The Hardships of Regulation and Lobbying Interests When Breaking into the Market: The Recent Tale of a Silicon Valley Start-up Facing Opposition from an Established Industry

By: Entrepreneur & Innovation Clinic Student

Start-up companies often face many issues when first launching their products, including procuring adequate funding and establishing a working business model. Beyond these internal issues, start-ups can also run into trouble with its competition, especially when that competition has enormous amounts of lobbying strength and money to devote to preventing newcomers from entering into the market. This scenario occurred recently when Airbnb, a Silicon Valley start-up company, was recently banned from operating in its biggest market, New York City, after a state regulation was promulgated.

Airbnb was created in 2008 as a marketplace for people to list and book short term rental accommodations, and has since grown to list almost three million rentals in more than 34,000 cities worldwide. The company capitalized on the “sharing economy,” which allows people to profit from monetizing existing assets, such as a spare room in an apartment, as rental space. The start-up has grown so rapidly that in the United States alone, one in ten people have used an Airbnb platform (such as either Airbnb or HomeAway) to stay in someone’s home for a period of time. However, Airbnb has been fighting local rental regulations throughout the United States over the past couple of years due to the fact that it operates in such a gray area. The company’s products, rentals of apartments and homes owned by all different landlords, are not long enough to be considered leases but also do not fall under hotel regulations. Thus, the hotel industry and cities have been fighting Airbnb’s presence in the market due to the fact that both parties stand to lose revenue from hotel occupancy and from occupancy taxes.

The biggest challenge to Airbnb’s success came this fall when the New York legislature passed a law in October that allows authorities to fine Airbnb hosts up to $7,500 if they are found to be listing a property for rent for less than 30 days at a time. The fine applies to dwellings designed for three or more families, so it is aimed specifically at Airbnb apartment rentals. The law would apply to about 22,000 listings in New York city alone and would affect the one billion dollars in revenue that Airbnb’s homeowners would collect in the city. Rentals of less than thirty days were actually illegal under New York law even before the October law was passed, but regulators struggled to enforce the law without access to the company’s rental database. This new law is a workaround that punishes anyone who advertises on Airbnb, which is much more far-reaching and easier to detect online.

The October law was promulgated due to concerns around lack of affordable housing in New York City, as affordable housing advocates worried that the company was making it easier to unlawfully rent apartment units for short time periods to travelers. This is an issue because those units are off the market for permanent residents, which drives housing costs higher. Regulators were also concerned that landlords would prefer to charge high nightly prices on Airbnb rather than making them affordable for residents to stay in long term, which would give preference to visitors over locals and thus change the dynamic of the city. In addition, in 2015 the New York state Attorney General’s office released a report which found that thirty-seven percent of revenue generated by Airbnb hosts came from hosts with three or more listings, which implies that hosts are running quasi-hotels while evading the law. While stating the motivating factors for the law, a spokesperson for Governor Cuomo of New York said that Airbnb’s rentals “compromise efforts to maintain and promote affordable housing by allowing those units to be used as unregulated hotels.”

Airbnb responded to the controversial New York law by stating that “in typical fashion, Albany back-room dealing rewarded a special interest — the price-gouging hotel industry — and ignored the voices of tens of thousands of New Yorkers.” The company’s sentiments reflect its frustration with the lobbying efforts of the large hotel industry, which have successfully mounted opposition to Airbnb in several other smaller cities and countries like Iceland, Barcelona, New Orleans, and San Francisco. The disparity between a start-up’s lobbying expenditures and an established industry’s spending can be substantial, which in turn can have detrimental effects on the future of a start-up’s profits. For example, start-up company Uber also has faced regulatory challenges and opposition from the strong taxi-cab industry, which has lead the company to be banned in several cities across the country, resulting in lost profits for the ride-sharing company.

Hours after the New York law was signed in October, Airbnb filed a federal suit against the New York state Attorney General Eric Schneiderman arguing that the law would cause irreparable harm to the company. The two parties have since settled the case and are currently discussing how to best resolve the case in a way that would benefit both the state and the citizens of New York City. As Airbnb continues to grow, it will continue to face regulatory challenges stemming from lobbying efforts of the hotel industry. This challenge is common among many start-up companies trying to break into an already existing market, which can be detrimental to a company’s profits at a critical point in its growth cycle. One beneficial move that Airbnb can make is to hire as many lobbyists as it can afford to counteract the hotel lobby. The company can also make alliances with similar “sharing economy” companies, like Uber, to create a joint lobbying effort. Lastly, the company can reach out to those in the hotel industry and form partnerships with hotel chains so that the two parties will have a common understanding and will cease their lobbying fights. Airbnb is an innovative and growing company with regulatory issues to sort out, but if it can navigate its legal landscape properly and hire lobbyists to advocate for its products it has the potential to remain successful.