Update: Kara Swisher updated the story (link) that she broke after Chamath Palihapitiya sent a long email explaining that Airbnb changed their model. Also, Chamath is back in the deal. All in all just public laundry being “aired” pun intended.
Chamath Palihapitiya, former Facebook executive now turned big time venture capital, send a private letter to CEO of AirBnB about why he is not participating in the next round of financing valued at $1.2 billion.
Two things going on here: First, AirBnB founders are crazy. They are taking serious money off the table as a dividend screwing everyone else but themselves. Chamath makes some great points in his letter (see below). There is a big difference and delicate balance between entrepreneurship and greed.
Second, I fell off my chair when Mike Arrington was appalled by the letter leak – link here. Huh? What’s funny (to be brutal and honest) is that Arrington is shocked by the very tactic that made him the bad boy of Silicon Valley.
Two things are wrong with Arrington on this: 1) he is speculating on Chamath’s motives, and 2) he released emails all the time at Techcrunch including board business from Twitter now he’s outraged by the leak.
AirBnB is going to be raked over the coals for this. To me Chamath comes out smelling like a rose. Integrity and knowledge about how great companies are build. Kudos to Chamath.
Lesson to startups – The mindset of a great entrepreneur is to build a great company. Chamath brings out some great highlights of Facebook in his examples of good conduct unbecoming for Airbnb founders.
Here is the letter
From: Chamath Palihapitiya
Date: Sat, 1 Oct 2011 11:16:05 -0700
To: Brian Chesky
cc: Marc Andreesen, Reid Hoffman, my deal team
Subject: Airbnb financing…
Thanks again for giving me the chance to participate in your latest financing. I had a chance to review the docs at length yesterday and I wanted to follow up as, quite honestly, I’ve never seen a deal like this over ~60 investments I’ve done and I’m pretty concerned.
I’m all for getting the best valuation you can, minimizing dilution and maximizing control. We did this brilliantly at Facebook…all of our financings (except our first $$$ from Peter Thiel) were done not out of necessity but opportunity. As such, our investors had virtually no control and it resulted in a much better outcome. As we’ve discussed, I generally don’t believe investors add much to a success story and so minimizing their impact is a great strategy when you are onto something that is working.
This said, while several of these concepts are reflected in the current deal, there is one big thing that I am fundamentally against and violates my principles and will prevent me from participating in your round. When I saw that you guys were taking $31M out of the company, I didn’t think much of it as I just assumed it would entirely be via a secondary sale.
But as I understand the deal, it seems that you are doing only $9.6M in secondary and $22.5M as a dividend to common (of which $21M goes to you and your co-founders). I am really uncomfortable with this and don’t think its in the spirit of building a good, long term business. Effectively, it is a strategy that allows you guys to take money out of the business and not dilute yourself — I’m not sure why this is such a big deal when you guys are almost 90% vested and the financing is at $1.2B where your dilution is marginal. Further, it excludes many of the employees that probably have helped you and your co–founders get the company to this place as most of these folks probably don’t have any stock but have unexercised stock options and thus won’t get a dividend.
My basic principle on this stuff is that if you want liquidity, that’s fine, but you should make it available to everyone. Otherwise, no one should get it. Your current deal is the farthest away from this principle that I’ve seen in a while…this strategy has been done once before — at Groupon. We can see how “well” they are doing and how short term the investor community is now viewing their motives. I really think you can do better than this…and that you are better than this.
Separately, when you look at successful tech companies, it seems that dividends are an approach used by cash rich operations to distribute excess earnings — in fact, the most successful, cash rich tech company in the world, Apple, hasn’t issued a dividend and they have more than $75B in cash! Again, while I think Airbnb will be a good company, this is nowhere near the truth now — you guys still need to scale and build this thing for the future.
I really think you are onto something but I would implore you to not take the easy way out. Treat your employees the same as you’d treat yourself. Do things that you will be proud of and can defend to anyone including your Board, employees, prospective hires etc. In such a competitive hiring market, you are competing with not just your obvious competitors, but also any successful tech company who is also looking for great talent. A principle that treats your employees as well as you’d treat yourself is a huge strategy for differentiation, retention and long term happiness of the exact types of people you will need to be successful. In contrast, if you are viewed as self-dealing and shady, it will only hurt your long term prospects…
In summary, I’m passing on this financing because I strongly disagree with what’s going on. I’m not sure who advocated this approach but I did mention this to Reid [Hoffman, another Airbnb investor via Greylock Partners] last night and he was of a similar mind to myself and surprised this was the approach being taken. If you want some good advice — I would ask that you consider pinging him about different ways to think about going about the liquidity portion.
If you change your mind on how to close this financing, let me know and I’d love to reconsider. Otherwise, good luck and lets keep in touch.