Image: Courtesy of SiteMinder

Our Siteminder Investment & the Changing Hotel Distribution Landscape

I was recently interviewed by Tnooz, a leading travel publication, on our investment thesis with Siteminder. I clearly ramble when I’m excited!

How a VC from TCV sees hotel distribution now (This article ran originally in Tnooz)

In January 2014, Technology Crossover Ventures (TCV) invested $30 million in SiteMinder, a hotel distribution platform based in Sydney. To put the Series B round together, Dave Yuan, a general partner at TCV, (a fund that has also invested in Facebook and Netflix), recruited one of his venture partners and a former CEO of Expedia, Erik Blachford, to vet the company and its competitors.

A couple of years on from that investment, we checked in with Yuan to learn how the deal came together, how he feels about SiteMinder today, and what his thoughts are on the sector generally.

The wide-ranging conversation charted the growing attention on direct distribution channels and how global hotel brands like Marriott appear to have gotten caught in the middle of distribution and marketing riptides.

Tnooz: What’s the general thesis on SiteMinder?

Dave Yuan: Here’s a long answer. I need to give you the industry context at the time, before we can talk about today. Back in 2010 to 2012, we spent a fair amount of time mapping out huge, specific dynamics in online travel. Ultimately we identified a particular space in the channel management sector that looked promising. It’s a pretty sleepy space: the hospitality software market and the specific segment of channel management. We ultimately found SiteMinder.

This was back in the 2010–2012 time frame. Think about online travel, back then. It was relatively calm, right?

Tnooz: Mm-hmm (affirmative).

Yuan: Generally the consumer booking path was fairly straightforward. There was Google. There were meta players. Prices were fixed across those different channels and then platforms handed you off to a hotel, right? So the booking path was very straightforward. The concept of a hotel brand was pretty understood, right? For a certain percentage of bookings, they would give you a reputation of quality and service. It’d be access for distribution. They’d give you a technology stack and then wrap it all around a brand.

The thing that got us excited as the market progressed, and what ultimately led us to SiteMinder, was we felt like those two tenets of online travel were starting to get really noisy. They were starting to get disrupted.

I know you guys have published a lot on this trend, but direct bookings — that concept has been around for a long time. Around 2011 was the moment that, for the first time, it felt like there was some real attention and some really movement around the trend.

Obviously, the direct booking trend threatens to disrupt the $100 billion market cap roughly shared by Expedia Inc and Priceline Group. It’s differentiated inventory that makes an OTA, meta, or other aggregator have a compelling offering for a consumer.

Plus Google and TripAdvisor found themselves with a monetization problem as consumer engagement shifted from desktop to mobile. So they each responded by adding the instant book piece.

Doing so, if you allowed a hotel to acquire on a commission basis like Google did (pushing aside its cost-per-click model), it really leveled the playing field between the OTAs and the metas and the hotels directly themselves. Today you now see some real push from the big ecosystem players around direct bookings.

Tnooz: What about hotel brands?

Yuan: That’s the second large movement in the industry. The concept of a hotel brand came under question. All of the sudden the hotel brand viewed direct bookings as a big part of what their value add could be over time, but at the same time, their brand-based approach became a tougher construct to defend.

The second piece which I describe is the deconstruction of the hotel brand itself. The hotel used to rely on brand as a signal of quality and reputation consistency. But when consumers think about trying to understand reputation in hospitality, they’d rather go to TripAdvisor than necessarily trust the brands of Marriott or Hilton, right? Because there’s disparity in service quality within a brand.

Yuan: More distribution was coming under pressure. People weren’t necessarily walking in. They weren’t calling through the CRS (central reservation system), they were going to the OTAs and metas instead. All of the sudden, brands like Marriott found themselves as not having adequate scale. They didn’t have the media buying and conversion chops of the OTAs and they also didn’t really have the amazing experience, the aura of what an Airbnb now provides.

Tnooz: Are you saying that global hotel brands like Marriott are kind of caught in the middle?

Yuan: Yes. More and more of these hotel brands look like essentially sub-scale OTAs. Their distribution piece is challenged. Then finally at the technology level, if you look at the DNA and the technology of most hotel brands, their systems are pretty old. Global brands lack the technology proficiency to help hotels engage with all these new demand channels, whether it’s intermediate or direct, whether it’s domestic or increasing international demand channels.

In addition to other places where consumers are, whether it’s Pinterest or Facebook or Twitter. Now messaging is emerging as the new native challenge. Hotel brands were undergoing a lot of challenges. There’s this new alternative lodging space, too. HomeAway, Airbnb. And so forth.

So, we saw this rich mix of factors, which started to drive behavior at a corporate level.

I already mentioned Google and TRIP really pushing the direct bookings piece. We saw OTAs start to respond through trying to vertically integrate. Expedia tried to get bigger. It acquired a whole bunch of assets to get to scale. Orbitz, Travelocity, HomeAway. They tried to expand to “in-stay” services, so perhaps they could increase LTV and pay more. It seems they’re both trying to understand how they can co-exist with the direct booking space.

Tnooz: How else are hotel brands responding?

Yuan: On the hotel side, likewise, we start seeing these hotel brands actually start to try to get to scale as well. Obviously, Starwood is looking to merge with Marriott to get to significant scale and that brings cost efficiency, more brand and a bigger loyalty base. Accor Hotels has bought a bunch of technology assets. Marriott and Hyatt are obviously using their frequent flyer data to try to get around rate parity, to try to boost direct bookings.

There’s a super productive backdrop. Against that backdrop we can make money. The area we got most excited about was channel managers. You don’t have to necessarily take a bet that hotels will go to 100% direct book in this space to see its growth potential. Generally what you forecast is that the number of demand channels are going to increase. Plus, you’re going to have your traditional OTAs. You’re going to have your metas, traditional metas. You’re going to have your new metas, Google and TripAdvisor. You’re going to have your time-based OTAs, like Hotel Tonight. Against that backdrop, this notion of allocating inventory across channel and setting pricing across channel gets incredibly complex.

So what do you need? You need a channel manager. You need modern software that integrates into the PMS (property management system) to set real-time rates and availability, essentially like a yield manager in any other industry. You’re essentially managing inventory across channels, right?

Tnooz: How does this affect major hotel brands?

Yuan: If you think about the deconstruction of a brand, these brands are under pressure in terms of what their core value proposition is. Where do you think they are going to double down on and focus? They’re going to try to get to scale as they’ve done through these M&A actions.

They’re pretty good at creating the brand itself outside of a hospitality context of a brand by just a marketing brand. Technology probably isn’t going to be where they are going to double down. More and more, I think, hotels are going to look to classic software innovators like SiteMinder, to help with the tech stack.

Tnooz: How did you choose SiteMinder to support?

Yuan: We felt like both those factors really focused in on channel management. Actually getting to SiteMinder, as you know is based in Sydney, Australia, is a process of us looking for the best product in the space. The best diligence call I did was, when someone mentioned to me a small company out in Sydney, Australia, that must have raised a ton of venture money because they had a great product but were pricing at a tenth of what another particular company was pricing at.

They must be burning cash hand over fist, this industry expert said. But we actually knew through talking to SiteMinder that actually they weren’t a small company. They were actually relatively large and their economics were very strong. That got us excited. We got on the 14-hour flight over to Sydney and created a deal. That’s a bit of a ramble, but that’s how we found SiteMinder.

Tnooz: How hands-on are you with SiteMinder?

Yuan: We have seats on the board. As in any of our investments, we have a great management team in place that is running the business day-to-day, but we’re certainly very active trying to help them think through this landscape, with capital allocation, and hiring and recruiting.

Tnooz: What is your and Erik’s style when it comes to SiteMinder?

Yuan: It’s similar. We look for the management team to essentially help us understand where we can be helpful. Part of it is reviewing the operations every quarter. Actually, we have monthly calls as well. In that process we got a feel for what’s strong and what’s weak. Generally in any fast-growing company it’s like a body. There are muscles that are stronger than others and for a body to function at peak performance the muscle have to be in balance. We have invested in many companies that reached significant scale and revenues. We can understand which part of the new organization probably needs development. That’s how we engage. There’s a nice intersection between Erik and I. I’ve done some online travel, but my core strength is in both internet platforms and SaaS. Then Erik’s core strength is obviously in online travel, as well as marketing. Between those skills sets I think we can provide a balanced team.

Tnooz: Often when we have conversations about SiteMinder, it’s seen as it has raised too much money and that it’s kind of orphaned. Companies like Sabre and Amadeus might theoretically like to have it, but they probably can’t justify paying the multiples that would be needed to make SiteMinder’s investors happy. Now I realize the SaaS market has cooled down a bit from when Micros got purchased, so Oracle and other companies might be able to pick up cloud-software service companies a little cheaper than a year or two ago. But it would have to be a company like Salesforce or Adobe or Oracle, a non-travel-endemic software company, that could acquire it and pour on the jet fuel it needs to scale, right?

Yuan: We generally don’t comment on specific companies and exits. But what I would say, we’re only about two years in. Our general holding period is from 5–7 years. We’re super focused on fueling growth of the business, expanding the product set, expanding the capabilities of the company. We’re really not focused on exiting. This company has reach a good financial scale, good economics and it is experiencing very strong growth. So, if anything, we’re doubling down on the organic growth path of the business, and we’re excited to see it become the category leader in the space. A big important franchise, in both SaaS and online travel.

Tnooz: To use a cliché, what’s the 80/20 value that it has that really allows it to be a category leader? Obviously, execution is always critical. But wat is it in terms of the product set, or how it’s going about things product-wise, that really sets it apart?

Yuan: It’s a combination of factors that make it so difficult to succeed in this sector, and why few businesses have seen success in this category. SiteMinder is unique. It has this amazing product that has got a simple and elegant and beautiful UI that even an independent hotel with a small staff can use. It has an incredibly powerful backend and functionality that can scale up to the largest chains. On the product side, it’s both powerful but easy-to-use. Likewise it has this high-velocity, efficient sales model that allows it to sell this product into the independents and boutiques where that inventory is incredibly valuable. It’s where most profit is generated in travel.

Those two things make it really difficult to replicate in order to really succeed in this end market. It’s a combination of those two. They kind of work together. If you have a great sales forse and great sales execution, but really bad product, you’re not going to be able to address this market. Likewise, if you have great product but weak sales execution it’s very, very difficult.

Tnooz: There’s been some rolling up of B2B hotel tech players. Thoughts on that?

Yuan: I do think direct bookings becomes increasingly real as a trend, because Google and TripAdvisor have to figure out a conversion path that makes sense on mobile as a user experience. The second related piece is Priceline, it seems to be defending itself against this disinter-mediation via the direct booking trend by trying to vertically integrate itself. They obviously got Buuteeq and Hotel Ninjas. We’ll see how successful they are on that B2B front, but they are a formidable company with great execution.

As it relates to a broader industry roll-up of marketing tech, or hospitality tech, there’s a lot of truth to that. There’s a lot of great point solutions that have a good value proposition but maybe not a value proposition that either gets hotels excited enough to deal with the integration and to existing vendors, particularly their PMS vendor or it doesn’t offer enough value proposition to pay a high price that could support a direct sales model. There can be some consolidation that can occur in this market.

From a SiteMinder perspective, we’re excited because we’ve reached scale and we’d be one of the consolidators. There’s always trade-offs associated with M&A but it’s certainly an option as we think about how to add to our stack over time.

Tnooz: Is it in the nature of channel managers and how hotels need to have a trusting relationship with them that it would be very difficult for a company like SiteMinder to find a home at an OTA group? Hotels may fret about whether their proprietary data is really going to be fire-walled even though, obviously, companies like SiteMinder, do have precautions like that. Must channel managers stay independent of OTA-type companies to thrive?

Yuan: Yeah, it’s our belief that channel managers should be independent, but obviously, feels otherwise in terms of hospitality technology. To your point, while there’s probably no structural issues, there might be perception issues among hoteliers. It’s our belief that SiteMinder can add value to our clients as an independent entity.