Airbnb’s Bottom Line Is Hurting. New Safety Efforts Could Make Matters Worse

Airbnb’s Bottom Line Is Hurting. New Safety Efforts Could Make Matters Worse

Online travel platform Airbnb is routinely hailed as a Silicon Valley standout—a tech company generally admired by the public, with a clear vision to scale into new businesses and revenue. It’s already valued at $35 billion, and headed toward an initial public offering later this year—and until recently, it was turning a profit. This week, the story got a little messier. The Wall Street Journal on Monday that Airbnb had a net loss of $322 million in the first nine months of 2019, down from a profit of $200 million during the year-earlier period. While the company did manage to post a profit in its third quarter, which ended in September—traditionally the strongest period for travel companies—that profit was $266 million, down some $71 million from the same period a year earlier. When contacted by Fortune asking about the accuracy of the Journal ‘s numbers, a representative at Airbnb acknowledged the request but did not confirm or deny the Journal ‘s reporting. […]

Last fall, six weeks after Airbnb announced its intention to go public in 2020, the company was hit by a wave of bad publicity about its safety practices, involving a fatal Airbnb house party shooting and a viral exposé documenting a widespread scam on the platform. The company responded to the backlash with promises to verify 100% of its 7 million-plus listings and its hosts for quality and accuracy, and to implement 24/7 hotlines around the world to field complaints from neighbors, among other measures. CEO Brian Chesky said the commitments were part of a package that would involve $150 million in spending over the course of 2020 dedicated to addressing safety issues.

The safety spending was announced in December; the Journal‘s numbers and Airbnb’s third quarter end in September.

Analysts estimate Airbnb’s annual revenue at between $4 billion and $5 billion. After Chesky announced the $150 million commitment in December, he discussed the safety spending in an interview for a story I wrote profiling the company. Chesky said that due to that spending, the company “redid the budget… which, when you land on a plan, to find another $150 million is not an easy exercise.” Fortune noted that the spending could eat into future profits—and that’s before accounting for any revenue lost due to removed listings from its strict safety overhaul.

Hunter Walk, a partner at seed stage venture fund Homebrew, has written about Silicon Valley’s desire for “software margins”—high gross and net profits due to fixed development costs and ability to scale, often found in tech companies whose main product is a “platform.” The tradeoff of pursuing those margins is that engineering efforts are often focused on growth and revenue, rather than operational issues like safety standards.

“There are a host of innovative and valuable startups—Airbnb included—which touch the physical world in ways that traditional software companies never had to deal with,” Walk tells Fortune. “The complexity of trust and safety when dealing with housing or transportation is far greater than staffing a call center to just deal with enterprise software bugs, and accordingly we should assume it might cost more too.”

In other words: This might just be the beginning of a new economic reality for Airbnb, as the company sacrifices software margins while addressing the expenses of protecting the people using its platform.

“If you go public, if your liability goes up significantly in any sort of fraction of regulation, I have to believe some portion of higher expense has been due to stories of fraud taking place on their network,” says Roger McNamee, a founding partner of venture capital firm Elevation Partners. McNamee was anearly investor in Facebook but has since become a critic of companies typically described under the label of “Big Tech.”

“One of the problems with disrupting an offline business is that some of the costs of those businesses are actually really important,” McNamee says. There’s a reason hotels cost the amount they do, he continues: They have to pay for security, infrastructure, housecleaning—things Airbnb often leaves to hosts—and comply to “regulatory framework that was designed 100 years ago.”

Big expenses before going public

According to the Journal, Airbnb is spending $100 million a year on upgrading the technology of its platform. That’s likely related at least in part to safety as well. The newspaper’s report says general and administrative expenses such as HR, accounting, legal, and maintaining Airbnb’s offices doubled year-over-year to $175 million in the third quarter. In October, tech site The Information reported that Airbnb doubled its losses in the first quarter of 2019, largely because of a big marketing push—a common tactic companies use to convince investors of their value ahead of an initial public offering. The company sunk $367 million into sales and marketing in that quarter, a 58% jump from the same period a year earlier.

If you take a step back from specific costs, the fundamental concern is that increased expenses could make the company look less valuable to investors. Airbnb is about to seek the validation of the public markets at a time when investors are already skeptical of in-the-red tech companies. Fellow unicorns like Uber, Lyft, and Slack underwhelmed following their public debuts—not to mention the WeWork debacle.

“Investors will be concerned if [Airbnb’s] losing money,” says Kathleen Smith, a principal at IPO research firm Renaissance Capital. “It’s been seen as one of the more unique private companies, but losses will cause more scrutiny. It will be sold on expected profitability.”

But some point out the initial reason that Airbnb earned the “Silicon Valley darling” tag in the first place. Unlike those companies just mentioned above, Airbnb already achieved profitability, even if it has slipped off of that pedestal. The company has also said it has $3 billion in cash on its balance sheet.

“I think it’s different when you say, ‘We’ve got a business that works. We’ve proven that in this market, with this product we can be profitable,'” says Seth Borko, a senior research analyst at Skift, a travel media and research firm.

“Now you take some cash and say, ‘We’re going to juice our marketing spend, our safety, and negate bad press,'” Borko adds. “It doesn’t concern me as much as [it would with] a company as that has never been profitable.”

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