How do two arts graduates and their buddy with no travel experience and zero technology experience build a six-billion-dollar empire in only fourteen years?

Dave Young:

Welcome to The Empire Builders Podcast, teaching business owners the not so secret techniques that took famous businesses from mom and pop to major brands. Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is, well, it’s us, but we’re highlighting ads we’ve written and produced for our clients, so here’s one of those.

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Dave Young:

Welcome to The Empire Builders Podcast. I’m Dave Young, along with Stephen Semple, and we’ve got business stories for you. And today, Stephen-

Stephen Semple:

Today.

Dave Young:

… you whispered in my ear that we’re going to talk about… This is a big one.

Stephen Semple:

I bet everybody’s heard of this one.

Dave Young:

I bet everybody’s heard of it, and I’ll bet most people maybe have an experience with it, too.

Stephen Semple:

That’s right, they probably have. Mm-hmm.

Dave Young:

Yeah, good or bad. Airbnb. Airbnb has sort of become, not generic, but like we say, “I’ll get a hotel room,” or, “I’ll get an Airbnb,” like it’s one or the other sort of thing. And Airbnb, even though it’s not generic, it’s become the same as Vrbo.

Stephen Semple:

It really has.

Dave Young:

Right?

Stephen Semple:

Vrbo has a challenge in that front. Yeah.

Dave Young:

It’s “Hand me a Kleenex,” is Airbnb.

Stephen Semple:

It really is. And Airbnb today has more rooms than the biggest hotel chain in the world. So, if you were adding it up by rooms, they are now the biggest on the planet.

Dave Young:

Man, it’s one of those businesses that defined the term disruption.

Stephen Semple:

Really did. Really did.

Dave Young:

Right? You had Uber, and you had Airbnb, and it was like, man, Uber turned taxis on their heads. And Airbnb, man, talk about changes to the hotel industry.

Stephen Semple:

Yeah. And it’s a really interesting story. Today, they have over 6,000 employees, and they do $6 billion in revenue. And it was founded by Brian Chesky, Joe Gebbia, and Nathan… I’m going to butcher this name because I’ve not actually heard his name pronounced, but Blecharczyk, I think is the last name. In 2008 is when they came on the scene, in 2008. So, the other thing that’s remarkable is it’s not really that old a company.

Dave Young:

No. I’ve read some things about the origin, and it really started just as these guys in their apartment seeing if they could get somebody to stay on their sofa, right?

Stephen Semple:

Yeah. That’s how this all started. Because these guys, when you talk about disruption, these guys had no background in travel, no background in hospitality, and believe it or not, no background in technology. These guys weren’t a bunch of technology guys. This was just an idea. And Joe and Brian graduated from art school in Rhode Island. So, when do you think about it, art school graduates, no travel experience, no hospitality experience, no technology experience. And they completely disrupted the industry.

Dave Young:

What you’re saying is I have a chance.

Stephen Semple:

You got a chance.

Dave Young:

There’s a chance.

Stephen Semple:

You got a chance.

Dave Young:

All I need is an idea. Okay. All right.

Stephen Semple:

So, Joe and Brian are college buddies, and they both move west after graduating. And Joe has a job designing book covers. And he worked really hard to convince Brian to move to San Francisco. He said, “You should come live in San Francisco, and we should start a business together.” And so, they both quit their jobs and start dreaming up ideas for a business. So, they’re literally sitting there going, “Oh, we could do this or we could do this or we could do this.” They’re dreaming of all these ideas. And so, while they’re doing this, one day a letter comes in the mail from the landlord and the letter says, “Your rent is going up 25% next month.”

Dave Young:

Oh. So, this was the beginning in San Francisco.

Stephen Semple:

They realized, “We don’t have the money. We can’t make rent.” So, here they are, backs against the wall. And both of them will say, this is where the creative training that they received in art school really comes into play. And I need to rant on this a little bit because I have a daughter in art school, and people are always like, “Oh geez. What is she going to do for a living?” And what I’m going to tell you is I think art school is really underappreciated from the standpoint of the way they teach these kids to really think outside of the box. And today, we all run around going, “Oh, we need think outside the box. We need think outside the box.” And yet the area that teaches that the most is really undervalued. So, my daughter, Crystal, faces this all the time, and frankly I got no worries about her. She’s so creative. She’ll figure out a way to make money.

But coming back to this, so here they are, backs against the wall, and their creative training kicks in. And Joe thinks back to when he moved out west because he has this idea. And this is the origin of this idea. So, when he decided to move west, he had a sale where he sold all of his stuff. He said, “I don’t need all this stuff. I’m not moving it all.” And when he’s doing this, he meets this guy who’s been driving across the country, or had been driving across the country, and this guy bought a piece of art from Joe. And Joe got talking to him, and Joe found out this guy knew no one in town. So, he asked him to join him for drinks. And over drinks, he discovers this guy has nowhere to stay, and before he knows it, Joe lets him sleep on an air bed in his living room.

So, in this moment, Joe thinks back to that and he got thinking, and he whips out his laptop, and he sees that there’s a design conference in town. And on the website, it says, “Hotels sold out.” In that instance, he looks around, sees all the extra space. They have air beds because they had them for when people were visiting. “Let’s rent out the space.”

Dave Young:

All right. Now, I have to admit something right now. This is the moment in my life when I learned and made the connection that the air in Airbnb is an air bed. They didn’t start with it… My favorite is to rent the whole place, but that’s not how it got it started. It was an air bed in a little extra square footage.

Stephen Semple:

Well, in fact, the first URL was airbedandbreakfast.com.

Dave Young:

Dave, you’ve got to pay attention. You’ve got to pay attention.

Stephen Semple:

Well, no, but I also get it because it’s in the cloud, air, we go that way.

Dave Young:

Yeah, exactly.

Stephen Semple:

And if they were technology guys, that might be the direction. But no, they went out and they got a URL, airbedandbreakfast.com.

Dave Young:

If they were technology guys, it would’ve been called EB&B.

Stephen Semple:

There you go. Something like that.

Dave Young:

Something stupid.

Stephen Semple:

So, what they decide to do is they look around and they see all this extra space and go, “Let’s rent out this space.” So, Joe and Brian decide to rent it out, but they wanted to do more than that. They wanted to make it a bit of an experience. They made breakfast. They picked up renters at the airport. They gave them a guidebook to the area, the whole deal.

So, they go and they design their own website. And this website is just for this conference. And as I mentioned earlier, it was called airbedandbreakfast.com, and they started to get these emails from around the world. And they were renting for 80 bucks a night. And they get three guests. And this is cool. And they actually take some time and share the city with them. And they’re really excited about that. Not Christmas. They went home. And the only thing they could talk to people about was this idea of renting. And half the people they talked to thought this was a cool idea. The other half terrible idea.

Dave Young:

Like, “You’re letting serial killers into your home.”

Stephen Semple:

Absolutely. Yeah. And in interviews, and this is really important, and there’s actually a bit of a lesson here that we’re going to come back to, but in interviews with Joe, he shares his thoughts on this. And I think it’s a really great observation. Innovative ideas polarize. They absolutely polarize. Some people love. Some people hate. That is the nature of innovation. Any innovative idea polarizes. And we run into this all the time with ads. Our ads polarize. Some people love. Some people hate. And you need to just embrace that. They still decide it’s great idea, and they want to push forward with it. And to do this under on a bigger scale, they need technical expertise. And this is where Nate comes in. Nate was a roommate, and he was similar to Joe and Brian from the idea of really hardworking and how he looked at the world. So, on January 2008, they tell Nate about this idea. And Nate loves it.

Now, Nate had the computer expertise they needed. He had a computer science degree from Harvard. They decided to launch the business at the next big conference. They thought that this was their opportunity, housing for conferences. That’s kind of where they thought this would start. And the next big one was down your way, South by Southwest in Austin.

Dave Young:

Right.

Stephen Semple:

And as you know, hotels sell out months in advance. Lots of technology companies, Twitter, Foursquare, and whatnot, have launched at this event, but they only have three weeks in order to get their act together and build out the site. And they had no money. They get it launched just in time and six listings go up, and they get a total of two bookings. And one is Brian. So, it’s not a success at all. They’re completely demoralized. All right. And you think about they just came back at Christmas with half people saying, “This is a terrible idea.” They run this and it bombs. They’re completely demoralized.

Dave Young:

So, their overnight success has to wait another night.

Stephen Semple:

Their overnight success has to absolutely wait another night. But got them to thinking. Got them the thinking, and they realized a few things, and they said, “Exchanging money in person is awkward.” So, they felt they needed to bring the transaction online, but this also meant that they could take a transaction fee. At the same time, the few people that had used them, they reached out to them and got some feedback. And it also got them thinking, “Maybe this should be a travel site.” And so, they decided to launch a new version of this, but they also wanted to launch it with some PR. They wanted to get this press out there, get people knowing about it, and they knew they only had one chance to make this big impression. So, the next big event, even though it is going to be about travel, they still thought event would be a great point to get some PR.

The next big event is when Obama is speaking at the Democratic National Convention in Denver, Colorado. And it’s a housing crisis. Denver has a total of 30,000 hotel rooms, and they’re expecting a hundred thousand people to come. The mayor’s even talking about opening the parks for people to camp.

Dave Young:

Oh, wow.

Stephen Semple:

So, they figure this is the perfect opportunity to relaunch. There’s rooms needed, plus there’s all sorts of press there covering this event and covering this crisis. So, they fly to Denver. They meet people on the ground. Met with press in Denver. And they did this weeks before the convention. They ended up doing a live interview with CNN from their living room. And remember, this was pre Zoom days when that would’ve been weird.

Dave Young:

Yeah, yeah.

Stephen Semple:

Right. They get about a hundred people booking. First sign of a viable model. So, you go, “Wow, this is awesome.” But suddenly, they go from zero homes on the site to 800 homes listed in eight weeks.

Dave Young:

Wow.

Stephen Semple:

They thought, “This is it. Build it and they will come.”

Dave Young:

Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this.

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Dave Young:

Let’s pick up our story where we left off. And trust me, you haven’t missed a thing.

Stephen Semple:

Convention ends. Numbers crash.

Dave Young:

Yeah.

Stephen Semple:

They introduced the idea to 20 investors. They met with five. Zero. A zero.

Dave Young:

No investors-

Stephen Semple:

Invested it. Nope. So again, they’re demoralized. Had this big high. Things come crossing down. No investors. And here’s the problem that investor said to them. “Stranger danger. We’re taught from children, “Don’t invite strangers in your home.” Think about it. Vampire Chronicles. What do you know don’t do?

Dave Young:

Oh, yeah.

Stephen Semple:

You’re safe from a vampire until you invite them in your home. This is instilled deeply in our psychology. Also, you’re posting pictures of your most intimate spaces, your bedroom, over the internet from strangers from all over the internet to stay.

Dave Young:

It takes a certain kind of extrovert, doesn’t it?

Stephen Semple:

Well, this is the thing they were hearing, but they still believed in it. So, they ended up raising money. They ended up going to credit cards. They literally got to the stage where they had a binder of credit cards that they had all run to the max.

Dave Young:

Oh my gosh. Yeah.

Stephen Semple:

And at this point, they call this the trough of sorrow moment. That’s the words that they gave to it.

What they realized is they had no product market fit, and they couldn’t find the product market fit, and that’s the reason why there was no growth. And in 2008, they had no investors and tons of debt, and they needed to make money.

Dave Young:

Okay.

Stephen Semple:

Now, this will seem like it’s a side road, but this is actually really important to the story. They ended up making this breakfast cereal, this politically themed, breakfast cereal that they were going to sell. And this was at the time of the Obama-McCain debate. So, they bought cereal, decide to design their own box, and they found a guy who-

Dave Young:

These are art majors.

Stephen Semple:

These are art majors, but they also still found a guy who could design the box and make it and fold it and everything else, right?

Dave Young:

Yeah.

Stephen Semple:

And they would make 500 of each box, 500 Obama boxes and 500 McCain boxes. And they made it limited edition by numbering the boxes. And they sold the boxes for 40 bucks a box. And the Obama Os, CNN did a live show on this cereal, and they sold out of the Obama Os and made 20 K and paid off their credit cards.

Dave Young:

Nice.

Stephen Semple:

But at this very time, they’re having a fateful dinner with some mentors, guys that have been helping them. And they wanted them to participate in this incubator called bicombinator. And this is a hard one to get into. There’s a lot of these little incubators out in Silicon Valley. And the deadline was the night before they get their submission. But they got an extension, got the application in right away, and the application was accepted for an interview.

They were then interviewed with four partners, one of them being Paul Graham, who’s big in Silicon Valley. And Paul looks at them and says, “People actually use this thing. That’s weird.” Like this booking thing. And they’re walking out of the room, and they decided to give the guys a gift, and they gave them the cereal box. And suddenly Graham says, “You made this?” And they told him the story. And he said, “So, you funded the company so far by selling cereal?” They’re like, “Yep, that’s what we did.” The ride home, they get a call. “You’re in the program.”

Dave Young:

Bicombinator? Not Y Combinator?

Stephen Semple:

Oh, I might have it wrong. I’ll have to double check, and I’ll put a correction at the end. I may have typed it wrong.

Dave Young:

Okay. Because, I mean, that one I know.

Stephen Semple:

Sorry. It is Y Combinator. Yes.

Dave Young:

Y Combinator? Okay. Phew.

Stephen Semple:

Sorry, sorry, sorry, sorry, sorry. You know what? Probably is one of those ones when I was typing my notes that the spell check screwed me up. No. Yes. Y Combinator.

Dave Young:

I bet it is.

Stephen Semple:

Y Combinator? Yes, you’re absolutely right.

Dave Young:

Y Combinator. Yep.

Stephen Semple:

I just looked at my handwritten notes. Y commonator. Yes.

Dave Young:

Combinator.

Stephen Semple:

So, on the ride home they get a call. They’re in the program. And they later found out that what got them in was the cereal because it proved they had hustle and grit. It proved that they could figure out how to make this work. Now, once they are in the program, they’re asked this question, “Where is your market?” They suddenly realized they didn’t really have one, and people were not finding the site. And there was some promise in New York City. They had a few people who had signed up in New York. So, they’re immediately told, “Go to New York City and talk to these people. You need to realize how to solve these things in a scalable way.” They have been trying to solve the problem with coding. Let’s keep fixing the coding. And what they really need to do is go see the customer.

Dave Young:

One of the biggest lessons that we end up telling clients is, “You are not your customer. The minute you think you are your customer, you need to go talk to your customer.”

Stephen Semple:

And it’s amazing how many startups I meet, especially in the technology space, who are sitting in their office typing code and never meeting the customer. These guys got on a plane, flew to New York, met with customers, and they identified a pattern from the posts. What they realize is people didn’t know how to take good photo of the home. Pictures were low res. They were taken at night. They looked bad. And these guys were artists. So, you know what they did? Showed up with some cameras, took pictures. They went to all 30 hosts, and they took pictures, and the hosts loved the pictures. They ended up spending a few hours with each of them, talking to them. They went into their design research mode, which again is taught in art college. Understanding the world from the point of view of the customer. See the world so closely. See how they’re using and create something new.

And what they realized was the hosts didn’t know how to use the [inaudible 00:20:02]. They thought they had created this calendar system and this messaging system that was really easy. It turns out it was not. They did not realize this until they sat down with the customer and saw how the customer was using it, and they saw the gaps. They came back with all these discoveries, and suddenly they went from $200 a week in fees in the first six months… So, it took them six months to build up to that. … to a week later, they’re doing $400 a week. So, they doubled in the week. And it all came from the host they met with. That was where all the increase was. Suddenly, the people knew how to use the service.

Now, became a little bit viral because what also happened is people who used the service as a customer wanted to start becoming a host. And this is when the gears started to click in. And the weird thing is people in Silicon Valley keep an eye on all these things. So, they started to have this growth. Things started to click in, and all of a sudden people started to reach out to them to invest. And Sequoia Capital was one of them. And they are a big deal. They are big in Silicon Valley. So, they closed a deal. Got a first round of financing. They could now pay the rent and hire a team.

And in 2010, they were still small enough that they looked at every listing. Every new listing that came in, they would take a look at them. And at one point, they came across one in the Fiji Islands, and they were like, “Oh my God.” It was this really fancy… It had a private chef. There was water sports. It was just one that was so out there. And they got so excited because it was like, “Wow. How did somebody in Fiji find us?”

Now, they did a number of financing rounds, and today they’re the massive, publicly-traded giant that we all know about that is doing just 6 billion in revenues and has got more rooms than the biggest hotel chain in the world.

But when I read this story, I realized there was a couple of really great lessons in it that I think people need to understand. And the big one we already talked about a little bit. Get a couple of customers. So, they got a couple of customers. Do whatever you need to do to get a couple of customers. And then, spend time with those customers. And don’t be defensive when they say, “This is shit,” it’s crap. Recognize that.

Dave Young:

Mm-hmm. Yeah.

Stephen Semple:

Don’t go, “Oh well. If it wasn’t for the dumb user… ” And I don’t care what business you’re in. Get out and see the customer and get the feedback. Learn what they like. Learn what they don’t like. Make it better for the customer. And here’s the other thing is take your industry cap off.

What I find that’s so remarkable with these podcasts, we’ve talked about 80 companies and almost all of them come from people outside the industry, because you know what they don’t say when you’re from outside the industry. “Oh. Well, the industry doesn’t do that. We can’t do that.”

Dave Young:

Yeah.

Stephen Semple:

I just had a conversation with a customer where we put together an idea in front of him, and he said, “I don’t know that I want to do this. I took a look around my industry and that’s not best practices.” Meanwhile, I spent the weekend with a friend of mine who’s an unbelievably successful, rich individual. This guy developed a ski resort. He went out and bought 2000 acres of land and developed a ski resort. And at the time he was developing that ski resort in Quebec, everybody would call things [inaudible 00:23:37] this, [inaudible 00:23:38] that, [inaudible 00:23:38] The other thing. His first gut reaction is, “Well, since that’s what everybody’s doing, I can’t do that. I need to do something different.”

Dave Young:

Everybody’s zigging. You need to zag.

Stephen Semple:

You need to zag. Your gut needs to be, “I got to go against this.” And that’s often what the outsider brings. But there’s no reason us in the industry can’t think that way. Go out and see the customer. And if the customer says this, and you go, “Well I can’t do that because plumbing’s not done that way,” that’s your opportunity.

Dave Young:

Yeah.

Stephen Semple:

Figure out how to do that. Don’t say no. Figure out how you do it. And then, you got something that will go massive. But the other part that I thought was really interesting is they had a launch strategy. So many businesses don’t do that. They thought about it. They said, “Here’s a place where this is going on and there’s going to be press there. If we go there and do this, we will get attention.” They had a launch strategy. And whatever that is, you need to do that. You can’t just go, “Oh, my website’s live.” That was like Sarah LaFleur from M.M.LaFleur. Remember they built the big website. They rolled it out there. They were going to wait for the orders. And it was crickets.

Dave Young:

Yeah.

Stephen Semple:

Right? Just crickets. And they had to go back and regroup. So, you really do want to have a launch strategy and have funding for that. You want to sit there and say, “Hey, I’m going to put X number of dollars to launch and get some attention. Get that momentum doing it.” And sometimes, especially startups, you have to do what you have to do. You got to gut it out. I mean, these guys worked hard. They scrambled. They did the things they needed to do to create oxygen to keep that business going. So, I think the three things I learned from this one is get out and see the customer, make sure you got a launch strategy, and just do what you have to do to gut it out.

Dave Young:

Yeah, right. What a great ride for those guys.

Stephen Semple:

Yeah. Like love them or hate them, they have made a big impact.

Dave Young:

And the impact has extended far past the hotel industry. Right? They’re affecting rent prices in cities. Because I’m thinking of when my daughter was in school in Boston, we’d go to Boston and most of the Airbnbs were apartments in these large apartment buildings. They were equipped with some IKEA furniture and pretty barren. You weren’t staying in a house that anybody lived in. These are businesses.

Stephen Semple:

Originally, the idea was founded on, “I’m going to rent out a room in my house.” There is still some of that, but really, I think most of the bookings now are complete rooms that you have on your own. And yes, it has become an industry.

Dave Young:

Yeah.

Stephen Semple:

Yeah.

Dave Young:

What an amazing story.

Stephen Semple:

It really is. It really is.

Dave Young:

I love the innovation that they faced. I love how they came up with some solutions, how they just kept trying, and that they were art students. Man, that warms my heart.

Stephen Semple:

I know that’s the part that also really warm my heart was that they came from this such a different perspective. And I think that’s what’s needed. If you want to innovate, that’s what’s needed.

Dave Young:

Yeah. Thanks for bringing us the Airbnb story.

Stephen Semple:

Thanks David.

Dave Young:

Thanks for listening to the podcast. Please share us. Subscribe on your favorite podcast app, and leave us a big fat, juicy, five-star rating and review. And if you have any questions about this or any other podcast episode, email to questions@theempirebuilderspodcast.com.