☁️Do clouds pay taxes?
Where is a tech company really based?
Hi folks. Can here. Today we talk about countries, border, and of Airbnb again.
If you were to start a tech company today, where would you do it? Would you, for example, come to the Bay Area? And if so, would you do it in the South Bay, like in Mountain View or Palo Alto or actually make it all the way up to San Francisco?\
This seems like a weird question to ask in 2020, but it wasn’t too far long ago when this stuff mattered, a lot. For example, as late as 2018, the storied startup accelerator YCombinator wanted, sorry required, its applicants to move to the Bay Area for at least a few months. They even had somewhat of an unwelcoming tone about it, like that they’d not help you find a place to live. Go back a decade, in one of his, dare I say classic, essays Paul Graham even mused whether founders picking the city with all its distractions and temptations would be a negative signal over those who’d rather live in the suburbs.
Anyway, all this surfaced in my head again as I watched in awe and disbelief, much like Brian Chesky himself, the stock price of the Airbnb IPO skyrocket. By the end of the day, the one-time who famously had to rent out his bedroom to strangers and super-glue cereal boxes to pay his rent was now worth around $11.8 billion dollars!
That many billions of dollars is a big number to wrap your head around. But here’s a number to compare that against: the entire budget for the city of San Francisco where Airbnb has their ridiculously pretty office is around $13.1 billion dollars with a big $1.5 billion dollar hole in it as of recently. With some creative Margins accounting, you could even say they are around the same! Obviously, this is a stupid comparison but given we are also in stupid times, I’m going to stick with it.
Is Airbnb a Tech Company?
People often muse about what makes a tech company a tech company, but in some ways, it’s hard to find a better example than Airbnb. The company entered an industry that is as asset-heavy as they come and entirely flipped it on its head. Instead of building hotels, it simply allows people to list their homes.
Sure, it did a couple of cute things early on to embellish and promote listings by sending professional photographers, but for the most part, it literally pushed the entire burden of hosting on the hosts themselves while simply taking a cut over the fees. That is what I mean by Airbnb as a tech company. Compared to its industry peers, Airbnb is nothing but software. While Hilton and Mariott had to build and maintain tens of thousands of hotels and buildings and parking lots and furnaces and beds and pay tens of thousands of people’s salaries, Airbnb “just” built a website where you could find rooms listed by people who did all that. Up until recently, they did not even bother to verify most of their listings. That’s some chutzpah!
Is Airbnb a San Francisco Company?
This raises an interesting question: what does it mean for Airbnb to be based in San Francisco when its business is really just a bunch of websites and apps that are on the internet? What are the things that make a jurisdiction more than just a bunch of laws and regulations that allow not just a business to succeed but for its people to live in? When the internet flattens everything and pushes the variable costs of doing business to zero across borders, does it even matter where people live? Or more interestingly, when you are not tied to a single place, be it a city or a country, where do your allegiances lie when the push comes to shove?
The allegiance question is an interesting one to me as an immigrant who still holds a Turkish passport but is a permanent resident of the US but it’s worth pondering on the corporate level as well. Take Facebook, for example. The company boasts around 2.37B users around the world, which by definition means most of its users are outside the US. However, the company still makes almost half of its revenue here in America, which means the American users are practically subsidizing the rest of the world. Add to that how the entire Facebook board of directors is a bunch of Americans living in America, just like a big chunk of its R&D staff, it’s hardly surprising the company has a wildly, if not recklessly, American slant in how it approaches most of its contentious issues.
But then, you could also flip this argument on its head to say that the company’s eye-popping valuation is really based on its growth potential which will surely come outside the US, so when the push comes to shove, it’d do what is right for itself outside the US, not in. This is not an easy problem!
Let’s go back to Airbnb. If you look at their revenues, they roughly follow that of Facebook. Things have gone a bit more America-heavy following the recovery from the seeming collapse of their business, but before that, it showed a decent geographic mix with America leading in the averages:
As a result of COVID-19, the geographic mix of Nights and Experiences Booked, GBV, and revenue during the first nine months of 2020 reflected a shift toward North America, where we have seen the strongest recovery. For the first nine months of 2020, Nights and Experiences Booked were 56.4 million, or 38% of the total, in North America compared to 55.3 million, or 38%, in EMEA, 20.2 million, or 14%, in Asia Pacific, and 15.0 million, or 10%, in Latin America. For the first nine months of 2020, GBV was $9.7 billion, or 54% of the total, in North America compared to $5.6 billion, or 31%, in EMEA, $1.6 billion, or 9%, in Asia Pacific, and $1.1 billion, or 6%, in Latin America. Similarly, for the first nine months of 2020, revenue was $1.3 billion, or 50% of the total, in North America compared to $0.9 billion, or 34%, in EMEA, $0.2 billion, or 9%, in Asia Pacific, and $0.1 billion, or 7%, in Latin America.
Again, this looks like a legitimate internet business, much like Facebook. And if you somehow close your eyes and ears and pretend we are not living in a time of exasperated exuberance like my co-host Ranjan suggests, it becomes even more impressive. Seriously, who in their right mind could have guessed a hospitality business not just surviving but thriving in an age of decimated travel? It wasn’t even just a few months ago that Airbnb had to cut literally 25% of its staff and now they are a public company at $60B. This is amazing! (Sorry, Ranjan! I am no longer a miserablist)
But, let’s also go back to our original question and ask it in terms of Airbnb: Could you start a company like Airbnb anywhere but San Francisco today? Or maybe, put another way, how much of its success do Airbnb and its now fabulously rich founders owe it to their city? If you really could not start Airbnb anywhere else, what do you owe to those who are less fortunate than you that made it possible?
They are all interesting questions to ponder. I’d be lying if I had an honest answer. Brain Chesky himself is not even sure. I moved around a lot growing up, and San Francisco is the city I’ve lived longest in my adult life so I do feel a strong allegiance to it. Conversely, I have worked in tech my entire life, and I often wonder whether its astronomical rise has been a good thing for the city or not, and how much of that, the good and the bad, can be attributed to the city’s handling of it and how much of it to an industry that thrives on not being tied to a physical location to do business and when it tries to pay back, it does in the most awkward way imaginable. I obviously want my city to succeed, and get out of its rot.
But at the same time, I do not want the entire world economy to run from a single, earthquake-prone city. I genuinely want the wealth of tech to be spread around the world, not just so that more people can benefit from the opportunities I’ve had by having moved here on what wasn’t more than just a whim really, but also so that we build things that respect other people’s ways of living. It also seems silly to think the Bay Area has or should have a monopoly on good ideas, good people, or just should or could be the only place on earth to have the right set of ingredients.
The question of allegiances, or paying back to the place that made your initial success still remains, however. As Brian Chesky himself argues, it’s unlikely that he’d be able to get Airbnb off the ground anywhere but San Francisco and most of the company’s value is clearly created here. Yet, looked another way, the company exists solely on the internet, with most an overwhelming portion of revenues coming from outside the Bay Area. The question of not just financial, but also political and cultural loyalties will only become more pertinent as more companies have not just become digital but also baseless. We should start thinking about how to answer the hard questions that come with these circumstances sooner than later.
PS: When I think of San Francisco elitism of the tech industry, I am always reminded of this marvelous passage from Matt Levine. Before Miami and Austin, there was Oklahama:
Oh come on:
When Josh James traveled to the Bay Area in 2000, seeking funding for a web analytics company he had founded, he spoke at length with a venture capitalist about his plans for growth. The conversation was going well, Mr. James recently recalled, until the investor asked where he was based. “As soon as I told him I was from Utah, he literally, without saying a word, turned around and walked away.”
That's from 2000, but still. It reminds me of Jason Calacanis's book "Angel," which I read two weeks ago as a stunt. Chapter 5 of that book is titled "Do You Need to Be in Silicon Valley to Be a Great Angel Investor?" The entire text of the chapter is "Yes." A basic rule in business, and in life, is that progress consists of rejecting established irrational prejudices and replacing them with considered rational analysis, but then also immediately throwing in some new and even dumber irrational prejudices. While also becoming ruder. Anyway that article is about the thriving unicorn scene in Utah, which is thriving in part because startups have had to be efficient and bootstrap themselves, because Silicon Valley investors are so irrational and rude.