Start-ups – Backing the big idea

The travel industry has been a breeding ground for start-ups ever since the web materialised – some have made their mark, some haven’t. Martin Cowen looks at a few of the successful businesses, examining the paths they have taken and the critical issue of funding


Google – a 10-year-old business worth around $140 billion – didn’t start out as a commercial venture, but as a piece of academia. Back in 1996, e-commerce was virtually non-existent. It’s changed a bit since then.


But around the same time as Larry Page was working on developing the algorithms, a British travel hack was already monetising what little there was of the web. John Hatt set up Cheapflights from the attic of his Wandsworth home two years before Google Inc started life as a registered business from a garage in California.


Google and Cheapflights are just two of the online businesses that have developed a mythology around the way in which they started out. It’s highly likely that similar concepts would have been developed by others, but it’s fun to speculate about where we would be if Page’s tutor had told him to find a different topic for his PhD, or if Hatt’s online travel book shop, Eland, had taken off.


Not to be outdone, the travel industry has its own interesting origins. It is widely accepted that leisure travel as we know it was set up by some bloke called Thomas Cook who organised an overseas  package holiday – destination Paris – for 40 Brits in 1855. And the fact that he lost money on the trip after being stitched up on his access to cross-Channel slots only adds to the legend.


Cook’s Excursions, as the business was called then known, recovered, changed its name to Thomas Cook and 150 years on, the business is Europe’s second largest operator. If you are looking for successful travel start-ups, being in business for 150 years is a pretty good bellweather. A sobering thought is what Google will be up to if it is still in business in 2146.


But defining the success of a start-up is about more than longevity. Was Lastminute.com nearly three times as successful as Ebookers because the former was sold for £577 million (to Sabre) while the latter only for £200
million (to Cendant)?


Cheapflights is widely regarded as a success, despite being notoriously tight-lipped about its financials beyond saying it has been profitable every year since launch. You could say the fact people are even talking about WAYN.com being worth £100 million is pretty damn good.


But one of the most successful online travel start-ups is often overlooked, if only because the brand has been absorbed. Active Hotels was bought by Priceline for $161 million (£90 million at the time) cash in 2004. Priceline then paid $133 million (£76 million) cash for Booking.com, merged the former into the latter and now has arguably the strongest consumer-facing bedbank business in Europe.


Active was set up by Dr Andrew Phillipps and Adrian Critchlow in 1999 with a relatively modest initial outlay of £400,000.


Nevertheless, some might consider that a massive amount of money. Oliver Brendon, founder and chief executive of ATD Travel Services, started his business in 2002 with £5,000. Attraction Tickets Direct, which sells pre-departure tickets to Florida theme parks through B2B and B2C channels, now turns over £40 million a year and has a one-third share of the market.


Brendon saw the gap in the market from his time spent as a rep in Florida, and used the contacts he built up while working for Unijet, Cosmos and the Florida Tourist Board to start the business. “For the first three months it was a one-man band – me,” he says. “It was hell. I had a notebook, a mobile phone and a calculator that I carried everywhere, and that’s how I would take bookings,” he explains. “I was in the pub watching England-Argentina in the 2002 World Cup when I got a call. I was outside, leaning on the roof of a car taking the booking when the car drove off. I stood there and watched my business disappearing down the street.” A gust of wind and a sharp turn luckily brought the business back to life.


Even in 2002, Brendon realised that the call-centre/online combination was what the business needed. “We built it up through online marketing, a bit of offline and some PR.”


He is particularly proud of having grown the business to where it is without recourse to venture capitalists. “I’m only interested in profitable growth. It’s ethical and sustainable,” he explains. He also argues that being self-funded gave him the freedom to do things that a VC-backed outfit might baulk at.


“Using homeworkers was one of the best business decisions we made,” he says. “They are on a salary – so there is no hard sell. Customers pick up on that and we get loyalty in return.”


Using profits from the theme park business, Brendon launched Dosomethingdifferent.com for experiences. The £250,000 he spent bringing this to market eclipses the start-up costs of ATD, and might seem as if the success has gone to his head – until you realise that DSD is operating in a market worth $350 billion, according to direct competitor Isango.


Viator is the other rival in this space, but Brendon welcomes the competition. “We are trying to build a market – there was no demand before for advance purchase of your dog-sled ride in Canada, but with at least three suppliers it is coming.”


He is similarly undeterred by their deep pockets. Isango recently announced second-round funding of $8 million from SPARK Ventures, Beringea and existing shareholders. The first-round funding was not disclosed.


Viator, in contrast, is the veteran of the sector. It has operated in Australia since 1995, with its internationalisation kickstarted with $6 million in November 2005 from Carlyle Venture Partners and Technology Venture Partners. The same investors stumped up another $4 million in spring 2006.


The mere mention of VCs or investment, however, inevitably leads to the phrase ‘exit strategy’.


But while some entrepreneurs do sell and move on, others stay the course. Online Travel Corporation, for example, has changed hands more times than most – bought by Lastminute (£65 million in 2004), which was then bought by Sabre Holdings (£577 million in May 2005), which in turn was sold to VC behemoths TPG and Silverlake ($5 billion in December 2006).


Here in the UK, how is the market for travel businesses looking to sell? Chris Lee, head of the travel division at Barclays Corporate thinks the market, at the larger end of the volume scale at least, is buoyant, driven by a number of legislative changes.


The biggest, he argues, is the removal of the ATOL requirements on travel suppliers. For the past 38 years, businesses have had to effectively insure themselves against going bust so that they can bring all their customers home. “When the ATOL requirement goes, a lot of big travel companies’ credit line will be freed up,” he says.


For start-ups on the supply side, the bond removal is a double-edged sword. While it might give the likes of Thomas Cook and Thomson even more room to flex their financial muscles and buy a business, the bonding issue for travel start-ups, or those who’ve been around for less than four years, will still have to be factored into the business plan in the costs column.


Lee offers a personal, rather than Barclays-specific, perspective on how banks – rather than VCs – approach start-ups. “Financial involvement with any start-up is comparatively risky. With an existing business, it is easier to make projections. New ventures do not offer that, unless there is a name involved,” he explains.


He mentions one of his clients, Youtravel.com, created by John Kent. Kent was previously co-founder of Med Hotels, the B2B bedbank that now forms a part of Lastminute.com’s B2B and B2C accommodation offer, which was bought for up to £22.6 million in cash and shares in December 2003.


“Banks’ lending to start-ups is effectively unsecured debt,” Lee adds.


“So they are taking the same risk as the proprietors. And in return they might expect a bigger gain of the rewards in light of their initial risk. It’s hard to get unsecured bank funding for a new small business.”


This, then, leaves the VCs to take the risk and reap the rewards, and the bedbank space seems to be where there is currently a fair amount of action.


Many industry watchers were quite surprised when the normally conservative First Choice plc paid £108 million cash for Laterooms.com, only two years after private equity firm ECI funded a buyout of the business for a reported £21 million.


Laterooms is now performing well for new owners TUI Travel plc, with the growth not only market-led but also driven by a number of smart partnership deals with websites such as Thetrainline.com and London City Airport, as well as internationalisation strategy.


Another way of funding businesses is through the markets. The aforementioned Ebookers and Lastminute.com were both UK-listed when they were bought, with the latter in particular using cash and shares deals – Medhotels, Holidayautos – as a way of buying scale, with a few convertible bonds thrown in as well.


But the markets have a way of coming back to haunt you. Ask Lawrence Hunt, founder and chief executive of business-class-only carrier Silverjet. It raised £25 million through its IPO in April 2006, another £26 million through a shares issue a year later with another loan/issue combination bringing in £22 million at the back end of last year.


Part of the plan was for potential customers of his airline to hear about it through coverage in the broadsheets’ City pages. However, the same pages were there to report on the gradual decline in its share price.


Hunt admits: “We have a huge profile and awareness, as well as actual bookings, but we are now heavily exposed to opinion and sentiment.”


Hunt has been involved in seven start-ups to date, although none, until now, on the scale of launching an airline. (Sir Richard Branson reportedly once said that the easiest way to become a millionaire was to start off with a billion pounds, launch an airline and millionaire status would follow.)


His highest-profile travel business was Dreamticket.com, an upmarket online agency that started well but folded when the dot-com bubble burst and the funding for the next stage of its expansion never came.


“The investment market dried up, or to be precise there weren’t any investors looking at the long term.”


A similar dynamic is currently in play at Silverjet. “Our core investors are still looking at a three to five-year commitment,” Hunt insists. “The public markets and hedge funds are only interested in six months.”


Hunt is dismissive of the suggestion that Silverjet was the culmination of everything on his start-up CV so far.


“Every start-up is different, and has its own challenges, with different competitive threats,” he explains. “The technology side of an airline is as important as operations,” Hunt adds, “particularly as we are expected to deliver high standards of service – and that includes the website, call centre, the back office, the crew-rostering software, the lot.


With such a war chest at his disposal, Hunt is probably in a better position than most to justify his observation that “all start-ups need to fund growth until they are profitable”.


For example, employing M&C Saatchi as your ad agency doesn’t come cheap, but then airline and agency have won a number of awards on both sides of the Atlantic.


The concept of ‘funding growth’ sits awkwardly with Brendon and Phillipps, however, who both advocate the organic approach.


Maybe scale is the issue here – Lastminute.com’s chief executive Ian McCaig often warns that the danger for any business in any sector is getting caught in the middle between having global reach and targeted niche.


Chris Lee predicts there will not be another Lastminute.com-size deal in the online travel sector, but still thinks that specialists that are profitable on a small scale will always be a takeover target.


AIM-listed Travelzest, for example, paid £1.76 million cash and shares for Peng Travel, a naturist specialist that was making £236,000 profit on turnover of £2.9 million.


Size also matters for start-ups looking to sell to VCs. Lee suggests that the private equity houses are only interested at a certain size, with the cost of doing the deal biting into what the VCs would pay.


Phillipps is also erring on the side of the small. He is sharing his wisdom with a new generation of budding entrepreneurs, lecturing at the London Business School as well as INSEAD.


“‘The Internet is still pretty popular among my students, with a lot of interest in location-based mobile applications”, he explains.


“For travel, there are a few niche ideas knocking around but the mainstream is crowded at the moment.”


So if there is one piece of advice Phillipps can instil in his eager business people of the future, it would be that “focus is important for a start-up”.


Brendon is probably as focused on his Florida theme park tickets with £5,000 resting on it, as Hunt is on delivering an affordable business-class product with the market breathing down his neck.


“Active’s competitors had a wide range of interests and their business plan required them to buy businesses with diverse cultures and try to integrate them,” he says.


“We did one thing only and did it well. That’s probably the main reason why the business did so well.”



Active Hotels: An early Long Tail model


Andy Phillipps’ move into the hotel sector was based on two fundamentals: “Hotels had always been a profitable sector, and at the time IT costs were coming down and we saw a way of using this to help distribute hotels.”


Phillipps and business partner Adrian Critchlow used the bulk of the first £400,000 they raised to set up a call centre to take the bookings. The hotel contractors were family and friends, who literally drove round the country, turning up at non-chain hotels in the UK and selling in the concept.


Having developed a scalable infrastructure for UK hotels and launching a website, the team then moved on to the continent. “The idea that a small 30-bed hotel in France could make its room available to anyone in the world was very much ‘Long Tail’ – although we didn’t call it that then,’ he says.


“The £400,000 was not a lot compared with what the likes of Expedia and Lastminute.com were spending at the time,” Phillipps adds. “You need a massive infrastructure to spend lots of money successfully.”


Phillipps admits that, maybe like John Hatt and Eland, things could have turned out differently. “At the time, Adrian and I had a few options,’ he says. “We did come pretty close to a buying an olive factory in the south of France. I thought there was a market in the UK for flavoured or spiced olives.


“It was all happening around the time of the dot-com boom, and it seemed strange to be buying into an olive factory during the biggest structural transformation in business history.”


So the olive factory never took off. The size of the prepared flavoured olive market in the UK is hard to track down, but Mintel said a few years ago that olive oil sales in the UK were worth £100 million a year. Small change compared to online accommodation providers.



Surviving the lastminute.com rollercoaster


Mark Jones and Vic Darvey were there at the beginning, both involved in getting the £2 million needed to start the Online Travel Corporation. Darvey is still there as vice president of distribution and business development at lastminute.com; Jones has since decamped to Harrods.com.


Darvey insists that the entrepreneurial start-up mentality is alive and clicking within Lastminute.com, particularly within the distribution side of the business that he now runs.


“Within the Lastminute.com group, the distribution unit is not mature, so we are very much in start-up mode,” he says, “We actively cultivate that environment. To get the game-changing breakthroughs the strategy guys need the entrepreneurs.”


He admits that change of ownership can be disruptive – and privately names a few who have taken the money and run as soon as their lock-in period ends. “It is difficult when the decision-making process is taken away from you,” he admits, “but you have to have faith in the new owners and keep your head down.”


Michelle Peluso leads by example in this respect. The Travelocity chief executive joined when Sabre bought her own start-up Site59 in 2002.


Travelocity has since dropped Site59 with Peluso herself admitting that the name didn’t mean much, even in the US.


“For many people, the name is difficult to remember, and usually requires an explanation of what it means – the 59th minute,” she admits. But the development cycle continues. Travelocity will now shift its late-availability inventory in the US through the self-explanatory Lastminute.com.

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