Airbnb banked on short-term rentals. Can it continue without them?

The home-share giant invested in niche players as it grew. Now it’s in survival mode as the wider market crumbles

TRD NATIONAL /
Jul.July 17, 2020 07:00 AM
From left: Zeus Living CEO Kulveer Taggar, Airbnb CEO Brian Chesky, Oyo founder Ritesh Agarwal and Lyric CEO Andrew Kitchell (Getty, iStock)

From left: Zeus Living CEO Kulveer Taggar, Airbnb CEO Brian Chesky, Oyo founder Ritesh Agarwal and Lyric CEO Andrew Kitchell (Getty, iStock)

Just over a year ago, Lyric was riding high.

On the heels of a $160 million funding round led by Airbnb, the short-term rental startup was plotting a massive expansion in the spring of 2019. Employees mused about buyouts and stock options.

“It was a big deal,” said a former Lyric executive who asked not to be named. “We were depending on a fundraise to grow the company, plus to have a big and well-known company like Airbnb back us was definite street cred.”

Brian Chesky, CEO of Airbnb

The euphoria was short-lived. Lyric all but shut down in late June after coronavirus ravaged the travel and hospitality industries.

Over the past decade, Airbnb created a booming industry for short-term rentals, investing in smaller players and seeding a sprawling network of startups. As of 2018, the global market value of the short-term rental industry was estimated at $169 billion, according to a Skift research report. With the market now reeling, the strength of that expansive network is being tested.

Zeus Living, the corporate housing startup that Airbnb backed in December, laid off 30 percent of its staff this spring. Oyo Hotels & Homes, the fast-growing budget chain out of India backed by both Airbnb and SoftBank, is shuttering hotels after losing $335 million last year. A partnership with home-share startup Niido, led by Miami developer Harvey Hernandez, recently dissolved in litigation. And by July, Lyric had all but shut down after closing most locations and pivoting to software development.

Other investors might have bailed out their struggling companies, and some did. In May, Zeus got a $15 million lifeline from backers including CEAS Investments I and Soros Fund Management — but not Airbnb.

“At their core, they’re not an investment firm,” Seth Borko, a senior research analyst at Skift said of Airbnb, which saw its valuation fall to $18 billion from $26 billion in March.

Seth Borko, analyst at Skift

“You have to ask yourself, are [side investments] nice-to-have or need-to-have?” Borko noted. “If you’re Airbnb, any investment in a company other than your own is no longer necessary.”

In a May 5 letter to Airbnb employees, CEO Brian Chesky put it this way: “This crisis has sharpened our focus to get back to our roots, back to the basics. This means that we will need to reduce our investment in activities that do not directly support the core of our host community.”

The domino effect

Since its 2008 launch, San Francisco–based Airbnb has spawned businesses ranging from property managers to rental empires. In recent years, to build a comprehensive travel platform, it began backing some of the very businesses it inspired.

Doing so was a “win, win, win for those plugged into the ecosystem,” Chris Lehane, Airbnb’s global head of policy, told Bloomberg last year.

Chris Lehane, global head of policy of Airbnb

Chris Lehane, global head of policy of Airbnb

For startups, the upside was obvious: associating with Airbnb boosted their profile and hiring power in a cutthroat industry. “Being able to say ‘We’re the horse Airbnb chose to bet on’ matters,” Borko noted.

Smaller players could also expect Airbnb to drive traffic to their sites, even if the investment didn’t require firms to exclusively list properties on Airbnb, which most didn’t. “Their value proposition resonated with a lot of startups,” said Jordan Nof, co-founder and managing partner of Tusk Venture Partners, which also backed Lyric.

For Oyo, the stakes were even higher. The budget hotel chain was already well-funded by SoftBank and other venture capital players when Airbnb invested a rumored $150 million to $200 million last year. That came as Oyo was looking to expand globally, and it validated the company’s narrative as a travel-industry disruptor.

The connection to Airbnb also lent gravitas to Oyo’s 26-year-old founder, Ritesh Agarwal, as he led the company toward a presumptive IPO.

“You’ve got the SoftBank capital, you’ve got the very aggressive expansion plans, you’ve got the astronomical valuation,” said Michael Norris, a researcher at AgencyChina, a marketing firm that tracks Oyo. “What you perhaps are missing is the star-studded board that makes the 20-something-year-old founder and CEO look like he’s surrounded by the smartest people in the room.”

Ritesh Agarwal, founder of Oyo Hotels

Ritesh Agarwal, founder of Oyo Hotels

For Airbnb, the investments were part of a growth strategy crucial to its own prospective IPO. Having evolved beyond its couch-surfing roots, Airbnb was hungry for professionally managed inventory, which it found in Niido, Zeus, Lyric and others. “They wanted to be a broader, travel umbrella brand,” Borko said. “Those investments had a lot to do with trying to ensure a flourishing ecosystem on its platform.”

In particular, the deals boosted Airbnb’s access to inventory in big cities, where it previously tangled with local politicians anxious to curb the growth of short-term rentals. With $3 billion in backing, Airbnb had enough dry powder to not only fill gaps in its offerings, but also test different models. Zeus opened the door on corporate travel, Lyric targeted upscale urban travelers, Niido promised a pipeline of managed multifamily developments, and Oyo gave it a foothold in the fast-growing Indian travel market.

“For Airbnb … the intel of what these companies are up to is probably worth the price of admission in and of itself,” said Bradley Tusk, CEO of Tusk Ventures.

In 2017, Airbnb and Miami-based Newgard Development Group announced a deal to develop several Airbnb-branded buildings. The partnership was designed to streamline short-term rentals and overcome the regulations that threatened them, according to Hernandez, CEO of NDG and a co-founder of Niido.

Harvey Hernandez, CEO of NDG and co-founder of Niido

Harvey Hernandez, CEO of NDG and co-founder of Niido

“[Airbnb] knew if they wanted to grow they needed to be multifamily and they wanted to be in an environment where their actual product and the owner of the real estate embraced that activity,” he said. “Why? Because you see how every city is fighting them.”

But Niido’s partnership with Airbnb imploded even before Covid. Airbnb sued in January, claiming it invested $11 million in the partnership with NGD, which failed to deliver 12 of 14 planned buildings. Airbnb further alleged Hernandez siphoned $1 million of the investment into another one of his projects. The case has since been settled. Hernandez declined to comment on the matter, citing confidentiality.

Airbnb’s bet on Oyo also lost its luster as reports of the Indian chain’s “toxic” culture and financial mismanagement surfaced. After a splashy launch in the U.S., Oyo faced regulatory scrutiny when it failed to secure franchise rights in several states.

“There was a strategic rationale,” Simon Lehmann, co-founder of travel industry advisory firm AJL Consulting, said of Airbnb’s investments. “But to be perfectly honest, it felt more like trial and error.”

With that in mind, observers speculated Airbnb wasn’t in it for a big payday.

“Traditional lead investors will think about reputational risks” and invest as much as possible to make “venture math” work in their favor, Tusk Ventures’ Nof said. “For Airbnb, the relationship and partnership is what they’re after.”

Plagued by the pandemic

Even if Airbnb emphasized relationships over profits, no one saw Covid coming.

  “There was a strategic rationale. But to be perfectly honest, it felt more like trial and error.” — Simon Lehmann, AJL Consulting 

In Beijing, Airbnb bookings plunged 96 percent from January to March, according to analytics firm AirDNA. In the U.S., hosts saw $1.5 billion in bookings disappear almost overnight.

“In this crisis, it felt like I was a captain of a ship and a torpedo hit,” Chesky told NPR in late April.

Oyo, valued at $10 billion before the pandemic, slashed thousands of jobs as it bled cash.

Smaller companies, buoyed by Airbnb’s deep pockets just months earlier, fared no better, nor did companies adjacent to the travel startup. Loftium, a Seattle firm that leased 700 units and rented them to Airbnb hosts, laid off half its staff in March after failing to pay rent. In an interview with the Seattle Times, CEO Yifan Zhang blamed the “sudden and significant” loss in Airbnb income.

“The ones that were hinging on Airbnb to validate their business model, now they’re stuck,” Nof said. “The space got really crowded, really quickly. [And] all of a sudden it came to a grinding halt.”

The slew of players with master lease agreements — including Lyric — were in a particularly tight spot, facing lost revenue and mounting bills. “That’s the fatal flaw,” said Jesse DePinto, co-founder of Frontdesk, another short-term rental player that has both master leases and revenue-sharing agreements with landlords. “They had guaranteed rent payments that they were more or less obligated to pay in good times and bad.”

Jesse DePinto, co-founder of Front Desk

Jesse DePinto, co-founder of Frontdesk

For many, things came crashing down. Unable to sustain itself, Lyric laid off the majority of its employees and moved to close most of the 400 units in its portfolio.

“Many people would probably have thought, ‘Oh shoot, Airbnb is investing in Lyric and Zeus. Clearly they will use their massive ability to put their thumb on the scale to help those companies succeed,’” said a source familiar with Airbnb’s investments. But Covid underscored that fallacy. “Where was the Airbnb firepower? Where was the strategic component of the investment? It’s hard to point to any obvious evidence of that happening in either case,” the source said.

Zeus Living, which lost $2.5 million in bookings in March, asked many landlords to cancel leases or switch to a revenue-sharing model. But there were bigger financial problems looming. Bloomberg reported it lacked the cash to comply with a covenant tied to a loan from Soros Fund Management. Zeus, which raised $55 million last year, got a $15 million lifeline in May. The round valued it at $110 million — barely half of its $205 million valuation last year.

Kulveer Taggar, Zeus’ CEO, did not respond to requests for comment.

Airbnb itself found itself in a similar boat. With its IPO uncertain, it raised $2 billion in debt and equity in April but saw its valuation plunge.

After the pandemic hit, some startups were comforted knowing Airbnb was facing a similar tsunami. “When you’re in the short-term rental industry, you cannot ignore Airbnb,” said Omer Rabin, managing director of the Americas for Guesty, an Israeli startup that helps hosts manage their properties.

  “The ones that were hinging on Airbnb to validate their business model, now they’re stuck.” — Jordan Nof, Tusk Venture Partners 

On average, 60 percent of the company’s bookings are Airbnb. In March, Guesty placed 10 percent of its employees on unpaid leave and cut executives’ salaries. Staff were later notified that the period of unpaid leave would be extended and salaries would be further reduced. The company was also looking to “reduce costs through other means unrelated to human resources,” a spokesperson told Calcalist.

“We all shared the panic,” Rabin said. Since May, when travel restrictions eased, he added, “We’re all sharing the optimism of the industry bouncing back.”

Rebound mode

Early June brought the first signs of that possible recovery.

After an uptick in bookings, Chesky revisited the idea of an IPO this year, noting that Airbnb wasn’t ruling it out.

That same month, the company agreed to hand over listing information about its hosts to the New York City government, settling a yearslong legal dispute in one of its biggest domestic markets — a significant stumbling block in its path to a public debut.

Even before the pandemic, Airbnb was under pressure to go public, with two tranches of employee equity set to expire in November 2020 and in mid-2021, according to the New York Times. The company was reportedly leaning toward a direct listing rather than a traditional IPO.

But Airbnb also looks very different from its pre-Covid self, after laying off nearly 2,000 employees and paring down its focus to its core business — stripping away novelty projects such as transportation, Airbnb Studios and luxury rentals.

Against that backdrop, investments in outside firms seemed inconceivable. “I will go on the record to say that travel will never, ever go back to the way it was,” Chesky told Axios in late June.

Nonetheless, Airbnb is banking on its hosts to ensure it can meet demand when travel resumes, in whatever form that may take. In particular, the home-share giant is betting that guests will prefer staying in homes over hotels to minimize their virus exposure. “Homes is still a critical driver of Airbnb revenues,” said Makarand Mody, an assistant professor of hospitality marketing at Boston University.

  “If you’re Airbnb, any investment in a company other than your own is no longer necessary.” — Seth Borko, Skift Research 

In the U.S., two-thirds of Airbnb’s supply comes from professional hosts or investors. For that reason, Mody said, the company is keeping a close eye on what percentage of supply makes it through the pandemic.

The startup’s relationship with many of its hosts was tested after Airbnb changed its cancellation policy in response to the pandemic, triggering a backlash that prompted Chesky to apologize and launch a relief fund for hosts. Still, some opted to leave the platform in favor of long-term rentals, as they struggled to make ends meet without a steady flow of short-term guests.

“Airbnb is in a damage limitation mode,” Mody said. “They don’t want to lose too many of the professional investors; that’s the model that’s been driving Airbnb’s growth over the last five years.”

Branching out

In addition to retaining hosts, Airbnb’s strategy of offering more than just home-sharing — a move that predates the pandemic — remains in motion. In July, the company announced that its online “experiences” platform had become its fastest-growing product.

“There’s certainly been a concerted effort to expand out of the short-term accommodation segment of travel and expand into increasing their wallet share of travel spending in general,” said Arun Sundararajan, a professor at New York University’s Stern School of Business.

And as people look for rural escapes, there is far less demand for urban units operated by the likes of Lyric, Zeus and others. Airbnb data show that while overall host earnings have slowed during the pandemic, hosts in rural areas saw a 25 percent bump in June, with earnings over $200 million.

Airbnb has also been promoting longer stays, appeasing nervous hosts and capitalizing on demand among city dwellers looking for a break from cramped apartments. Rabin, of Guesty, said short-term rental inventory is not lost; it’s simply changing hands. For example, after U.K.-based Hostmaker, an Airbnb management service, went out of business in March, rival Houst picked up some of its assets.

In the U.S., Frontdesk has acquired abandoned units from failed competitors. “Coronavirus is clearing the deck of amateur hosts,” said DePinto, whose company raised a $6.7 million Series A funding round during the pandemic. He said there was a moment in early March when he thought of calling it quits. Since then, he has watched competitors drop. “All we have to do,” DePinto said, “is survive.”

Similarly, hospitality startup Sonder raised $170 million in June from investors bullish on its outlook. “A crisis like this is really a crucible for business models and for individual companies,” said Frits van Paasschen, former CEO of Starwood Hotels and a Sonder board member. “The ones that survive a test like this … have very good long-term prospects.”

Lyric co-founder Joe Fraiman, who quietly left the company in July, told Forbes he didn’t know if the startup would last another year.

But like many in the business world, he sees promise through the wreckage.

“Change in the industry is going to create new opportunity,” he said. “And I want to go after it.”

Write to EB Solomont at [email protected] and Sylvia Varnham O’Regan at [email protected]


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