Private Airbnb email on how a VC missed out on a unicorn

Airbnb is a big company. If you got in on that in the seed round you would have made a pretty nice return, right? Well, skipping on Airbnb happened a lot. I have friends that passed on the angel round laughing and saying “no ways, bro!”. The idea was just too stupid at the state that they were. It literally was air beds on floors.

What you don’t see often are the emails from investors on the car crash that is missing out on a massive unicorn.

In 2011, Paul Graham shared a series of Airbnb emails with  Fred Wilson from USV effectively passing on Airbnb, despite the pleas of PG. It’s a fascinating read for historic reasons, with a number of insights into how venture capital investors think. I’m going to spell them out for you now and then share the Airbnb email sequence. First some words from Fred.

We missed this one

Fred posted a blog on missing Airbnb in 2013, entitled simply ‘Airbnb.’

When you walk into our conference room at Union Square Ventures, you see the box of cereal on the right on our conference room credenza next to a wifi router and a jar of Jolly Ranchers. It is there because we are big Obama fans? Nope. The cereal box is a reminder to back great entrepreneurs whenever they walk into our office regardless of what they pitch us on (as long as its in our investment universe).

Investors back people, teams. They are the ones that make the magic happen. Startup is a total shit show. How you start isn’t how you end. It takes a great team to see the writing on the wall and pivot to where the opportunity is. As PG wrote in an email:

Ideas can morph. Practically every really big startup could say, five years later, “believe it or not, we started out doing ___.”

I am sure you have heard about the Obama Os and Cap’n McCains hack, right? Fred was impressed by this, but not enough to invest. The legacy of this is something that is memorialised every time founders show weakness.

I asked them if they’d leave a box of the cereal for us and it has been sitting in our conference room ever since. Whenever someone tells me that they can’t figure out how to raise the first $25,000 they need to get their company started I stand up, walk over to the cereal box, and tell this story. It is a story of pure unadulterated hustle. And I love it.

So why did they pass?

We couldn’t wrap our heads around air mattresses on the living room floors as the next hotel room and did not chase the deal. Others saw the amazing team that we saw, funded them, and the rest is history… We made the classic mistake that all investors make. We focused too much on what they were doing at the time and not enough on what they could do, would do, and did do… But we don’t always get it right. We missed Airbnb even though we loved the team. Big mistake. The cereal box will remain in our conference room as a warning not to make that mistake again.

Here’s the thing though. The main reason investors pass on a deal is the team. They’ll never say that though like you’ll never walk out on a Tinder date in 30 seconds telling them they don’t look a thing like their photos. It’s rude. I’ve explained this in The real reason founders are not funded VCs don’t say in a pitch process. If you don’t know what an investible founding team looks like, I’ve written a presentation on Investible Founding Startup Teams.

Whilst you don’t have to be Stanford CS grad to get funded, you need the personality. That’s something you have or not. The Airbnb guys weren’t actually great on paper at all. They apparently are in hustle.

I’d recommend having the debate after meeting them instead of before. We had big doubts about this idea, but they vanished on meeting the guys. – PG

Insights from the Airbnb emails

Here are some of my observations that founders can pick up from the Airbnb email sequence, accompanied by the quotes.

VCs will actually do due diligence on what you are doing before they invest

VCs do know a lot and are not lazy. They are basically glorified librarians. They research to get their head around an opportunity. But they can only see what was, not will be. They need your vision to see past the data. Airbnb failed to get what they could be across, they showed what they are. Which leads to the next point

I am not negative on this one, I am interested, but we are still in the gathering data phase. – FW

VCs don’t always see where the opportunity is

PG and FW both seemed to think the ultimate opportunity was getting into hotels. It wasn’t.

I know you’re skeptical they’ll ever get hotels, but there’s a continuum between private sofas and hotel rooms, and they just moved one step further along it. I bet you they will get hotels eventually. – PG

VCs know people and ask around

VCs are helpful when it makes sense. They also know a lot of people, don’t assume they don’t. Here’s a great example:

I’ve done a few things, like intro it to my friends at Foundry who were investors in Service Metrics and understand this model. – FW

It is also worth noting your idea is not special. So many people have had the same idea, but just don’t do something about it. It annoys me how many times people ask me dumb questions like ‘How can I protect my idea when pitching‘ on Quora. Execution matters.

I am also talking to my friend Mark Pincus who had an idea like this a few years ago. – FW

VCs love founders who don’t waste money

‘Capital efficient’ is something that investors love. They give money to people for a living, that should be obvious.

Airware, a drone company recently shut down after blowing $118m. TechCrunch attributes the quick descent on the company’s heedless spending policy. According to their source, “[AirWare] spared no expense ever.” I heard something similar from a hardware founder in Australia about Skully who also shut down (But are apparently alive again, for now).

So invest in them! They’re very capital efficient. They would make an investor’s money go a long way. – PG

Market size is critical

The market always wins. Always. It doesn’t matter if you are awesome if you have a small market. Investors can’t get a big exit in a small market. They are obsessed with it. It’s a critical pass/fail test.

But even so, if you include short term room rental, second home rental, bed and breakfast, and other similar classes of accommodations, you get to a pretty big opportunity- FW

They have an interesting business. I’m just not sure how big it’s going to be – FW

Where you start and end is not presumed to be the same

You want to top Everest, but you have to get to base camp first. Investors know this. If you really have a long term vision/plan, investors really do take it into account.

Did they explain the long-term goal of being the market in accommodation the way eBay is in stuff? That seems like it would be huge. Hotels now are like airlines in the 1970s before they figured out how to increase their load factors. – PG

You need to sell to your audience

Not everyone is going to get it…

I saw a video from a founder of Shoes of Prey and she said that they pitched their bespoke shoes business for women to male VCs. They didn’t get it. So what did they do? They sent a voucher to women on the team so they could get a pair. They timed it so it would be the same week they were pitching. The VCs could see how the women liked them and then ‘got it’.

Oli Samwer didn’t get Birchbox. I was told he only ‘got it’ when his wife came home with a magazine. ‘Why did you buy that?’ he asked. ‘For the free lipstick‘. Then he got it and they started GlossyBox.

It’s interesting. Our two junior team members were enthusiastic. The three “old guys” didn’t get it – FW

Just because a VC wants to meet you, doesn’t mean they are interested

There is a massive gap between a meeting and being funded. Don’t be delusional. They might not really be ‘that into you.’

They say to you:

Airbed team – Are you still in NYC? We’d like to meet if you are – FW

They say privately:

We are still very suspect of this idea but will take a meeting as you suggest – FW

VCs do need convincing. Don’t expect a slam dunk

VCs invest less frequently than you think. Maybe 1-3x a year. 99% are a no. If you think getting a fat check is going to be clear on your first meet, think again. It’s like sales. Most of your sales are going to come from perseverance in following up leads. Same with VCs. There is this concept of ‘dots form lines’. Over a number of interactions, VCs will see where you fit on a trust curve.

He likes to observe startups for a while before acting, so don’t be bummed if he seems ambivalent. – PG

The Airbnb email sequence

from: Paul Graham
to: Fred Wilson, AirBedAndBreakfast Founders
date: Fri, Jan 23, 2009 at 11:42 AM
subject: meet the airbeds

One of the startups from the batch that just started, AirbedAndBreakfast,
is in NYC right now meeting their users. (NYC is their biggest
market.) I’d recommend meeting them if your schedule allows.

I’d been thinking to myself that though these guys were going to
do really well, I should introduce them to angels, because VCs would
never go for it. But then I thought maybe I should give you more
credit. You’ll certainly like meeting them. Be sure to ask about
how they funded themselves with breakfast cereal.

There’s no reason this couldn’t be as big as Ebay. And this team
is the right one to do it.

–pg

from: Brian Chesky
to: Paul Graham
cc: Nathan Blecharczyk, Joe Gebbia
date: Fri, Jan 23, 2009 at 11:40 AM
subject: Re: meet the airbeds

PG,

Thanks for the intro!

Brian

from: Paul Graham
to: Brian Chesky
cc: Nathan Blecharczyk, Joe Gebbia
date: Fri, Jan 23, 2009 at 12:38 PM
subject: Re: meet the airbeds

It’s a longshot, at this stage, but if there was any VC who’d get
you guys, it would be Fred. He is the least suburban-golf-playing
VC I know.

He likes to observe startups for a while before acting, so don’t
be bummed if he seems ambivalent.

–pg

from: Fred Wilson
to: Paul Graham,
date: Sun, Jan 25, 2009 at 5:28 PM
subject: Re: meet the airbeds

Thanks Paul

We are having a bit of a debate inside our partnership about the
airbed concept. We’ll finish that debate tomorrow in our weekly
meeting and get back to you with our thoughts

Thanks

Fred

from: Paul Graham
to: Fred Wilson
date: Sun, Jan 25, 2009 at 10:48 PM
subject: Re: meet the airbeds

I’d recommend having the debate after meeting them instead of before.
We had big doubts about this idea, but they vanished on meeting the
guys.

from: Fred Wilson
to: Paul Graham
date: Mon, Jan 26, 2009 at 11:08 AM
subject: RE: meet the airbeds

We are still very suspect of this idea but will take a meeting as
you suggest

Thanks

fred

from: Fred Wilson
to: Paul Graham, AirBedAndBreakfast Founders
date: Mon, Jan 26, 2009 at 11:09 AM
subject: RE: meet the airbeds

Airbed team –

Are you still in NYC?

We’d like to meet if you are

Thanks

fred

from: Paul Graham
to: Fred Wilson
date: Mon, Jan 26, 2009 at 1:42 PM
subject: Re: meet the airbeds

Ideas can morph. Practically every really big startup could say,
five years later, “believe it or not, we started out doing ___.”
It just seemed a very good sign to me that these guys were actually
on the ground in NYC hunting down (and understanding) their users.
On top of several previous good signs.

–pg

from: Fred Wilson
to: Paul Graham
date: Sun, Feb 1, 2009 at 7:15 AM
subject: Re: meet the airbeds

It’s interesting

Our two junior team members were enthusiastic

The three “old guys” didn’t get it

from: Paul Graham
to: Fred Wilson
date: Mon, Feb 9, 2009 at 5:58 PM
subject: airbnb

The Airbeds just won the first poll among all the YC startups in
their batch by a landslide. In the past this has not been a 100%
indicator of success (if only anything were) but much better than
random.

–pg

from: Fred Wilson
to: Paul Graham
date: Fri, Feb 13, 2009 at 5:29 PM
subject: Re: airbnb

I met them today

They have an interesting business

I’m just not sure how big it’s going to be

fred

from: Paul Graham
to: Fred Wilson
date: Sat, Feb 14, 2009 at 9:50 AM
subject: Re: airbnb

Did they explain the long-term goal of being the market in accommodation
the way eBay is in stuff? That seems like it would be huge. Hotels
now are like airlines in the 1970s before they figured out how to
increase their load factors.

from: Fred Wilson
to: Paul Graham
date: Tue, Feb 17, 2009 at 2:05 PM
subject: Re: airbnb

They did but I am not sure I buy that

ABNB reminds me of Etsy in that it facilitates real commerce in a
marketplace model directly between two people

So I think it can scale all the way to the bed and breakfast market

But I am not sure they can take on the hotel market

I could be wrong

But even so, if you include short term room rental, second home
rental, bed and breakfast, and other similar classes of accommodations,
you get to a pretty big opportunity

fred

from: Paul Graham
to: Fred Wilson
date: Wed, Feb 18, 2009 at 12:21 AM
subject: Re: airbnb

So invest in them! They’re very capital efficient. They would
make an investor’s money go a long way.

It’s also counter-cyclical. They just arrived back from NYC, and
when I asked them what was the most significant thing they’d observed,
it was how many of their users actually needed to do these rentals
to pay their rents.

–pg

from: Fred Wilson
to: Paul Graham
date: Wed, Feb 18, 2009 at 2:21 AM
subject: Re: airbnb

There’s a lot to like

I’ve done a few things, like intro it to my friends at Foundry who
were investors in Service Metrics and understand this model

I am also talking to my friend Mark Pincus who had an idea like
this a few years ago.

So we are working on it

Thanks for the lead

Fred

from: Paul Graham
to: Fred Wilson
date: Fri, Feb 20, 2009 at 10:00 PM
subject: airbnb already spreading to pros

I know you’re skeptical they’ll ever get hotels, but there’s a
continuum between private sofas and hotel rooms, and they just moved
one step further along it.

[link to an airbnb user]

This is after only a few months. I bet you they will get hotels
eventually. It will start with small ones. Just wait till all the
10-room pensiones in Rome discover this site. And once it spreads
to hotels, where is the point (in size of chain) at which it stops?
Once something becomes a big marketplace, you ignore it at your
peril.

–pg

from: Fred Wilson
to: Paul Graham
date: Sat, Feb 21, 2009 at 4:26 AM
subject: Re: airbnb already spreading to pros

That’s true. It’s also true that there are quite a few marketplaces
out there that serve this same market

If you look at many of the people who list at ABNB, they list
elsewhere too

I am not negative on this one, I am interested, but we are still
in the gathering data phase.

fred