Airbnb: Changing where backpackers and billionaires sleep-away

April 5, 2011: 1:26 PM ET

The startup with "startling" growth is part of a second generation of disruptors -- improving on businesses like Craigslist, that were disruptors themselves.

By Kevin Kelleher, contributor

FORTUNE -- The sad truth about hotel rooms is they are at bottom hostile to the spirit of adventure. They lock tourists away from the city's vibrant social life, isolating their guests in charmless, anonymous spaces with no kitchens but plenty of cable TV and booze. It's novocain for travelers.Small surprise, then, that the web has offered alternatives to hotels. HomeAway offers 225,000 vacation rentals on its site. Couchsurfing.org is an online network that has found 2.6 million travelers a free place to crash on the road. And Craigslist has long offered classified ads for travelers seeking short-term accommodations.

But a company much younger than all of those is the one getting the loudest buzz and may well prove to be the most disruptive. Airbnb is building a community-cum-marketplace linking world wanderers with people willing to open their homes to them. Just as eBay transformed the sleepy niche of collectibles into a vast global marketplace and turned millions of consumers into retailers, Airbnb's online community of travelers aims to reshape the accommodations market and free tourists from the dreary confines of the hotel room.

The idea has been catching fire in recent months. "Their growth is startling," says Paul Graham, a venture capitalist and co-founder of Y Combinator, a seed capital firm that has invested in Airbnb. Graham says Airbnb reminds him of eBay (EBAY) in its early days. "They're a peer-to-peer marketplace for a very basic commodity: accommodation."

Since its August 2008 founding, Airbnb has booked nearly 2 million nights for travelers, a figure that has doubled since late February. Airbnb wouldn't disclose its financials, but the company says revenue grew about 350 percent in the first quarter from the previous quarter. That makes it, along with Dropbox, one of Y Combinator's most successful investments to date.

On the face of it, what Airbnb offers doesn't sound especially new -- a site for travel accommodations. But as often happens with web startups, what a company does may not matter as much as how it does it. The community features that Airbnb has designed throughout its site -- detailed profiles for guests and hosts, messaging technology that allow people to introduce themselves conversationally -- bring a strong social element to the mix. In some ways, it's the reverse of a social network like Facebook: Rather than linking old friends online, Airbnb allows strangers across the globe to meet and hang out together.

On Airbnb, some 20,000 hosts in 182 countries list for free and pay a 3 percent fee when they book guests successfully through the site. Most hosts are people welcoming travelers into their homes. Often, they will offer guests an a local's insider recommendations on where to dine or what to see, even showing them around town.

Increasingly, the spaces for rent on Airbnb are growing broader and more eccentric: In addition to 3,500 bed and breakfasts that list on the site, Airbnb's hosts include people renting spaces in villas, boats, cars and exotic locales like a castle in Yorkshire, England ($2000 a night), a remote island in Fiji (with a cook on site, $500), an igloo in Slovenia ($189), a treehouse in Volcano, Hawaii ($201) and a yurt in Hautes Pyrenees, France ($91).

You can even rent a cherry red Jeep Cherokee for $20 a day, courtesy of co-founder Joe Gebbia. In fact, all of the company's 43 employees have booked through the site. "It's a requirement," Gebbia says. "You have to know what your users are experiencing." Gebbia has booked a dozen stays and co-founder Brian Chesky says he's used it more than 50 times.

The company's insistence on dogfooding runs strong, and goes back to the industrial-design ethos that Gebbia and Chesky learned at the Rhode Island School of Design, where they met. Airbnb is the rare web startup with a majority of founders coming from design rather than engineering. The third co-founder, CTO Nathan Blecharczyk, has a computer science degree from Harvard.

While Airbnb may have much in common with early eBay, its biggest inspiration is Apple (AAPL) -- which holds design as a core value that informs the entire user experience, from marketing to packaging to the consumer experience of its products. Similarly, Airbnb was conceived not so much as a web site but as an experience for hosts and guests. "We don't just design what the buttons look like," Chesky says. "We try to design entire experience."

Designers of manufactured goods like baby bottles or backpacks often immerse themselves in the everyday lives of consumers -- interviewing them  and observing them using the product. Chesky and Gebbia applied this approach in designing the site, sitting next to the earliest users and tweaking features to improve the experience bit by bit.

"We realized that our first three versions weren't something they loved but gradually they started to like it," Cheksy says. "Most startups build platforms with the idea that it has to serve millions of people. So it runs counterintuitive to meet with users. You can't meet with millions of users. But we decided to do it as long as we could. It teaches whether it's the right platform you're building."

That counterintuitive approach is paying off. About 70% of Airbnb's users learned of the site through word of mouth. And the other 30%? "It's something we don't disclose," Chesky says, noting that they discovered it after working for a year to keep the supply of hosts up with the number of travelers seeking a place to stay in many cities. "It's safe to say there's a lot more under that hood than there appears to be at first glance."

That was also the case back in 2007 when Gebbia and Chesky, strapped for rent, offered up three airbeds in their San Francisco apartment (hence the name, which was originally AirBed and Breakfast) for attendees of a major design conference in town. They quickly found three ready takers, but were surprised that all were over 30 -- including a 45-year-old father of five -- not the recent college grads they were expecting.

"That was when we learned unexpected things could happen," Gebbia says. "We had no idea what this would become, but we knew something special had happened." They next took the airbed idea to South by Southwest in Austin, and again had three customers. Things were much different last month, at this year's SXSW. Airbnb not only scored rooms for 1,500 people at a conference infamous for scarce accommodations, it walked home with an award for its iPhone app.

Like many successful startups, Airbnb stumbled into a surprising idea and made the best of the happy accident. "It's an interesting way to start a business: Look in life for special but everyday moments and then just scale it up," says Chesky. "All we've done is take that first week in our apartment and scale it up throughout the world."

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