7 Charts That Show How Airbnb Went From Selling Cereal to Becoming the World's Biggest Hotel

In seven years, Airbnb went from a small company no one wanted to invest in to a startup star valued at US$25.5 billion.

It raised US$1.5 billion at a valuation of US$25.5 billion. After that funding round at the end of last month, Airbnb became the world's third-largest startup, behind only Uber and Xiaomi.

Today the online home-rental service operates in 40,000 cities across 160 countries and lists more than 1 million rooms. That is more than any global hotel group, Marriott, Hilton and Starwood included.

Yet when Airbnb started seven years ago, "sleeping in a room in a stranger's home" was not a popular idea. Even with a recommendation from Y Combinator, Silicon Valley's best startup incubator, Airbnb was turned down by one venture investor after another. Among them was the well-known tech investor Fred Wilson, who had backed such uncertain bets as Twitter, Foursquare and Kickstarter. Even the designer the founders tried to hire made no secret of his doubts, saying he hoped the company had other projects in the works.

In its early days, Airbnb made most of its money selling cereal

Look back at Airbnb's early history and you will find that it looked nothing like the polished brand of today, and that both the product's origin and its name were strikingly honest.

Airbnb began because its founders, Brian Chesky and Joe Gebbia, could not pay their rent. To cover it, the two young designers put three air mattresses in their living room and rented them out, with breakfast included, for US$80 a night. They gave the service an honest name: AirbedandBreakfast. This was the end of 2007.

Airbnb's early history

It sounded like just another cheap service along the lines of Couchsurfing, which lets travelers sleep on a couch in someone's home, not the Airbnb of today, with its eye for design and its beautiful listing photos.

The first sign of life came in 2008, when the company seized on large offline events.

AirbedandBreakfast launched its product in March 2008 at South by Southwest (SXSW), the big festival and conference. It was also a US presidential election year, and the founders promoted the service in Denver, where the candidate Barack Obama was giving a speech. Denver had few hotels and a great many people coming to see Obama, so the service suddenly took off.

But the buzz did not last. After those big events, AirbedandBreakfast's growth soon stalled. To keep the company alive, Chesky and Gebbia had to take on side jobs. Chesky bought a batch of cereal and redesigned the boxes, creating an Obama flavor and a flavor named after John McCain, then the Republican candidate. He then sold the boxes at trade shows for US$40 each.

Brian Chesky with piles of cereal in the apartment

The cereal sold better than Chesky had expected. After selling 1,000 boxes, he and Gebbia ended up with US$30,000, which was AirbedandBreakfast's most important source of money in its early days. The boxes that did not sell fed Chesky and his team for a while.

The Obama and McCain cereal boxes

At the end of 2008, Chesky's team finally landed an interview with the founder of Y Combinator. "Their idea was terrible," said Paul Graham, Y Combinator's founder. Even so, he gave AirbedandBreakfast US$20,000 in startup money and let the young team join Y Combinator's program, "because the founders had an undying conviction and a lot of imagination."

Indeed, in 2008-2009 few people bought Chesky and Gebbia's idea. One story Chesky often tells goes like this. In 2009 he wanted to hire a designer, so he first pitched the idea to a friend. The friend turned him down and gave him some very tactful advice: "Brian, I hope this isn't the only thing you're working on."

Chesky and his team were also rejected by Fred Wilson, the prominent New York investor, because Wilson could not tell how big their business could get. "I believe they can scale in the market for air beds and breakfast, but I'm not sure they can get into the hotel market," Wilson wrote in an email to Paul Graham.

In April 2009, the room-sharing service graduated from Y Combinator. Because most investors still did not believe in it, Y Combinator was one of the backers of its US$600,000 seed round.

The turning point: dropping the budget route, hiring photographers and taking on hotels

How the market Airbnb targets has changed

After shortening its name from AirbedandBreakfast to Airbnb, the company spent several months stuck at US$200 in revenue, with no obvious growth in users. That figure did not even subtract what Chesky spent staying in Airbnb rooms every day, which he did only because he had nowhere else to sleep. But along the way, Chesky came to see that users wanted more than a bare mattress and breakfast. People like beautiful homes.

If Airbnb first set out to be a cheap lodging service like Couchsurfing, then from the second half of 2009 Chesky and Gebbia began to lean on what they did best: design.

The two founders, both trained as designers, spent US$5,000 renting a camera to photograph the first rooms they planned to rent out in New York. The carefully composed and lit photos drew guests in, and bookings for the photographed rooms rose two- to threefold.

Encouraged, Airbnb began offering hosts free professional photos of their rooms, a policy it still keeps today. The room is Airbnb's core product, so it has to be packaged well. This change in thinking moved Airbnb for good from a hobbyist, couch-surfing-style outfit to an online travel-lodging company.

That was Airbnb's first turning point. Its second is still under way: shifting its listings toward local, personal, culturally rich homes that are not budget lodging. They cost about the same as local budget hotels, or slightly more, but sell a well-designed local experience. Next to the comfortable private homes and local experiences on Airbnb, budget hotels, with their shabby decor and barely usable internet, have no appeal at all.

All of Airbnb's profit comes from brokerage fees. It charges guests a service fee of 6%-12% and hosts a fee of 3%. So the price each room can fetch directly sets Airbnb's revenue. For the homes on its platform, the best way to command a high premium, besides better service, is to be more beautiful than the rest.

At the end of May 2014, Airbnb began testing a service called "Local Companion," which lets travelers put questions to locals, who can give shopping and travel advice and help with buying tickets, renting cars, childcare and more. On July 16 that year, Airbnb published a post titled "Belong Anywhere" on its official blog, saying that Airbnb gives users a sense of belonging and builds a shared belief that the world is one family.

All of this shows Airbnb trying to compete with the standardized traditional hotel industry by going local, and to earn higher premiums by giving each home cultural value. Today Airbnb's website sorts homes into four product types: "Affordable," "Home Experience," "Unique Stays" and "Immerse in Local Life." The last three are all, in one way or another, ways to charge "higher prices."

Once it found its path, how fast did Airbnb grow?

How fast have Airbnb's funding and valuation grown?

In January 2010, Airbnb's total nights booked stood at only 100,000. By the end of that year the figure had reached 800,000, an 800% increase in one year. By then Airbnb had long since outgrown New York and become a global web service. Its guests came from 160 countries, and it had hosts in 89 countries.

In May 2011, founder Brian Chesky told the Financial Times, "I really think we (Airbnb) will become the next big marketplace after eBay." By then Airbnb's cumulative bookings had reached 1.6 million, thanks to rapid growth abroad, especially in Europe. Journalists were also increasingly using "Airbnb for X" to describe new sharing-economy startups.

In July that year, Airbnb closed a US$112 million Series B round at a valuation of US$1.3 billion, just three years after the founders had been scraping by on cereal sales.

Airbnb's valuation compared with the market value of hotel groups

The Series E round that just closed in 2015 brought Airbnb another US$1.5 billion in cash and a valuation of US$25.5 billion, making it the third-largest startup in the world, behind Xiaomi and Uber. That is very close to the US$27.73 billion market value of Hilton, the world's largest hotel group. And Hilton, as a listed company, can more easily attract capital. If Airbnb went public, it would very likely be worth more than Hilton.

If Airbnb were a hotel group, it would rank second in the world by market value and first by number of rooms. In February 2014 Airbnb had only 300,000 rooms; by December it had 1 million. Other major hotel groups, such as Hilton, Marriott and InterContinental, each have fewer than 700,000.

Airbnb's room count compared with hotel groups

Still, although Airbnb lists more rooms than the hotel giants, many of those rooms are not reliably available, so occupancy remains fairly low. Barclays analyst Vicki Stern estimated that Airbnb booked 37 million room-nights in 2014, only one-fifth of InterContinental's total. But she also said that at its current rate of growth, Airbnb would book 129 million room-nights in 2016.

What exactly has Airbnb changed?

"Whether you want to spend a night in an apartment, a week in a castle or a month in a villa, you can enjoy Airbnb's one-of-a-kind travel experiences at any price, in more than 34,000 cities across 190 countries."

So reads the "About Us" page on Airbnb's website, seven years after the company was founded. Airbnb is not yet big enough to threaten the high-end hotel business, but it has met people's need for short-term lodging at almost no cost. As a textbook case of the sharing economy, what exactly has it changed?

Airbnb compared with the hotel industry

First, Airbnb has changed how short-term living space is organized. Think of what it takes to open a traditional hotel: lease a building, renovate it, buy equipment, hire staff, and so on. Airbnb instead turns the spare rooms in people's homes into guest rooms. It bears none of those burdens and acts only as the middleman between guests and hosts.

A traditional hotel has a fixed number of rooms, and whether or not anyone stays in them, it pays the same rent and staff costs every day. This is a centralized, asset-heavy model, and to turn a profit the hotel must keep vacancies low. Airbnb merely pools scattered resources and bears none of the costs. Any resident with an empty room can turn it into a guest room, and Airbnb collects a brokerage fee.

One major advantage is that Airbnb's market is more elastic than the hotel industry's. The market itself sets the supply of listings. When a big conference comes to town, for example, renting out a room pays better, so more hosts offer their spare rooms. Hotels cannot adjust this way. They must put up with high vacancy rates in the off season, and in peak season they can raise prices only so far before they sell out, leaving money on the table.

Reuters reported that Airbnb has become an official partner of the 2016 Rio Olympics and will house visitors during the Games.

Second, Airbnb has changed how lodging reaches guests. Airbnb is only an information platform where hosts and guests exchange information. All it has to do is help guests sort through listings with better algorithms and feedback systems, and guests can then find a place to stay on their own.

Traditional hotels, by contrast, must not only reach out to guests themselves but often also work with travel agencies to find the right ones. This can get even more complicated: sometimes three or four layers of middlemen stand between a hotel and its guest.

Airbnb relies on hosts who carry the assets, and it cuts out the middle steps between rooms and the people who need them. By stripping out the excess costs of the hotel model, it can lower average room prices and still earn brokerage fees, and then, through economies of scale, turn those fees into huge profits.

More interesting still, Airbnb can expand and keep growing its profits while adding only a little cost: buying servers and hiring a few more people. It can then safely pour those profits into improving its software and systems, which sets up a virtuous circle and lets it build a dominant position over its competitors.

Airbnb has more than 1,600 employees managing more than 1 million rooms in more than 190 countries. By comparison, Hilton had nearly 160,000 employees running 670,000 rooms in 2015, and Starwood had about 180,000 employees running fewer than 350,000 rooms in 2014.

Airbnb has also become a business model

Airbnb was once called "eBay for Space." But today "Airbnb" means more than the Airbnb service itself. Like Uber, it has become the name for a sharing-economy business model and a template for startups to follow. "Airbnb for X" is the label they reach for, and founders love to describe their companies as "the Airbnb of X."

On Product Hunt, a site for discovering new startups, you can easily find dozens of Airbnb for X companies, heading in every direction imaginable:

Airbnb has become a business model

But Airbnb did not simply ride the "sharing economy" buzzword. It looks like a lucky winner that had the right timing, the right place and the right people. It built a system that closed the information gap between hosts and guests. It used technology to strip out the heaviest costs of the hotel business, namely leasing property, running and marketing a hotel brand, and hiring staff, and that let it spread around the world with little effort. And its focus on design and personal local experiences happened to match the rise of independent travel in recent years.

But the main reason it all happened is that Chesky and his team never gave up, whether they faced doubts from friends, rejection from famous investors, or trouble growing users and raising money. Under a post in which investor Fred Wilson looked back on missing the chance to invest in Airbnb, we found quite a few people who had tried to build something like Airbnb back then, only to give it up for one reason or another.

"When I saw Airbnb, I immediately saw its potential," wrote a commenter named LIAD. He bought the domain name iStay and launched a service. But he did not love the work enough. "So when someone made a high offer for the domain, I dropped the project," he said.

Nick Grossman tells a similar story. "In early 2008, I also built a service much like today's Airbnb." But he gave up before it launched: its three founders were all working on it in their spare time, and the project fell apart.

Perhaps it is just as Brian Chesky told The Atlantic: "Starting in January or February of 2008, I found that a lot of ordinary people wanted to do this too. From then on, I was convinced of what we were doing."

Today Airbnb's business model is not hard to understand; what the company does has barely changed since 2009. But only one company carried almost everyone's doubts down this road, survived the lean days of eating cereal every day, held on, and changed the world. That company was Airbnb.