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"You know the story right?" Brian Chesky asks me. I nod. I've read it in so many places, it's practically an origin myth by now.

Before Airbnb became a giant online marketplace for sharing homes and spaces, it was a couple of air beds on a floor in San Francisco. In 2008, Chesky and his co-founders, desperate for cash but confident they had an idea worth pursuing, got into the cereal business. They made special-edition Cheerios boxes for both presidential candidates called "Obama O's" and "Cap'n McCains" with hot glue and cardboard, selling several hundred items for tens of thousands of dollars when investors refused to give them money. Five years later, Airbnb is a $2.5 billion company used by an estimated 50,000 to 60,000 people a night and the keystone of the emerging "sharing economy."

Last week, I spoke to Chesky, now CEO of Airbnb, at length in New York City, where the company has run into trouble with a city law that makes Airbnb-type rentals technically illegal. We talked about the early years, advice for young entrepreneurs, what he's working on at Airbnb, and whether sharing is for everybody -- and every business. This transcript has been edited for clarity.

ON AIRBNB, THE BEGINNING

THOMPSON: Was there a moment when you thought this idea was never going to work?

CHESKY: Yes. The moment when we thought this idea wasn't going to work was the moment we came up with it. We thought, "This'll work for one weekend to pay the bills while we come up with The Big Idea." People still said it was absurd.

People said to your face: "Brian, Airbnb is a really dumb idea"?

There was a designer in LA who I looked up to. And I remember telling him about the idea. And he said something I'll never forget. He said: "Brian, I hope that's not the only thing you're working on."

When did you realize you had stumbled on something that could be massive?

In January or February 2008, there were enough ordinary people who wanted to do this. From there, we pretty much believed in the idea. Because all you had to believe was, if I like it, I have to bet that I'm normal enough that other people will like it, too.

How did you go from "we have a great idea" to "we're building a great business."

We met all these investors and they just wouldn't invest. So we started funding it ourselves. We sold collectible breakfast cereal and did other crazy things. We got into Y Combinator [the San Francisco-based incubator led by Paul Graham] in 2009, and when New York took off, we flew back every weekend. We went door to door with cameras taking pictures of all these apartments to put them online. I lived in their living rooms. And home by home, block by block, communities started growing. And people would visit New York and bring the idea back with them to their city.

Today, you're perhaps the most famous company to come out of Y Combinator. What was the best advice Paul Graham gave you?

"Do things that don't scale." It's better to have 100 people love you than to have 1,000,000 people like you. Go to New York to build your company, he said. Don't stay in Mountain View. Go to New York. That was the best advice we ever got.

"Do things that don't scale." What does that mean?

Create the perfect experience however you need to do it, and then scale that experience. Every company that makes something is just two things. It's creating an experience. And then it's multiplying them. We care about just two things: How great that one experience is and how many we make. Too many people start in technology with "how many you sell" and then they try to make it better. A lot of movements start with a small set of evangelists.

ON AIRBNB TODAY

How has the company changed since you first came up with this allegedly stupid idea that everybody warned you was stupid?

It was literally named Air Bed & Breakfast. It was literally supposed to be all about air beds. Today we have 123 people staying in castles.

At first, we thought, surely you would never stay in a home because you wanted to, you would only stay there because it was cheaper. But that was such a wrong assumption. People love homes. That's why they live in them. If we wanted to live in hotels, more homes would be designed like hotels.

I've heard people say that you're "eating" the hotel business. Are you trying to make hotels obsolete?

No. I still don't really think that way. I don't think we're disrupting hotels unless hotels refuse to change. Silicon Valley does have this mentality, "for me to win, you don't have to lose." We generally believe that the pie can grow so much, it's not a fixed pie. Around the world, tourism is as big an industry as oil. Oil is $4 trillion and tourism is between $2 trillion and $6 trillion. With the rise of Brazil, Russian, India, China, you have all of these new travelers, 300 million people from China alone. Think about what that means for the industry.

How hard is it to grow abroad with different regulations in every city?

We're in 34,000 cities. Every city is unique. And the regulations that affect us are at the city level. And sometimes at the neighborhood level. That means we have 34,000 jurisdictions to look at.

A New York judge ruled against an Airbnb customer recently. What's the city's argument for why people shouldn't be renting out their dwellings?

There was 2010 law that was written because slumlords were kicking tenants out of the buildings and turning them into hotels. Tenant rights groups complained. Neighbors complained. The fire department complained about all the illegal walls. That's not Airbnb. We weren't the focus of the law. But it was written broadly, and we've been talking to the city. I wouldn't be here if the city hated us. The city wants to find a way to make this work.

What's your top priority now?

We're really focused on mobile. Mobile, mobile, mobile.

One problem Airbnb has is that there's no one-click-booking the way there is for hotels and that's a big transactional cost when people are weighing you and a hotel. How do you fix that?

Friction is the biggest product thing we're working on. We have a new product called insta-book. About 1-2 percent of properties have it. It's like a hotel. You click, and it's reserved. One thing that we're doing is trying to shift every host to mobile. We'll eventually get to a place where every booking is insta-book. The single most important thing we can do is to get every host on mobile.

One obvious problem I see there is one-click-booking works for hotels because there are people whose job is to confirm that booking quickly. But on Airbnb, when the seller is a software engineer or salesperson, their job isn't to quickly confirm bookings. Their job is their job. It's less important to them how fast they resound to people who want to sleep in their beds.

Imagine Uber if every driver didn't have a phone They have a laptop. And every driver had to drive home to check the laptop to see when a ride was available. Think about how much friction Uber would have. In our business, if a seller has a mobile device, it could simulate the responsive and the up-to-dateness of a hotel. This is why mobile is transformational for our business. It means a seller can act like a company, in the best possible way.

ON THE "AIRBNB ECONOMY" AND ITS LIMITS

You're sort of the template for the sharing economy, so whenever I hear about some new peer-to-peer company, it's always the "Airbnb of this" and "Airbnb of that." Why shouldn't you try to become the Airbnb of Everything?

We're in the business of trips. There are two things we care about. First, we want to make every trip as meaningful as possible. The second thing is we want to popularize the sharing economy and create as many micro-entreprenurs as possible. If somebody can build something that lets people share and become entrepreneurs better than us, they should do it. Maybe we partner with them. Maybe we don't. If they can't do it better than us, and we think we can create a more shareable world, we would do it.

Okay, what's sharable like houses and cars that doesn't have a company yet?

There are a lot of them. Other than housing and rides, like Uber and Lyft, I don't think anything else has reached critical mass. So let's talk about the rest of them. General car sharing, not ride sharing, will be big. Other types of spaces, too, like office spaces. Today, artists are working out of coffee shops, but you can only work out of so many coffee shops. Parking. Freshly prepared food. Anybody who likes to cook can be a chef and have dinner parties. I think you're going to have a multi-million-dollar dog-bnb company.

Do you bristle at that term: "The Airbnb of X?"

I think Paul Graham popularized the "This for That" template. You know what we were? We were "e-Bay for space."

I think some people have a fundamental aversion to the sharing economy because it runs contrary to their feelings about trust. I know I can trust a hotel, a restaurant, an established institution. But can I trust a total stranger for a dwelling or a dinner?

I'm going to zoom up for a second. It's basically a simple shift from centralized to decentralized production. Centralized production works because you trust a central brand. What happens when everybody is a brand? When everybody has a reputation? It means every person can become an entrepreneur. You can call it the sharing economy. Or the trust economy. I think there's something really special about that. A year from now everybody [on Airbnb] will be required to verify, meaning share their email and their online and offline identity.

But about people who don't want to be brands?

Some people will choose to be anonymous their whole life. That's okay. But if you don't opt into this online identity, you'll have less access to the services that require it. The rest of us build a history. We build a brand online. The trust currency makes every seller an entrepreneur.

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