Vertical Travel Search Engine Kayak CEO Steve Hafner (Part 5)

SM: Obviously you made a big departure from established business models in the travel industry. Can we discuss that in terms of growth?

SH: Our business model is very similar to Google’s. We get paid for the referral. We are unbiased which is great for consumers because when you have an advertising driven model the incentive is to have more comprehensive search results.

Another key aspect of our business model is that we are very lean. Today we only have 56 people. We can charge very little to our advertisers. Since we charge little and have a large volume of queries we can make a decent living and provide tremendous value to those marketing on our website. Our ratios are much better than traditional OTAs like Expedia or Orbitz. The difference is where Expedia will do $12B in gross bookings we will only do $150M in gross revenue. However we will have a much higher profitability than they will have.

SM: Is your business model in competition with Google or is it complimentary model? Expedia is obviously one of the biggest advertisers on Google and they are probably big advertisers on your site as well.

SH: In the Internet everyone competes for consumer attention. In some ways Google is the biggest travel site on earth. People go there for their entry into travel research. Expedia is certainly the biggest travel site in terms of bookings. We would like to do a little bit of both. We want to be the best place to find travel information and we want to be the best place to find the supplier of your travel needs. I think we compete with Expedia and Google for audience. Ultimately we are not taking share from Google or Expedia because the transaction has to happen somewhere. Google is hitting on so many cylinders that I don’t think we are having an impact there yet.

SM: By raising two rounds of funding you were already cash flow positive. Why did you have a Series C?

SH: That series was led by Accel Partner’s London office. At that time we only operated in the US and we wanted to export it abroad. It was designed to help fund the international expansion. The US was the least expensive, most efficient market to get started in. In Europe the marketing channels and the language requirements make it much more capital intensive.

SM: How big was the Series C and what did it provide you in terms of international presence?

SH: We raised $18M. We are in seven markets now. We launch a new market every 2 months. International is still less than 10% of total sales, however that is primarily because the US business is just so big. This month the US will bring in north of $12M in revenues which is up 15% month over month.

SM: What was the reasoning for your recent purchase of SideStep and have you benefited from the acquisition?

SH: At Kayak we are an engineering driven company. We did not have a sales force, a display ad business, or an email business. SideStep did. It is a bit like Google buying Yahoo. The one thing we knew at Kayak is that our systems scaled better, our algorithms monetized the website better, and we fundamentally had a better product which provided a better user experience. SideStep had an audience albeit one that was a third of the size of Kayak. They also had a commercialization aspect we did not have. I approached their CEO in October of last year with a simple email that said “Do you want to get married?” and he wrote back “Let’s talk”. In the course of three weeks we hammered out a deal and signed an agreement in mid December. We raised money and closed the deal within two weeks which is unheard of. It required a lot of time and effort by our legal staff and technology guys.

SM: Can you talk some about the negotiation of a private to private merger? Those deals are always tough in terms of valuation.

SH: There are two ways to approach it. The first is on a relative valuation side. If you can agree on relative valuation then sometimes you can just issue your paper for their paper. We could not agree on relative valuation.

We then looked at how much money is invested in their company and the expectations of their VCs and around valuation. We were able to get clarity in terms of cash expectations and got comfort in terms of the metrics to validate those expectations. We then agreed to give them cash and subsequently went out and raised cash on our own based on Kayak’s trajectory. We raised cash at a high enough valuation that we were able to get over the relative issues. So, ultimately, it was an all cash acquisition.

SM: What did that mean for the SideStep team? Did you want to retain that team or not?

SH: We wanted to retain their sales and marketing teams. At the time Kayak had 46 people and SideStep had 83 people. When all the dust cleared we had 7 or 8 of their people left.

This segment is part 5 in the series : Vertical Travel Search Engine Kayak CEO Steve Hafner
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