Predicting Airbnb’s valuation in 2020
Unicorn valuations are driven by future revenue, rather than existing revenue. This does not necessarily mean that we are in another financial bubble. Future growth depends on the market size and the ability of a company to grab marketshare. But growth and, with it, valuation multiples will taper off with time. This adds complexity to investors in unicorns like Airbnb that face limited exit strategies for their investments.
Airbnb just closed a $1.5B round at a $25.5B valuation. This is the latest in a series of unicorn investments by private equity and venture capital funds. The industry is trying to figure out what the era of unicorns means, largely from a bubble perspective. Recently, Ben Evans and Scott Kupor pointed out that different from the Dotcom bubble of 2000, the unicorns of today come with real revenue. This is an important point that has so far been overlooked. I want to share some perspective on how revenue impacts Airbnb’s valuation today and provide two predictions on its impact in the future.
Startup Valuations
EBITDA multiples are the preferred way for valuing companies in the financial markets. EBITDA is, however, frequently negative or very low for emerging growth companies. Valuations of startups are better understood on the basis of revenue: a startup will show signs of revenue early on, it will unlikely go public without any revenue, and startups can be compared to established companies by way of revenue multiples.
When evaluating revenue for startups, I like to look at four aspects of revenue:
Revenue = Users * Average Revenue Per User (ARPU)
ARPU = Measures success (or cost) of gaining Market Share
Market Share = Users / Total Addressable Users
Enterprise Value / Revenue = Revenue Multiple
Please note that “users” can be guests, visitors, users, and customers as applicable.
Before we look at the Airbnb data, it is helpful to lay out one fundamental aspect of private equity and venture capital investments that is frequently misunderstood in the debate. While investors care whether a deal is public or private, the marketplace of consumers and businesses rarely make purchasing decisions based on whether a product is sold by a public or private company. The business fundamentals of selling on a certain market are not significantly different between public and private companies, although their organization, regulatory oversight, and cost structures may differ significantly. From a revenue valuation perspective, this means that revenue multiples for privately held startups will normalize as their growth slows and eventually align with multiples of public companies. We shall see later why this is important.
Airbnb
Turning now to Airbnb and its recent valuation. The data on the company and its recent financings is pulled from news reports from the last couple of years. In particular, I looked at the Airbnb financing valuations and data on Airbnb’s revenue and guests served for 2013, 2014, and 2015 (estimated) [see Table 1]. Also, I pulled EV and revenue number fundamentals for a group of public market comparables for Airbnb.
Table 1 — Airbnb
The data clearly shows how the Airbnb financing valuation is driven by Airbnb’s momentum in acquiring new guests in the marketplace. Where revenue multiples among public market companies have been pretty stable, averaging 3.92x over the past 3 years, they have had little impact on the hike in Airbnb’s valuation [see Table 2]. Meanwhile, ARPU for Airbnb has had a negative impact on its valuation. Airbnb has decreased its revenue per guest served since last year, which is likely related to the cost of taking market share faster.
Table 2 — Public market comparables
This leaves growth in guests as a key driver for Airbnb’s valuation, accounting for 99% of the increase since 2014. But it is not only short-term growth that feeds the valuation. Applying the market’s mean revenue multiple to the estimated revenue for 2015 of Airbnb shows that current revenue only accounts for a small part of Airbnb’s valuation. It supports about ~13% of the valuation. Investors are clearly eyeing the continued market growth of Airbnb over the next couple of years. In numbers, the value of Airbnb’s future growth of guests can be estimated at 6.5x its revenue valuation.
A valuation incorporating future growth of Airbnb is a risky bet for investors. Returns ultimately depend on the company’s ability to deliver on its growth promise. Airbnb is aiming to hit 10% marketshare of the hotel business by the end of 2020 and generate $10B in revenue. That is 10x growth in revenue in 5 years. Also, Airbnb wants to successfully increase the price per guest served by 20% from today — based on reported estimates of guests, revenue, and current market share. Past growth of Airbnb gives some basis for this to happen. Clearly, investors think they can.
A prediction or two on revenue multiples
Let us assume that Airnbnb strikes big and makes its high set goals by 2020. What can we say about its valuation at that point in time? I argue two changes will likely have occurred that impact how to value Airbnb.
First, growth will have started slowing for Airbnb and its revenue multiple is, consequently, normalizing. If we assume that Airbnb is still acquiring guests faster than the market, its growth is still limited by the total market share Airbnb can acquire. For purposes of this blog post, I propose that it is unlikely that a platform like Airbnb will get more than 20% of the total hotel market given that it has limited attraction to business travelers. Airbnb’s valuation in 2020 may, hence, be around 7x its revenue. This is almost double the average for the market today, but significantly less than its current multiple of 30x. With $10B revenue, the company is probably worth about $70B.
A second development by 2020 is that early investors in Airbnb will be eyeing liquidity on their investments. Private equity and venture capital funds all have an expiration date and need to realize returns to their investors. Slowing growth of Airbnb will catalyze this search for an exit. For investors in Airbnb in 2020, liquidity comes in a couple of flavors.
One alternative is for investors and management to try to sell Airbnb to a buyout firm. At $70B, however, Airbnb’s valuation would dwarf the Texas Utility deal holding the current deal-size record at $45B and leave few potential exits for incoming investors. It seems far-fetched.
Moreover, Airbnb could start paying dividends on its shares and a secondary market could provide liquidity to existing investors. Investors would like this, but it seems unrealistic given that it would require an efficient secondary market to have emerged by such time.
This leaves investors with an IPO. Investors will have to navigate both the then current trend of public market valuations and the slowing growth momentum of Airbnb itself to sustain a premium valuation and get outsized returns. While the market has seen $50B+ IPOs before, Alibaba was valued at $155B, IPOs perform best with increasing and not slowing revenue and market momentum (Alibaba was accelerating its growth prior to the IPO) [corrected from the first published version].
Conclusion
A lot of things need to come together for Airbnb’s investors to see an IPO in 2020. Yet, it may be the best case scenario for investor liquidity. This should make investors in Airbnb think twice. Investment in startups is about risk and reward. Yet with plenty of risk, it is unclear what the upside is for the private equity and venture capital funds that are feeding the unicorns.
