Startup Stars

Airbnb: More than a place to crash

May 3, 2012: 5:00 AM ET

The web startup has thrived by making it easy to list and find rooms to rent. But CEO Brian Chesky thinks the site can be an eBay for the social age.

Designing men: Airbnb founders (from left) Nathan Blecharczyk, Brian Chesky, and Joe Gebbia at the company's San Francisco headquarters

Designing men: Airbnb founders (from left) Nathan Blecharczyk, Brian Chesky, and Joe Gebbia at the company's San Francisco headquarters

FORTUNE -- The house-sharing website Airbnb lists 4,881 apartments for rent in Paris, but CEO Brian Chesky is paying a lot of attention to listings like the one for a parking spot in Île-de-France for $20 a night. Strange things like that keep popping up on Airbnb lately. In San Francisco a guy named Mark will lend you his touring bike for $20 a night. In West Hollywood, Andrea will lend you her 2011 Audi Q5 for $114 a night. And Kay in Texas has 22 acres where you can park, well, anything you want for $135 a week.

Launched in 2008 to help people offer and find affordable places to crash for the night, Airbnb is starting to emerge as a listings site for rentals of all kinds, a sort of Craigslist for the social media set. The company so far has more than 1 million renters and hosts, and some 100,000 active listings in 192 countries, mostly for houses, apartments, villas, yurts, and the occasional tree house. But Chesky, a clean-cut and affable Rhode Island School of Design graduate, has even greater ambitions: Armed with $120 million in funding and investors and advisors such as LinkedIn (LNKD) founder Reid Hoffman and actor Ashton Kutcher, Chesky says he wants to build an online marketplace that small businesses and other entrepreneurs can use to enable what he calls the "sharing economy." In other words, Airbnb could one day be the go-to destination to offer or locate anything you want to rent -- and tap into a broad array of services that help you manage the transactions. In the words of Andreessen Horowitz partner Jeff Jordan: "It's eBay all over again."

Creating a so-called platform is a tall order for a young startup, but such expansive thinking has become de rigueur for social media companies these days. Ever since Facebook enabled third parties to build applications and even develop entire companies on the Facebook platform, a growing number of web entrepreneurs have been positioning their businesses as way more than one-hit wonders. "At some point in 2012 there should be enough scale for an ecosystem to make sense," Chesky explains. "We will have millions of people. If you make something for Airbnb, you will have a market."

Airbnb's office, which features replicas (left) of some rooms on the site

Airbnb's office, which features replicas (left) of some rooms on the site

Even if Chesky, 30, is able to transform Airbnb into a vibrant online emporium, he'll face plenty of competition. There already are dozens of e-commerce sites, ranging from specialty sites such as Etsy for handmade goods to Amazon (AMZN), Yahoo (YHOO), and, of course, eBay (EBAY), all of which also offer digital storefronts for small businesses. And Airbnb copycats abound. There are Airbnb clones for bikes, baby clothes, office space, and ride shares -- and two separate sites for dogs. "Airbnb should continue to be what it is and just do the best job of it -- the market is plenty big enough," says Stifel Nicolaus analyst Jordan Rohan.

Chesky's edge may be Airbnb's elegant and intuitive design. (What else would you expect from a design school graduate?) From Airbnb headquarters, he storyboards every element of the rental process for both visitors and renters. (After reading a Walt Disney biography, he named the process "Project Snow White" because Snow White was the first animated feature film. Before Snow White, cartoons were just shorts.) By paying attention to every aspect of the service Airbnb offers -- from making it easy for anyone to upload photographs of his rental offerings to coming up with a simple way to handle the payment transactions -- Chesky found instant success, especially among younger users looking for cheap accommodations or ways to supplement their incomes.

More: Renting rooms for fun and profit

Indeed, Airbnb got its start because Chesky and his roommate, Joe Gebbia, another RISD alum, were looking for a way to make some cash to help pay the rent on their San Francisco apartment. It was the fall of 2007, and the city was hosting the Industrial Designer Society of America Conference. Affordable hotel rooms were in short supply. So Chesky and Gebbia procured three air mattresses and ginned up a website for a service they called Airbed and Breakfast. For $80 a night per guest, they offered lodging, breakfast, and a bit of sightseeing advice. (Soon after, they recruited coder friend Nathan Blecharczyk as a third co-founder.)

Airbnb created and sold these cereals to raise cash during the Democratic convention in 2008.

Airbnb created and sold these cereals to raise cash during the Democratic convention in 2008.

The team soon decided to make the site available to other users, but had a hard time securing investors; no one wanted to fund a couple of designers. To raise some cash -- and awareness of the company -- they descended on the 2008 Democratic National Convention in Denver, where they enlisted a slew of locals to list spare bedrooms on Airbnb for visiting delegates. Chesky then found a small manufacturer to create 1,000 boxes of two Airbnb-branded cereals -- Obama O's and Cap'n McCain's -- which they gave out at the convention and sold online as collectors' items. They raised $30,000 and got on the evening news.

A few months after the convention, Airbnb was accepted into YCombinator, the elite Silicon Valley incubator for startups. Sequoia Capital invested in a seed round, and by 2010 the company had attracted backers like Hoffman through Greylock Partners and angel investors such as Ron Conway and Yelp (YELP) founder Jeremy Stoppelman. By the time it raised its $112 million round, led by Andreessen Horowitz last July (which gave it a valuation of $1 billion), Airbnb had emerged as one of the "it" startups of San Francisco, complete with a spacious loft in the Potrero Hill neighborhood and a company chef hired away from Google (GOOG). On two separate visits to the office, Fortune encountered tour groups, including MBA students, designers, and teens from a city youth-development program.

Financiers insist that they were drawn to Airbnb's revenue model and growth potential, not its glam factor: Unlike a number of the other social websites, Airbnb generated cash right from the start. It charges a commission of 6% to 12% on every transaction, landing it a reported $500 million in 2011 revenue. By contrast, a traditional agent might charge 15% to 20% to rent a property.

The

The "Mushroom Dome" in Aptos, Calif., which is replicated in Airbnb's offices.

But those agents, or middlemen, often help screen renters and provide other services. Last year Airbnb found itself in a PR nightmare when a San Francisco renter returned home to find her apartment had been vandalized. The incident magnified security concerns at a time when the customer support hotline still reached an answering machine checked every morning. Chesky's security team disappeared into a windowless bunker inside the office to double down on new features. Within a few weeks Airbnb introduced a $50,000 physical-property guarantee, voice- and video-verification systems, and a 24-hour customer support hotline.

Airbnb has also begun to bump up against the systems that regulate the traditional hotel and rental industries. There are significant questions in some cities as to the legality of residents renting out their apartments for less than 30 days. (Co-op boards across New York City are taking note.) And in April the city of San Francisco raised the question whether Airbnb should be paying the hotel and tourism taxes that hotels pay.

All of which may help explain why Chesky is keen to expand into other categories. He's already experimenting with services that Airbnb can offer budding entrepreneurs and freelancers to lure them to list their properties on the site. A number of years ago the team realized their listings needed better photos. He and Gebbia flew to Manhattan and rented a pricey camera to take pictures of dozens of listings in the city. The move helped jump-start bookings, but it wasn't a model the founders could repeat in every market. So Chesky hired someone to build a database of 3,000 professional photographers that Airbnb users could contact to have their properties professionally photographed. Airbnb pays the photographers $60 a job. "We're going to continue to provide more and more services," says Chesky, "and maybe the ecosystem will provide them as well."

Other listings on Airbnb include a sleek house in Pioneertown, Calif., for $350 a night.

Other listings on Airbnb include a sleek house in Pioneertown, Calif., for $350 a night.

Even as Airbnb broadens its mandate, Chesky and his co-founders say they will maintain a focus on the audience that made Airbnb what it is today: a community of independent, mostly young -- average age is 35 -- users who are passionate about the company. Chesky says Airbnb early on got distracted by larger vacation-rental companies that wanted to list multiple properties. These professional operations could help Airbnb expand its listings quickly, but Chesky soon found that his small team of product engineers was spending so much time designing services for those larger outfits that it was neglecting Airbnb's core users, so he stopped catering to those companies. "We probably lost six months," he says. "There are so many things we can do; the most challenging part of this is to figure out what not to do."

Chesky believes that if he continues to focus on the user-driven design that has cemented the Airbnb community so far, everything will sort itself out. Chesky thinks of Airbnb as more than a company -- to him it is a movement. His site invites users to return to a time when hitchhiking wasn't dangerous -- when it was just fine to share anything with strangers because no one was all that strange. Users come for the deals, but they stay for the trust and good will. It worked for Craigslist and it worked for eBay -- and that was before Facebook mapped out a more social web. The opportunity, according to Chesky, is surely even larger.

This story is from the May 21, 2012 issue of Fortune.

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About This Author
Jessi Hempel
Jessi Hempel
Senior Writer, Fortune

Jessi Hempel is a New York-based technology writer for Fortune. She has written extensively about digital media, online advertising and social networking. Before joining Fortune in July 2007, Hempel worked at BusinessWeek and most recently served as their innovation department editor. Hempel is a graduate of Brown University and received a Masters in Journalism from The University of California at Berkeley.

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