0:33 Intro. [Recording date: August 7, 2014.] Russ: This has been the summer of the sharing economy here at EconTalk. We even had a recent episode with Barry Weingast on law that ended up touching on the sharing economy. We had Mike Munger and I pontificating as academics about its significance. And we're closing out the summer with arguably the most important, certainly one of the most important firms of the sharing economy, Airbnb. So, Nathan, welcome to EconTalk. Guest: Thanks for having me. Russ: What is the business proposition for guests and hosts at Airbnb? How does Airbnb make money? Just give us the basic logistics of how it works. Guest: Sure. We have 800,000 properties around the world in 192 different countries. These are properties that are offered by individuals. They are primary homes. They are offering either while they are away on vacation or business; and sometimes they are actually renting out rooms in their homes. So there's all different types of properties that we make just as easy to book as a hotel for guests. And so we now have guests from around the world booking these accommodations. A big part of what we have done is take the friction out of the process. What I mean by that is, you come to our site and you search a place like Paris. You'll see 30,000 different homes in Paris in which you could stay. You can read the reviews that were left by past guests, and if you find something you like, you can book it online. You enter your payment information; you pay Airbnb. And the host does not get paid until after you arrive. That way, if you need to cancel or you show up and something is not as described, all you have to do is call Airbnb's customer support and we can give you your money right back. So, this builds a lot of peace of mind for both the guests--and the hosts--knowing that the payment is secure and that there's the profiles and the reviews. And it has really allowed this activity to thrive. Six years ago nobody was doing this. And just last Saturday, we have 375,000 guests staying at other people's homes in a single night. Russ: Reminds me a little bit of a MOOC (Mass Open Online Course), where you have hundreds of thousands of students taking a course online. You have the world's largest hotel, in a sense, except the rooms are distributed out into the world. And that's really remarkable. Just a clarifying question: what proportion roughly of the rooms that you rent are while the host is staying there versus the entire house itself? Because that's a very different thing than a hotel--usually you don't have a roommate. So, I'm curious how that--and if it's changed at all over time. Guest: The majority of the inventory and the bookings are for entire places. I would say about 30% of the time the guest is choosing to stay in a home in an extra bedroom or such. So, there's definitely both taking place. But the majority of the time, people opt to get the entire home. And what's the take--the commission--for Airbnb to make this as seamless as it is? Which is really remarkable. I'm staying, by the way, here for the summer out in the Bay Area, and for the first time we're using Airbnb. Guest: Perfect. Russ: Because Craig's List had virtually no listings. You've taken that marketplace--you've basically taken it over, for a bunch of reasons. So, tell us how that works. What's your take and how much is it? Guest: So, the guest pays a service fee that's between 6 and 12%. So the higher the overall spend, the lower the percentage. And the host pays a flat 3%. Russ: And how do you prevent--so, we're renting an entire house from a family that's off in Europe for the same amount of time that we're here. Let's say we want to come back next summer--which we do--to the Bay Area. And we could save that 9% by just making a private arrangement. Now, that wouldn't be the end of the world, because you got a good commission the first time. But there is repeat business, obviously. How do you provide something of value that's bigger than--ideally bigger than that 9%? Guest: Sure. Well, the percentage is low to begin with. But after each transaction, the guest reviews the host, and the host reviews the guest. So, both parties walk away from the transaction having gotten a review. And that review has real value, because-- Russ: Wait a minute--you're saying I'm going to get reviewed? Guest: You're going to get reviewed, too. Russ: Darn. I knew my kids should have behaved better! No, that's a joke. My kids did a really good job this summer, not breaking anything. Go ahead. Sorry. Guest: But because you get that review, you're going to be more trustworthy in the future when you ask to book someone else's home. So this whole marketplace is based on trust. And so the reviews are a critical currency for getting access to people's homes. And so that right there has some value. Most hosts will appreciate paying the fee in order to get an additional review. As well as the convenience of how we handle the money. Russ: Yeah. That's what I'm interested in. So, for example, let's say, one issue of course is I come back next year--let's say it's not Airbnb, we make a private deal on the side. And the house is a wreck, it's a mess; I have no recourse; it's a lot less pleasant. Obviously, you're going to take care of me--at least that's the plan under the current system. How do you--the other issue that happens when you rent a house--and I've done this for 10 summers now, so I've seen the whole range of challenges that arise, even when honest, well-intentioned people interact in the marketplace without a contract, or at least without a perfectly-specified contract. Let's say they come back from their vacation and they find that we've broken something, and we say, We didn't break it. Or, we say, Yeah, we broke it, but it was all old and it was falling apart anyway. How do you handle those kind of disputes? Guest: Sure. Well, most importantly we have a million dollar, what we call 'host guarantee.' Which means, up to $1 million is something is broken or stolen, Airbnb will cover that for you. So that gives tremendous peace of mind. Now, we can only provide that because it happens so infrequently. And why does it happen infrequently? Well, the reviews certainly help. As well as, the guest knows that Airbnb has your payment information on file. It's like going to a hotel: you put your credit card at the front desk, and it's expected that if you mess up the room, you are going to pay for that. They know who you are. Likewise, Airbnb knows who you are. And this just creates the right incentive structure for everyone to be on their best behavior. Russ: The challenge comes when there's disagreements, though. Do you have some way to adjudicate disputes when things don't go as expected? So, again: I come back; they blame me for something I claim I didn't do. Whose word do you take? Do you have a system for dealing with that? Guest: Sure. Well, that's incredibly rare, but when it does happen, that's what our customer support is there for. So you can call us; we'll mediate between the two parties, and we'll do our best to resolve it. And in the event where it just can't be reconciled, we do have certain guarantees in place that is kind of a potential safety net. Russ: How much do you worry about a disaster from a really bad piece of publicity? This happens in all the examples of the sharing economy. It happens with Uber; it happens with Airbnb. Something goes--not just a broken lamp--something goes dreadfully wrong, and alarms people about the safety of, say, renting a stranger's house. Have you had those issues? How worried are you about those? And how worried were your investors, when you first got started? Guest: Certainly in the beginning that was the first thing that came to anybody's mind when they heard about this idea. They'd say, 'This is a terrible idea. Somebody's going to get hurt. Something is going to be damaged.' What's amazing is that, each night we have up to 375,000 other people staying in someone else's home for the first time, and how remarkably smooth that goes. So the vast majority of stays have no problem whatsoever. At our scale, occasionally there are issues that arise. Some of these have showed up in the press. It's easy to get the wrong idea by seeing those headlines. And certainly the press gravitates toward sensationalism. Russ: I love it. Guest: But that is definitely not representative. And you have to put it in context. 375,000 guests, every single night. Russ: And of course people--the press isn't the only part of our world that over-reacts. People over-react. So, you don't worry about that? When you get that kind of press that future users are going to be alarmed? Guest: Well, to be honest, we do get a lot of press in general, and the vast majority of that is quite positive. So, I do think there is a pretty good balance. At least right now.

9:32 Russ: Let's talk about your competition. You were preceded by something that's still out there, VRBO, which is Vacation Rental by Owner. Obviously there are people who use vacation rental by owner for overnight stays for business. And vice versa. There are people who obviously use you for vacations. So they are a competitor in some dimension. They are an online provider , people trying to rent their own houses to people they don't know very well. And they rely on reviews just like you do. So that's one kind of competition. The other kind of competition is Airbnb-squared--some newcomer that comes along and says, We're going to do what Airbnb does; we're going to do it better, cheaper, economist. What's your competitive edge, do you think, that prevents that second thing from happening? And, do you see any of these folks out there as real competitors? Guest: Sure. Well, those are two, very different types of, we'll call them, competitors. With regards to the direct clones that have been inspired by our success, and there's been many of them, and some of them have raised as much as $100 million dollars to try to take this model and try to grow it in other countries, one of the special things about this business are the strong international network effects. In other words, what makes Airbnb be a great product is not so much the website, although I will say, as one of the engineers behind it, it is a good website. Russ: It's a beautiful website. Works very well. Big challenge, obviously, to do that well. Guest: But the product is not the website. The product is the 800,000 properties around the world at which you can stay. That's ultimately what people are paying for an appreciating. And so, when you have that kind of scale, that kind of selection, that's where people are going to want to do their shopping. And so, to take this model and try to do the same thing in another country where the people of that country are going to want to travel internationally, they are instantly going to want to use whichever site has the global footprint. Russ: Let's do it here. Let's start in the United States, which has a big chunk of your business: I'm going to start a competitor that does exactly what you do, and I'm only going to charge, say, 1% and 5%. I'm going to charge less, and people, those 800,000 loyal renters of yours, landlords, are going to switch to this new site. What's going to stop them? Guest: Well, the thing about the hosts is that at most they have 365 units to sell--nights per year--to sell. And if we can do that effectively for them, then they don't need any other website in which to do that. And there is a certain switching cost to being on multiple platforms at once. And so, we are quite effective in providing demand for our owners, our hosts; and so there isn't really a need for a competing service. A directly competing service. Russ: No, I agree. But I'm pushing to--maybe you don't want to say--maybe your technology--obviously those demanders, which are right now what you provide on the surface. But what you really provide is an interface for those demanders to find those suppliers. As an economist, it's just an utterly fascinating thing. It's a classic example of how the lowering of transactions costs allows people to interact commercially in really spectacular ways. Probably there are days when you think about your business as helping people find a cheap place to stay. What you are really doing is making it easier for people to travel and see loved ones and do their business and a thousand really extraordinary things rather than just say, oh, I got a cheap room tonight. So, it's really a glorious thing. But the technology has really got to be your edge. What do you think you do well that would be hard for somebody to copy? Guest: Right. We certainly have the most efficient, we'll call it, clearinghouse or marketplace in economic terms. And what makes that so efficient is the payment system. It is the reputation system. And it's not just the technology of those components, but the fact that the reputation system, you accrue reviews. And so that builds value. Which is kind of contained within the platform. We also have teams of engineers that focus on matching and search. So, it's all about understanding what is the customer's need, the guest's need, and displaying the relevant inventory. You have to remember that of those 800,000 properties, every single one of those properties are unique. And so we really need to understand our inventory well in terms of what it offers, what it doesn't offer. And match what's appropriate to the traveler.

14:13 Russ: Let's go back to the early days. We had Sam Altman on from Y Combinator this summer, part of our sharing economy series--unplanned. And he talked about some of the challenges you guys faced. It didn't go very well at the beginning. So, tell us what went wrong. Why was it so hard? Were there parts of that experience where you thought you weren't going to make it? Did you really eat cereal--was it breakfast, lunch, and dinner or just breakfast? Because if it's just breakfast, it's not that impressive. If it was all day long, I am impressed. Guest: We did eat a lot of cereal. I'll get to that part of the story. The original inspiration for Airbnb came in October 2007. And we were really just solving our own problem, which was that the rent on our apartment was raised 25%, and I decided to move out. The other two guys wanted to stay. And they didn't have money to pay the rent. They are both designers and they saw that a design conference was coming to San Francisco, and they noticed that all the hotels were sold out. So they decided to rent out that extra bedroom to designer who needed a place to stay. And so that weekend not only did they make about $1000, not only did the designers buy the place to stay in a city that otherwise had no hotel rooms, but they all went to the conference together, Joe and Brian showed them around the city. It was just a great time for all. And they stayed in touch afterwards. And so, based on that one experience, we thought to ourselves, we must be able to do this for other people in other situations. So that's what we set out to do in early 2008. Russ: Great thing about that example, of course, is--it's natural. Maybe it shouldn't be, but it seems somehow more natural to stay with other designers who are going to the same conference. It seems safer. It seems more normal. Right? Was that your original idea, let's find groups that have natural synergies that are going to be more trusting? Guest: Right. So that was the great, almost ice-breaker, to bring two otherwise strangers together. And that was certainly a big part of our focus in the beginning. And actually, when we launched the site officially in August of 2008, it was for the Democratic National Convention, being held in Denver. And that's where Barack Obama received the Presidential nomination for the Democratic Party. And it was a historic event; it was being held at a stadium that held 80,000 people. You only had 17,000 hotel rooms in the surrounding area. And so-- Russ: People were staying in Arizona. Guest: Right. People were flying in just for the day for this. People were not going this on business. They were doing this because they personally were so devoted and supportive. So, they didn't necessarily have a lot of cash. And they were looking for alternatives. So, we launched in this context our website. And there were also a lot of locals that were looking to get out of town, actually. Right? To escape the influx. Russ: And the traffic. Guest: And we accumulated 800 properties for this event; we were able to host many guests. So events are a great catalyst for Airbnb. And just recently during the World Cup down in Brazil, we hosted about 150,000 guests in Brazil. It was actually about 20% of all international visitors, stayed on an Airbnb property. We now have 20,000 properties in the city of Rio. So, Airbnb is a great solution when there's an event that brings an influx of people and there's a lack of the existing hotel capacity to kind of flux and accompany all that. Russ: The classic economic jargon for that is it's a peak load problem. You don't really want to have enough hotel capacity in a distant part of Brazil--you'd like it to come and go every, well not every 4 years because Brazil doesn't host the World Cup every 4 years--every, say, 32 years. Can't do that, so prices spike up on the regular hotels. And what you've done is ease the supply in a way; and that disappears, again. It's a beautiful application of economic way of thinking. Guest: And it's a great solution for cities, because cities want to host there events. They want the visitors. They want the visitors to spend their money. But the cities don't want to build capacity for demand that's not going to be there on an everyday basis. Russ: Is it true that New York has about the same number of hotel rooms as Chicago, by the way? Guest: That may be true. New York has about 110,000 hotel rooms. I'm not sure how many Chicago has. Russ: That's shocking, right? Because more people want to stay overnight in New York than in Chicago. Chicago's a fine town; I went to school there. Nothing against it. But I think the ongoing demand for New York would be much higher, and of course that's one of the reasons New York is a very expensive place to stay overnight. Guest: Right. And there's a lack of real estate available to build those additional hotels. Russ: And I suspect there are some other barriers to building those hotels--zoning. I suspect to build a new hotel in New York takes a long time.

19:19 Russ: So, you started off with this idea of special events, special situations, you could maybe convince people to stay in strangers' houses. That sounds appealing. But it didn't go so well at first, right? And what went wrong? Guest: That's right. So, for the first year, all of 2008, we were working on this; we launched about halfway through the year. This whole time we were trying to raise some money. Because of course we had quit our jobs; but we weren't making any revenue from work or from our business. And so we were financing the company off of our credit cards, and hoping that we could raise venture capital. And all the investors thought: This is not a product I would use; this is probably if at all a market. And so they weren't interested. And to make things worse, the recession began, in September of 2008. And then there weren't any investors, period. And so by the end of 2008, we were in debt; we had been without jobs for a year; we'd been making no more than $200 a week. We were on the verge of collapsing and quitting. Russ: What did your parents think? Guest: My parents, for the first, probably few years, thought this was a crazy idea; and my dad would ask questions like: So, how much longer do you think you're going to be doing this? Kind of a passive aggressive question. Russ: Right. Let's pull the plug. Guest: Yeah. So it was very difficult. And towards the end of this time, one of our mentors suggested to us that we join a program called Y Combinator. Y Combinator is an accelerator program for startups. It's really just a 13-week program, in which you get $20,000 and a little bit of structure, mentorship; and it culminates in what's known as Demo Day, where you get to pitch a roomful of investors. And so our adviser, he said, this is a program I went through; I think it would be good for you, pull the team together, reenergize you. And really focus you. Because we had realized that, today, although we had been working really hard, we hadn't been giving 100%. We were different geographies; we each had some side commitments. And we said, for 13 weeks we are going to be like soldiers on this project. And we are going to all live in the apartment again together; we are going to get up at 8 together, go to bed at midnight; we are going to work 6 days a week and really drive this to Demo Day and see where we can take it. And it was during Y Combinator that things turned around for us. Russ: When were you eating the cereal? Guest: So, the cereal is probably the low point in the story, right around the time of the recession. So, what happened there was, at the time, our company wasn't Airbnb. It was Airbed and Breakfast. And that's because that first weekend, when we hosted the designers, that room we offered up to them actually had no bed. So Joe set up an Airbed. And instead of calling it a Bed and Breakfast, he called it an AirBed and Breakfast. And so that's where the name today comes from. And back then, we were actually known as AirBedandBreakfast.com. Very long URL. Russ: And some of you have that still in your email, I noticed. Guest: So, one night, Joe and Brian got this crazy idea to basically make a parody of our name, and focus on the breakfast aspect of the URL. And this is shortly after the Democratic National Convention, so we had this political theme in our minds. We said, What would we serve our guests in the morning? And we came up with the ideas of Obama O's and Cap'n McCain. Cap'n McCain's was 'a maverick in every bite' and Obama O's was 'hope in every bowl.' And so they came up with this concept, and they found a printer to print 500 boxes of each. They did original artwork for these boxes. We actually went to the store and bought regular cereal and repackaged it into our cereal boxes, hot-glued it all together, and set up a website where we could sell these for $40 a box. But, we sent the first 100 of each box to reporters that we had met through the course of our debut in August. And so, we knew if we emailed the reporters, they would just delete our email. But we also thought if we sent them this physical box of cereal that was so incredibly witty and beautiful, that they would call us back and ask us what's the story behind this thing. And this is building up to the election in November, so there's a lot of kind of excitement and crazy stuff happening in this buildup. So, sure enough, in a week we are on Good Morning America. We were on CNN International doing a video interview. That day, we were the Number 1 political video of the day on CNN.com, featured on the home page. That day, we sold a $40 box of cereal every 3 minutes. And by the end of the week we had sold out, $30,000 worth of cereal. And so we like to say that in that first year we made more money off of cereal than we did, by far, the core concept of Airbnb. Russ: Were you eating the cereal? Sam Altman's version is that you had all these leftover dollars toward cereal you were eating. Guest: So, the Obama O's sold out. The Cap'n McCain's did not. Russ: Not everybody wants a maverick in every bite. But they do want hope in every bowl. And that says a lot about cereal and politics probably. Go ahead. Guest: Maybe we could have predicted the election outcome through our cereal sales. We had some extra Cap'n McCain's. This is now November, December 2008. This is the absolute low point. It's been a year now without any income. And we have all these cereal boxes around us, but no money for food. And one evening, Brian just grabbed one of the cereal bags, ripped it open, and just grabbed with his hands the cereal and started eating it. That was kind of the level of desperation, almost like a pure animal instinct, sort of survival mode. Russ: No milk. Guest: No milk. There's no money for milk. Russ: So, you went through the Y Combinator. You pushed really hard. You went to Demo Day. And you had to get chosen by Y Combinator, of course. And what Sam said was that he was really--they were all really impressed with the determination; that that was really important. Maybe they weren't so convinced the idea was going to work out, but they figured you guys were pretty talented and that would probably eventually lead to something. Guest: Well, that's a funny story, actually. So, let me just take a minute to share it. So, we go to pitch Paul Graham (PG), who runs the program at this time. And you only have about 5 minutes to pitch him. So we go in there very much prepared to talk about what we're doing. And within 2 minutes, the conversation goes off track. And Paul Graham basically interjects and says, I can't believe anyone's doing this. That's crazy; I wouldn't do that. And then he basically proceeds to try to convince us to do something else. And so the remaining time goes by, basically him doing the talking, telling about what he wants us to do. And so 5 minutes flew by. As we were walking out, Joe pulled out of his bag a box of the Obama O's, and said, 'PG, this is for you.' Russ: That's Paul Graham. Guest: Paul Graham. That's right. And Paul said, 'I don't understand; you bought this for me?' Guest: And Joe said, 'No, we made this.' Paul said, 'I don't understand.' Tell me more. And so we actually sat back down and told him the story of how we made the Obama O's and Cap'n McCain's. And he said: If you guys can figure out a way to sell $30,000 worth of cereal and figure out how to make that, then I'm sure you'll figure out a business model for what you are doing. And so based purely on that and the hustle he saw in that initiative, and based nothing on the idea that we pitched him, he let us into the program. Russ: So, just as a side note: I've been thinking a lot lately about luck versus skill and how much of our outcomes are based on our efforts and how much are just random. So here's a case where--whoever pulled that box of cereal out, I don't know if that was your plan originally--that was pretty fortuitous, right? There's a decent chance if you hadn't done that--certainly if you hadn't made the cereal, we wouldn't have Airbnb. Do you ever think about that? And do you think about how much of where we are sitting right now, in a nice set of incredibly airy and beautiful offices here in San Francisco, whether there, for the grace of God, or bad luck, you might be back doing something else? Guest: Well, there's certainly lots of opportunities such that had they turned out otherwise, we wouldn't be here today. So, super appreciative of all those things that went right along the way. What I'll say about the kind of question around, kind of, luck versus skill-- Russ: Effort. Guest: Yeah--is that, I think luck is happening all around us every day. And the skill is recognizing when it's happening and seizing the moment. And to go a layer deeper on that story, when I saw Joe putting the cereal into his bag, I told Joe: 'Don't bring the cereal. That's not what we're here to do. We're here to pitch him on our business.' And to me, at the time the cereal represented basically us getting distracted. It's true we made $30,000, but it's also true that it took two months. And it's also true that we promised royalties on it. So we only pocketed $10,000 of the $30,000. So, when you actually computed the ROI (return on investment) of that, it didn't really make sense. But Joe insisted on bringing it anyways. And good for him for recognizing the right moment for pulling that out and seeing that through. I might not have seen that opportunity. Russ: That's a great observation.

29:23 Russ: So you go through Y Combinator, you get to Demo Day. And did you raise money at that point? Let me ask it a different way. What time are we at right now--in the calendar, when is this? Guest: This is now between February and about March, 2009. Russ: So, you've been trying for how long at this point? Over a year. Guest: So we are about 14, 15 months in. Russ: And what's your revenue at this point? Guest: $200 a week. Russ: That's your take from the people using the website so far. Guest: That's right. That's our money, $200 a week that we are putting into the bank account, starting from basically August through basically January. And it was during Y Combinator that we figured out really how to--what the value proposition was and how to drive that value proposition. And so between the start of Y Combinator, $200 a week, we ended up 13 weeks later at $4,500 a week. Russ: Wow. From stuff that you learned in that 13 weeks, or stuff that you came to realize. Guest: That's right. Russ: It wasn't just that things started to percolate. You did something different. Guest: That's right. There were a number of thought-provoking questions that were raised; actually, the first time we met with Paul Graham once the program started, he asked us a question of: 'Where are all your users?' And we said, 'Well, they are kind of spread out everywhere.' And he said, 'Well, where are most of them?' And we said, 'In New York.' And he said, 'Well, why aren't you in New York right now?' And we said, 'Well, because we are here at Y Combinator, like you told us to be.' And he said, 'Doesn't matter. Go to New York. I want you to meet all your users.' And that wasn't intuitive to us at the time. Because we didn't have any money to do that. Russ: And besides, there are users on the web. You don't really need to--you already know them fine. Right? Guest: Right. I mean, the whole idea of being on a web business is that it's scalable. You don't need to meet your users. But he said: It's okay to do things that don't scale when you are just starting out. So he said, Go to New York, meet your users. Russ: So, Paul was a guest here in 2009 on EconTalk. And he's a very creative guy. And one of the things I know he pushes is to get a small group of people to really love your product. And he may have learned that from the Airbnb experience; but he probably picked it up also from other startups he's worked with. So, when you went to New York, you found stuff out. What did you find out that was important? Guest: What he said and was originally quoted I think by Paul Buchheit, the creator of Gmail, is that it's better to have 100 users who love you than 1000 users who like you. So, find your core evangelists; build product for them. So, we went to New York, and before we showed up, we called every single user, every single host. Russ: How many were there? Guest: About 30. Russ: Okay. That's 30. Guest: It was not a monumental task by any means. And we said, How would you like a professional photographer to come by your home and take some pictures? And I think that question was a little bit out of the blue, but people were curious and they said, It's free? Yes. And they said, Okay, sure, why not. And, you have to remember, at this time camera phones weren't that great. They were lower resolution, poorly lit. So we noticed the photos could be better. So we offered to take them, have a professional take them, for free. What ended up happening was that Joe and Brian would go to the camera store, rent the camera for the weekend, and show up themselves, knocking on the door. So the host would open the door expecting the professional photographer, and it was Joe and Brian, the founders of the company. But they let them in anyways, and Joe and Brian took the photos. And while they are in there, sat with them at the computer, showed them how to use the website, got product feedback, as well as invited them to share beers later on. And so we'd get together anywhere from 5-8 people in the evening, have a beer, tell them our story over the last year. And once people had heard the story and gotten to meet us, they became our advantage list. They wanted us to succeed at that point. So much so that even once we came back to San Francisco, we could call them up and give them advice, such as: you really have a beautiful apartment but you've only written a paragraph describing it; could we add a few more paragraphs? Could we perhaps start with your price being lower, and then raise it if you are getting too many inquiries? And so once we had great pictures, lower prices, more complete profiles, and cooperative hosts, that was the special combination. It was then that those properties started getting booked by travelers coming from all around the world. The travelers had great experiences and then would go home to their home cities--Paris, Berlin, Hong Kong--and the guests would oftentimes say, Hey, I want to do this, too. And the guests would become hosts. And so, within months there was a global cross-pollination of the idea in a way that might not be true of other businesses. Russ: You ever kick anybody off the site? Or is it just that users don't use them--when you get somebody who is--not desirable? What do you do? Guest: That's the value of the review system. And so, after every transaction both parties are reviewing each other. They can leave public feedback, private feedback for each other; and private feedback for Airbnb. And so we carefully monitor the scores and the private feedback, and if we identify a problem them of course they are dealt with and removed. Russ: So, let's talk about scaling. You've got your hundred people who love you, and now you want to go to 800,000--or whatever, I don't know how many you have in New York. You had 30 then. I'm sure you have more than 30 now. Two things. What are the challenges there, and particularly in terms of that coaching. When you have 30 people, you'd say things like: Add a paragraph. Do you give advice in some form? If I'm entering a description of my house and I only write a paragraph, does the software prompt to say, Do you want to say more? Other things like that? How do you handle that scaling? Guest: So, we were obviously very hands on in the beginning. And you can only do that for so long. But here's the magical thing: If you set a strong, positive example amongst the core set of users, when new users found out about it, they would come onto the service, look around their neighborhood, see the high quality of properties, the great photographs, and the affordable prices; and they would say, Oh, that's what I have to do to be competitive. Russ: That's my competition. Guest: Right. That's my competition. And so it created a really high bar to begin with. Now, of course, we offered contextual help within the software to give more detail. But this whole incentive system creates the right behaviors. Russ: Let's talk a little about one particular issue that's very interesting to me, which is real identification. So, when I get onto your site, I think I have to be who I am. Or at least that's the idea, right? And this is--Facebook claims to do it--you can create a fake Facebook persona--I don't know how easy or hard it is. But we are moving toward a world where people have--let's say it differently. There are two parts to the Internet: the part where people are anonymous and troll and do dark and private and wonderful things, but they do it anonymously; and there are parts where they come as themselves: they have a picture of themselves, they have their name. How important is that to Airbnb? How do you make that happen effectively? And what do you see it's significance being? Guest: Certainly. Well, we only stand for real identities. That's core to the whole building of trust. And the vast majority of the public are like that anyways. It's only the small minority that have this reputation that grabs the headlines, etc. Couple of things we do. So, one, for convenience's sake, you can sign up using Facebook, and that just makes it really easy to get started, and it pulls in all the relevant information, and it creates a close link between what's on Airbnb and what's on Facebook. And Facebook has done a good job of creating a trusted environment. That's just the beginning though. We also have all different levels of things that we do. So, as a host, you can say that: I only want to accept reservations from people who have gone through our Verified ID Program. What Verified ID means, is that we will prompt the guest to upload a picture of their driver's license or passport, and we will recognize the characters on it, confirm that the details are correct, and also compare the name and other information to your Facebook account or something like that, cross-reference it. So, we can do quite a sophisticated check to make sure that all these different sources are true, all lined up. So, we can do that if requested, and if anything looks out of the ordinary. So, we have a whole bunch of machine-learning algorithms that are monitoring everything that happens on the site. So everyone who does a search, everyone who signs up, makes a booking--we look at the usage patterns. And if we see usage patterns that are unusual, we'll rate that user as more risky. And if they are more risky, then we'll ask them to prove that they are trustworthy by going through something like Verified ID or another one of these processes.

38:41 Russ: So, you've made it. You're an incredibly successful company. It's incredibly satisfying, I suspect. You can tell your parents it's okay, it worked out. They're happy. Your friends are impressed. Is it still fun to come to work in the morning? Guest: Absolutely. Russ: And why? Guest: Well, I don't think we've actually made it yet. We've accomplished things that are beyond our wildest dreams, for sure. But I also think, today, we can envision so much more that we can do than ever before. So that's what makes it so exciting to come to work, to know that, from where we are today, which is admittedly very far, we are in a better position than ever to change the world. And so, I think there's plenty to do with our core business, but there's plenty of innovation to do around the entire [?] experience. So we are not just thinking about combination. We're thinking about: What are all the conveniences, the value we can offer to make your trip more meaningful, more memorable. So, we want to not only provide the combination or the connection with the host, but also all the local recommendations. What are those local spots that you are going to remember forever? What neighborhoods--how can we unlock the beautiful parts of the neighborhood and better connect you to this place that you are visiting? And get you out of the touristy places to the places the locals like to go? And how can we just connect you with people in general? We have such a critical mass of guests in a city at any given time; we have such a critical mass of hosts who have all kinds of local knowledge. How can we use our software, and all our data, to make things happen? Connect people? Share information, such that people are having better trips, more memorable experiences. Russ: Yeah. I can't help but think about the dispersion of knowledge that Hayek talked about and how the Internet is actually helping to bring that together. Obviously on one night in any city there are a bunch of people who are looking for interesting things to do. One of the things they want to do is meet the other interesting people who are looking for interesting things to do. We have some ways to do that now, but they are pretty primitive, I guess. So I think there's clearly a lot of potential there. Guest: I think what's amazing is that for a long time a lot of the innovation now is happening online was basically coming at the expense of the offline world. So, people were spending more and more time online, not connecting with each other. And now there is suddenly a transition of, what I call, online and offline. So, it's still online technology, but it's more integrated with our offline lives and making it possible to derive value in your every day. It's almost totally integrated with your everyday activities. Russ: I just want to mention--we are getting some background noise here. We are recording this in a corner office on the fourth floor in San Francisco, and there's some truck and-- Guest: The 5 o'clock rush hour. Russ: The 5 o'clock rush hour here in San Francisco. Any big mistakes you made, that are obvious now in retrospect that you hope you don't make again when you are doing the next expansion or whatever, extension, of what you are doing? Guest: When we have been so successful, it's hard to regret much. A lot has obviously gone right. I will say that it wasn't easy. There was definitely some pain along the way. It's not easy to scale your company so quickly. For the first couple of years, it was just Joe, Brian, and I. And then we started hiring people. But we are literally doubling the size of the company almost, each year. We have close to 1000 employees now. And that's a lot of new people to bring in and bring up to speed. That would be a challenge for any company. I think we've done it remarkably well, but when you have to figure this out and haven't necessarily done this before, you need to as quickly as possible, find the right leaders, bring them in. That is a hard thing to do when you don't have the professional networks. Luckily our investors have been very helpful in that regard. They have considerable networks. But I would have to say if we were to do it again, you would have a lot more instincts about how to make those kinds of decisions quickly and know what you need. You've never seen anything like this before, you don't necessarily have the perspective necessary to feel confident and make fast decisions sometimes. And once you've seen it, then the next time around you have the pattern recognition.

43:07 Russ: Let's talk about the regulatory environment. This faces a lot of players in this space. We've talked before on this program about Uber and being threatened by the taxi commission. Hotels are not really happy that you are competing with them. Obviously it's not just that you are getting the overflow. You are putting price pressure on their offerings. And they are arguing that, hey, we have to face all these regulations on cleaning and hiring of people and inspections and safety. These poor people out here on the web, they are renting these houses from strangers; they are at the mercy of this system. They need to be protected by the same regulations that protect our customers. What do you think of that argument? I know what you think of it. Don't tell me what you think of it. Tell me whether you think it's going to be successful. Is it going to slow you down or stop you? Or are you going to get some regulation that's going to make life harder for you? Guest: The existing regulation in most cases was made 30, 50, even 70 years ago, and hasn't changed much since then. And certainly the times have changed; the technology has changed. The way we live our lives has changed. So I think it's totally fair game to say that these things should be updated from time to time. I do think it's time to have regulation that takes into account the 21st century, [?] event. Nobody is in favor of no regulation. Russ: Well, don't be so sure. But go ahead. Guest: Well, there are some very sensible rules that should exist, and we would support those. At the same time I think you have to be careful to assume that regulation is going to have the intended consequence, especially when you think that just 6 years ago none of this existed. And so to think that we understand what's going to happen 2 years from now, I think would be a mistake. I think there's clearly something very special happening here, in the sense that immense value is being created for guests, hosts, and cities alike, actually. We've done a lot of studies showing the value that's being generated for cities. And so I think it's important that we take the time to really understand the transformation that's happening and put into place balanced regulation and not just react to the whims of different groups who are making quite a bit of noise about the fact that there's what's perceived as a destructive model. Now, what I'll say regarding hotels is that hotels are now having their highest occupancy ever. And recording some of their highest nightly prices, ever. So, I don't think our success is coming at the expense of hotels. I think that we've done some studies and have found that a lot of people when they travel actually stay with friends or family. And they are finding that Airbnb is a good middle ground between staying with friends and family but not wanting to stay in a hotel that puts them in a different neighborhood and really disconnects them from the people they are visiting. And so you'll see a lot of our guests getting a place in the same neighborhood as the people they are visiting. Just for one example of how we are actually increasing the size of the tourism pie. Russ: The thought I had--we talked about this with Mike Munger--is that to a large extent, your trust system and the reviews that you generate on both sides of the transaction are the regulators. Right? So, the guest that came before me is the person who inspected the property for me. So in some sense the technology and the way it brings people together is a substitute for regulation. I'd like to see the hotels move toward that way of guaranteeing their own business model rather than trying, for them, to extend the 50-year-old regulation to you as a way to deal with this change. Guest: The amazing thing about these systems, these technology systems, for managing reputation is that they take real-time feedback directly from the customer and make it visible to all. That's incredibly powerful. And if you think about the regulatory constructs that try to accomplish the same thing, they often involve inspections that happen annually. It's far from real time and it's not necessarily reflective of the experience the customer is having. Russ: So, you are part of a wave. We don't know what the full consequences of that wave will be. But I'm struck--it's just amazing how many people are trying to do what you've done with other things, whether it's your car parked at the airport or your pet that needs to be housed somewhere and so instead of putting it at a kennel you house it with somebody who has already got a pet and is walking their dog and you have more comfort about the fact that a dog lover is taking your dog rather than just a kennel. This is exploding, right? Why did it take till now for this explosion to come? What do you think was the--obviously somebody had to have the idea. You guys are part of that wave. But it's more than that. It's the technology alongside the idea. What's special about now that makes it work so well? Guest: I think the big barrier for a long time was trust. And people assumed that there wouldn't be trust, or they didn't know how to foster it. And I think, actually, Facebook and the kind of social network age that we live in where people's true identities are being truthfully represented online has changed people's perception. It was only probably 10 or 15 years ago that the idea that someone's online profile is accurate was almost ridiculous. Nobody would use their real name online unless they were buying something. They wouldn't voluntarily put that out there. And now so much of our lives are online, and we trust that that is representative of the reality. And so culturally our perspectives have shifted, and I think made space for these new business models. And I think in a lot of ways Airbnb has proven the model and furthered the trust of consumers and other entrepreneurs alike that this is viable. And thus you see it also taking off in other business verticals[?]. And it's being referred to as the 'sharing economy'--the idea that people have underutilized assets for even their own time, and that technology now makes it possible to share that quite easily. Russ: About the technology, though--do you think smartphones, bandwidth--is that part of the story, too? Guest: Oh, absolutely. So, mobile is all about removing the friction in the transaction. So people are always connected to the Internet. It's right in their pocket. So, when somebody sends a message on Airbnb to a host, the host gets a real-time notification in their pocket and can respond immediately. And so that removes the friction from the transaction. Meaning that the customer gets almost a real-time response. And that's much more satisfying than if the person had to run home or not come home for several hours or a day and have a delayed response.