Migration, Rebound, IPO
As a global society, we hadn’t any instructive experience with an indiscriminate health crisis that would redefine our very lifestyles. As we entered 2020, we had nothing within our history that could equip us with an understanding of the ways things would be changed by a virus that necessitates a significant slowdown in economies around the world and imposes a dramatic change in the way we live. Today, if you’re like me, the phrase “unprecedented and challenging times” makes you want to douse a pile of face masks with hand sanitizer and set them aflame because of the mind-numbing overuse of those words.
Still, these times are indeed without precedent. We haven’t lived through anything like this before. Some effects, like the severe hit inflicted on so many small businesses, were rather predictable. Others are equally logical but perhaps weren’t as easy to see coming. As I spent this past summer at the Jersey Shore, I was fascinated by conversations with local realtors that told the story of mass migrations from New York, a scenario that I assume has been playing out among all major metropolitan areas. As people flee densely populated cities across the land, suburban residential markets are handling a stampede of unprecedented and challenging buyers. One Monmouth County broker shared with me the details of a brand-new listing. He told me that after he had conducted a thorough price analysis considering comparable area homes and other factors, he recommended a price tag of $685,000, the seller insisted upon going with $795,000. realtors are used to homeowners with unrealistic expectations, but this instance represented a more than 16% premium over the professional estimate. Still, the broker accommodated the seller’s wishes and loaded the home’s stats into the Multiple Listing System. Within fifteen minutes, the broker’s cell phone was ringing. The caller was a young father from Manhattan, and he offered to buy the house, sight unseen, for $825,000. The broker, skeptical of the security of such a hasty offer, asked the buyer to sign all sorts of waivers and disclaimers. The buyer gladly did so, along with an explanation that he had been outbid on numerous other listings, and that he wanted to ensure that his family would be in a safer place by the time the school bells rang. The deal closed within ten days, and the realtor went on to field similarly elevated levels of interest for all of his inventory.
As someone who has dealt in New Jersey real estate in the past (I still maintain a license here, but only for referral purposes), I have an informed appreciation of this story’s magnitude. Nobody could miss it, really. The moral is that masses of people want to raise their children in less dense communities, and they will break the bank in order to make it happen. As a pre-IPO investment facilitator, I now examine the facts through a different lens. The exodus from the cities reflects a larger societal shift. One such broad-scale adjustment is taking place within the hospitality industry. In that case, large hotel chains from the Ritz to Holiday Inn, situated in urban areas and around now-underused airports, are analogous to the big cities. The beneficiaries, like the small towns in this example, are the single-family short-term rental opportunities like the ones provided by gig economy behemoth AirBnB.
Consider the lodging alternatives at our disposal when we finally determine that the freedom to get out and explore the world outweighs the risk of possibly coming in contact with the pernicious infectant known as coronavirus. The concerns surrounding a stay in a building populated by a rotation of many hundreds of potential virus carriers can be significantly allayed by booking a one-family home that has been sanitized in accordance with health authority recommendations, and that guests can clean upon arrival with disinfectant for good measure. The balance of the stay, then, will be enjoyed with the exclusive company of loved ones. It’s pretty much the same as “sheltering in place”, but the “place” is somewhere cool, like by a lake, in the mountains, or at the seashore. Apart from offering more preferable vacation alternatives, AirBnB rentals in relatively remote locations have been used for instant refuge from city crowds, for more comfortable places to set up a virtual office from which to “work from home”, and for setting up a local vantage point to search for a new permanent residence with my realtor friend.
Since its founding eleven years ago, San Francisco-based AirBnB has essentially created a colossal network of short-stay alternatives to the big hotel chains. They allow ordinary homeowners to become amateur hoteliers. To be sure, AirBnB took its share of the economic impact at the outset of the COVID-19 crisis from every perspective, including that of your friends at Iron Edge VC. Per-share prices of transactions in the second market dipped about 40% in the first half of this year. A strong argument can be made, though, that skepticism about AirBnB’s future, and its suitability to weather the viral storm, were quite overblown. In fact, we learned that year-over-year numbers brought good news: last July, consumer spending at Airbnb was 22% higher than the year before. On July 8, 2020, more than one million nights of future AirBnB stays were booked. That hadn’t happened since March 3. The rebound was clearly taking shape much faster than most had expected.
Last May, the consequences of social distancing became evident for AirBnB. Their number crunchers forecast that 2020 revenue would likely be half of what they made in 2019. It was no time for panic and surrender, though: AirBnB responded to the weakening numbers by assuming $2 billion in debt and laying off about 25% of its employees across the globe. Clearly, this was an unpleasant circumstance (especially for those who suddenly found themselves unemployed), but it was a necessary strategy to maintain as much fiscal health as possible. Apart from cutting costs to try to prevent the balance sheets from capsizing, the funds produced by the layoffs and the debt were applied to the company’s bread and butter. An important part of AirBnB’s business model is keeping both renters and hosts happy. With the extra billions, the company could afford to waive cancellation fees for skittish travelers and add financial perks to keep the rental providers engaged. Today, that extreme strategy seems to be bearing fruit. Notably, from what we see in the pre-IPO market, investors are paying pre-pandemic prices for private shares and the company has announced plans for an IPO.
Before the whole world changed, observers widely speculated that AirBnB was poised to conduct a direct listing because it didn’t have the need for the windfall a traditional IPO brings. Those plans have changed, and last month’s announcement suggests that the company will partake in the traditional public offering approach, bringing with it the issuance of new shares and an influx of capital that will greatly assist in completing their recovery. What’s more, insider shareholders --- early investors, company employees, and remarkably shrewd Iron Edge VC investors --- have been waiting a long time (in some cases more than a decade) to cash out. Some have restricted stock options that will expire early next year. The company wants to take care of this community of theirs, and the recent strength and stability in the public markets is offering a welcoming environment in which to do so.
The sellers who earlier this year drove down the pricing of AirBnB shares on the second market might not have been considering the company’s ability to adapt to a changing world, and the attractiveness of their product relative to the more traditional options. While mulling these things over, be mindful of one more important point: today, as you read this, you may not purchase shares of this burgeoning enterprise at the stock exchange. As of this moment, AirBnB is not publicly traded. At Iron Edge VC, though, we can still usher you through the front door and provide access to you. We can help you secure your piece before the masses have the opportunity to pay up, driving the stock price higher. If you would like to learn more, or if you know of anybody else who would, do not hesitate to contact us.
As always, shares are available on a first come, first served basis.