Airbnb

"There’s someone in my apartment . . . right now." Joe Gebbia sounds like he’s reading a line from a horror film. It’s October, and Gebbia is in New York to speak at a design conference. Back home, in San Francisco, a complete stranger is roaming around his living room. But Gebbia isn’t phoning the police--he’s grinning. This stranger is paying him $80 per night for the pleasure.

In that same living room back in 2007, Gebbia cofounded Airbnb, the digital accommodations marketplace that people use to rent out their homes or spare rooms (or igloos, castles, or private islands) like a hotel.

Horror is one word that captures the initial reactions of the 15 A-list investors who passed on the pitch a few years ago. "I thought the idea was crazy," recalls Y Combinator cofounder Paul Graham. "Are people really going to do this? I would never do this." Horror also encapsulates that feeling of having missed the next big thing: Airbnb has enabled more than 4.5 million bookings on 100,000 active listings in 192 countries--facilitating a reported $500 million in transactions in 2011, on which it charged up to a 15% fee. Along the way, Airbnb has become a disruptive force in the stagnant hotel industry, a major driver behind what’s now called the sharing economy, and, perhaps most significantly, proof of the value of design in the engineering-centric tech world.

The roots of Airbnb’s success lie in its cofounders’ backgrounds at Rhode Island School of Design. But when Gebbia and his classmate Brian Chesky (now Airbnb’s CEO) first sought funding for their cool idea, they discovered that Silicon Valley culture is much more MIT than RISD. Investors found their design backgrounds jarring, even though the two had teamed up with a third cofounder, Nate Blecharczyk, who had a solid tech background. "They thought we just made things pretty," says Chesky, who was told repeatedly, " 'Really great teams have engineers and maybe a businessperson.' " Incredulous, they’d ask Gebbia and Chesky, "You have two designers?"

But design has proved crucial in helping Airbnb prevail. Walk into Airbnb’s Potrero Hill headquarters and you’ll see an enlarged, waist-high cereal box adorned with a cartoonish picture of President Obama. This is the cereal box that saved Airbnb. Back in the summer of 2008, the startup was barely pulling in a couple hundred dollars a week. With $20,000 in credit-card debt and no angels (as in angel investors) in sight, Chesky and Gebbia came up with a Hail Mary idea to put the "breakfast" in what they were then calling AirBed and Breakfast. They created two Airbnb-branded cereals, Obama O’s and Cap’n McCain’s, to sell online during the height of election fever. Airbnb found a small manufacturer in Berkeley who agreed to fabricate 1,000 cartons in exchange for a cut of the royalties. The team bought generic Cheerios and Chex, transplanted the cereal into their own boxes, and hot-glued the tops.

Somehow the plan worked. The boxes, which cost $40 a pop, received national coverage from CNN and Good Morning America; Katy Perry even auctioned off an autographed box to her fans. The promotion netted Airbnb $30,000, enough to keep the company afloat until Paul Graham and Y Combinator decided to invest. "Those guys were animals," Graham says today. "It was certainly the first time [we] funded a startup that had two designers and one hacker." Last year, Silicon Valley heavy hitters Andreessen Horowitz, DST Global, and General Catalyst plowed $112 million into Airbnb, giving it a $1.3 billion valuation. VC Fred Wilson, who passed on Airbnb, keeps a box of Obama O’s in his Union Square Ventures conference room--a reminder never to make the same billion-dollar mistake again.

Gebbia’s and Chesky’s training pushes them to seek right-brained solutions to every problem. Early on, Airbnb was not getting much traction in New York. So the team flew out and booked rooms with two-dozen hosts to learn why. Users, they found, had no idea how to present their listings. "The photos were really bad," says Gebbia, who typically sports Twizzler-red sneakers and thick-framed glasses that resemble lab goggles. "People were using camera phones and taking Craigslist-quality pictures. Surprise! No one was booking because you couldn’t see what you were paying for."

They crafted a very untechy solution. "A web startup would say, 'Let’s send emails, teach [users] professional photography, and test them,' " explains the jockish Chesky, a former bodybuilder who wanted to play pro hockey. "We said, 'Screw that.' " The pair rented a $5,000 camera and snapped high-resolution photos of as many New York host apartments as they could. Bookings soared. By month’s end, revenue had doubled in the city. "Rinse and repeat," Gebbia says. "When we fixed the product in New York, it solved our problems in Paris, London, Vancouver, and Miami."

Airbnb now offers its hosts free professional photography services from more than 2,000 freelancers who have visited 13,000 listings across six continents. The startup realized the long-term benefits--such as improved aesthetics and verified property addresses--far outweighed the costs. Travelers are two and a half times more likely to book these enhanced listings, which earn their hosts an average of $1,025 per month. "Do things that don’t scale," Chesky says, a sentiment that would be considered blasphemy at Google or Facebook. "We start with the perfect experience and then work backward. That’s how we’re going to continue to be successful."

The company immerses itself in that experience. Its San Francisco offices, which resemble a particularly high-end Ikea, feature conference rooms that double as precisely reconstructed replicas of four of its most popular accommodations. It’s not just a shtick. They’re prototypes to be studied. (In November, Gebbia could be found lounging in a snug bachelor pad in Berlin, and Blecharczyk was holed up coding in a chic New York loft. The Hong Kong apartment and mushroom-dome cabin were vacant.) These showcase listings sell out weeks in advance and have earned their owners in total more than $170,000.

Gebbia has gone one step further: He’s converted his original apartment, Airbnb’s first listing, into a live model. "We rent it to test things," he says. "If we have an idea, we walk over to the apartment and install whatever it is we’re doing." He hints that he’s currently using it to push more engagement with the surrounding neighborhood, an opportunity to sell additional products to the renter. "How can we get you to interact with the local businesses?" The company recently partnered with Vayable, a startup that offers travelers guided experiences such as food or history tours.

This commitment to personally testing ideas served Airbnb well this past July, when a host’s home was ransacked by a visitor, creating a PR nightmare for the company and highlighting serious security flaws in the service. Gebbia posed one question to his team: "How can we improve trust on Airbnb?" He likens their process to designing medical devices. "You become the patient, lie in the bed, tape the IV to your arm," he says. "That affords me inside access to pain points." Within weeks, the team overhauled its safety features, introducing a $50,000 liability guarantee, voice- and video-verification systems, and a 24-hour customer-support hotline. The majority of company revenue now comes from hosts renting out spaces while they’re away.

Airbnb has become one of Silicon Valley’s most imitated successes. There are Airbnb-inspired companies for sharing cars, parking spaces, laboratories, and grown-up toys like boats and motorcycles. And there are also dozens of direct rip-offs popping up all over the globe. "How many knockoff Airbnb sites does the world need?" complained tech-startup doyenne Chris Shipley in a blog. Airbnb, of course, believes the answer is zero and is working to eliminate confusion between itself and its rivals.

Beyond the clones, Airbnb’s primary influence may be in changing the way techies think about design. "Design used to be an afterthought," Gebbia says. "Startups wouldn’t hire designers for months or a year after funding." Now, startups as varied as Square (No. 5 on this list), Flipboard, and Instagram count design as crucial to their success. "You no longer have to be a hacker to start a company," Graham says. "You can win through design rather than technology." You might even say that design has become Silicon Valley’s breakfast of champions.

Photograph by Jake Stangel