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Airbnb, the revolutionary start-up that pioneered the "sharing-economy" - the unlocking of the value of unutilized or underutilized assets with the use of twenty-first-century information and communications technology - has run into trouble with the very software tools that power it. For the longest time, the company has been known as a vagabond, that operates outside the regular tax, zoning and housing regulation which affects other non-internet powered property occupiers and aggressively (litigiously) resists any attempt to bring it under the fold of city, state or federal regulation.
Much like Uber and Lyft which are now facing increasing regulatory pressure from cities (particularly New York City), Airbnb may have just met its match. Ordinarily, the city officials are powerless to adequately cover and apply the regulatory mandate to the millions of Airbnb hosts - that's where Host Compliance comes in.
Airbnb's AI-Powered Nemesis
As stated previously, being technology-powered and enabled, Airbnb has unleashed millions of regular homeowners onto the market as Airbnb "hosts". The usual city norms and regulations in the realm of Zoning and tax were not crafted to deal with the millions of homes suddenly made available through a smartphone prior to meeting any requirements as to licensing and taxation. There is something to be said for operating outside the zealous and watchful eyes of municipal governance but critics point to the dangers and harmful consequences of a complete lack of regulatory oversight. The Airbnb network is loose and vastly spread, a decentralized supply chain - that authorities cannot effectively regulate or police. However, Ulrik Binzer, a Danish entrepreneur and venture capitalist has figured out the right tool for the job. Mr. Ulrik noticed the regulatory gap and realized it was, in fact, a very large and untapped market with effectively no players.
He founded "Host Compliance" - a simple self-explanatory name for a company that similarly has silently gone on the hunt for Airbnb's lunch without alerting seemingly anyone. After all, it wouldn't be an overstatement to say that an artificial intelligence-powered city regulation enforcement aid - which is what Ulrik has managed to create - is a fundamental threat to Airbnb's business model. The company utilizes advanced AI techniques to automatically scan the market for Airbnb hosts and simply serves them with enforcement notices. It is offering its services to 300 cities in the US so far. This approach has the potential of bringing Airbnb under the cover inter-alia of registration and tax regulations.
In the words of Douglas Bell of Forbes "The business model is to automate the identification of cheats, to put the onus on hosts to prove compliance, and effectively, to become a private tax collector". This comes on the back of cities globally mobilizing and finding ways to establish an effective enforcement regime - San Franciso authorities fine $1000 per day for hosting Airbnb apartments without a license. Furthermore, the city has eliminated nearly half the supply - at around 4760 hosts. Barcelona has so far removed over 2577 hosts. These aggressive measures are motivated by inter-alia the increasing density of Airbnb apartments - in Edinburgh, there is 1 Airbnb for every 42 residents. Other states are levying taxes, Florida aims to raise over $800 million in revenue through a 6% tax occupation. A similar story is playing out globally in major world cities like London.
The Hope of IPO Before The Downturn
This challenge to Airbns's modus operandi and more broadly the commercial practices of "sharing economy" enterprises comes amid hopes by Airbnb to float an initial public offer (the company said it aimed at an IPO in the current fiscal though it is not etched in stone). Uber and Lyft in contrast already went public earlier this year with middling to disappointing results.
Airbnb has shown tremendous growth quickly amassing customers to reach 2 million daily with presence in 100,000 cities globally spread over 191 countries and over 500 million check-ins since the company's founding eleven years ago. It posted a net income of $93 million in 2017 against a gross revenue of $2.6 billion. Earlier this year it sold common shares at a valuation of $35 billion and more recently valued itself at $38 billion internally (409a valuation) putting itself well ahead of travel booking rivals Expedia (NASDAQ:EXPE) and Hilton (NYSE:HLT) and it has no real competitor when it comes to an IPO.
Financially so far the company has fared much better than its cousins in the sharing economy space. However, that might now be changing. The ability of the company to successfully operate off the grid and under the radar is going to be limited by the emergence of effective "regtech" start-ups as a response. Furthermore, Given the indications of a soon-to-arrive downturn (including but not limited to the inverted yield curve) and possibly a full-blown recession, companies are rushing to IPO to capture the capital available at a much higher valuation than they would otherwise manage. Airbnb is similarly hoping to capture funds in the capital markets at a high valuation while the going is not yet tough. Any downturn will hit the real estate sector and technologically enabled lend-leasing and brokerage very hard.