“First they ignore you. Then they ridicule you. And then they attack you and want to burn you. And then they build monuments to you.” Nicholas Klein commenting on a strike at the Amalgamated Clothing Workers of America conference in 1914
This quote is often misattributed to Ghandi. In fact, there was a festering conflict between thousands of garment workers and the clothing industry. The strike action pitted workers against management and against Chicago police on horseback. It also exposed divisions in the union. The organization did not support its unskilled members. This culminated in striker deaths by gunfire, wounding, and mobbing of a 10 year old over a period of a few years. The industry bosses made a risky assumption. They assumed their employees will accept difficult working and financial conditions.
Also, they assumed that employees would remain productive under these conditions indefinitely. In practice, the workforce was ignored and ultimately attacked. Angry, the employees fought back. Once the dust settled, a social shift occurred. Employees earned the right to fight for reasonable conditions. In this case, the change went through these four phases, as Klein observed in his quote.
And it’s a pattern for social change which has been followed by tech startup outliers. If you think about startup unicorns from the last three decades, many of them have undergone a similar process . If you look at the ex-China unicorns since the dot com crash, most of them came about by following that pattern. A pattern that would seem counter-intuitive to the average person in 2001. When they first started out, the very idea in its basic form seemed crazy. “Access your files from anywhere” by Dropbox. Send cyberpayments via PalmPilots for PayPal. And so on. Many of these startup ideas are based on a social or behavioral premise. One that would have been hard to believe for the average person at the time. As a result, there is an implicit social conflict many of these companies had to overcome. This is in addition to all of the other business and technical challenges they had. At the heart of this conflict, you’ll often see critical assumptions about customer behavior.
Let’s look at AirBnB, to see why risky assumptions matter in practice
AirBnB is a two-sided marketplace. They match landlords and homeowners with spare capacity to short term travelers. In this case, there is at least one risky assumption for each side.
- The travellers
- The homeowners or landlords.
“Air” stands for air mattress. In the very early days, the founders monetized their spare capacity using an air mattress.
You should have imagined when I called home, and told my mom about this idea. She said, “OK, so you built a website so that strangers could sleep in your home, because you don’t have enough money for rent? I guess you don’t have that job with health insurance anymore.” I said, “No, I don’t, but that’s not why I’m doing it.” –Brian Chesky
Using a paraphrase of his mother’s words, Brian articulated their risky assumption about landlords. Well pretty close. The idea of letting strangers sleep in your home was quite counter-intuitive back then. Particularly given that you had very little to go on. And that you needed to trust you’d be safe.
Proving the risky demand side assumption (as they were ignored)
At the time, the website looked approximately like this:
They wanted to prove that consumer travelers would be interested in paying for such an arrangement. Just because the founders were keen to earn a few extra bucks at conference, it didn’t mean they would be able to find a consistent stream of prospects. Ones who would be willing to not stay at a hotel. According to Brian Chesky, a co-founder and CEO of AirBnB:
We look on the hotel section, and all the hotels they were recommending are sold out. It’s like the Marriott’s sold out, the Hyatt’s sold out, sold out, sold out, sold out. Joe and I, we look at each other, and we say, “Well, why don’t we just create a bed and breakfast for this conference? That seems like it makes sense. We’ve got all of this extra space.” We’ve got a living room, a kitchen, two bedrooms, and no furniture. There was no furniture in the apartment. A bed and breakfast without a bed, it’s like a floor and breakfast, and we couldn’t really afford breakfast, so it wasn’t really super romantic. I said, “Joe, this is a problem. We don’t have any beds.” Joe said, “Don’t worry. I just went camping.” He brought some air beds out of his closet. I have no idea why he had all these air beds. He said he went camping. We pulled these three air beds out of a closet. We inflated three air beds, and we called it the “Air Bed and Breakfast.” We eventually cooked people Pop‑Tarts, yeah. They were really, really good Pop‑Tarts.
Even if these same tourists travel under “air mattress” conditions when visiting their own family, would they be willing to pay for the right location? (but not necessarily a hotel). This also turned out to be true.
In Brian’s words:
To my surprise, three people wanted to stay with me. They broke every one of my assumptions. The first was a woman, a 35‑year‑old woman that wanted to stay in our apartment. If you knew anything about me growing up, you would be very surprised that a woman would want to stay in my apartment. That was the first thing that totally surprised me, or surprised everyone who knew me. The second thing that surprised me was a 45‑year‑old father of five from Utah ‑‑ he was Mormon ‑‑ came, and he wanted to sleep on an air mattress in our kitchen floor. The third person that wanted to stay with us was from India. At this point, I’m like, “This is like a United Nations. This is a wide range of people. What is going on here? Why do they all want to stay with me?”
In other words, despite all of the reasons it could go wrong, the end consumers were fine with it. With the idea of renting someone’s spare room. And sleeping on a mattress and eating Pop Tarts for breakfast. Regardless of what they said their preferences were, clearly they were ok to act as if it was ok. Because they wanted the freedom to be at the conference or in San Francisco, despite limited hotel space.
Proving the supply side (as they were ridiculed)
For the supply side, the team needed to confirm that they could acquire landlords. But also that landlords would be interested in following the model the founders pioneered. An extra income on the side might not entice enough landlords to make it all work. AirBnb found conferences to be a clear case of insufficient supply. So they continued down that route. When they launched the company “officially” at SXSW in 2008, they made 2 bookings. But then when they managed to get blogger coverage around the Democratic National Convention in 2008, they made 80 bookings. (official company history). That was enough to confirm that–under the right conditions–people were happy to rent out extra space. Yet the marketing was still a struggle:
And we don’t blow up. No one wants to use the site after the DNC. Most people think we’re crazy. My mom thinks I’m out of my mind. All of our friends later tell us they thought we were crazy.
So with risky assumptions on both sides of the market validated, it made sense for the team to shift gears. To start investing time and effort into the product.