Airbnb's $11b valuation raises eyebrows

Airbnb is poised to join the 11-digit club.

The company, which was created nearly six years ago as a way to help people find spare rooms and couches to sleep on, is in advanced talks to raise more than $US400 million in capital, a round of financing that would value it at more than $US10 billion ($11 billion), people briefed on the matter said on Thursday.

Such a valuation would surpass that of Hyatt, the 57-year-old hotel stalwart, and make Airbnb the latest technology start-up firm to gain an eye-popping net worth. Investors hungry for a piece of the fastest-growing start-ups have opened their wallets, hoping to get even a small piece of the action before what they hope will be a giant payday.

But Airbnb, a centrepiece of what has become known as “the sharing economy,” is also drawing increasing scrutiny from regulators concerned about safety, rental laws and tax collections. The company has become a point of contention among landlords in big cities, as well.

Leading the potential new fund-raising round is TPG Growth, the investment firm that already has a stake in the car-ride service Uber, the people briefed on the matter said. Other prospective investors include the Dragoneer Investment Group and T. Rowe Price, one of these people added.

The discussions, which were first reported by The Wall Street Journal, are continuing and may still fall apart, these people cautioned.

Despite murmurs of a new technology bubble, valuations appear to be rising unchecked. Last month, Facebook — itself worth nearly $US170 billion — paid more than $US16 billion for the messaging service WhatsApp, a bid that some analysts have described as reasonable given the acquired company’s growth prospects. Dropbox, a provider of online storage, has been appraised at about $US10 billion, while Palantir, a sophisticated data analysis firm, has raised money at a $US9 billion valuation.

The pace of investments appears to be accelerating. Venture capital firms spent $8 billion in the last three months of 2013 investing in the likes of Pinterest, the fast-growing social network, according to data from CB Insights. The hope, as ever, is that these start-ups will eventually be sold or go public at still higher valuations.

“I’ve never seen people so encouraged,” said Colin Blaydon, a professor at Dartmouth’s Tuck School of Business. “There will be big winners, and investors don’t want to miss out.”

Others view the valuation race more skeptically.

“We’re seeing valuations go nuts,” said Jim Ellis, a lecturer at Stanford’s Graduate School of Business.

Even so, Mr Ellis conceded that many of the companies now enjoying the limelight are a far cry from those that rose and fell during the dot-com bubble. Many start-ups now have business models that can lead to sustainable revenue and profits.

Airbnb appears to be one of them. Founded in the summer of 2008, the company has since become one of Silicon Valley’s most celebrated and one of its most disruptive. Its marketplace lets people rent out their homes, from couches to entire houses, drawing an estimated 11 million guests in more than 34,000 cities.

Airbnb makes money by taking a cut of each transaction. With 600,000 listings on the company’s site, that could translate into significant revenue. The company doesn’t disclose its financial information.

Under the business model, one shared with Uber, homes and cars are not just possessions but potential sources of revenue. The model also allows customers to pay lower rates than those charged by traditional service providers like hotels.

But with the disruption that companies like Airbnb and Uber promise comes greater legal scrutiny. Airbnb has faced challenges from regulators concerned that the service allows homeowners and renters to avoid paying taxes. Other government agencies are investigating whether these start-ups run afoul of state laws governing rentals.

New York’s attorney general, Eric Schneiderman, has subpoenaed Airbnb for information on customers in the state who he suspects may be illicitly using its services for their main income. Airbnb has moved in court to quash the information request; a hearing is scheduled for next week.

And Uber has battled taxi and limousine commissions in a number of places, including Washington, where the established industries have argued that the service violates local regulations.

Those potential hurdles have failed to daunt prospective investors. TPG Growth, for example, participated in a fund-raising round for Uber last year that valued the service at $3.8 billion.

Investors are betting that Airbnb will continue to show enormous growth. Its last fund-raising round, in 2012, valued the company at $US2.5 billion. Should its latest efforts to raise capital succeed, it will carry a higher valuation than Wyndham Worldwide, whose market capitalisation stands at $US9.3 billion, or Hyatt, whose market value is $8.4 billion.

The round would also put a valuation on Airbnb more than twice that of HomeAway, a publicly traded vacation rental company that carried a value of $US3.8 billion as of Thursday.

Airbnb’s current investor roll reads like a list of Silicon Valley’s biggest venture capital firms. Among them: Sequoia Capital, the only outside investor in WhatsApp; Andreessen Horowitz, an early backer of Facebook; Founders Fund; and even the actor Ashton Kutcher.

The New York Times

The story Airbnb's $11b valuation raises eyebrows first appeared on The Sydney Morning Herald.

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