Could Airbnb Collapse And Become 1st Lehman-Type Event Out Of Silicon Valley?
Airbnb was on track to have the hottest stock market debut of 2020 with a valuation of up to $70 billion, but the coronavirus pandemic brought travel to a standstill. With half the world under orders to stay home, the Silicon Valley tech company is mired in confusion over cancellations at its 7 million properties around the world.
Airbnb recently raised $1 billion in funding at 10 percent interest and still needs $1 billion more. The terms “show the distress the home-sharing company is under due to the coronavirus pandemic,” Jean Eaglesham and Kirsten Grind wrote in the Wall Street Journal.
The planned IPO may be “in limbo because of stock market volatility and uncertainty caused by the virus,” Erin Griffith wrote in the New York Times.
The company’s valuation for shares held by early investors in the private secondary market fell from $150 per share a few weeks ago to less than $90 a share, valuing the company at less than $30 billion.
Could Airbnb collapse and become the first Lehman-type event out of Silicon Valley?
The Lehman Brothers collapse is almost synonymous with the 2008 financial crisis — one of the biggest bankruptcies in U.S. history of one of the largest investment banks. It was caused in large part by the housing crisis in 2008.
Lehman Brothers the Great Depression, two world wars and many crises. However, its ultimate downfall was over-leveraging and subprime lending.
“It was perhaps the catalyst of the collapse of the banking and housing industries and proved that even those that boast enormous success one year can be bankrupt the next,” Ann Spraders wrote in The Street.
Airbnb’s loan at 10-percent interest is a rate often associated with distressed companies, WSJ reported — a benchmark known as the London interbank offered rate, or Libor, plus 10 percent — people familiar with the negotiations said. “If Airbnb goes public, investors will have the option of being repaid in shares or cash. The investors are getting warrants that can be converted into shares based on a valuation for Airbnb of $18 billion — much lower than the $31 billion valuation in the company’s last fundraising round in 2017.”
Airbnb is under pressure to support hosts who have lost income due to pandemic-related cancellations.
A longtime Airbnb host from Charleston, S.C. who makes up to $30,000 a year renting out a studio attached to his house, tried calling Airbnb. The wait time was about six hours.
Guests who were forced to cancel their plans in locked-down cities complained that the refund process was too complicated and they were unable to get full refunds. Airbnb co-founder and CEO Brian Chesky agreed to refund guests for bookings through mid-May, infuriating property owners who saw revenue disappear.
“Airbnb is under intense pressure to show it can maintain its position as a Silicon Valley powerhouse,” Cat Zakrzewski wrote for The Washington Post.
How to save Airbnb?
“Airbnb’s angst has been a long time in the making,” Sheng wrote. “The problem it faced seemed complex at first — distrust, ongoing lawsuits, fraud. But now all of a sudden, its problem is urgent and singular- Airbnb needs cash, a lot of it, and very fast.”
How to save Airbnb?
Sheng suggests Airbnb should pivot to business travel and higher-end guests, accessing cash by partnering up with blue-chip real estate investment trusts (REIT) such as KKR. KKR “has a high quality residential real estate portfolio in innovation cities such as NYC, Durham, Austin, Chapel Hill, etc. It should also seek similar international REIT partners with similar portfolio makeups,” Sheng wrote.
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Sheng also suggests Airbnb streamline its operation to address trust issues on the platform related to fraud and crime. By aligning itself with professional REIT companies that are consistent in their operations and the types of properties they offer, “Airbnb might be able to frame guests’ expectations and deliver a more consistent experience for certain types of guests who were frustrated by the platform before,” Sheng wrote.
Finally, she suggests Airbnb cut costs related to big investments in Airbnb Experiences, which allows guests to book outings and tours.
Airbnb told WSJ in March that it has a capital cushion of about $4 billion. Its board and investors are increasingly concerned. Who knows how much longer the pandemic will last? What if the company’s revenues don’t bounce back in the second half of this year?