Q&A With Brian Chesky: Disruption, Leadership, and Airbnb’s Future

FORTUNE: Brian, one thing that people don’t often hear about from your early days is how hard it was to get the idea for Airbnb off the ground. Investors fled and ran away from the idea. People thought it was crazy. Tell us about that.

CHESKY: In summer of 2008 I meet a guy named Michael Seibel. And Michael Seibel says there are these people called angels, and they’ll give you money. The first thing I thought is I can’t believe this guy believes in angels. That’s how naïve I was. He introduced us to about 20 angel investors and a couple of venture capitalists. At that point we were trying to raise a $150,000 at a $1.5 million valuation.

Million with an M.

CHESKY: Yeah. So 10% of the company. We probably got 20 introductions. Most of them didn’t meet us. We probably met a half a dozen people. People mostly ran away from – well, everyone ran away from the idea. No one funded us. The first reason was Joe and I were designers. And as far as they were concerned, designers didn’t start companies. We didn’t “look like” tech founders, which I think is ridiculous, because I don’t think you should ever hire someone just because they look like something else. If you want a new thing, well, maybe they’ll look different.

But everyone was looking for either the Zuckerberg model, the Harvard coder, or the Google model.

CHESKY: If you didn’t drop out of Harvard or you didn’t drop out of a PhD program at Stanford, you weren’t going to be the next Google or Facebook. It was a little absurd. But the bigger issue was people asked, how many air beds are there in the world? In fact when we were trying to do our first investor deck we had to create a total addressable market. And the first thing we thought was, well how many air bed sales are there? This is before we actually realized we should open the model up [to renting out rooms or entire apartments rather than space on air mattresses].

That’s very narrow.

CHESKY: The [even] bigger problem was a simple idea: People did not think strangers would stay with other strangers. They thought it was crazy. One person said, ‘Brian,I hope that’s not the only idea you’re working on.’

And at some point in late 2008, after the financial crisis had hit, one investor told us, ‘Listen, the stock market is cratering. I can’t even invest in good companies. I’m going to invest in air beds?’ That kind of hit home. We ended up not raising money. We probably each racked up like $25,000 in credit card debt. Until they stopped giving us credit cards.

And then we didn’t make a lot of money with air beds, so we thought well, we’re Air Bed and Breakfast, let’s go into the breakfast business. We made $30,000 selling collectable breakfast cereal. And this is actually how we funded the company.

NYSE

So what’s the lesson in there for other entrepreneurs?

CHESKY: Well I think there’s two things. A lot of entrepreneurs meet me and they say, ‘I need to have investors, I need to raise capital.’ I think the first round we raised was $20,000. Startups today are over-capitalized. It’s easy for me to say now, but things get expensive with scale. You don’t need millions of dollars to start an idea, though. Unless you have fixed costs, you don’t need any capital to create a prototype. Ideally your co-founders, with sweat equity, can create the product themselves.

There’s also a bigger lesson, which is we just didn’t quit. I think a lot of people who try to do what we did, or try to do other things, they quit, they stop short. A lot of people ask, ‘Why didn’t you quit?’ The reason we didn’t quit is if you start a company, very simply, you have to know something no one else knows about your business. You need to have a unique insight. And we had a very simple, unique insight. It was totally by happenstance. When we rented our home one weekend, our unique insight was, it’s actually not weird for strangers to stay with other strangers. And you can make a bunch of money and the people who travel there can save money and have an amazing experience. If people could just experience what we experienced that one weekend, this would be an idea that would spread around the world. And again, maybe thousands of people one day would use Airbnb. That was our unique insight, so that was kind of our star. We just kept thinking in [those] terms. That’s why we kept going.

So you spread very fast, very far and wide. But it hasn’t been easy.

CHESKY: No.

Because as soon as you started to get to a sizeable size all the opposition started to come out of the woodwork.

CHESKY: Then we became disruptors.

Then you became disruptors. You don’t like that word. But you are Exhibit A of disruption.

CHESKY: I guess so.

Your end user likes you, that’s very clear. But many other stakeholders do not. And that’s because the core business of renting out a home for a short term violates local laws in many markets. You’ve worked to turn those over in many places. But there are some markets that just won’t budge—and New York is one of them. This has been a big source of opposition for you. So talk about that a little bit. Why has there been so much pushback? And what’s the endgame?

CHESKY: Yeah, so to back up for a second. Before I got to [Rhode Island School of Design,] good design was if somebody who used the product liked it. And when I got to RISD, suddenly there was this thing called green design. Sustainability. And the idea was, it can’t just be [that] people like your product, it has to be good for the world. We call these externalities. It’s not just about guest and host.

When we started Airbnb, we didn’t fathom millions of people doing this. So I did not consider landlords, I didn’t consider cities. It grew to be so much bigger than what our idea was. Our idea was just to bring two people together. It grew so fast, and I came from the school of, like, Craigslist—[the idea] that the community is the immune system and that bad people get ridded from the site by its review system. A few years in it became very clear that we had to be much more mindful about how we designed the platform.

One of the people we hired early and who had a huge influence on me was Belinda Johnson, our Chief Business Affairs and Legal Officer. She was a lawyer by training. And she told me something very simple. Growing up I felt like if people didn’t like you, you stay away from them because you’ll get in a fight and that’s really bad. But she said, you have to meet with people. You have to meet with cities. Even if they don’t like you, if they hear your story, and you hear their story, you can come to a resolution. And so we decided that we would have a principle that we would partner with cities. Now, it didn’t go totally smoothly, and I wish it was much easier here in New York City, but we did this, city by city. We now have agreements with 200 cities in the world. We collect and remit hotel tax. We typically have regulatory schemes. Those regulatory schemes often involve a registration. Every city’s got a different process.

In New York City there were a number of things going on. We were slow to be here. We didn’t get our story out early, and there was misinformation about who our company was. But there are some substantive problems. There was a phenomenon that occurred where landlords decided you can make a lot of money by taking units off the market and just renting them on a short term basis.

I think the scope of it was overstated, but this was a real problem, a very bad negative externality. So we were a little behind in this and we’ve had to play catch up. In New York City, we’ve done a number of things. We’ve made clear we want to pay, collect and remit hotel tax like we do in San Francisco and Chicago and all these cities around the world. We want to limit hosts to one home—just the home you rent. The basic premise is if a city has a housing constraint—[like] San Francisco and New York City—we want people to rent the homes they live in and not take units off the market. So, San Francisco instituted a cap. They figured after [renting out] X number of days you probably don’t live there. We work with those caps.

The last thing is landlords. I know not all of them love to have this activity in their building. And so we’re in the process of instituting a friendly landlord program where landlords can sign up and we can allow them to get information about who in their building is using Airbnb. They can even get a revenue share of the income. And they get the peace of mind knowing that the rent check’s probably going to come. We’re trying to get much more hands-on around people understanding the rules and regulations of their city and their buildings.

Courtesy of Airbnb

Much of this opposition has also come from the hotel industry. Talk a little bit about your relationship with the hotel industry over the years. Early on, I know that many of the CEOs came to Airbnb, they had a day of immersion, they saw your headquarters. But it seems to have gotten a lot more frosty in recent years. They’re funding the opposition to you in many places, and there’s been accusations on both sides. Tell me how that’s evolved.

CHESKY: I think the hotel industry is actually many constituents. You have the hotels—Hilton, Marriott, these major brands. You’ve got the hotel unions, and you’ve got the hotel associations. And the United States is quite different than Europe. In the U.S., we’ve had a friendly relationship with the hotel companies. I’ve met with Chris Nassetta [the CEO of Hilton], and Arne Sorenson, who’s the head of Marriott. With the hotel unions, it’s been very difficult, especially here in New York City with the Hotel Trades Council. It’s not the relationship I would have wanted.

I’ll give you an example. I’m staying in Harlem, and 1.5 million people came to New York last year on Airbnb. One in seven of those people stayed in a majority minority neighborhood like Harlem. And the majority of the people in Harlem renting their homes are local Harlem people who live at or below median income. And so travelers now are coming to Harlem, spending money in the home, and the host keeps 97% of the income. And then they go around the local coffee shop or they’ll eat at Sylvia’s or eat at one of the local restaurants, and they’ll spend money there. This cumulatively led to billions of dollars of spending in the City of New York. There’s something incredibly powerful about bringing money to these different neighborhoods. We did an economic impact study, and we asked: how many jobs were created in the Airbnb ecosystem? If you add the direct spending, meaning the spending this year by people in [Airbnb] homes, and the indirect spending on neighborhoods, it adds up to more than $60 billion dollars. This year they estimate that will translate into 1.3 million jobs.

With hotels, almost all their revenue is in the central hotel district, around midtown Manhattan. And then you go to a multinational restaurant. And so I think there’s a story here, where there should be a place for local communities to be able to participate.

The notion that we’re in competition with hotels is also a little bit overstated. I don’t want to say there’s no overlap or cannibalization, but I’d like to clear up a couple of things. The first is that the average person at Airbnb stays about two and a half times longer than the average person who stays in a hotel. Our average stay is five to six nights. One in five people stay longer than 30 days. We’ve surveyed people and asked if it wasn’t for Airbnb, what would you have done? Hotels weren’t historically in our top three answers. The number one answer is ‘I wouldn’t have traveled.’ The number two answer is ‘I would have stayed with friends and family.’ I mean, how much do people want to travel and then stay with their in-laws? So this allows you – and of course it’s offensive to say [to family] ‘oh, stay in a hotel.’ But now they’ve got Airbnb down the street. And the number three answer is ‘I wouldn’t have stayed as long.’

So I do think it’s a different use case. Now is there an overlapping use case? Of course. I’m not going to say there’s no overlap. But I think the overlap has been overstated. My evidence of that is if you ask Chris Nassetta, CEO of Hilton, which until the merger of Marriott and Starwood was the largest hotel company in the world, he actually went on record numerous times saying they haven’t seen a material impact. Their revenue per average room is a lot higher today than it was when we started in 2008.

I think they see your business doubling every year and they think okay, maybe it’s not right now, but what’s going to happen next year? I think a lot of it is coming from fear of the unknown.

CHESKY: Fair enough. I understand that the absence of information is filled with misinformation. And things that involve technology, that just come out of nowhere—the internet moving to your neighborhood can seem like a really scary thing. I understand that.

We’re talking about the hotel industry, but this is happening across industries where startups are coming out of nowhere, challenging the way things are done, whether a company is saying that I should rent my clothes instead of buying them, or robo advisors challenging the banks, or I do Blue Apron so I cook at home three nights a week, and I haven’t set foot in a super market in months. So this is happening across the board. What’s driving all this, and how can the incumbent industries be prepared to deal with it?

CHESKY: Well, this is both exciting and can also make people nervous, but the change is only beginning. If you think of Moore’s Law—it basically means that processors double in speed every two years—the next ten years will change a lot more than the 25. In fact, in the next hundred years the world might change as much as the last 2000. The way we live in cities is going to completely change. Some changes we need to be prepared for. I’ll give you one example. We have a new President of the United States. And I would say the root of Donald Trump becoming president, was economic uncertainty in the United States, and people feeling like they aren’t better off than they used to be. They’re angry. There’s different perceived causes, like globalization. And maybe there was a real impact of globalization on people’s jobs.

But globalization is nothing compared to automation. Will manufacturing come back to the United States? Of course. But that doesn’t mean jobs will come back because [things are] made in America, because the labels may as well say made “by robots” in America. That’s what technology is going to do. All of these technology companies [are] automating and automating because robots are going to be cheaper than China. And so automation is a huge thing. Oxford did a study that said that half of U.S. jobs will be automated in 20 years. Many of us in tech believe that was a vast understatement. It’s important to take a step back and realize that’s the reality.

I actually am not scared and I’m very optimistic. Because I think while one trend is automation, there’s another trend happening. A phone is [now] more powerful than a super computer from the 1980s, and so we now have super computers in our pocket. We can have reputations in a minute or two. We can pursue our passions and skills. There are so many things you can do. I hope that that’s just the beginning. I think there are many trends where there can be a lot more income being created on our platform.

So this is the picture. It’s important for all of us realize the world is changing and embracing the technology. And I think if you embrace it and you’re ahead of the curve, you can find a lot of opportunities.

You have a new title. Tell me why you have a new title.

CHESKY: I’m CEO, and last week I decided to expand it to Head of Community as well. The reason why is I love Steve Jobs and Walt Disney; they are some of the great CEOs of the 20^th and 21st century. What made them great was they were obsessed with the product. And, one day I was thinking, what’s our product? Our product is not the website, it’s not the app–it’s the community, the people. CEOs are often chief product officers. But for me to say I’m a chief product officer when my product is a community, I really should be thinking of myself as head of this community.

So you’re actually spending a lot of time with your community, which does bring up an interesting contrast right now between Airbnb and Uber. You’re always lumped into the same bucket.

CHESKY: Always.

Your businesses are very different. But you’re both the pioneers of the sharing economy. Uber is going through a crisis of leadership specifically right now. It’s been accused of everything from a culture that is not friendly to women, of aggressive tactics, and we saw the video of Travis Kalanick berating one of his drivers a few weeks ago. He has come out and said, I need leadership help, we are going to get that. There seems to be a contrast here between the way you deal with these things. Can you comment about that?

CHESKY: Well, I think that all of us are on our leadership journeys, frankly. I know Travis is. I’ve been on one myself. I think we’re all learning. Just to put all this in perspective, my life experience before Airbnb was a year and a half making $40,000 a year as an industrial designer in Los Angeles, California. And before that, growing up the son of two social workers. I had never even heard the word ‘entrepreneur.’ I think there’s a benefit to young people like us starting companies. We can come up with novel ideas. But it also means that we’re learning on the job. That’s the price sometimes of these things.

We need to have mentors. I think I’ve always been pretty shameless about seeking out people much smarter and much more experienced than me from the very beginning. Michael Seibel and other people. And the more successful I got, the more leaders I started seeking out, whether it was investors, or Sheryl Sandberg at Facebook, or I got the opportunity to spend time with Warren Buffett and he became a close mentor of mine. Somebody once said ‘You’re the average of the five people you surround yourself with.’ So the question is, how mature are the people you surround yourself with? If you surround yourself with the right people, you can grow up pretty quickly.

Courtesy of Airbnb

So do you think that Travis has not surrounded himself with the right people?

CHESKY: I don’t know.

What would your advice be to him?

CHESKY: I think he’s doing everything he probably should be at this point, which is to say he’s owned up to every problem– every time there was a challenge that broke out, he apologized. He’s owned it, and he seems to have established a step forward. The advice I would have for any entrepreneur is it’s very easy initially to be defensive. Sometimes people have accused me of things and I want to be defensive: “That’s not true, you just don’t like us.” And then you step back and you kind of cool down and you ask, “well, is that true? Like, are we having an impact on housing? What is our relationship like with landlords? What about this, what about that?” And if you take a step back and you have some humility, I think you can solve a lot more problems.

You guys are friends. Has he come to you for advice?

CHESKY: We haven’t spoken about any of his challenges recently.

I want to switch gears a little bit and talk about your future plans. News came out last week that you had closed on another round of funding. Everyone’s wondering when are you going to go public? And here we are, sitting in the New York Stock Exchange. I guess I’ll just ask you, like I’ve asked you before: When are you going to go public, Brian?

CHESKY: I hate giving, like, no answers. We don’t have anything to announce. We are working on making sure the company is ready to go public. We’ve always said it was a two-year project. We’re probably halfway through that project as far as us being ready to go public. But at that point, you know, our investors are very patient. None of them are really anxiously waiting for us to go pubic. A lot of them find that at least right now, we can take really big bets as a private company. And so everyone’s really patient. We only want to do it when it’s the right thing for the business and the community.

I have something you said to me about this two years ago. You said basically the same thing—you said, “If we decided we wanted to go public, we’d want to give ourselves two years. That way you have the flexibility to pick that moment.”

CHESKY: When did I say that? How long ago?

You said that in 2015.

CHESKY: Okay, well.

So are we in the two-year window?

CHESKY: Two years is flexible. Not exactly 24 months.

You did just raise all this money again, you’ve raised a lot of money. And I have it on pretty good reporting that you don’t spend a lot of that money.

CHESKY: There’s four reasons you go public. The first reason is because you need money. We don’t need money. The second reason is because it’s a branding event. I think that’s a pretty bad reason to go public.The third is because you want to have currency for M&A. We’ve done some acquisitions, but we beat out public companies in those bids. We don’t need currency. So the fourth reason, the only reason to really go public in my opinion, is you need to get liquidity for shareholders. We’ve done a couple of employee liquidity rounds. So it really comes down to the investors. So far the investors have been pretty patient.

You also said to me when we were talking, as I was reporting the book, that you believe that the bigger you are, the better you will fare in the public market. It’s better to wait and be a little bigger when you go public.

CHESKY: Yes. I think there’s three tiers of companies: you’ve got small market cap companies, mid market cap companies, and what I call ‘tier one’ companies. A tier one company would be the big five, which are the four I mentioned plus Microsoft. And there’s an interesting trend in the Internet today where the small companies are actually getting smaller, and the big companies are getting bigger. When I came to Silicon Valley, being a big company was bad. Big companies couldn’t innovate, they stopped growing and they were considered weak. Today, competing with Google or Amazon doesn’t seem like an awesome opportunity. They’re just very, very powerful.

I think there’s a mature mobile platform, and it will all shake out again when the next thing after mobile comes out—right now, everyone’s debating, is that AI or what is that going to be. But I think for now, you want to be robust. This is something that Jeff Bezos [an investor in Airbnb] has told me—that you want to be a robust company, so if somebody hits you, you can stand up. The public markets provide a huge force against companies. If you’re not strong and you don’t have good roots, if you don’t have good fundamentals, you will just fall over. You’ve seen a lot of small-cap companies not make it out very well.

You’re also in the middle of expanding the business. Last November, Airbnb came out with an ambitious plan to go from just providing accommodations to providing all kinds of other things: Experiences, restaurant reservations. You’ve teased that there’s going to be something around ground transportation, flights and more. You’ve told me that ultimately you think that the revenue from just accommodations will be less than half of the total.

CHESKY: Yeah, to qualify that I’d say not including things like Lux [the company’s new luxury business], which we just acquired. If you think of the company as of last November, before we started doing new stuff, that will one day I believe be the minority of our revenue. We just bought a company called Luxury Retreats, where the average price per night is $2,000-$3,000 a night. They’ve got some of the nicest homes in the world—4,000 luxury homes. Every home goes through a 250-point inspection. It’s like a four to six hour inspection in person. Every single home has a 24/7 concierge. And they have any service you can imagine. Somebody wanted a pop-up synagogue on the beach. Who knew you could do that? So most of Airbnb, by 2021 or so, will probably be new things that we’re shipping at of 2017 on – including new stuff within accommodations.

We’re looking at a lot more services. We launched Trips, which is basically experiences, things to do. Here’s an important ratio we found: One to one to three. For every dollar you spend in a hotel, you spend a dollar in flight, you spend three dollars in the city. This is called “daily spend.” Now, historically, it’s not been sized to the big market. There’s no Hilton of daily spend. There’s no Delta of daily spend. But most of travel is daily spend: Where you eat, entertainment, what you do all day. And so we think that’s probably, long term, the biggest opportunity, the most fragmented. It’s the place where you could probably add the most value. So now you can go to Paris and you can do dining experiences. I just came from London where we announced music experiences. I think in 10 years, more concerts will be in intimate spaces and homes than in stadiums. Which is a good thing. Because today, very few musicians make any money. And if you can have more small experiences, you can empower tens of millions of entrepreneurs to become chefs, to become musicians and artists—and they can give lessons. So we have this basic “the world is a village” type idea where all these new micro-entrepreneurs can be started. And that’s kind of a vision of our economy.

Your models for this notion of taking a company that’s known for one thing and expanding it into many things were Amazon and Disney. Talk about that.

CHESKY: Amazon, Disney and Apple. So basically a company goes through three stages then you repeat. In stage one, you’ve got to make a product. That stage ends when you get through this thing called product-market fit. And product-market fit basically means ‘Okay, we’ve figured out the product, now we can scale it.’ Then you enter stage two, which is growth and hiring—you’re scaling a company. A lot of entrepreneurs fail at this stage. You’ve got to hire really fast. In stage three, you have to become a mature organization. This is typically marked by hiring an executive team. A lot of companies mess that up, too. If you succeed to do all this, you’ve made it very far. If there’s 10,000 companies, 9,990 have probably not gotten that far. But if you’ve succeeded, you succeed only to do it all over again. Meaning now, you’ve got to come up with a new product. And if you don’t, then you’re Blackberry or one of the ‘90s, technology companies we don’t really talk about today like Silicon Graphics or something like that, and you become a roll up of some other company. Very few companies that have endured have a single product. Even Google, where almost all the revenue is search, it’s really created a whole ecosystem. Apple did it four times in a decade. They did the iPod, the iPhone, the iPad, and they also revolutionized music. Amazon did this.

The problem is what they call the ‘second album problem’. Why can’t they come out with the next product? I studied these companies, because I didn’t want this to happen to Airbnb, and I realized, why do companies fail? Companies fail because they do the opposite of what a mother does to a child. When you raise a child, if you have a three-month-old and a 13-year-old, who are you going to give more attention? If you don’t pay attention to the three-month-old, it’s going to starve and die. So you better give the 13-year-old more independence and spend most of your time and energy with the infant. The problem is, if you’re a big company, you inverse it. Whatever generates all the revenue gets all the good people and gets all the money and gets all the CEO’s attention. So I had a rule that we do the opposite: we moved a lot of our best people to the new thing. And if a manager didn’t fight me [because that person was so valuable], I didn’t want them. I only wanted to take people that upset the organization. And so you have to do these kind of counterintuitive things. This is what Jeff Bezos did. This is what Steve Jobs did. This is what Walt Disney did. Walt Disney bet the entire company on Disneyland. And he took the very best animators, and the studio was really angry.

One of the things that’s interesting to me about this move is that your first product, the way that Airbnb was created and became viral and became huge, was almost by accident. You didn’t think it was going to work, and lo and behold it was transformative. But now you have the opposite of that where you’ve spent the past few years sort of developing this product in the Airbnb lab, and now released it onto the marketplace. How is that better or worse or just different?

CHESKY: I’d say different, unclear whether it’s better or worse. I think there was an element of luck involved with the founding of the company. We’re lucky that we chose homes first. If we chose trips or experiences first, it wouldn’t have worked. Because you need demand. And people aren’t searching for experiences. They’re searching for places to stay.

I think both [ways] are fine. Amazon and Apple, they were very intentional about their second or third, fourth products. Everyone’s first product was totally by accident for the most part. I don’t find that being a defining factor. I think the key is, do you put the best people on it? Does the CEO spend more of their energy on the new stuff, not the mature stuff? And are you constantly testing?

One other reason companies fail, is this—there’s a great story [involving] Disney. Disneyland launched this thing called California Adventure. It’s actually now doing pretty well, but initially it was a huge failure. The reason it was a huge failure was, there were like 50 executives who went to an off-site to figure out what a new park should look like. They basically violated most laws of how to build a great product.

They realized, ‘We make a lot more money on food and beverage than rides. So we’re going to have way more restaurants. We’re going to serve alcohol so parents can drink. We’re going to do a California theme park in California.’ Even though most people who visit are from California. So it was basically created in a business plan. It was an amazing business plan—the only problem was, people didn’t want it. They had to basically redo the park with a multi-billion-dollar renovation.

A lot of products fail because they start as business plans. But the key thing is, are you making something people want? If you’re starting it because it’s a good revenue generator, well, your customer doesn’t care about that. It might be a great business, but not if no one uses it.

Tell me what you see Airbnb being in the future.

CHESKY: You know we’ve completely changed, or we’ve created a whole new category of how to ‘stay.’ We’ve had a 160 million people, from every country in the world but North Korea, Iran, Syria, South Sudan. And it’s two million people over New Year’s. Pretty soon that will be every night. That’s what we’ve already done. I want to, in the next 10 years, get to this place where we can sell end-to-end trips—and have hundreds of millions of people every year booking end-to-end experiences where the home [stay] might be a minority of what we’re doing. Ten years from now, if it’s Friday or Saturday night, you’re like, ‘What’s fun to do around here?’ Whether it’s the city you live in or a city where you’re traveling, you’d look to Airbnb.

We will have created tens of millions of entrepreneurs who are creating experiences. A whole new part of the economy is the experience-based economy. And then we’ll have also gone to aviation, and started to redefine how we fly. Because what if flying was the best part of travel, not the worst part of travel? We call all this ‘magical trips’—basically trips that are just amazing, memorable, end-to-end experiences. This is what we want to be doing in the next 10 years.

This interview has been edited for clarity.