Airbnb, My $1 Billion Lesson

Airbnb, My $1 Billion Lesson

 

I discovered Airbnb on August 12, 2008 and six weeks later gave them a term sheet for their entire seed round. But in the (literal) final hour, it fell apart.

It’s an unusual story and one of several key experiences that shaped my approach to investing in startups. Over the last seven years, I’ve discovered and invested very early in a handful of highly valuable companies (Wish, Lyft, Zenpayroll, Postmates, AngelList, Plated, Styleseat, Klout, etc.) as well as plenty of disasters. But Airbnb taught me some of the most distinct lessons as an investor.

Brian Chesky recently wrote about his 7 Rejections — feedback from a small set of the many investors who turned him down. This is my story as the one guy who didn’t. I was one of the few investors who actively pursued this deal from August through October 2008, and the only among them to agree on a term sheet.

Every deal, every interaction with a founder teaches you something and I’ve consistently revisited my performance, my judgements, my biases, my filters and my approach to investing. Like most of you I’m highly critical of myself — this may not be self-evident, but I constantly question myself and engage in my own personal creative destruction. I question my beliefs and my tactics; I tear myself down and try to figure out what I’m missing, what I’m doing poorly, where I’m letting people down. And then I build myself back up again.

On a tactical level, I repeat this creative destruction almost weekly as I analyze an individual deal; on an operational level I do it every few months (re-evaluating my deal flow, co-investor network, deal structures, etc.); at a strategic level I sit down almost every year and question my overall philosophy on founders, theses, markets, etc.

Today I’ll share with you my tactical critique on the Airbnb deal and the key lessons I learned.

Sourcing

Let’s start with sourcing — how did I find Airbnb? If you look at my four tactics for deal sourcing, I engaged in classic hunting.

My approach then — and still to a degree today — was imagining future solutions and then focusing my time on finding founders who fit within those theses. When I started as an angel in ‘07/’08, I would pick an idea and just start Googling for websites and news articles about any young company that matched. (Now I’ve the benefit of sites like AngelList, ProductHunt, and Betalist plus a much larger network of tech relationships to help me hunt.)

team-slide

the airbnb deck back then

I believed that there was a massive opportunity in the collaboration economy specifically around hospitality. Earlier in 2007 I had this idea of the “biggest virtual hotel in the world.” I can’t remember exactly what triggered this thesis, but if you hang around me you know that I frequently spin out crazy ideas about what the world needs. I bounce them against smart friends and do some desk research and brainstorming, then if they survive I start looking for relevant founders. Generally I can’t find the right team, however…trying to find the right team that meets your thesis is difficult, and pushing other people to build one of your ideas is horrible.

After stumbling into “Airbedandbreakfast.com” that August, I immediately signed up, played around and reached out to the guys via their Contact Us email. I was based in Washington, DC at the time, but after a short email thread and review of the original deck I responded within 48 hours that I’d fly out and meet them face-to-face the next week at the Brainwash.

Diligence

Luckily for me, I didn’t put much emphasis on their metrics. If you looked at the Airbedandbreakfast.com numbers as of September 20, 2008 you would have seen a sharp drop off (around 50%) in users, reservations, and revenue from August to September.

Airbnb Metrics (Sep 23, 2008)

My primary focus was on understanding the team. I was incredibly impressed by their work ethic, vision, and scrappiness — you could feel that these guys were all-in and nothing would hold them back. That small set of data just didn’t come close to conveying how impressive this team was. They were using their own crappy home as a test bed, leveraging the travel boost of 2008 Democratic National Convention (DNC), and getting their hosts to approach reporters. I made introductions to the RNC and to Daniel Hoffer (Co-Founder of Couchsurfing) and submitted bugs about the site — their turnaround was always immediate. We brainstormed product features, user acquisition, budgeting, and fundraising strategies and their responses were thoughtful.

Negotiation

From August 26th to September 25th we engaged in a four week valuation discussion. I won’t go into too much detail, but essentially there were two key events.

Airbnb 1st Budget

airbnb_2nd_budget

Throughout our first meeting, I spent a lot of time going through their budget with them and realized their $100,000 fundraising ask was too low. Based on their traction and burn rate, we came to an agreement that they needed to raise funding closer to $250,000 to give them enough runway, and that it made sense to increase the valuation in order to protect their interest and upside as founders.

The second set of discussions thereafter were pure stupidity on my part. I spent three weeks going back and forth with them negotiating between a valuation of $2M and $2.5M. After a couple weeks, we in fact did agree to terms though, and on September 26th I had Todd Rumberger at Foley put together our docs and coordinate with their lawyer at Fenwick.

Over those extra weeks, however, the other investors who had been circling all dropped out of the deal…instead of a handful of us coming together as I expected, I was the one lone dude writing a check for the entire seed round. But ultimately that was fine by me — I was good to move ahead.

Closing

At the end of September, we agreed on terms and I flew up to San Francisco to do a closing dinner at a little café next to Brainwash. We had some good food and wine and I thought things were solid. We shook hands and planned to formally close the investment the next day.

That next day, however, Todd Rumberger hit me up telling me he still hadn’t heard from Brian. I didn’t think there was anything to worry about — I thought it was just the logistical step of signing the deal papers formally — but I texted Brian to see what the hold up was.

I hear back from him later in the day. Initially, he had great news to tell me: Y Combinator had changed their mind and was in fact going to participate in the round. “Awesome,” I thought, “that’s another great investor for the guys to have involved,” and it gave me some appreciated reassurance after all the prior investors had opted out.

And then Brian told me the second part — that only YC would be participating. Talk about good news followed by ugly fucking news. YC was taking the full allocation and I was getting bumped. And that was it — end of story. After 6 weeks of work, I didn’t get to invest.

Airbnb has of course gone on to execute exceptionally well and become what it is today. I’m genuinely happy for them and for the fact that the world has gotten so on board with collaborative hospitality — Brian, Joe, and Nate brought an amazing product to the market that has changed lives and forged a new industry.

Looking back now with the experience of having invested in well over 100 startups since, I recognize that losing out on this deal had been my fault, not theirs. After getting the boot, I should have gone back to them and found a way to get in. At the time I was still a novice unaware of how venture capital, YC, and the competition for deals works. The reality is I should have worked my ass off to get in that deal even after YC’s decision. These days when I find a deal I want, I chase it until I’m dead and I almost never believe any deal is definitively “closed” off.

Take Aways

Losing a deal like Airbnb can be painful. Great lessons came from the rejection at the very end, however. After getting the cold shoulder, I realized I needed to go out and build some valuable knowledge, needed a more robust network, and needed to craft my own brand as an investor.

When I found Airbnb I was a nobody in the investing world, but I spent the next year afterward traveling around the US meeting founders and investors. I attended and hosted several dozen events and I talked to just about everybody in tech I could. I read voraciously and learned as much as possible from one-on-one conversations. I put in a full year of hard work before I did my next deal.

Airbnb also taught me that investors need to act fast. Over the last several years I’ve learned to close deals quickly and avoid the fine print that distracts some angels and VCs. Helping Brian and the guys put together a realistic budget and valuation was good; I regularly make sure we’re investing enough capital to get a company to the next inflection point. But spending three weeks on minor details is just dumb. You won’t find me wasting founders’ time on that crap anymore.

It’s the positive reasons why I liked Airbnb at the time and recognized its potential when other investors didn’t that have served as my most powerful lessons though. First and foremost — and something I practice every day — is to focus on the founders of a startup, not the metrics.

In the earliest days, metrics will mislead you or simply lack the cumulative data to give you a real answer (to give you the certainty about product-market fit that you will never find at this stage). Metrics are mainly useful for understanding how the founders themselves think about them — but they don’t mean much on their own. Focus your time understanding the people building a company, not its charts and spreadsheets.

And secondly, if you believe in those people, then don’t lose your nerve when other investors fall out. There is a lot of misguided trust (conscious and subconscious) in social cues among tech investors, and you can’t let it distract your judgement. I went ahead with the deal even after every single other VC and angel dropped out because I trusted my gut about the team and the thesis I had outlined. Don’t be afraid to do the same if you find a startup team you feel the same way about.

Airbnb was a tough deal to ultimately miss out on, but the lessons from it enabled me to be a much sharper investor in finding and supporting other exceptional startups in the years since. And at the least, I still get to benefit as a consumer who gets to use the incredible Airbnb marketplace when I travel.

Interesting stuff:

The full deck from back then, plus the early event schedule and projected growth for rolling out Airbnb.

My email thread discovering Airbnb and going back-and-forth with them early on:

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  • http://www.dorianocarta.com Paisano

    Thanks for sharing this Paige. There are some valuable lessons in here for sure. I like how graciously you took the whole thing… most would not be so cool about it especially after how much money AirBnB has made. I like the founders and found it disturbing that they and ycombinator did this to you.
    Thankfully you’ve done incredibly well with many other deals so I guess it helps when dealing with the one that got away.
    Don’t ever mention Zynga to Jason Calacanius who still regrets passing on it.

  • Varadh

    Such a fantastic post! Thanks for sharing Paige

    • Bart Stevens

      Who is saying that you could have brought AirBnb to the current level? Maybe only possible via YC …

  • http://closr.to/ Jess Bachman

    Paige… epic post man. Kudos on the transparency. Especially the email chain… it just makes it all so real. I’d love to see the their deck that got you on a plane…

    • paige craig

      Thanks man – That’s the original deck above man.

      • http://closr.to/ Jess Bachman

        Ah, missed it. LOL “Brian Chesky, Founder of Brian Chesky, Inc” ..awesome. No traction slide though, unless I missed it. Just some projections in the emails. Did you already have numbers on how they were doing?

        • paige craig

          Yeah the numbers are in that spreadsheet inserted into the blog post above. No projections – but projections at this stage are a waste of time anyway

  • James

    Great to see the other side of the start-up tale. It was a very interesting read.

  • Kelly Thomas

    Who cares what this guy writes, his credibility in the media is over. https://en.wikipedia.org/wiki/Lincoln_Group

    • paige craig

      Kelly – OMG did you just reveal my secret past… Seriously dude most everyone knows about my past career in Marine Corps and national security world. Stop being an angry pissant

      • SM

        I’m glad he did…I’m super impressed. Would love to have coffee next time you’re in the bay area. I use run product/engineering at Military.com

        • paige craig

          Give me your email or hit me up on Twitter @paigecraig

          • SM

            salim (a-t) AsthmaMD (d-o-t) org

    • http://www.scott-thorpe.com Scott Thorpe

      Just ask around. Everyone who knows Paige, would do anything for him. He’s rare, I’m surprised you didn’t pick that up from what he wrote. First time I’ve ever read a VC article so transparent and helpful.

  • http://twitter.com/lauraglu lauraglu

    Telling that from nearly day one there was budget for a community manager and a decent (for this stage) marketing budget.
    I think details like that are often lost in origin stories of “scrappy” startups.

  • Karan Jassar

    As a first time founder, the first thing that became clear to me is that the investors who rely on ‘This is great. Who else is in the round?’ to decide aren’t going to be great. At the very least, an investors should be able to say no independent of others.

    It’s easy to dismiss airbnb as is evident from all the rejections. You, on the other hand, went after it with solid conviction. Thats very rare.

    -Karan
    https://angel.co/orangetwig

  • http://www.goformative.com Craig Jones

    That was a really great article. Thank you for sharing the primary source documents and lessons learned.

  • MrScrewupGuy

    Ouch. That sucks. Then again, it’s not like you rejected the deal… just wasn’t meant to be I guess. You’ve still done pretty well getting into Lyft, Zenpayroll and Wish. Thanks for sharing.

  • SM

    WOW…great post and I’m so impressed by your thinking and approach in finding these startups. I only wish I was this smart and methodical.

  • Slavomìr Hruška

    Well written article. I think I just read it at the right time, when we are closing our 2nd financing round and actually just 3 weeks tuning the details. But its also because our first investor wanted some changes in the term sheet. Forwarded this article to our investor in the next round, maybe he gets some inspiration 😀

  • Vanessa E. Beary

    Thanks for sharing, Paige. Such an important perspective, and a story that would otherwise have been lost had you not shared. Ever-impressed. Honored that I got to work with you back in the day.

  • http://www.life-pivot.com Michael Fitzpatrick

    Great view inside that deal and thanks for sharing with such reflection and humility. You da man:). Paige!!

  • http://www.scott-thorpe.com Scott Thorpe

    “I constantly question myself and engage in my own personal creative destruction.” Love it, honest and true. Awesome article Paige. Did anyone else notice Brian’s email about pre-seed money and burn rate? Airbnb was making enough money to connect the dots on why they needed funding and how to deploy it. I would call that a signal. Follows the original/old investment mindset, Company X already making money but adding outside capital will grow Y times faster with Z capital. I think that’s what IPO’s used to be used for…

  • http://aerospike.com/ Brian Bulkowski

    SImply: Without YC, AirBNB probably would have failed. Isn’t the lesson “bring more to the table than money” not “act fast” ?

  • Sungmoon Cho

    Thanks for sharing the lessons. Story becomes incredibly powerful, when it gets to this personal level. As an angel investor myself who missed a 40x-in-2-years opportunity because of lack of self-conviction, I agree with you 200%.

  • Saul Waizer

    Incredible lesson, thank you for sharing your experience with AirBnB, would love to hear the story on Lyft in the future! I’m humbled by your attitude towards getting the cold shoulder on the 11th hour man, speaks volumes of your character. Would be awesome to get your advice on finding the right angel(s), as a founder, your perspective would be invaluable – I’ll be in L.A. in a few weeks, maybe I can buy you a coffee or beer? – Thanks for this post man.

  • http://www.michaelbroukhim.com Michael Broukhim

    Great post and insights Paige. So excited for ArenaVC!

  • Chris Yeh

    I still remember someone telling me, “I want you to meet Drew Houston. He’s building something called Dropbox that stores your files online.”

    “Online drives? Those never work,” I said. “No thanks.”

  • http://veleza.com aurepavi

    Most transparent and interesting article I have ever read. Heard about their early story from marketing side, but always wondered how they were doing in terms of numbers. Looking for a funding ourselves – this is very valuable.

  • http://www.masadit.net Aditya D. Putra

    thanks for sharing! great post

  • http://vitaliyg.com VitaliyG

    Hi Paige, what an insightful look into the way some companies handle business. Quickly skimming through the comments, I am surprised that no one had mentioned the truth: Brian handled the situation like a dick. You helped them, prepared them, AND stuck with them, and this is how they handle things? That’s really dirty. And honestly, one way or another, you probably dodged a bullet along the way. Why do business with someone who doesn’t respect you enough to work something out?

  • Graeme Lewis

    wow. So rare to have such transparency. I’d love to work with you Paige.

  • Richard Du

    Mr. Paige Craig:

    I hope all is well. My name is Richard Du, and I am the founder and CEO of Agorafy, http://www.agorafy.com.

    We chase every building just like Facebook chase every person.

    I read your article about Airbnb, and you lost $$$ billion dollars opportunity!

    Do you want to make it up? Invest in Agorafy, and I will make you more than you lost in AirBnB, i promise.

  • http://www.midineromifuturo.com My Money My Future

    Kudos and Thank You for the transparency. As a startup founder this type of insight is invaluable, particularly as we think about how and with whom we partner with. Really admire the self-evaluation, seems to be an unusual trait among VC’s.

  • Brian Foley

    This is awesome stuff. Thanks for sharing, Paige!

  • http://blog.coinvest.co/ Zysman

    What about the legal side of it? You all ignored unapproved renting and hotels’ license& regulation.

    • http://www.about.me/stephenbarr Stephen G. Barr

      Seconded….didn’t it concern you that their entire business model violated most local zoning ordinences? Did they budget for large legal expenses?

  • Todd Embley

    Great article Paige, very insightful and honest. I think for anyone (like myself) who relies heavily on what their gut tells them about the team should read Malcolm Gladwell’s “blink” where he discusses how this works including what he terms “thin slicing”.

  • William Bryant

    Paige, thanks for sharing this story about the fish that got away. Love the conviction you had at a time when the data wasn’t compelling. Appreciate the lessons both pre deal interaction and your post mortem.

  • http://www.fyp.io Michael Koh

    Great story Paige. Thanks for taking the time to share it.

  • Alex

    Loved this article – I’m a student, with little to no experience of how deals like this work. Articles like this one help so much in providing insight into that world. Thanks tons for the level of detail and honesty that you imbued in this piece.

  • Kailash Nichani

    Thanks Craig! Your post gives a confidence boost to a start-up like mine! I have never come across a post from the point of view of an investor with such transparency & candidness such as yours.

  • http://about.me/othmanesghir Othmane Sghir

    Super insightful article. Love how you transport us through the story with such transparency. I guess it’s super hard to balance between caution and the fear of missing out.

  • Cristiano Andrade

    Excellent post! Thanks for sharing your experience!

  • Edgar Aronov

    Got to this bit late, but great article Paige!

  • http://www.mayati.com Sean Tout

    Great post indeed. There are always lessons learned when it comes to both investors & entrepreneurs. Considering the experience you have accumulated over the years, I’d love to get your view on a new mobile app we built. At a top level, It’s like the airbnb of the recruiting industry. Rather than filing this post with too much details, I’m pasting the URL for more info: http://www.mayati.com

  • Munly Leong

    I’m guessing YC played hardball and Brain wouldn’t have cut you out on his own volition but if that was me and someone not only took initial faith, but wrote the whole cheque when they had to after the hanger-ons got cold feet I would have stuck up for you as an investor. My terms would have been at least a 25% of the original allocation of the round to you or I would walk. YC or not. People that believe and lead on you when you have 0 traction and/or problems like their user dropoff are worth more than marquee names. It would have been YC that would have had to figure out if they wanted to get on the train before it left the station.