New age companies like Uber and Lyft have transformed the way standard cab services operate in a region. Airbnb is trying to deliver a similar transformation for the hotel industry. The service is attracting some high profile users with Warren Buffett encouraging people to use Airbnb as a staying option. Recent reports also reveal that Airbnb is gradually becoming more prominent on business expense reports.
Airbnb now boasts of listings that are doubling each year to 600,000 listings spread across 200 countries. Their listings range from a sofa in a house to private homes, mansions, and more recently, IKEA showrooms. Airbnb earns revenues by charging both the property owner and the renter a commission. The owner is charged nearly 3% of the rental value and the renter is charged anywhere between 6%-12% as commission. While most of its financials are kept under cover, analysts estimate that they more than doubled their revenues last year to $250 million.
They are venture funded with $795 million funds received from TPG Growth, T. Rowe Price, Dragoneer Investment Group, Founders Fund, CrunchFund, Sequoia Capital, Ashton Kutcher, Andreessen Horowitz, Digital Sky Technologies, General Catalyst Partners, Jeff Bezos, Jeremy Stoppelman, Elad Gil, SV Angel, Y Ventures, Keith Rabois, Greylock Partners, and Y Combinator. Their latest round of funding was held in April 2014 when they raised $450 million in a round led by private equity firm TPG at a valuation of more than $10 billion. That is a significant increase from the $2.5 billion valuation estimated last year. Following the latest funding, they have put their IPO plans on hold for a while.
Airbnb’s Legal Hurdles
Airbnb’s biggest hurdle lies in managing legal and image issues surrounding short-term rentals. Recently, there have been several articles about properties rented from their site being used as brothels. In another case, a Southern California vacation pad owner rented out her property in late May but the renters stopped paying rent after 30 days and refused to leave. State laws ensure renters’ rights for a stay longer than a month, which makes eviction an expensive and time-consuming process.
Additionally, there are several legal hurdles regarding zoning, taxation, and permit laws. For instance, New York State regulation bans the occupation of an apartment without the permanent resident present for less than 30 days. Earlier this year, the New York State bodies found that 64% of Airbnb’s offerings in the state were illegal and they had to remove thousands of New York City-based listings.
Similarly, Airbnb’s home town San Francisco is also evaluating regulations that would restrict short-term rentals, making it difficult for Airbnb to operate in the city. In the US, American Hotel and Lodging Association is already working on a regulatory battle against short-term rental companies to highlight the issues of unfair and in some cases “unlawful business practices” used by short-term online rental companies leading to taxation and security issues.
However, things are not the same across the globe. In the US, Portland last month legalized Airbnb rentals based on owners obtaining a permit for $180 and informing their neighbors of the intention to let out their place. Recent legislation changes in European countries like Amsterdam allowed owners to rent out their property for a maximum of two months a year provided they paid a tourist tax and restricted the number of renters to four at a time. In Quebec, property owners with permits can rent out their property for short-term rentals provided they meet certain insurance and taxation norms.
Despite the legal concerns, Airbnb has not slowed their growth plans. They recently expanded their focus on the Australia and New Zealand markets and appointed their first country manager for the region.
Overall, the market’s high valuation suggests confidence in Airbnb’s business plans. Gradual legislation changes across the globe are helping them justify this valuation.