Airbnb IPO: Legal Challenges Ahead

  • New York Attorney General has declared that more than 75% of Airbnb’s listing in New York are illegal
  • Despite legal challenges, Airbnb continues to grow at tremendous speed pushing up its valuation
  • Continued legal and regulatory challenges in several jurisdictions is likely to delay Airbnb’s IPO

Airbnb, the rent sharing company, is one of the most valuable startups with the latest funding round valuing it at $10 billion. The company has been growing at a phenomenal rate in last five years. However, legal challenges continue to trouble the start-up, with the company facing existential threats in many cities. Legal challenges are the likely cause for the delay of Airbnb IPO. There are many internet companies like Airbnb, Dropbox and Box lined up for IPO.

Airbnb’s Legal Woes

Barely few weeks after San Francisco legalized Airbnb, New York Attorney General (AG) Eric T. Schneiderman, released a report which states that more than 75% of Airbnb’s listing are illegal. NY AG has sort of declared a war against Airbnb, terming it illegal and accusing it of putting hosts and neighbors at risk. Mr. Schneiderman has accused Airbnb of violating several rental and zoning laws.

The Airbnb Report

Mr. Schneiderman’s “Airbnb report” is based on the data provided by Airbnb for the period between 1st January 2011 and June 2014. Contrary to Airbnb’s claim that most of the hosts are ordinary New Yorkers who share their rooms so that they can earn a few extra dollars to pay the rent, the reports states that 36% of the listings and 37% of the revenues belonged to commercial users who offered more than two unique units for short term rental. The top New York host had listed 272 unique units and pocketed $6.8 million in revenue during this period.

According to the report Airbnb has earned $60 million in fees from the private listings in last four years of which $40 million is from illegal listings. The report also states that New York City is owed $33 million in hotel taxes in last four years. Airbnb has removed nearly 2000 listings from its site since the investigation was launched. A decision by New York to close illegal listings will hurt Airbnb’s growth. Airbnb also stands to lose around $100 million if New York asks Airbnb to pay up the taxes including penalty and the illegal revenue, which it had made from illegal listings.

Airbnb_NY_revenue
Source: Airbnb Report

Airbnb Continues To Grow In Spite Of Legal Challenges

Meanwhile Airbnb has continued to step on the gas, which has seen total listings grow from 350,000 last year to 975,000, a growth of more than two and half times. Total listings in the month of July were 550,000. Airbnb’s revenues have also seen similar kind of growth. While official numbers are not available, according to Wall Street Journal, Airbnb’s revenue doubled from 2012 to $250 million in 2013. According to the report by Schneiderman, Airbnb’s revenues in New York doubled every year between 2011 and 2014.

Airbnb_listings_11_27_2014

Airbnb Planning Stock Sale at $13 Billion Valuation

Airbnb’s backers have shrugged of the legal challenges and continue to believe in its growth story. Airbnb had raised $450 million in April 2014 at a valuation of $10 billion. According to a report from the Wall Street Journal, Airbnb is planning a stock sale which will value the company at $13 billion. Airbnb’s current valuation makes it more valuable than established hotel chains like Hyatt and Windham Worldwide. However, Airbnb lags far behind another “sharing economy” start up and Silicon Valley darling, Uber. According to Bloomberg, latest round of funding will put Uber’s Valuation at $40 billion.

Fundraising of Airbnb

Conclusion

Airbnb continues to grow at break-neck speed. Total listings have grown more than two and half times in last one year, which has positively impacted its valuation. However legal issues continue to be a major concern. A decision by New York not to change its existing laws and enforce closure of illegal listings, apart from asking Airbnb to pay taxes with retrospective effect, penalty and the illegal revenues it had made will be detrimental to Airbnb’s growth. Not only Airbnb will have to pay millions of dollars and close majority of the listings, the bigger worry is that other jurisdictions may also follow New York. Airbnb needs to address this challenge by working with various cities to pass laws which allows Airbnb type of vacation rentals. Legal Challenges may also affect Airbnb IPO Valuation.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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