Long WeWork, Short Airbnb?

Real estate’s two greatest unicorns offer important lessons about the meaning of “tech”, the future of venture investment, and the lasting power of real assets — and real liabilities.

WeWork epitomizes everything people hate about startups. It “reinvented” something that seems banal and easy to replicate. It is growing for the sake of growth. It has a heavy balance sheet. It is burning through investor cash at record rates. If it ever becomes profitable, its margins will be modest, not software-like. Its founder is a piece of work and it hails from that dreaded city named New York.

Airbnb is everything technology investors love to love. It built a delightful digital product that saves or makes money for travelers and hosts. Its two-sided marketplace creates network effects that hinder new competitors. It is growing at a healthy but not extravagant rate. It is profitable, and does not have to own property or sign leases. Its “aggregation” strategy fits perfectly within Silicon Valley’s disruption roadmap. Its founders seem quaint and idealistic and they live in San Francisco, as any founder should.

WeWork wanted to go public in 2019. That didn’t go too well. Airbnb is planning to go public in 2020. All the signs point towards success. They might be in for a surprise.

Asset Light, Asset Darkness

Both WeWork and Airbnb make money from real estate. But they do so in very different ways. WeWork is a vlaue-added reseller (VAR). It acquires products made by others, modifies them, repackages them, adds a layer of service, and distributes it to end users. “Acquires” in this case means, in most cases, leases. Airbnb is an aggregator. It makes it easy for potential end users to find, vet, book, and review properties that Airbnb does not own or control.

Airbnb facilitates trust between hosts and guests by offering an integrated and consistent digital booking experience (see Ben Thompson’s detailed breakdown of this model here). WeWork facilitates trust between landlords and end users in a more traditional way: by delivering an integrated and consistent physical experience. Airbnb’s flagship products are digital — a web site and an app. WeWork’s flagship products are physical — office spaces with a certain design aesthetic, service experience, and buzz.

As an aggregator, Airbnb aims to make a profit by monopolizing demand for shared housing. If all potential guests begin their journeys on the site, all the hosts will have to play by Airbnb’s rules (and pay Airbnb’s fees) in order to generate revenue from their properties. More than 250 million have already used Airbnb. Fortunately, this makes it difficult (and very costly) for a new player to emerge and undercut Airbnb’s relationships with both hosts and travelers. Unfortunately, Airbnb is already swimming in waters infested with old players that are large, ruthless, and well capitalized.

Booking Holdings operates web sites such as Booking.com, Priceline, and Agoda.com. Expedia Group operates web sites such as as Hotels.com, Trivago.com, and Expedia.com. Marriott International operates thousands of hotels under brands such as Westin, W, Ritz-Carlton, St. Regis, Sheraton, and Marriott. Together, these three companies generate about $10 billion in annual profits. Airbnb’a profit was $93 million in 2017 and recent reports indicate it is now losing money. Hosts and guests can easily shop around and use multiple platforms. This is particularly true for travelers who begin their journeys by searching on Google, another major player in the listings space.

To become profitable, Airbnb will have to improve its margins.To justify its valuations ($36b), it will also have to keep growing at a brisk pace. Looks like it’s going to be tough. Airbnb is hoping that growth will come from four new initiatives:

• Adding more hotels to its platform. But hotel listings are already hyper competitive.
• Partner with real estate developers to secure exclusive supply. Fine, but the number of units it can add each year will likely be negligible.
• Create new revenue streams that do not require hosts or real estate partners. That’s what Airbnb Experiences was supposed to be. So far, its impact on the top and bottom line has been minuscule.
• Deploy its own modular units into people’s backyards in order to create instant supply that’s only available on Airbnb. That didn’t happen yet, and will not in itself create the type of cash that Airbnb would need in order to compete with the other monsters in the space.

It turns out that not owning or leasing your own inventory might not be such a great idea after all.

What else can Airbnb do? And what does all this mean for WeWork and other companies in the space? And what are the implications for the valuation of other real estate and technology startups?

All that and more, in my future newsletters. These themes are also explored in detail in my book — available on Amazon.