Venture backed atoms

Atoms are bad now.

Margins

Hi. Can here. Today we talk Airbnb and scaling venture-backed, atoms-based businesses.

A few years ago, I used to live in a somewhat sketchy building in San Francisco. I wanted to live in a hip neighborhood, and even though I made tech money, it still wasn't enough to both get a nice place and save some for the future. The unit above me, I'd soon discover, was an hourly-rental, which meant it attracted a ton of unsavory characters at odd hours. I'd get woken up at the wee hours of the night by someone ringing my door if I was lucky. If I were less fortunate, I'd get up to bang on the ceiling so that someone would stop, ehem, whatever people do at 3 AM at an hourly rental while on god-knows-what.

Again, it was all part of the charm, living in a big city as a young kid. It was never pleasant. There was a sense of adventure to it. Having lived most of my life till then in Turkey, and a big chunk of that in comfortable boarding schools, I enjoyed throwing myself into the deep end. I looked forward to having some real San Francisco stories that didn't involve tech people being tech people. And most importantly, I knew what I was getting myself into, from day one.

Things, however, changed a bit a few months into my lease. My roommate and I never became friends with our neighbors, but we were acquainted; sharing those awkward lip-pursing smiles with the nice old lady across from our apartment was a morning tradition.

Yet, one day, I heard someone trying to enter a key to my actual unit's door. Understandably, I freaked out. I darted to the door and looked through the peephole only to see a cartoonishly hippie guy, with a bandana and tie-dye shirt. I yelled, "What the fuck man?" through the door, and he came back with a taken-aback, "Oh shit, wrong unit!" in an Australian accent. It seemed genuine enough, so I opened the door. He was visibly embarrassed and told me that he was staying in an Airbnb, and he got the unit wrong (See Note #1). He had meant to enter the unit across from mine, the one with the nice old lady. I told him that, and he went on his way with his again-cartoonishly hippie girlfriend.

And that was just the beginning. Soon after, we realized not just the unit across from me, but multiple other units in the house (which were all owned by the same old lady) became Airbnbs. I had thought I rented a unit in a sketchy building with sketchy characters and some nice old ladies but turned out I ended up living in a hotel. And right then, I started having hotel problems. There were always multiple lockboxes tied to the outer gate, a tell-tale of any Airbnb-laden building.

The would-be guests, however, with shocking frequency, would find it easier to ring random bells to see if someone would help them get into the building. As a stickler for rules, I'd always tell them through the intercom that I can't let them in, and they'd have to call whomever. Then they would ask me what number to call. I'd tell them no clue. Rinse, repeat. It wasn't a daily occurrence, mind you, but it happened enough to be a bother. The worst part is that I felt like the rug had been pulled under me. Zoning regulations existed for a reason, damn it!

What is Disruption?

The (misguided) disruption theory rhetoric in Silicon Valley peaked a while ago, but it's still there. If I can point to a single company that did disrupt lots of people, it'd be Airbnb. And I am being a somewhat of a hypocrite here, as I've stayed in 4 Airbnbs in my lifetime, and 3 of them were quite decent (and one, not so much). I certainly don't blame people who need a few extra bucks to turn to their houses into an asset to capitalize. Airbnb also seems to have had a change of heart, moving away from flaunting the rules as a growth tactic, doing what you’d think is the bare minimum for a hospitality business, following some shocking coverage and deadly incidents. Still, like my former employer Uber, it relied on some regulatory arbitrage in its earlier days.

And if I am picking on Airbnb here, it's both because I had direct experience with it and it's one of the most visceral, tangible of all Silicon Valley companies I can think of. Facebook disrupts elections (not a crazy idea!) and enflames genocides, but it's mostly an app on your phone. Google knows everything about you and your loved ones, but, like, it's also like air. It's everywhere and nowhere at the same time. But you can sleep in an Airbnb, or drive in an Uber. It’s different.

The problem with Airbnb isn't the business model or the idea (though maybe it is). But that, in order to succeed in the venture-backed model Airbnb found itself in, is one that rewards scale. I am not saying Airbnb accidentally raised VC money, but it raised money because we all thought it was how you get a company off the ground, especially if it had a website and everything. And by scale, I do not mean 2X or 3X (See Note #2), but 10X or more. If you've ever raised money or worked at a company that did, you know the feeling. It can be fun, as an intellectual exercise to find more and more ways to "add," but it can equally be a mind-numbing, dehumanizing experience.

It does make you wonder if everything has to be designed in a way to leave nothing on the table? For example, this newsletter doesn't scale by design. It's only two of us writing, almost trying not to get more subscribers. The entire Margins enterprise is a penance for our past (and future) sins as growth hackers. Our growth strategy is me retweeting random praise I see on Twitter, but doing it at 4 PM PST because I once read it's a good time for engagement. It's so unscientific and unmethodical that it's more of an act of defiance against the tactics of those sleazy growth hackers.

When it comes to the dangers of seeking growth at all costs, it's tempting to point fingers at capitalism. The argument is that capitalism forces companies to grow forever, which does seem impossible on its face. There's a limited amount of resources, be it nature or labor, so obviously we'll have to stop growing. The counter-argument, of course, is that we know how to do more with less as we progress. We each have supercomputers in our pockets that can store data that'd barely fit into a shipping container just a few decades ago.

But laying the blame on capitalism's feet is a cheap shot. I am not one to use Silicon Valley exceptionalism as an excuse, but, building software is a different beast than building a widget or a widget factory. But the problem is that the venture model, which worked when it dealt with technology, which has high fixed costs but tiny marginal ones, doesn't work when translated into atoms. Venture capital as an asset class was built for software margins, which can support growth as economies of scale kicks in. This is the reckoning we are seeing in the public (or in WeWork's case, almost-public) markets.

The human aspect of all that, of course is going to be harder to unravel. WeWork's IPO failed, but the founder(s) made out like bandits. Yet, the last time I stayed at an Airbnb in Paris, I felt a sense of shame come over as I ran into the neighbors. It could just have been me, or the casual Parisian misanthropy, but I could sense that the people living there were not excited for yet another random people staying over in their building. I tried to make conversation to ease the pain, both for them and myself, but my barely A1 level French did not help things move along.

Meanwhile, a couple of weeks ago signed a lease for a new apartment in San Francisco. Unlike the other places I've stayed so far, it's beautiful, airy, with a expansive view of the way. Well, except one problem. My neighbors just decided to Airbnb the unit next to me. Vie de merde.


Note 1: There was actually a unit number on my door previously. However, a couple of days ago, the door had gotten stuck behind a wood panel that lifted from the other side. It had practically locked me and my guests in. I tried for a couple of minutes but the door wouldn't open. So I ended up climbing up the fire escape on the balcony to the roof and entered the building from there. And then made my way to the apartment's door from the other way. Again, the door was stuck in such a way that I literally had to kick it open, breaking it in half. The landlord, shockingly, didn't make much of a fuss, and replaced the door right away. Yet, it took them a few weeks before they could put a new unit sign on the door.

Note 2: What to scale, turns out, is a hard problem on its own. In Airbnb's case, I assume it's the bookings. But what if each of your bookings is losing you money? And not all bookings are the same; there are major geographical, seasonal differences. Not only that, some markets take a long time to mature, so you might have to eat a lot of losses before they turn a profit, but some never do. When do you cut your losses, or change strategies? Or are some of your markets loss leaders, just so that you can have a presence for vanity metrics or other future projects? This stuff is hard.

Note 3: If any of you thought this piece was about shoes, please unsubscribe.


What I’m Reading

Who Wants to Clean up Adtech? — There are so many things wrong about adtech, but Jay Pinho points out how its sheer complexity is one of its worst qualities. And to make things worse, it’s not going to get better anytime soon. The inimitable Maciej Ceglowski (aka Pinboard) wrote about this a few years back too.

Softbank Shafts Startups — Couple weeks ago, I said I got SoftBank wrong. I thought that we’d see some structural changes or at least there’d be some deflation of the irrational exubarance on Masa’s part, but we hadn’t seen much. But maybe, I wasn’t as wrong as I thought I was! Dan Primack at Axios has an interesting scoop on how the Japanese conglomerate backed away from signing the term sheets after sending them.