Recently internet start-up Airbnb announced that it has raised $112 Million from Andreessen Horowitz, DST Global, and General Catalyst for its global expansion. The company is now valued at over $1 billion. What can we learn about attracting venture capital investments from this company?

1. Niche Idea

The first thing that is important for a company that wants to attract venture capital investments is a niche idea. Some important questions to ask when determining whether or not your idea for a company has such an idea are:

Does it mean a perceived need? Have other companies with similar ideas been successful? How competitive is the market?

In the case of Airbnb, the company met the need of temporary housing when other accommodations in popular vacation areas were full (i.e. New York, Tokyo), too expensive, or not in line with a customer’s needs and preferences. It also fits the profile of a recent technology wave which has spurred the creation of similar companies such as RelayRides of HomeAway. HomeAway, which recently went public, had a market cap of $3.27 billion on the NASDAQ this past week after going public in June of this year.

A third question that needs to be addressed when determining whether or not your company can take advantage of a niche market is whether or not it is the leader. Venture capitalists do not want to invest in companies with high risk. If your company has capitalized on a niche market, it should be the only company in the market, or one that is in first at the end of the day. Airbnb fits this profile, as they are the biggest of the “couch renting” market. Their other competitor, Wimdu, secured $90 million last month but is still far behind Airbnb, with only 10,000 listings in 150 cities around the world, compared with Airbnb’s currently has 110,000 listings in 13,000 cities, according to its website. Another added advantage of Airbnb is that it was the first of its kind, which is a type of intangible asset.

2. Strong Income Statement

The second thing that a company should have in order to attract capital is a strong income statement that shows high potential for growth. The year preceding the recent $112 million investment, Airbnb had growth of 800%; 100,000 bookings in January of 2010 and 800,000 by the end of the year. According to TechCrunch.com, they are expecting to reach 1 million bookings by the spring.

3. Opportunity for Growth

The third thing that is important in order to attract venture capital as evidenced by Airbnb is opportunity for growth in the future. Airbnb started out in 2007 in San Francisco with the owners renting out space in their San Francisco apartment for people visiting the Industrial Design Society of America conference, but has since expanded to include ritzier opportunities such as beachside houses in Greece. Greg McAdoo, a venture capitalist at Sequoia Capital, which has recently provided funding to Airbnb, believes that the company will be able to retain its current customer base in the years to come as it continues to adapt to meet more customers’ needs. In an interview with the New York Times he said, “We looked past the air beds and air mattresses because we realized the same people that might rent an air mattress today may someday be married with a family and looking for a similar transaction with a different kind of property.”

Airbnb proves that having a great idea can attract the right kind of investors if certain qualifications are met. Reuben Buchanan, Director of Integral Capital Group, argues in his essay “Tips for Raising Venture Capital” that venture capitalists don’t like taking risks. As an entrepreneur, sell your business by having a strong argument for why your company is the leader in its market niche, strong income statement and high potential for growth. With this information, you will be able to raise the money needed to propel it forward to become just as successful as Airbnb.

Sources:

1) SiliconValley.com: “Airbnb snares $113 million from Andreessen Horowitz, DST Global”

2) Docstoc: “Tips for Raising Venture Capital”

3) CNN Money: “Airbnb raises $112 million funding round”

4) Bloomberg Businessweek: “Best Young Tech Entrepreneurs 2009”

5) Docstoc: “The How to Guide to Raising Venture Capital”

6) New York Times: “Room to Rent, via the Web”

7) Tech Crunch: “Airbnb Tucked In Nearly 800% Growth In 2010; Caps Off The Year With Slick Video”

8) TechZone360: “Airbnb Raises $112 Million from Investors to Expand Globally”