Vertical Travel Search Engine Kayak CEO Steve Hafner (Part 4)

SM: Let’s discuss the competitive landscape. What was it like when you started and what is it like now?

SH: The market has evolved quite a bit but not as much as we expected it to. Initially the only competition came from two companies. One was called FareChase and they did not have a consumer facing application. It was mainly used by travel agents to find Southwest Airline’s fares. There was another company called SideStep which did not have a website. Instead they had a downloadable toolbar that would launch automatically when you visited an airline or agency website and it would show you fares on the side. Neither company was well capitalized and neither company had more than 30 employees. The competitive landscape was pretty insignificant and the product offerings were not that great either.

When we launched it attracted a lot of attention because of our top tier talent. We had a lot of financial backing and a big distribution deal with AOL. As a result we grew much faster than they did. To their credit there was a lot of cross-pollenization of ideas once we launched. We borrowed things from them, they borrowed things from us, and ultimately consumers saw a lot of improvements in a very short period of time among all three companies. Yahoo ended up buying FareChase in late 2004. We recently ended up buying SideStep.

SM: More competition has emerged in the past three years.

SH: On the Internet there is always going to be a lot of competition because it is easy to build a website. The hard part is making that website scale. There are a lot of international travel search engines that have tried to emulate the Kayak model. They do not have good brand awareness, they are not well capitalized, they do not have good supplier relationships, and ultimately their technology platform won’t support 50 million queries a month. We built our architecture to support a billion a month. A lot of these other companies are just scraping websites in real time.

You are right that the competitive landscape continues to evolve. Just this week Microsoft bought FareCast which was founded two years ago. We refer to them internally as the Kayak JV, but they actually have a really good tech team. They were acquired for $100M. Kayak is 20 times their size in terms of search volume.

SM: You have mentioned capitalization a few times as being a vital part of your strategy. What was your capitalization and financing strategy?

SH: It was to take a lot of money from various smart investors and to by selling them on the goal of becoming the number one travel site. The top travel sites at the time we launched were Expedia, Travelocity, and Orbitz. They made money by charging both consumers and airlines booking fees. They also collected a booking fee from a technology vendor called a GDS. As a result they were only paid when someone booked travel through their website. They biased their displays to show providers who paid them more. Their functionality was not terribly inspiring.

Our goal was to create a company that did search better than these major players and we knew it would require a lot of capital. At Orbitz we raised $205M before we turned profitable. At Kayak we have raised $230M to date although we turned profitable after burning just $15M.

SM: What was your source of financing? Can you break it down by rounds?

SH: Our first round raised $6.5M which was a pretty large Series A especially since it was a PowerPoint presentation.

SM: Did you put in any of your own money?

SH: I put in $1.5M as well as Paul English who co-founded Kayak with me.

SM: Who where your first round investors?

SH: General Catalyst Partners. They really knew online travel. Our second round was done by Sequoia Capital which brought our total raised capital to $15.5M.

SM: How far did you get with the A and B round of funding?

SH: We had already launched the product by the time we did our Series B and shortly after closing the deal with Sequoia we turned cash flow positive. We have built the base of our business with this funding.

This segment is part 4 in the series : Vertical Travel Search Engine Kayak CEO Steve Hafner
1 2 3 4 5 6 7