social media in a way that would have been inconceivable a decade before. Consumers were buying absolutely everything online. The U.S. was only recently out of its recession. These factors created a marketplace full of cost-conscious consumers–with a far more lax idea of privacy–ripe for what Airbnb was building.

The founders sculpted and buffed all aspects of the site. They simplified the payment process, so visitors could just enter a credit card number and hosts could get paid automatically once the stay was successful. They let hosts simultaneously publish their Airbnb listing on Craigslist (this feature is no longer available). At the push of a button, hosts could schedule a free professional photographer to shoot their place for their Airbnb profile.

Michael Munger, an economics professor at Duke University and an expert on the sharing economy, says these improvements and refinements helped Airbnb do something previous sharing companies hadn’t managed–to acquire an aura of style, respectability, safety, and trustworthiness. “The photos in particular made the locations seem prestigious, compared to bad, blurry photos on other sites,” says Munger. That meant people were slightly more likely to go with Airbnb. “It’s these tiny initial differences that lead to cascades,” he says.

Once Airbnb got people enjoying its service and telling their friends, and made it easy to become a host, the trust barrier got easier to leap. Step by step, the founders made it ridiculously simple to host or shack up with strangers.

“It was like liquid gold,” says Joshua Danielson, a host since 2010 who started renting a bedroom in his San Francisco apartment in 2014. “It was so easy to set up. I thought this is the coolest company I’ve ever heard of.” Guests, in turn, loved how friendly Danielson was, as well as his clean and spacious apartment, with its views of downtown and San Francisco Bay–all for $150 a night, versus $400 or more at nearby hotels.

“I call that the expectation delta,” Blecharczyk says. “It’s infectious. You’ve basically been raised and taught to not trust strangers. Suddenly, you take that risk, you question that assumption, and often your stay turns out magically. That’s what powers us. People can’t help but talk about it.”

Over the course of 2010, the site’s weekly revenue doubled, then doubled again. The founders came to believe their focus on the user experience was what stoked the growth. In June 2010, Chesky moved out of the Rausch Street apartment and started living in Airbnbs full time to gather insights.

The company headquarters are located in San Francisco, where Airbnb was first conceived by its three founders.

The company hired more staff, and in 2012, Chesky developed a way to organize the team around the pursuit of a perfectly smooth Airbnb experience. He hired a Pixar animator to create illustrations of each stage of what they imagined would be the ideal Airbnb trip, from both the host’s and the guest’s perspectives. They include steps like “browsing for the right place,” “checking out,” and “feeling prepared and ready for guests.” The company divides into teams to tackle the various steps, to bring real life closer to the dream experience drawn in the pictures, which are hung around the office.

“It’s believing that the best experience will always lead to the best outcomes,” explains Joseph Zadeh, Airbnb employee No. 9 and director of product. “Putting experience over any other consideration will lead to good things.”

Here’s what Airbnb means by “any other consideration.” First, it means money. In pursuit of the perfect experience, the company has incurred massive costs: sending professional photographers to shoot thousands of Airbnb listings, and paying salaries for an army of MBAs and PhDs to help perfect the customer experience. Airbnb raised six rounds of venture capital totaling more than $794 million–$100 million for each year it’s existed.

Second, it means the law. As smooth and enjoyable as Airbnb stays may be, they’re often illegal, says Janelle Orsi, an Oakland, California-based lawyer who specializes in sharing and cooperative law and is the author of Practicing Law in the Sharing Economy. Depending on location, Airbnb listings violate zoning laws (which prohibit people from running a business, hostel, or hotel in a residential area), health and safety laws governing hotels (requiring things like clean towels, sprinkler systems, and a map to the exit), and laws requiring hosts to pay hotel tax.

“Basically, Airbnb is arguing they should be allowed to operate without most limits,” says Orsi. “I think that’s pretty unreasonable.”

Airbnb says it leaves it to hosts to comply with local zoning rules. But cities are striking back. Barcelona fined Airbnb 30,000 euros for breaching local tourism laws. New Orleans, San Francisco, and Malibu have all investigated Airbnb hosts for violating zoning laws or their lease terms. In October, New York State attorney general Eric Schneiderman issued a report (the cover of which is Rausch pink) finding that 72 percent of Airbnb’s 25,500 New York listings violate hotel and housing laws, and that the hosts likely owe the state $33 million in unpaid taxes. The report also found that the top 6 percent of hosts (by number) generated 37 percent of Airbnb revenue in New York City between January 1, 2010, and June 2, 2014. The city recently sued two of these mega hosts for running illegal hotels in empty apartment buildings they own, adding fuel to housing advocates’ cries that Airbnb is driving up rental prices by reducing the city’s inventory of housing.

Airbnb’s founders made it ridiculously simple to host or shack up with strangers.

In the wake of the AG’s original unsuccessful subpoena for Airbnb’s host data, the company issued a statement saying it removed more than 2,000 New York listings that didn’t meet the site’s standards. A subsequent subpoena, upon which the report was based, was granted in May.

As you’d expect from a business model based on strangers sharing private space, there have been some disasters. The mother of them all happened in the summer of 2011. A Bay Area event planner, blogging under the name EJ, posted that her guest smashed a hole through a closet door; stole her passport, cash, credit card, jewelry, camera, iPod, and laptop; wore her shoes and clothes; and burned her things in her fireplace with the flue closed. “All the while … sending me friendly emails, thanking me for being such a great host … with an ‘LOL’ closing one sentence, just for good measure,” EJ wrote.

Airbnb bungled the situation. Its customer service department took a full day to reply to EJ and then failed to follow up. A month later, just after the company announced it had closed a $112 million round of venture funding, the news site TechCrunch linked to EJ’s post and the mainstream media piled on. Airbnb finally took action and announced it would add a 24/7 customer service hotline, form a trust and safety department, and offer a $50,000 damage guarantee.

Airbnb now has 600 people in its customer service and trust and safety departments, and the guarantee is now $1 million per booking. Airbnb’s PR team notes how “incredibly rare” such negative incidents are. That’s true. There were roughly six million guest stays in 550,000 listings in 2013, and there were 1,700 reports of property damage. But only 40 percent of complainants got reimbursement from Airbnb. (Some hosts reach resolutions with guests or take security deposits that cover damage.)

Airbnb’s opponents, including lobbyists from the hotel industry, argue that the risks to users are much greater than the company lets on. In September, a group of elected officials and housing advocates in New York City, calling themselves the Share Better coalition (reportedly funded in part by the Hotel Association of New York City), released an online ad pairing voiceovers from an Airbnb ad with staged shots of guests in horrific living spaces.

Airbnb fired back: “Some misinformed hotels are willing to spend millions of dollars because they don’t think regular New Yorkers should be able to share the home in which they live.”

The founders think these critics are fighting the inevitable. “I’m reminded of other innovations over the course of the last hundred years that also had their opponents and detractors. They were misunderstood at first, but once they were understood, they were inevitable,” says Gebbia. “The ATM met resistance when it came out in the ’70s. The VCR was embattled. The car had incredible opponents from the carriage industry. It would have been a big ask to get people to understand them overnight. But their value was proved over time.”

Defending the company’s right to exist is now a primary focus of Airbnb’s founders. Armed with $475 million in fresh capital from an April 2014 round of funding, they fight back with an armada of lawyers, 20 communications specialists, and three outside public relations firms. Ironically, the company employs this massive loudspeaker to deliver a humble message: They are a simple forum where locals looking to make extra money can host budget-minded tourists.

Chesky and Gebbia, now worth $1.5 billion each, according to Forbes, still live in that original Rausch Street apartment, and the red Jesus is still on the mantel. Their third bedroom contains an air mattress. Telling their story–that they are people just like their hosts and guests, humbly pairing travelers with locals–has never been more crucial to their success. Their charm spurs word of mouth. Pay no attention to the $10 billion corporation behind the curtain.

Schneiderman and other critics say Airbnb is just that–a big corporation built on the backs of hosts who assume most of the liability, and which gets an increasing share of its revenue from rich entrepreneurs, just as Chesky, Gebbia, and Blecharczyk are now.

But the point may be moot. The fact is that Airbnb has a grip that will be hard to break. Despite Schneiderman’s focus on big players, Airbnbers appear to be average people–in New York City, 87 percent of Airbnb hosts rent the home they live in and 94 percent rent out two or fewer units. Extrapolate those statistics over 800,000 listings. Airbnb may be helping people easily break laws and pissing off entrenched interests, but it has one hell of a constituency.

“Cities are realizing this is the new normal,” says Rachel Botsman, a sharing economy expert and author of What’s Mine Is Yours: The Rise of Collaborative Consumption. “When you have millions of people having a positive experience, it’s hard to argue a case against it. Cities now see if they don’t tax this in some way, they’re losing money.”

San Francisco and Portland, Oregon, have already agreed to legalize most types of Airbnb listings in exchange for tax revenue and other concessions. More cities are sure to follow. Airbnb will change how it operates. It’s a messy process, but that’s how progress happens in American society–and it won’t happen unless companies like Airbnb push for change. As Avis’s 2013 purchase of Zipcar shows, today’s disrupters can become tomorrow’s collaborators. Regulators, hoteliers, and neighbors may hate Airbnb, but it has revolutionized an industry and made it hard for anyone who wants to stop them. Twenty million users strong, Airbnb has nestled in to stay.

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