Airbnb and the race to lock up the vacation sharing market

As rumors circulate that PayPal cofounder and early Facebook investor Peter Thiel is due to make a $150 million investment in share economy darling Airbnb, it’s worth looking at why the company needs so much additional cash and what’s at stake for it.

First, let’s look at where Airbnb current sits. Looking at the booking numbers, Airbnb reported in June that it surpassed 10 million bookings. And as this handy infographic shows, it was at just 2 million bookings 12 months prior to that. This is the hockey stick of growth that gets VCs salivating.

Taking a conservative estimate of an average booking price of $80 at 8 million bookings, and Airbnb’s roughly 12 percent cut, (Airbnb scales between 9 and 15 percent on each transaction) the company did about $77 million during that 12 month period ended June 2012. It’s on a 400 percent growth curve right now and if we knock that down to 250-300 percent for the next 12 months, it’s fair to say the company can comfortably do $200 million annual revenue right now. But is likely doing more.

For the next funding round and the next 12 months, there are two major issues.

1) Europe, Europe, Europe. While we think of Airbnb as a Silicon Valley startup, it’s leading market is Europe. Of its roughly 200,000 listings, over half are in Europe (the U.S. has about 55,000). It acquired London based Crashpadder this year and did a killing during the summer olympics when bookings tripled and the company scored good PR (Airbnb likes to raise awareness of its brand around events where hotel supply is expensive and constrained).

And while here in the U.S., Airbnb has become the signifier for peer-to-peer vacation sharing, the way “xeroxing” became what you called photo copying (“Oh, you’re going to the New York for the weekend, why don’t you Airbnb it?”),  there’s actually competition for Airbnb in Europe.

German based startup Wimdu raised $90 million last year for its Airbnb clone, and reports at least 55,000 listings, primarily in Europe. Wimdu is funded by the same investors that built a Groupon Clone and sold it back to Groupon. Another German clone, 9flats.com, has raised significant cash, and acquired Toronto’s iStopOver, gaining access to the North American market and reporting 100,000 beds available.

At the very least, Airbnb is going to have to spend marketing dollars trying to tamp down competition in its leading market, and more likely may need acquisition money to make some of its competitors disappear.

2) Peer-to-peer vacation sharing will be a monopoly. Travel sites like Expedia or Orbitz have a limited group of suppliers (airlines), shifting power to the suppliers and allowing some competition. But in online marketplaces where the supply is provided by the public, there’s almost always just one platform that prevails. Consider Craig’s List or eBay and the absence of any notable competition (to my mind these two companies aren’t competing against one another, since the delivery mechanism for eBay is mail). Put simply, who wants to place an ad on two sites?

So at this point, it’s a mad race to lock up markets and be first. There are some distinguishing characteristics that make Airbnb more competitive, like its ease of use, insurance policy, and solid user interface. But it’s still difficult to distinguish one’s brand here.  Airbnb co-founder Brian Chesky noted last year that, “We were always expecting some competition. We just have to grow as quickly as possible.”

The company is hiring people daily as it will likely become a thousand person organization, having signed a 10 year lease in San Francisco at $97 million for 170,000 square feet of space.  The $200 million that Airbnb is looking at taking in its next financing is necessary to ensure that it can scale as fast as possible so that it has fewer competitive headaches and can lock up the peer-to-peer vacation sharing market.

When emailing with Wimdu’s press contact Saskia Holz, she wrote that “The peer to peer rental market is huge right now and there’s certainly enough room for several different competitors.” And while it could theoretically be good for consumers to have multiple options in booking places, I see it as unlikely that in 5 years there will be multiple vacation sharing websites in a given market. So for now it’s a raise to the finish. On with the fundraising.

Relevant Analyst
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Adam Lesser

Cleantech Curator Gigaom Research

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