The Rise of the One-Room Hotel

By Alexis C. Madrigal

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Many web startups begin without a business model. They have a cool service or a sticky blog -- or merely an *idea* that people might like.

Airbnb is not one of those startups. The site allows people to rent out their rooms or houses as vacation rentals, turning every place into a prospective microhotel. Their business model is simple: they handle the transaction, taking a 6-12 percent cut on each booking. In other words, they might not be a brick-and-mortar company, but they built in people paying them money from the beginning.

And that might be one reason that the company just grabbed $7 million in a Series A venture capital round led by Sequoia Capital and Greylock Partners, as Jenna Wortham notes in the New York Times.

Airbnb has come a long way since it was founded in August of 2008 by Joe Gebbia and some friends out of their shared apartment in San Francisco's SoMA district. Joe and I ran in similar circles in San Francisco, and I remember when he first dropped the idea on me. At the time, it didn't seem like the most serious business venture. There was already Couchsurfing.com, which seemed to provide the ability for people to travel around the world on the cheap staying with strangers. Why would anyone need Airbnb? Would thousands of people really want strangers staying with them?

But Joe knew he was on to something. They depersonalized the process a little, created a slick interface, earned a ton of media mentions, and got a very hip core group to start renting out their places.

As the site has grown -- it now has rooms in 8,000 cities -- I realize that I should have done the math. Airbnb told the Times that they've had more than 560,000 nights booked through their service in the last six months. Even at an average price of just $50, and at the bottom of their booking fee scale, that's almost $1.7 million in revenue. Let's say you start a content site that tries to monetize your audience with ads. Unless you're a premiere brand, you're only going to get a few dollars per thousand ad impressions. So, to generate $1.7 million in revenue, you'd need well over 300,000,000 pageviews.

The math is easy for consumers, too. Say you're going to New York -- just try to find a hotel for less than $150. But if you head to Airbnb, you can find dozens of places under $100, including a bunch for less than $50. Most of the accommodation options are just rooms in people's apartments, but so what? It's cheap! For room renters it makes sense because you're monetizing a previously worthless aset.

Of course, Airbnb still faces a lot of challenges. There's always the danger that something bad will happen to someone who rents a room, touching off a Craiglist-killer-like panic. Or that hotels lobby states or cities to ban the kind of short-term rentals that Airbnb depends on. But for now, they've got cash to grow and a mission to profitably disintermediate the hotel business.

Image: brixton/Flickr.

This article available online at:

http://www.theatlantic.com/technology/archive/2010/11/the-rise-of-the-one-room-hotel/66439/