Scaled and Failed #17 – Airbnb and Wimdu

Copy, Paste, Crash

May 28, 2021

Welcome to Scaled and Failed! My name’s Amil Naik and I’m an aspiring VC and founder at The University of Texas at Austin. I write about startups that scaled and startups that failed to draw insights about the patterns of startup failure and how to avoid them. Everything is clearer in hindsight, so it’s worth looking back.

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TLDR

Today’s Topic: Lodging Marketplaces
Scaled: Airbnb; Persevered despite lack of VC interest for years, got creative with bootstrapping, went through numerous product and idea iterations, got funding and mentorship from Y Combinator, visited the early adopter market and learned from them to make the product better, and the growth story took root.
Failed: Wimdu; Started as an Airbnb clone with plenty of funding, entrepreneurial experience in the founders, and backing from Rocket Internet, but couldn’t sustain its momentum. Cut costs and consolidated focus on Europe, but couldn’t keep up growth and faced serious regulatory pressure in Germany. The company was sold multiple times before finally being shut down.
Lessons Learned: Learn to judge potential and the value of feedback yourself; investors might not bite even if an idea or team is great. Pivoting or shutting down can be the right decision, but be confident in yourself and know when to commit and keep going. Seek mentors with the expertise to tackle specific problems you encounter. If you’re not the first in the market, staying a clone will keep you several steps behind; find a way to differentiate and innovate beyond the original.

Today’s Topic: Lodging Marketplaces

Hello everyone, I apologize for the two weeks hiatus; final exams and moving to San Francisco for the summer proved to be more challenging than I’d expected. Scaled and Failed will now resume its regular schedule! I thought it’d be fitting to write about a topic I’ve been dealing with in recent weeks: finding a place to stay. San Francisco doesn’t have the friendliest housing market, and I spent a lot of time scouring online forums, Facebook groups, and reaching out in Slack and Discord servers searching for a place to live and potential roommates. Given the short timeline I had to make arrangements, it was difficult to find housing for the next three months. I finally decided to hop on Airbnb and quickly found a great room in an awesome spot to serve as home base for the summer. I’m currently sitting in a bed halfway across the country from where I started Scaled and Failed, typing this newsletter thinking about how difficult this would be to imagine just over a decade ago. With vaccine rollout going strong, CDC recommendations easing up, and travel restrictions going down, a lot of people besides myself have also decided to travel again. The lodging market is seeing a sharp rebound back towards pre-pandemic levels even though full recovery may take years. As people go out and about once again, the demand for places to stay rises accordingly. Traditional hospitality providers like hotels, apartments, and alternative providers like Airbnb are picking up the supply accordingly.

Airbnb planted its roots in 2007 and has become the dominant tech player in the lodging space for both short-term stays and alternative long-term rentals today. It’s one of the classic Silicon Valley stories of a startup bootstrapped for years by innovative founders until they got the funding they needed to scale. The company IPO’d late last year and at one point saw a market cap surge over $100B, far outpacing many traditional lodging giants. Wimdu was founded in 2011 and funded by the Rocket Internet startup studio as an Airbnb clone centered on Europe. Though it saw traction in its early days and came with the funding to pose a serious threat, the startup slowly fizzled out and shut down in late 2018 (though it is now owned and operated by HomeToGo).

Scale: Airbnb

If you’re not staying in a hotel on your trip, you’re probably in an Airbnb. What began as a few air mattresses on the floor has become the juggernaut of travel lodging in a little over a decade with some inspiring stories of perseverance to boot. It all began in 2007 with roommates Joe Gebbia and Brian Chesky trying to make some extra money to meet their rent in San Francisco. With a design conference coming to the city and hotels completely booked, they decided to offer up air mattresses on their floor for $80 a night with breakfast in the morning provided. The duo brought on Nathan Blecharczyk and began turning this idea into a startup, “Air Bed and Breakfast”. They iterated through several ideas and launches for Airbnb in 2008, taking it to investors but getting a chilly reception. With no funding, they decided to launch again at the 2008 Democratic National Convention to capitalize on a shortage of hotel rooms again. To help finance their efforts and keep themselves afloat, they sold election-themed cereals for $40 a box. Along with bringing in $30,000 in revenue, the cereal came with information about the company and served as an effective marketing campaign. However, most people still didn’t buy into the vision, citing safety concerns and unable to grasp the possible scale of the business.

They finally got a small break with a $20,000 investment from Y Combinator and joined the 2009 winter session. Some of that funding was used to go to New York, their biggest market at the time, and visit every single host in the city. The team stayed with them, wrote reviews, and took professional photos that hosts could use on their listings while getting user feedback to inform product development. They also changed the name from “Air Bed and Breakfast” to just “Airbnb”. Not long after, Airbnb picked up a $600,000 seed investment from Sequoia, pivoted from just shared spaces to all sorts of accommodations, and the growth story began. By 2011, Airbnb had listings in 89 countries, over a million nights booked, had won an award at SXSW, and became a unicorn with plenty of funding flowing in. There were many regulatory battles in cities across the globe over the following years as Airbnb exploded and caused headaches for locals looking for long-term housing, but this hasn’t stopped expansion. Since then, Airbnb has rolled out a host of new services, such as Airbnb Experiences for local activities in 2016, and made large acquisitions, like HotelTonight for $400M in 2019. The pandemic hit the company hard, but with travel rebounding, so are Airbnb’s financials and growth metrics. The decline in usage delayed the company’s IPO, but it still met its goal of going public in 2020 with a December debut on the Nasdaq that popped on opening. It was a long road for Airbnb to start growing, but that road has led it to become one of the largest companies in the lodging space.

Fail: Wimdu

While Airbnb was turning its story into one of massive success, many clones arose hoping to cash in on the now-proven market across the globe. Airbnb acquired a number of its competitors as a form of easy access into new markets, but Wimdu was not one of these acquisitions. Incubated by Rocket Internet and founded by experienced German entrepreneurs, Wimdu had a very different experience from Airbnb in its early days:

Barely a month after it launched, it received what tech insiders said was the largest investment in a European startup ever. Wimdu was on the path to fast growth — online for less than 100 days, it already had 10,000 properties worldwide and was available in 15 languages, including English, German, French, Spanish, Italian and Dutch. Recognizing the vast potential of the Chinese market, Wimdu launched a spin-off business there called Airizu in May 2011. Well worth noting is that within two months of its launch, Wimdu was already employing 400 people and had opened 15 offices worldwide.

That early investment was to the tune of $90M from Kinnevik and Rocket Internet and helped accelerate Wimdu’s growth that it took Airbnb years to reach. Things looked good for the startup in these early years; Airbnb ended up closing its Austrian office and consolidating those operations in Germany in late 2011 amidst the battle with Wimdu in Europe. Many Wimdu’s growth tactics ranged from questionable to downright dirty, as detailed by an email from Airbnb to its hosts:

After receiving emails from many of you who are upset with these tactics, it’s time to address this issue as a community. Hosts are reporting these issues about the clone sites so far:
They falsely claim to be affiliated with Airbnb, or be the “international version” of Airbnb.
They claim that they are part of Ebay and/or Groupon. We’ve confirmed that this is not the case.
Their employees pretend to be Airbnb travelers in order to give you a sales pitch in your home.
They are duplicating personal profiles, descriptions, and photos of your Airbnb listing without your permission.

Airbnb was none too happy with Wimdu poaching its hosts to expand its listings, but Wimdu’s good fortune wouldn’t last. With costs rising astronomically alongside the intense growth it was experiencing, Wimdu cut back on international operations and focused more on Europe. The Chinese subsidiary Airizu closed in 2013, facing stiff competition from local competitors. The regulatory hammer also came knocking on Wimdu, particularly in Berlin. These challenges came alongside a stagnation in growth, with only a 31% increase in bookings from 2013 to 2014. Regulatory pressure continued to tighten, with a law in Berlin restricting private apartment rentals arising in 2016 and a subsequent lawsuit from Wimdu. With all of these obstacles stacking up in the competition with Airbnb and no new funding flowing in, Wimdu ended up merging with competitor 9flats in late 2016. A few months later, Wimdu was sold to Novasol, a holiday lodging provider owned by Wyndham. The baton continued to get passed on, with Novasol being sold to a private equity firm early in 2018. Finally, the decision was made to close down the business later that year. HomeToGo did end up acquiring its assets and has maintained the brand, but only for search traffic and as staging for small-scale experiments; the technology platform running Wimdu is the same as HomeToGo’s. Despite early optimism, growth, and funding, Wimdu crumbled quickly under the same challenges Airbnb powered through.

Lessons Learned

Airbnb is definitive proof that no matter how much potential an idea or team has, VCs may not be throwing money at the startup early on. There are a multitude of factors on the VC side that can play into an investment decision that could have no bearing on the startup itself: already established assumptions about the market, misunderstanding of the product, a bad mood because they didn’t get their morning coffee, or inability to look past a company name. Their decisions will be informed by their experiences, and this can count you out despite any potential you may have. For many investors, the idea of people letting strangers sleep in their homes was something they could never imagine average people doing. Maybe that would have been a serious roadblock if the founding team couldn’t find a way around it, but with strategies like designing for trust and a solid review system, people proved more open to the idea than most VCs they spoke to imagined. There are many times VCs will be right about a startup’s lack of potential, but as a founder, you need to be very discerning to determine whether their opinion holds water. Winding down a business or pivoting can be the right decision, but you’ve got to be able to figure out for yourself whether that’s true or not. If you’re digging a gold mine, you’ve got to stay committed long enough to get the payoff. It could be a matter of just a product redesign or some basic functional improvements before others see your vision. Be confident in your abilities, develop your own judgment capacity about market potential, and get the data and traction to prove your startup even if nobody will buy into it. You’ll either fail fast and learn from the experience while it’s still bootstrapped or push through and get the investment you need to scale. Regardless of thoughts about the idea, nobody can ignore solid growth metrics once you have them.

Mentors and guidance are also critical; for Airbnb, this was through Y Combinator. There will be knowledgeable people who believe in you if you’re on the right track, and they want to see you succeed. Paul Graham at Y Combinator pushed hard to help Airbnb get investors and suggested they visit early adopters in New York, and your mentors can do the same or provide other invaluable feedback that can make your company more viable. Find the right people to help you solve the problems you have, whether that’s getting funding, setting up pilots, making the right initial hires, or anything else that is critical in an early startup. The expertise of others is a valuable resource that you should capitalize on.

Wimdu’s advantage came in its speed and velocity early on, but this fizzled out quickly as Airbnb marched onwards. While it came on the scene with money, experience, and great backing, it was entering a market that Airbnb had pioneered and proven. The collective knowledge Airbnb had at this point was unmatched; they were the experts and the first-mover in a space they opened. Despite early success and serious growth, Wimdu never really did anything different and relied heavily on Airbnb’s reputation in its unscrupulous marketing. Coming into a market second, even as a clone, doesn’t mean you’ll get crushed; Airbnb paid a hefty sum for many similar competitors that popped up. However, Wimdu never differentiated itself as a company or tried anything different. Being a copycat indefinitely means you will always be a few steps behind; long-term success hinges on breaking off at some point to be your own business. No amount of capital or experience will let you win if you’re always playing catch up.

Scaled and Failed