On the first live show of 996 Podcast, GGV Capital’s Hans Tung and Zara Zhang interviewed Nathan Blecharczyk, Airbnb’s co-founder, Chief Strategy Officer, and Chairman of Airbnb China. In front of 150 audience members gathered at Airbnb’s San Francisco headquarters, Nathan discussed Airbnb’s China strategy, how it has evolved over the years, and what lessons he has learned through working with China. He also explained how to build relationships in China, how the company thinks about local competitors, and why Chinese authorities might actually be more open-minded than those elsewhere.
GGV Capital is an investor in Airbnb, and Managing Partner Hans Tung and Glenn Solomon have been advising the company’s China strategy.
HANS TUNG: Hi there. Welcome to the 996 podcast, brought to you by GGV Capital and co-produced by the Sinica Podcast. On this show, we interview movers and shakers of China’s tech industry, as well as tech leaders who have a U.S.-China cross-border perspective. My name’s Hans Tung. I am the managing partner at GGV Capital, and have been working at startups and investing in them in both the U.S. and China for the past 20 years.
ZARA ZHANG: My name is Zara Zhang. I’m the investment analyst at GGV Capital and a former journalist. Why is this show called 996? 9-9-6 is the work schedule that many Chinese founders have organically adopted. That is, 9 a.m. to 9 p.m., six days a week.
HANS TUNG: To us, 996 captures the intensity, drive and speed of Chinese Internet companies, many of which are moving faster than even their American counterparts.
ZARA ZHANG: Hi, everyone. Welcome to the first live show of the 996 podcast. First I’d like to thank everyone for their support for 996. We launched the show almost exactly two months ago, and have gotten a lot of really positive responses from listeners across the world. We were ranked as one of the top shows in the technology category on iTunes, and some listeners have told us that this is a show that they wish had existed.
On the show today we have Nathan Blecharczyk, who is Airbnb’s co-founder, chief strategy officer and most recently, chairman of Airbnb China. Nate has played a key role in helping Airbnb expand globally, and formerly helped establish Airbnb’s engineering, data science and marketing teams.
Nate first became an entrepreneur when he was in high school, when he launched a business and sold to over 20 countries. Nate graduated from Harvard with a degree in computer science. He has stayed in hundreds of Airbnb homes, and also hosts his own Airbnb home in San Francisco.
Welcome to the show, Nate.
NATE BLECHARCZYK: Thanks for having me.
HANS TUNG: So Nate has already beaten Mark Zuckerberg and Bill Gates by graduating from Harvard.
NATE BLECHARCZYK: I was going to say, what metric are you going to use?
HANS TUNG: Well, I thought I would pick a metric that is good for you. We have known Nate, GGV as a firm has known Nate for a long time, since early 2010. We didn’t end up being an investor then, but fortunately, four years later we became one. It has been quite an interesting journey working with you, not only on Airbnb itself, but also on China.
So you have recently been appointed as the chairman of Airbnb China, but you have been involved with China on/off for a while, almost from the very beginning, when Airbnb was thinking about China. Sort of take us through that journey. How did you guys start thinking about China? What was the process and journey you took to get to where you are today?
NATE BLECHARCZYK: As a founder, I’ve been thinking about China since we first got involved. I mean the story goes that — I’m going to go way back. So we made our first real international push outside of the U.S. in 2011 and 2012. The focus then was on Europe. That’s where we were facing a lot of competition at the time.
But by 2013, Europe had really settled down and we were looking towards Asia. In 2014, one of our four strategic initiatives for 2014 was what we called “Win Asia”. Very quickly going into that, we had a realization that China was going to drive a lot of the network effects in Asia. That all the travelers were coming from China — around the world, but also in Asia, it is a huge, huge percentage of the inbound travel into these other countries.
We actually, at the time, hadn’t otherwise contemplated really focusing on China. We had heard all the stories about how challenging it is to enter the market, how Western tech companies are often not successful, and so we were actually focused on places like Japan and Korea. But it was through that realization that all the inbound travelers were going to be coming from China that we realized that okay, China is a critical part of this equation.
And then the question became, how do we do this in a way that we think we can be successful? Our starting assumption was, after hearing all these stories, that the default is to be unsuccessful, for sure. So we have to have a pretty strong rationale for how we’re going to approach this, and we’re going to have to be choiceful.
For us, we realized our kind of unfair advantage is the global network effect that we have. The fact that we have today 4.5 million homes in 191 different countries, and we thought okay, we’re really the only company in the world that can provide an outbound travel solution to Chinese travelers. Let’s just focus on that.
In other words, we were not focused on the domestic business in China, and we were very explicit about that. So that really shaped the first probably two or three years of our China story, starting in basically mid-2014.
Initially, the focus was all on really product, actually. There are a lot of product things that simply didn’t work in China due to restrictions. We had a lot of dependencies on Facebook and Google. Of course, none of that stuff would load in China. And so we had to basically pull out those dependencies and find other solutions.
A lot of stuff just wasn’t relevant too, in terms of social network integration, so we had to connect to the local app stores, local social networks, local payments. So this actually was a fair amount of work that is still ongoing, but I’d say the first year, year-and-a-half was really dominated by just fixing the product. The basic things that make it work, which of course made a remarkable difference. Once the product started working, growth really did start to take off.
I would say in parallel to that, we were exploring setting up a local entity, and that took a lot of time. I think going into the market, we had heard all the stories and people ask you all these questions that are a little bit daunting like, how do you think about data privacy and corporate structure? There are all these things that as a newcomer, you don’t really have a strong perspective on, or any instincts.
I think at the time we definitely basically asked every company that had experience going into China, asking them how they approached these things, really learning a lot. It took a while to get through that. It wasn’t really until probably two years in that we really had a local entity up and running, that was properly licensed and everything like that. And that’s when we started hiring the team.
So basically in mid-2015 we started building the team, and it was quite small for a while. Well fast-forward to today, we have 150 people in Beijing. It’s growing pretty quickly. At the start of 2017 it was around 30.
We saw a big transition about a year-and-a-half ago which is, although the initial focus was on outbound travel, what happened in China which has happened elsewhere too is travelers go abroad. They have a good experience on Airbnb and then they come home and they say to themselves, “Hey, maybe I can do this at home.”.
And so organically, a lot of people were signing up to host who had previously been travelers and they’re doing hosting in China. And so today we have about a 175,000 homes in China that have largely materialized organically over the last two years, and we’ve spent actually very little money to create this domestic business. And so now, domestic is actually a very important part of the strategy too, but I think we’ll get more into that later.
HANS TUNG: Sounds good. I remember in one of our first meetings with you, you asked Glenn, Jixun and myself all the questions that I am going to ask you which is, should you have a server in China or outside? Do you have a JV or not? Should investors invest in the parent company or set up a separate Chinese entity?
How did you guys work through those issues? What was some of the most useful advice you got during the process of learning? I think a lot of startups are looking at China from the U.S. and they are going through exactly the same process you went through between 2014 and the summer of 2016.
NATE BLECHARCZYK: You need to ask a lot of questions. We would make trips to China and we would go visit all of the companies we could, both Chinese companies and Western companies in China, and sit down with management and really get their perspective, get their advice. Going into any country, but especially China, I think you have to be a student of the market, and I think you have to go into it assuming you know nothing. So having that blank slate is important.
You hear a lot of things, oftentimes conflicting things, unfortunately.
HANS TUNG: What was some of the conflicting advice that you got? Too many?
NATE BLECHARCZYK: The classic one is you need a JV partner to enter the market. I mean, you hear this on other countries too, which in our business, it is really hard to break apart one market from another, again because of the global network effects, common tech platform. You know, it really isn’t a separate business completely.
HANS TUNG: Unlike Uber, for example.
NATE BLECHARCZYK: That’s right. So we were resistant to that idea, but so many people tell you, even today, that without a local partner who has a majority share, that that’s kind of a recipe for not being successful.
HANS TUNG: Internally we had debate on how to advise you, and there were two schools of thought: JV or just stay together, and in the end, we gave you the advice that you should stick together as one network.
NATE BLECHARCZYK: I’d say also that you don’t have to make all these decisions at once. We definitely parallel processed. The product work could happen immediately. Setting up the local entity took a lot of time, getting licenses took a lot of time, hiring took a lot of time. In the meantime, you could still visit China and talk to community members. Meanwhile, your business is growing and you’re just learning from the community too. I mean that’s also, I think, hugely informative.
It’s just, look at what’s happening organically aside from what you are manually trying to do, and you can learn so much.
ZARA ZHANG: So you recently became chairman of Airbnb China. What has it been like for you personally? How often do you go to China now?
NATE BLECHARCZYK: This is very exciting for me, because again, I’ve been a part of the decision making on the bigger things from the beginning. I was a huge advocate of taking this leap and focusing on China. It is great to be able to see the story through. The difference now is that I’m in a more operational capacity, so I get to kind of deep dive on every decision and understand more of the context.
I think that’s really fascinating because China is such a different market that you need to do a lot of learning. What you read about is just so different than here. It would be less interesting if everything was the same and if it was easy. So the fact that it’s hard makes it a really interesting challenge for me.
How often do I go there? I would say basically monthly, right now. I’ll be going there on Sunday.
ZARA ZHANG: Are you learning Chinese at all?
NATE BLECHARCZYK: Am I learning Chinese? About a year-and-a-half ago I started doing a podcast series to learn Chinese. After about a month —
ZARA ZHANG: There is a podcast to learn Chinese?
NATE BLECHARCZYK: After a month I had to stop. I mean, the tones are just too much. It just doesn’t stick in my head.
ZARA ZHANG: I guess multiple people have proven that it’s not extremely necessary to know the language, but it really helps a lot.
NATE BLECHARCZYK: Sounds like a challenge.
ZARA ZHANG: What is the Airbnb China team working on now? You mentioned there are over 100 people there.
NATE BLECHARCZYK: Right, so we have 150 full-times at the moment. From a functional perspective, I’d say about 60 of those people are working on the product, and we intend to grow that number quite a lot. We think product is probably the biggest lever, in general, for the business and is very measurable.
The second-largest contingent would be what we call host community operations. This is really in market, on the ground, feet on the street type of things where we’re hosting meetups, inspecting properties, things of that nature. There are probably easily 40 people in that group.
And then I would say every function has at least 10 to 25 people. It’s a complex business, and so we have a very built-out marketing team that will be putting out a variety of homegrown campaigns throughout the year. In other words, not leveraging any global assets, but everything kind of original from the ground up, even the concepts.
Public policy, of course, is a big deal for us, and so that varies municipality by municipality and so that also requires a lot of people.
There’s quite a lot going on. I will say that part of our approach to China has been to build up as autonomous a team as possible, which largely comes down to making sure that all the resources needed to execute are actually in China, and we’ve really tried to cut all the executional dependencies from San Francisco as much as possible.
So in the early days, a lot of the product work and other work was getting done here or out of Singapore, and we’ve really gotten quite strict about that. I mean despite the fact that there are others in the company who want to help out, we’ve really pushed all the execution onto the China team so it’s all happening in the same office, primarily in Beijing.
HANS TUNG: So of we seperate your China business into two and talk the outbound business first, that’s where the global network effect is the strongest for you. You have said repeatedly in many conferences that China is the largest outbound tourism market in the world, and it could be the largest source of business for you at some point in the near future.
How do you plan to scale that business? Does it require a separate team to manage all the inventory worldwide to cater to the Chinese consumers?
NATE BLECHARCZYK: It does not really require that much of a separate approach, especially on the supply home side. The homes that Chinese travelers are booking are no different than anyone else around the world thus far, and that doesn’t seem to have slowed us down.
I do think there’s a question on my mind which is as we become more mainstream and we move beyond Tier 1 into Tier 2, Tier 3 how do the requirements change? I’d say a lot of our travelers right now have some comfort level with English, and of course, that’s not representative of the market. And so we have thought about, how can we better match Chinese travelers with Chinese hosts abroad? How can we help translate the user-generated content? Things of that nature. But by and large thus far, we haven’t gone that way yet.
I’d say on the domestic front we’ve done a lot of things from an execution standpoint that are totally unique to China.
HANS TUNG: For example?
NATE BLECHARCZYK: For example, we have a much bigger emphasis on quality and making sure that philosophically we don’t have what we call a two-tier system. We want to make sure that the quality of the product in China is of equal quality to that globally. And it’s a little bit challenging at different price points, because domestically there’s just a far lower price point, and there’s also an abundance of home inventory and vacant homes in China.
You get a lot of inbound homes that are kind of empty shells, that aren’t necessarily lived in, and so we have actually prioritized quality over growth, and we actually are routinely taking down properties in China that we feel don’t best represent the brand.
I’d say if we let the business grow completely organically in China, it might tend towards kind of serviced apartments, a little bit more professional, and you know we have this brand image that is all about unique, local, authentic travel. It’s a very aspirational brand. We want to make sure we preserve that in China.
Some of the operational things we do to support that are on-the-ground photography, we’re actually doing in-person inspections of homes in certain cases. Everything that gets posted on the site gets reviewed at least online, and often results in a phone call where we coach and we talk about how to make this host even more successful.
And so it’s just a lot more hands-on in China than we’ve done anywhere else.
ZARA ZHANG: Speaking of the brand and the lower-tier cities, I think one issue that a lot of western companies face when they expand into China is that their brand is perceived to be very Western, and it is hard for them to connect with the grassroot users, many of whom are in the lower tier-cities. So it is perceived to be “bujiediqi (不接地气)” or not connected with the energy of the land. I wonder if that is something behind the decision to name Airbnb “Aibiying (爱彼迎)” in Chinese, which means “welcome each other with love” in Chinese.
What efforts have been made to make sure the brand is perceived as more grassroots in China?
NATE BLECHARCZYK: Absolutely. We launched our Chinese brand name I guess a year ago now, so there were actually a few years there where we had Airbnb, and there’s no evidence that was slowing us down. That being said, as we thought about becoming more and more mainstream, there is the hypothesis that we needed a local name.
I would say one year in, I think we were correct about that. I saw the latest marketing surveys which definitely show that Aibiying (爱彼迎) is resonating a lot more, and more memorable than Airbnb, which I’m sure is very difficult for a local person to say or to remember, since it has nothing to do with the language.
So I think that was a good choice for us, but if you look at our history of starting with outbound, it wasn’t really necessary on day one and I think it’s more necessary now as we think about growing the domestic business and branching out into Tier 2, Tier 3 cities.
ZARA ZHANG: So when you enter China, the market wasn’t a blank slate. There were quite a few other domestic companies that were doing home rental or home sharing. How confident were you that you were going to be able to carve out a meaningful market for Airbnb, and how do you perceive local competition from the beginning?
NATE BLECHARCZYK: I was always very confident about the outbound piece, because I knew that was something we could do uniquely well and it would be a long time before local companies could build an outbound business. And so that part, I think, was always pretty clear and honestly, that was our only aspiration to begin with. I mean there was an assumption that the domestic business was likely going to be too hard, and so we explicitly did not focus on that for two to three years. It wasn’t until we saw that organic growth that we started getting a little bit more ambitious.
Looking at the competition, which there’s been a lot, I think at one point there was about a dozen companies in the earlier days; now there’s just a few. There has been a lot of consolidation in the meantime.
We’ve kind of seen some of this story in other countries as well. I mean there certainly have been a lot of Airbnb clones in Europe and elsewhere. I think there’s a few learnings that we’ve seen elsewhere, which is that Airbnb is a marketplace, Airbnb is a C2C marketplace, consumer to consumer. It’s a community and it’s built on trust, and often through user referral. Growing that kind of business takes time.
What we’ve seen with competition around the world is that they look at us and they say, “Oh that’s a successful model. I’m going to raise a bunch of money and try to beat them quickly.” I think that is a common mistake, because to build the kind of business we built, we purposely have kind of gone slow and it’s been built through word of mouth and user testimony and trust building, and not through direct sales.
And so what we’ve seen in other countries, not specifically China but other countries, people raise $100 million, hire a huge sales team and it immediately becomes kind of like a B2C model, almost right off the bat. And if it starts out that way, it’s really hard to then back into a C2C model. The minute all your homes feel like they are from professionals, suddenly the average person doesn’t feel like they belong in that community. And so that’s one generalization I would make.
The other thing is that we’ve been, I think, very honest with ourselves which is to recognize that we will never move as fast as a truly local company. We will try to, but I think you have to be honest about what your strengths and weaknesses are.
The weakness is that we will never move as fast as a local company and we will probably never have the appetite to spend as much money as a local company would be willing to spend. I mean it is truly eye-opening how much a local company is willing to spend and spend and spend with very little revenue, but based on the idea that it’s kind of winner take all. I think that works for local companies.
But as an outsider, I knew that was just something that was not going to work for us. What I did know would work is the outbound, and so that has been our focus and I think what has saved us, despite those other two limitations.
ZARA ZHANG: GGV is also an investor in Tujia which some people have called the Airbnb of China. Hans, could you explain what Tujia is and maybe it’s different from Airbnb?
HANS TUNG: Sure. I think Tujia started with the help of Ctrip, partially because they saw HomeAway growing in the U.S. and also Airbnb taking off. So the idea was to give them quite a bit of money, seed them to grow fast,and it ends up immediately getting to going after more the professional, managed-service apartments, so it has more of a B2C feel than C2C, for sure. It captures that segment of the population in China which definitely there’s a need for.
And we also saw in the market that there is Xiaozhu. That’s more of a much lower price point than the both Airbnb and Tujia, and that one is funded by a lot of local money, even RMB money, and it’s going after more the value consumers, young students at 10 bucks, 15 bucks a night type of accommodations even.
China has four tier cities and you have, at least in this segment, three tiers of competitors and each one covers a need. But obviously we think that the market is big enough to accommodate multiple winners.
NATE BLECHARCZYK: The way I would describe the difference between say Airbnb and Tujia, and it goes back to what I said earlier about how they kind of bootstrap their business. They immediately went after, as Hans said, apartment buildings that had 20 vacant units at a time, sometimes even hotels or service departments. And so they brought on a lot of inventory, a lot of homes and apartments very quickly, but they were all fairly generic, and they didn’t have the same level of character that an individually-owned home or apartment would.
And so there was a large quantity of inventory, but it didn’t necessarily stand out as being, I think, as being that much more unique or cool relative to a hotel. I think it was hard to build an interesting consumer brand around that. I think they’ve done a very good job of having a lot of supply. I think they’ve had a much harder job filling the supply of consumers, and I think part of that is because there isn’t as much of a brand around Tujia and there isn’t as much that makes it distinct.
HANS TUNG: I think in China the budget hotels have expanded a lot, unlike in the U.S. where you go to one of the big hotel chains in the U.S., most of the buildings or rooms haven’t been refurnished or upgraded in the last 10, even now 20 years.
In China, there are a lot of new hotels coming up. So to win against the hotel business, you need to have something that can differentiate. Airbnb chooses to do it through community building, and Tujia chooses to do it with a professionally-managed staff that try to make it in more places than the hotels can be.
So it’s a different way to tackle the market, for sure.
ZARA ZHANG: Jerry Yang, the founder of Yahoo! has said on our show that China is not a place for transactions, China is a place for relationships. I wonder, what have your experiences been like building relationships in China, especially as someone who didn’t grow up there?
NATE BLECHARCZYK: I totally agree with that. Again, and going into the market, our mindset has always been, be the student. Don’t assume anything and ask all the questions. There’s no dumb question. I’m really thankful that when I go to China, people have been very generous to take meetings, very generous with their time and very generous with their advice.
I’d just say that those casual interactions open a lot of doors and expose you to a lot of learnings that that make you more successful. I would also say that it’s very easy to not know what’s going on as an outsider. When you don’t understand the language or the customs, I think it’s very easy to get the wrong impression. So when you take a more transactional approach, you think you’re on the same page about something, or you think something went well because you had some quick exchange and you thought you took away the right message you absolutely didn’t.
I think it’s only when you spend, at length, hours with somebody that you really kind of truly get on the same page and kind of have an understanding.
I would also say the culture — and again, this is from an outsider’s perspective — but it just values relationships. The fact that everyone always has a gift for you when they come to visit, or you visit them even, I think is a sign of valuing relationships and putting an emphasis on that.
HANS TUNG: I think that’s a hint for Zara, to make sure we have gifts.
ZARA ZHANG: Hans, do you want to share your experience on that, since you also didn’t grow up in Mainland China, but worked there for eight years?
HANS TUNG: I think China’s market is meritocracy-driven. If you go into the market with the attitude that you’re going to learn a lot and can contribute a lot, sometimes contribute before you get anything back. It’s a country where a lot of people are willing to work with you, because of your willingness to do something good and positive.
Earlier this evening, we had another talk in which an enterprise from Singapore is trying to sell their service into both the U.S. and China, and they actually found China more welcoming. As long as the product worked, the customers like Alibaba and Tencent were willing to fast-track them, give them more resources to help them build the product and rolle it out quicker, sooner, because the customers know they can use the solution and help them win.
That willingness and that openness, and also work 9-9-6 to get stuff done is almost very difficult to find anywhere in the world.
NATE BLECHARCZYK: Even with government relations, I think it is just super relevant, which is to say going to the conferences, talking about the topics that are important to the officials, having the meetings, telling the story, signing the memorandums of understanding. All of these things go a long way and I’d say are fairly unique to China. Some of it’s Asia more broadly, but I’d say in China these things have really opened doors for us, where if we had taken the Western approach I think we would be shut out.
I wouldn’t have known any of this without having a local team. I think that’s another part of our approach, has been to build a local team in Beijing, really empower them and make sure that all the execution happens through that team. They basically guide me on how to create these more constructive relationships, versus taking what would otherwise be probably the naive approach.
HANS TUNG: Right now you have about 150 people in China, and obviously this is a huge market. You can easily see 10X if not 100X the size. How do you plan to grow the team in China over a period of time?
NATE BLECHARCZYK: Well in general, with our model it is relatively operationally light. I will say one of the unique things about China is the cost of labor can be less, and so it enables a lot more operational models, and I think you see this a lot with the sharing economy companies, and why the sharing economy is so successful in China is the fact that there is so much labor available to assist in making the transaction go smooth.
That being said, I think we’re still going to take a relatively disciplined approach to how we grow the headcount, how we grow the cost. Like I said earlier, I acknowledge that we probably will never be willing to spend as much as the competitors, but we will definitely spend more than we do in other countries.
For example, what we’re doing in China having 150 people on the ground we’ve done nowhere else and it is our only product team outside of the U.S. And so we’re definitely willing to think different. I do think that the discipline can also be good.
I’ll also just say one other thing in reflection of how we approach the market which is, there’s a fine balance between conviction and paranoia, and I think you need both. I think we went into the market having a lot of reflection on our strategy, but we’ve also kind of stuck to our guns with that strategy. At the same time, I’m constantly paranoid about what are we missing? How are we doing? Are we falling behind? Are we getting ahead?
I think it’s a fine balance between conviction and paranoia because when you’re paranoid, you can easily question your conviction and change direction, which if you do that too many times, is a big problem. At the same time, if you have so much conviction that you’re kind of overly confident, that’s a big problem too. So I think that’s been critical as we think about, do we do things like we do here, or do we do things like we see others doing in China? It’s definitely both. I think finding that middle ground and sticking with it, while also being very reflective, is critical.
HANS TUNG: Right. Travel is inherently a very network-driven business. The bigger you are, the more advantage you have because the network is going to be worth more. One of the simple math that we did before we invested in you guys in 2015 was that Priceline at that point in time was $60 billion and they didn’t crack China. Fast-forward three or four years later, and their valuation is now $90 billion and continues to grow. But you have something that’s harder for them to replicate.
In China, they are taking a more indirect approach, as you know. They invested in Ctrip early on, and most recently they invest in Meituan. They actively encourage Agoda and other assets they have to go to China to partner with a lot of people in China, to go after the outbound market from China.
Do you think that indirect approach is a feasible approach? And do you think that by strategically investing in other companies in China, that is an approach that could work out for them, at least going after the outbound market?
NATE BLECHARCZYK: Well I think it’s certainly a safe approach, and it’s somewhat of an incremental approach as a hedge. I think that can be a very smart way to start. And based on what they learned through those experiences, they might decide to lean into it more, which I think they have over time.
It’s not unlike us, where we started off making basically a product decision to invest some resources in fixing the product. Then we decided to set up a local entity, but really still limit our involvement to outbound, which is a lightweight endeavor. To now, it’s a full-fledged, fully-staffed for each function team focusing on domestic, in addition to outbound. So there’s been a progression there as we’ve learned. I think the decisions they’ve made and played out is basically allowing them to learn as they go.
So you don’t basically jump too far into something you don’t understand, and lose large.
HANS TUNG: For them, I think cracking the domestic OTA market in China is very difficult, because Ctrip and others already are very sizable. Ctrip is starting to make acquisitions, Qunar too.
But for you guys, it’s different. You go into China, you actually can compete against local players in the domestic business. In the long run, how do you want to grow the domestic business and what segment of the population do you want to focus on?
NATE BLECHARCZYK: I should have mentioned this earlier with one of the questions, but the reason why we we kind of expanded our ambition to include domestic wasn’t simply because it was organically taking off. I mean, that gave us confidence but I think from a strategic perspective why it’s actually really critical that we’re successful with the domestic is that domestic is a more frequent use case, and it’s relevant to a larger part of the population.
And so we have a concern that if we’re not successful at domestic, then somebody else will define what home sharing is in China, and it won’t be Airbnb. As as outbound travel becomes more common, those outbound travelers will already be customers of the local company, and it will not be natural for them to now come to Airbnb. And so I actually think our success domestically is a little bit of a race to educate the market and build the relationships that will hopefully blossom into an outbound travel.
The other kind of co-dependency between domestic and outbound is that there’s a very different ADR. ADR is average daily rate. It’s basically the price people are willing to pay per night. And so when Chinese travelers go abroad, they pay going international rates, which is more on the order of $90, $100 a night. Domestic travel is at a much lower ADR, because there are a lot of inexpensive hotels and so you are talking more in the $40 range, somewhere in there.
And so what that means though is very different economics, because your cost structure isn’t necessarily that different. In other words, we justify a lot of our expenses based off our outbound revenues. A lot of those investments actually benefit our domestic business, whereas the local companies, they only have domestic revenue and so they actually have a much smaller revenue pool from which to justify their costs.
Now they are willing to burn a lot more money than we are, and so they still spend a lot even if they have less revenue. But from a business model perspective, we can sustain our business in much more healthy terms because of this dual dynamic.
So coming back to the importance of domestic and how we compete, I think it’s really about continuing to draft off our outbound business to grow the domestic, focus on quality because that’s something I think requires extra effort and we’re doing things in China we don’t do elsewhere, but don’t spend money against just the domestic business.
Everything we spend money on also, especially from a consumer demand perspective has relevancy for the outbound business as well. The ROI can be justified purely on the outbound, and it just so happens that it also grows the domestic.
HANS TUNG: I think it is important for our listeners to know this point. Fourteen years ago, Jack Ma made a decision to start Taobao, and he was worried that the Alibaba.com business, which is the outbound trade business for Chinese suppliers for selling stuff worldwide, may be under attack if eBay cracks the domestic e-commerce business in China. So he had to start Taobao, if nothing else as a defensive measure to make sure that people who start selling from day one will be selling on a Taobao domestic platform before they sell to customers overseas.
And a second point I think is also important for our listeners to know is that in China, we really value frequency of usage. In the U.S. and also even MBA textbooks, you spend a lot of time learning about having high margin, even low frequency is okay, but make sure unit economics are good. Every order you do is high margin, is great business. Those businesses most likely end up being more niche business, they just don’t scale very well.
And so in China we learn that you have to have the high frequency of usage. Look WeChat, look at Taobao. If you have high frequency of usage, the chances are you can spell that into other business over time. Without a high frequency of usage, having those users, you don’t have any leverage to start other businesses.
ZARA ZHANG: That’s why Meituan-Dianping which started off as Groupon and food ordering now is expanding into ride hailing, movie tickets, travel and everything else.
HANS TUNG: Right.
NATE BLECHARCZYK: I think also what’s different in China is the mobile adoption is extremely high. You see all the activity happening on mobile, and what’s different about mobile is people only work with so many apps, and they only have so many apps installed. And so I think there’s kind of a natural tendency to gravitate towards those same trusted providers that have your payment information on file, that are already installed in your phone, versus venturing out and trying something new and different.
ZARA ZHANG: Could you walk us through how Airbnb approaches localization? How is your Chinese consumer-facing product different from the one we are used to? I heard that half of the bookings in China now are through Alipay now. What are other examples of changes you’ve made to the product to suit the tastes and habits of Chinese consumers?
NATE BLECHARCZYK: There’s the front and the back end components. The back end is actually quite extensive, and I’ll get into that in a minute. On the front end, there is the obvious stuff, in terms of the maps and the social network integrations and mobile app store and the Alipay. And by the way, something like Alipay, when we added that, it was like our business increased 15 percent overnight. And as you said, it’s now more than half of the transactions, by far.
HANS TUNG: You haven’t added WeChat?
NATE BLECHARCZYK: I never launched a product feature and had the business jump a double-digit percentage overnight, so that was pretty cool. That was very impactful. Other things we do that are less noticeable, the home page is slightly different in China. So are what we call the product display pages, the profile pages that display the homes is different. They basically lay out the information differently, prioritize different things.
I mean, funny enough, the changes that the China team came up with they then tested globally and it actually worked well globally too, so we took some lessons out of China and exported them.
I would say a lot though is similar. In other words, we made the decision from the start not to fork the code base, not to create a separate app. The byproduct of that is 80 percent, 85 percent is pretty similar.
On the back end, there is a lot of complexity that can easily go under-appreciated, and that complexity has to deal with data storage laws, to deal with site performance.
HANS TUNG: Monitor content?
NATE BLECHARCZYK: We’re not a social network, so that’s as big a hurdle for us. But of course, there’s that. I would say fraud in China is quite sophisticated, and the fraud that we see coming out of China is very different than the fraud we see elsewhere, and so we actually have —
HANS TUNG: They are very innovative.
NATE BLECHARCZYK: They are very innovative, yes, and so we actually have a dedicated China fraud team just to focus on Chinese-type fraud.
HANS TUNG: Yes, that is absolutely needed.
NATE BLECHARCZYK: These are the things you don’t initially think of. Another thing is, there’s a lot of credit scoring type of innovations coming out, Zhima Credit and such, and these are good inputs into our trust and safety, so these are other things that we’ve invested a lot in the back end that you don’t necessarily see on the front end.
HANS TUNG: Right. I think that is a very important lesson for a lot of American startups to realize.
NATE BLECHARCZYK: Yes, and just a moment on that. I’ll say that you can look at your numbers and feel really good, but I think you really have to sanity-check your numbers and not get too excited too fast, because so often you realize that —
HANS TUNG: You’re being schemed.
NATE BLECHARCZYK: Five to 15 percent of whatever you’re seeing might not be for real. I think that’s another lesson from China, is that you have to have a dedicated team just on that. You can’t take your eye off the ball, and you can easily find yourself in a place where you thought your business was doing really great, but it was actually all artificial activity.
ZARA ZHANG: So in China, millennials now account for over half of the travel market, and they’re known for their taste for adventure and they’re more open-minded. I think millenials now account for over 80 percent of Airbnb’s China market, which is a higher proportion than other countries. Do you make any special effort to appeal to Chinese millennials?
NATE BLECHARCZYK: I think it’s a little bit less of what we do and it’s more about what we don’t do that has caused this. In other words, Chinese millennials are materially different than their parents, which of course there is a difference in every country, but in China it’s very stark. You have a different comfort with language, with international travel, especially around organized tours versus the free, independent-type planning with technology. We just see young travelers having the ability and appetite to embrace Airbnb in a way that older travelers just aren’t prepared to take that leap. We’ve also not invested in working with tour operators and such, so we haven’t necessarily gone after the older market.
Contrast that with other countries. In China it’s 80 percent millennial on the traveller side; in other countries that would be 50 percent by comparison. I think on the host side, there’s also a difference. I don’t know the official number, but certainly from my anecdotal experience, personal experience, you’ll definitely see a lot of the hosts being younger. Typically they’ve come at it because they traveled on Airbnb before, so they start from that angle, whereas in other countries typically the hosts are older property owners, empty nesters.
HANS TUNG: I will mention, just listening to what you said on this podcast that if there’s a way for you to do more China outbound business with millennials who may not be as fluent in English — and there should be more of them than those who are fluent with English — if and when you can crack that, that should be a huge driver for your domestic business over time as well.
NATE BLECHARCZYK: Absolutely. Absolutely, and I think that’s going to be maybe the next big challenge for us, in terms of we’ve accomplished a lot. I’d say in Tier 1 cities we’re very ubiquitous, extremely strong. We are present in Tier 2, but that’s the really big part of the market. Can we do as well there? I think that will be interesting over the next year.
HANS TUNG: In preparation for this podcast, we also looked at some basic Chinese organization stats, compared against Europe and the U.S. There are 14 cities in the U.S. that has over 1 million residents, and there are three in California here: San Diego, San Jose and L.A. There are three alone in Texas: San Antonio, Houston and Dallas. There are just under 40 of such cities with over 1 million people each in Europe, including Turkey but in China, that number is 160. That number is going to double in the next 10 to 15 years.
So when we look at 160 to 300 cities with at least 1 million people each, that is just a huge market for Airbnb to tackle.
NATE BLECHARCZYK: I mean, I’d much rather be popular with millennials because they’re going to grow older and you’re going to grow with them, so you have a long lifetime to grow with them. But I also think as millennials go off and have families, they want to afford larger homes in urban areas which they have an affinity for, I think we can be a part of that journey. Meaning I think we can help them to buy a bigger home, to live a higher lifestyle and be that stepping stone. That’s what we’ve seen elsewhere.
In China, there is this move towards urbanization. And when you look at these urban centers they’re growing so quickly, but also becoming so expensive, the affordability is actually becoming quite low, especially in the new development which I think a lot of young the millennials aspire to live in. I think we can actually be a part of the solution that they’re already familiar with and help them to afford a bigger residence.
HANS TUNG: I think that’s precisely the strategy for China’s government is that the top 20 cities will be too expensive to live in. So the other 140 cities are urbanized enough that are connected by high speed rail, and then more subway to be easy for millennials to move to. So you can see that you guys are moving along the right trends in China.
ZARA ZHANG: I think partly because of urbanization there is also a booming sharing economy there. There are so many startups that describe themselves as Airbnb for this, or Airbnb for that. So there are startups that allow you to share bicycles, clothing, basketball, phone chargers, umbrellas, luxury handbags. And the Chinese government actually expects to grow the transaction of the sharing economy by 40 percent year on year for the next few years; and by 2020 is expected to account for over 10 percent of China’s GDP.
Why do you think the sharing economy has taken off in China? Do you think this growth is sustainable going forward?
NATE BLECHARCZYK: Well I think the urban density and sheer scale of the market helps a lot to create liquidity between supply and demand. I also think that the low labor costs allow for a bit of handholding in terms of making transactions work well. In other words, a lot of the marketplaces in China are not pure C2C. I mean there’s usually a component of handholding to facilitate the transaction at a level that you wouldn’t see elsewhere.
Usually there’s offline kind of runners who help with the delivery or quality control or taking inventory, stuff that frankly would not be cost effective, certainly in San Francisco, but I’d argue, in a lot of other countries. So I think that’s why we’re seeing so much innovation.
I’d also say the government has made a pretty strong message that innovation is welcome. And for me, it’s such a different conversation when I go to China and the general outlook of policymakers are, listen, new models to them are opportunities. There should be rules around those opportunities, but they generally say new models are a good thing. Let’s do this, but like let’s learn our way into it and take steps together.
In other countries, basically policymakers say, “Wow, that sounds really cool, but I have all my existing constituents who are running on an old model. And so we really need to be cautious and basically optimize for the incumbents in the industry and kind of start from that mindset.” As opposed to seeing everything new, as a big opportunity.
I think that helps some of these ideas to thrive. I think bike sharing is a great example of this, where bike sharing in China has been a little bit of a free-for-all, and that’s generally been accepted in a way that in the U.S. at least, and I think other Western-world countries, people have said no, there’s going to be a lot of ground rules about where you can discard your bike and frankly, needing to be licensed before you can even try this idea.
ZARA ZHANG: Hans, do you want to comment on, I think a running theme in our show that is quite unexpected is China actually has less regulations, or people face less regulatory pushback when they start new things in China, that a lot of people find surprising.
HANS TUNG: A lot people don’t know that 10 years ago the most valuable, publicly-traded companies in China were China Mobile, China Petroleum and ICBC, the largest bank in China. And 10 years later, the most valuable, highest market cap companies out of China is Tencent and Alibaba, two VC-backed companies with US dollar funds and listed outside of China.
So for a country that is run by the Chinese Communist Party, that is just something that you cannot imagine was even possible five or 10 years ago. At the same time, you look at the speed of adoption bike, take the bike sharing example. It has just gone so fast, so soon, partially because the government knows that ride sharing and bike sharing are part of the potential solution to deal with the traffic problems, so it is needed, and needs to be sort of encouraged to figure out how helpful it can be or not be, and regulated accordingly afterwards.
And so what happens is that you see new technology and new solutions being tried more quickly in China than it is in the U.S. On top of that, you think of China is a country that has 4.7 million STEM graduates every year, versus less than 700,000 in the U.S. Each year, more people are going to be more equipped to try and design and roll out new products at a faster pace in China than almost anywhere else in the world.
If politically stable and it continues for the next 10 years, it’s hard to imagine Airbnb not having a much bigger market share and to have more growth than it is today. So it is imperative for Americans to start to figure out how to crack China, because it is going to be such an important market that you just can’t ignore anymore.
NATE BLECHARCZYK: And I’d say this is coming back to the topic of relationships which came up earlier. This is where I think the mindset in China is yes, you can do this “but”, and the but is we’re going to kind of co-develop the regulation together, and it’s very much based on the relationship though. I think you need to establish dialogue early, and kind of give the heads up about your intentions, and there can be a lot of back channel conversation and collaboration that you just don’t see elsewhere.
Elsewhere, I think it’s kind of come to a head, unfortunately and then there’s a lack of progress. In China, I think there’s a lot of conversation on the back end about how are we going to navigate this and doing that in a cooperative manner.
HANS TUNG: Not to put Nate or Airbnb on the spot, but we went into this investment thinking that Airbnb is probably the most-likely U.S. startup, tech startup, to succeed in China, that it has the best chance to do so. A lot of people look at Uber as an example that failed in China. We actually disagree.
They quote-unquote “burned” $2 billion in China between 2014 and 2016, but the $2 billion dollars that quote-unquote “burned” ends up being a stake in Didi, which two years later is now worth close to $9 billion. For any mistake that could be 4X in two years, I think that’s very good.
Obviously had they done that earlier in 2013 when I brokered the first meeting, they could have had the same stake for only $20 million, but that’s a separate story.
We really think that. This is Glenn, Jixun and myself, we all think at GGV that Airbnb is uniquely positioned because travel is a global network, because you are running it, that Airbnb would be quite different in China versus what other startups in the U.S. have been. We want to make sure that you guys succeed.
NATE BLECHARCZYK: I really appreciated your support, so thank you, Hans.
ZARA ZHANG: We’re going to move to the last part of the show which is a round of rapid-fire questions. The first one is, what is the most memorable Airbnb home that you’ve stayed at, either in China or around the world?
NATE BLECHARCZYK: Nicest home was one in Maui recently. It’s actually going to be part of our new luxury product that we’re launching. But most memorable I would say was a treehouse in Bali, which was all made of bamboo in the jungle. It was like three stories, three bathrooms. But again, it was like a treehouse, so massive. So that was pretty cool.
HANS TUNG: How much was that for a night?
NATE BLECHARCZYK: 200 bucks per night. That’s it.
HANS TUNG: Oh my God. What a deal.
NATE BLECHARCZYK: It’s Bali, it’s Bali. But the most memorable experience is probably $18 a night in Latvia. So I put out three different stories to say that many different price points and many different types of experiences, all good, you can have but also very different. That’s the beauty of Airbnb.
ZARA ZHANG: Who is the entrepreneur you admire the most and why?
NATE BLECHARCZYK: I would say right now Elon Musk, simply because he’s just taking on like these kind of almost unthinkable challenges.
HANS TUNG: Mission impossible.
NATE BLECHARCZYK: Yeah, mission impossible over and over again, at the same time, and you just think, how is it possible that he can just take such a bold leap so confidently, and actually bring results? I am sure you all feel the same.
ZARA ZHANG: What do you do for fun?
HANS TUNG: If you have time for fun?
NATE BLECHARCZYK: Work is fun, right? It is, honestly. But that aside, I have a family so I have two kids, so they keep me quite busy and that’s pure joy. Aside from family, I go to the gym. (laughter) I don’t know what’s so funny about that.
HANS TUNG: You should buy a Peloton so you can do it from the comfort of your home.
ZARA ZHANG: (That’s a GGV portfolio company.)
NATE BLECHARCZYK: We have that too. But actually, I think staying healthy is really important when you’re working hard, especially even just de-stressing, working out, whatever form that takes, has throughout all my endeavors, starting at a much younger age has helped me a lot to stay focused and get stuff done and be productive.
Aside from that, travel of course, bicycling, skiing. that kind of stuff.
ZARA ZHANG: What’s something you read recently that you recommend that or that touched you a lot?
NATE BLECHARCZYK: Right now I’m reading something called Seven Powers. It’s a book about basically strategy, and it talks about the difference between strategies that really endure and create enduring power, versus what might create success in the short term. Basically the book says that everything can be boiled down to seven strategies, and so it’s kind of interesting to see something so simple. I mean the story behind so many different successful companies and to hear so many individual stories.
ZARA ZHANG: Well Nate, thank you so much for your time. This was really fun.
NATE BLECHARCZYK: Thanks for having me.
HANS TUNG: Thank you for coming.
Thanks for listening to this episode of 996. By the way, we also produces a weekly email newsletter in English, also called 996, which has a roundup of the week’s most important happenings in tech, in China. Subscribers have told us it is informative and fun to read. The newsletter also features original content and analysis from Zara and me. Subscribe at 996.ggvc.com.
ZARA ZHANG: GGV Capital is a multi-stage venture capital firm based in Silicon Valley, Shanghai and Beijing. We have been partnering with leading technology entrepreneurs for the past 18 years from seed to pre-IPO, with $3.8 billion in capital under management across eight funds. GGV invests in globally-minded entrepreneurs in consumer Internet, e-commerce, frontier tech and enterprise. GGV has invested in over 280 companies with 29 IPOs and 22 unicorns. Portfolio companies include Airbnb, Alibaba, Ctrip, Didi Chuxing, Domo, HashiCorp, Hellobike, Houzz, Keep, Slack, Square, Toutiao, Wish, Xiaohongshu, YY and others. Find out more at GGVC.com.
HANS TUNG: If you have any feedback on this podcast or would like to recommend a guest, please email us at firstname.lastname@example.org. This podcast is co-produced by our friend and business partner Kaiser Kuo, the host of the wonderful Sinica Podcast. It covers China’s economic, political and cultural issues.