Welcome to Story Time, Week 4. This time we're going to go to San Francisco and look at the story of Airbnb. Let's start with the idea behind Airbnb. The idea is that people have extra bedrooms and maybe air mattresses and why not rent that out? There may be people who are looking for maybe a cheaper option or a homier option and they will come and stay in that extra bedroom and pay us, the homeowner. But the idea behind that is like a platform business on a website. But think about this, do you think this is how the idea began? We know from effectual entrepreneurship that it probably began with the founders bird-in-hand. Let's look at Brian Chesky and Joe Gebbia, the co-founders of Airbnb. At that time, the company was not even called Airbnb. These were two guys in San Francisco. They had an apartment, they couldn't afford the rent for the apartment, and they started thinking what can we do to pay rent? They noticed that they have an extra room and they have an air mattress, and they came up with this brilliant idea, why not rent that mattress out and maybe somebody will pay us to come spend the night here especially if we made breakfast for them. Since they knew to code, they just stood up a website and offered the air mattress in their spare bedroom as a place that people could rent. To incentivize people to actually pay for it, they decided to offer a hot breakfast. It just cracks me up to think about the idea for American hot breakfast being that, we'll actually heat the milk for your cereal in the morning. Anyway, Brian and Joe get this website up. It turns out that somebody does show up looking at the website. This was Amol, their first customer who was okay with coming and staying on this spare bedroom air mattress. They think now, we have proof of concept. Actually, if you think about it, this was an affordable loss for the co-founders because they had that extra bedroom, but it was also affordable loss for Amol who was probably coming from another country. Maybe he had a coding job, maybe he had a consulting job. San Francisco is really expensive to rent an apartment or stay in a hotel. He found this a plausible option. They have their first customer. They think they have proof of concept, and they start thinking, now we need to go professional. They start the crazy quilt principle by calling one of their friends from school, their classmate who they thought was an amazing coder. Luckily for them, their friend actually came on board and started building a more professional website for them. Now they have the website going. They have proof of concept. They think the money is going to roll in and the customers are going to come in. But of course, a platform business is a very difficult business to put together because there are two sides to the platform. You have to get people who are willing to rent out their bedrooms, and you need people who are willing to come stay in those bedrooms. That was not happening. They start wondering what to do with all the cereal boxes and all the cereal boxes that they have purchased for their customers that did not come to rent this extra space. Around that time comes the Democratic National Convention in Denver. They decide to take their cereal boxes, relabel them as Obama O's and Cap'n McCain's crunch and go to the convention center to gen up some free PR. When you go to the convention, there are people selling hats and T-shirts and election buttons. Here are these two young guys and they're selling cereal boxes relabeled as Obama O's and Cap'n McCain's crunch. Now they tell the story of Air Bed and Breakfast, which is their company and they try to get some free PR. But just the chutzpah of doing that, relabeling the cereal boxes and creating these cool names and telling their story as young entrepreneurs, does get people interested and they get interviews and news media and things like that. But the most interesting thing that happens out of that is they get a self-selected stake holder in the form of Y Combinator. They get into Y Combinator and the first thing Y Combinator teaches them is to change the name of their company from Air Bed and Breakfast to Airbnb. Then Y Combinator also helps them get their first round of funding, just a little bit of funding from Sequoia Capital. Now they think, "Yes, we're taking off. We're up and running. But it turns out that even with the funding, even with the advice from Y Combinator, there is no real traction on both sides of their platform company. That is when they get into what is the most important lessons that effectual entrepreneurs learn, that shoe leather is important. That shoe leather is really the most important component of the pilot in the plane principle. You have to get other people to want to work with you. Brian and Joe literally get on the plane and go to New York City. They start knocking apartment door by apartment door. They will knock on doors all day, tell people about the business they're building, and try to get them to list their spare bedrooms on their website. As they start doing that, as you can imagine, shoe leather is a very difficult way to build the business, but you are gathering all kinds of people who are coming together to build a venture with you. You're actually effectuating the pilot in the plane principle. One of the things they start noticing as they do that is that whenever there is a good picture of the bedroom, that bedroom is likely to rent much faster. Seems like, "Duh, didn't you know that?" But sometimes you learn things the hard way by knocking on people's doors. Now they have to get better pictures done of these bedrooms. They're in New York City and they start talking to photographers and ask them the what would it take question. What would it take for you guys to come take photographs of these bedrooms for us for our platform company? It turns out that not all photographers are going to be excited to come take pictures of bedrooms, but Brian and Joe have something up their sleeve. They still have their bird in hand. They decide to make a photography platform for these photographers to showcase and market the portfolios of their artwork that they produce. In exchange for that, some of the photographers are happy to come take beautiful, interesting, quirky pictures of bedrooms that start renting. Now the whole venture takes off. The rest as they say is history. This week as we think about this story and learn a little bit more about the effectual process and the relationship between prediction and control, we, you and I, hopefully are also going to understand how history actually gets made through the effectual process. Let's get set to learn the effectual process next.