Month: April 2009

The Web Needs an eHarmony for Travel

mjgold3 Comments

When Dev and I began exploring ideas after PlayCafe, I considered what I would personally want to use. One idea immediately came to mind: an eHarmony for travel.

I am seriously considering living abroad. I’ve been in the Valley for 12 years now and while I love it, I feel some wanderlust. My criteria for a new place are:

  • Within 5 minutes of a beach, preferably warm-water
  • English-speaking, since the only other language I know more than ten words in is dead
  • Relatively low cost of living
  • Safe and somewhat modern

The question is, what are all the cities in the world that match this? The answer is surprisingly hard to find.

Travel booking sites like Expedia and travel guides like LonelyPlanet assume you know your destination. Travel social networks like Tripwolf have people to ask, but that’s manual and hit-or-miss. You can Google terms and guess like I did – New Zealand and Australia fit – but that’s inefficient. It took my roommate to suggest Costa Rica.

What’s needed is a data-driven, travel-matching system that shows you which cities match your needs.  eHarmony does this for dating: tell it who you are and it shows you matches. Travel sites do the equivalent of asking you possible names of who you’d like to date. When a search engine asks you for more information than you have, it’s not doing its job.

Market
Travel is a $100 billion market and not going away even in a recession. A friend in the industry says about 70% of travel is for business and non-discretionary, and of the 30% consumer market, about 70% goes to top 20 cities. Assuming this search engine wouldn’t change top 20 behavior much, that means the long tail of consumer travel is about 9% of the total travel market, or $9 billion. That’s still pretty big.

Note this will be useful for both the vacation and permanent moving market. The latter is especially valuable since people spend tens of thousands moving and that decision must be vetted more.

Product
The site could collect however much information travelers want to give:

  • Environment: temperature, humidity, rainfall, landscape types
  • Culture: languages spoken, religions, ethnic diversity, openness to foreigners
  • Government: tax rates, type of system, economic and social freedoms
  • Safety: crime rates and types, natural disaster patterns
  • Things to do: popular sports, activities, night life, cuisine options, tourist spots
  • Price: cost of airfare, hotel, car, food, rent, activities, schooling, housing prices, health care

Some travelers will only need one or two search filters; some will have highly detailed needs. The site can offer wizards to guide choices,  wikis for user reviews and content, and forums to connect with other searchers.

Business model
Anything that gets people to travel is lucrative. A typical one-person, three-day trip costs about $1,000 in airfare, hotel, car, food, and activity packages. Longer or family trips are at least several thousand. Each booked item can earn a commission of $20-200+; lead-generation in travel is big business.

The site’s search and data APIs could create demand and convert uncertain buyers for several types of partners:

  • Travel booking sites that can increase purchases by showing travellers their best matches. An Expedia VP said their users visit 10-15 times before buying. Reduce that just a few visits and Expedia will be thrilled.
  • Transportation vendors such as airlines, hotels, cars, and cruise ships that want to spark demand.
  • Travel guide sites that want to suggest your best destinations to sell relevant guides and ads.
  • Even weather sites that want to monetize their information better. “It’s 72′ and sunny in Hawaii today. See if Hawaii is right for you!”

Partnerships are essential for this idea to gain scale. Travel is too crowded a market to compete without a lot of partners or a ton of funding. Fortunately this offering is unique and valuable enough to gain partner interest. When I interviewed a VP at Expedia on this, he was ecstatic at the prospect, offered access to Expedia data, and began selling me on why I needed to start this.

Competition
Because travel is big business, it’s very crowded. Travel keywords cost tens of dollars per click on AdWords. Hundreds of sites focus on SEO to get a sliver of Google juice. There isn’t that much innovation in travel but it’s still a ruthless market.

There isn’t much out there that is a direct competitor.

  • Uptake has some matching features and categories of vacations you can choose, but still requires you to name a destination city, defeating the whole purpose of matching.
  • City-data.com has a lot of detailed data on cities and a surprising 6 million monthly visits, but no matching system and an awful interface straight from the playbook of Craigslist.
  • MyIdealBeach is a nice matching pilot from Orbitz, but only shows beach destinations from a limited set. Says Orbitz’s press release:  “Our research has shown us travelers want a different, better way to search for complex trips than by dates and destinations.”

Has anyone seen anything else like this?

Execution
Starting this is a bit time-consuming but fairly straight-forward.

  • Find reliable sources for the above data. Start with a few main traits, then expand as users tell you their needs. The Weather Channel, Expedia, Fodor’s, the CIA factbook, and many other sites have this data and some already have APIs.
  • Build a basic search engine to query the data on keywords and pre-set options.

That would yield a usable beta. You could then add social networking and wikis, build APIs, integrate commission programs, develop partnerships, and watch the dollars fly in.

Why we didn’t do it
Dev and I were open to starting this, but had a few key concerns:

  • Most people don’t move or take vacations often. We’d be lucky to have visitors return every six months. High user churn means constantly having to find new ones or targeting the small sliver of frequent, high-end travelers.
  • Search engines are a pain to market. This one is actually a little word-of-mouth viral in that people often travel together and may share search results and itineraries. Still, gaining search share is a bitch when Google looms.
  • Barriers to entry are low. Any of the major travel sites could copy this in a few months if they woke up. If this site got traction, they might be more likely to buy us than build but that still sets a ceiling on potential acquisition values. The site would need to cultivate sticky content like reviews or a social network to create a barrier.

I do believe just moderately good execution could make this a $5-20M business. What do you think?

P.S. I’m openly releasing this idea into the wild. If you steal it and strike it rich, you owe me lunch.

What is the worst successful domain name?

mjgold3 Comments

I have been exploring names for my new venture and thought of a question: what is the worst domain name for a successful company?

Let’s define some traits of a bad domain:

-Difficult to spell
-Confusing or unrelated to its topic
-Contains hyphens or numbers
-Not a .com, making it difficult to remember
-Long (>10 letters)

Looking at the Quantcast top 100 sites, a few candidates emerge:

-#14: craigslist.org
-#50: merriam-webster.com
-#57: ezinearticles.com 
-#96: city-data.com

Craigslist took a while to establish its brand since it’s undescriptive and started as a .org. Merriam-Webster’s spelling and hyphen are problematic but it had an existing brand. City-data also has the hyphen, but at least it’s descriptive.

My choice for worst successful domain name is ezinearticles.com. It’s long and complex, seems like it might have a hyphen, and has a tacky leading “e”. Yet, it receives 16 million visits a month. Like an ugly guy who still manages to get the hot girl, that’s fairly impressive.

Honorable mention: #1 Google, for misspelling their name.

Why Y Combinator’s Terms Are Poor (But I Still Like Them)

mjgold14 Comments

I love Y Combinator. They are scrappy, innovative, entrepreneur-friendly, and created a model that VCs originally laughed at but are now copying. I love Paul Graham’s essays and I like him personally.

Y Combinator invests ~$12k in early stage teams in return for ~6% of the company, implying a typical valuation of about $200k.  Paul Graham says this is a good deal because Y Combinator can increase your value by at least 6%.

While I think that’s true, that’s not the right question. The right question is whether YC’s deal is better than alternatives.

A typical $50k seed-stage angel investment for a team with a promising beta and users, even in this crappy market, is at $1M-$3M pre-money valuation in an equity round and can be as high as $5-6M if you use convertible debt. PlayCafe originally raised $250,000 of convertible debt with a $6M cap. (We eventually switched to a complete equity round when First Round Capital invested.)

Let’s compare the numbers:

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A $50k angel investment is almost ten times the better financial deal (9.6 to be exact).

YC asserts that their advice and connections are worth this premium. I respectfully disagree. Advice and connections for even idea-stage entrepreneurs are easy to find with a little initiative, and if you don’t have that, you’ll fail as an entrepreneur. YC’s connections, Demo Day, and brand are indeed value-added, but it’s hard to argue they’re worth ten times an angel and free advice and connections.

YC supporters say their teams are little more than first-time entrepreneurs with ideas. That’s generally true, but YC’s hackers are able to build most prototypes in 3-6 months anyway. Is it worth that time working separately to get a 10x better deal? I think so.

One could say it may be a bad deal but the equity involved is relatively minor. I am open to this point. 6% equity can be quite a lot – it’s $120,000 of equity on a $2M pre-money valuation, or the equity component for 5-10 early hires – but I’d agree it’s not a massive amount. Spending $150 for a restaurant dinner that you can create for $30 may be a bad deal, even considering the value of ambiance, but it’s not a disaster. Small stakes excuse small errors.

How much equity should Y Combinator take? I’d say the fairest method is punting on this question and using a convertible note, which would determine YC’s stake at the Series A valuation. The problem for YC is that $12,000 into a typical Series A pre-money valuation of $3M translates into a paltry 0.4% equity.

One partial solution is warrants that give YC the right to invest more money at a pre-set Series A valuation, such as $200,000 at a valuation of no more than $4M, yielding about 5% equity. We did this with First Round Capital to compensate for the dilution that they would suffer in later rounds.

Thus, recognizing that YC deserves at least a few points of equity, my real suggestion is that Y Combinator should invest more, which given their success so far and a recent $2M infusion from Sequoia, should be more than feasible. If Y Combinator just set their valuations at one-half market value instead of one-tenth, that would suggest Y Combinator invest $60,000 instead of $12,000.

Graham believes that $12,000 is enough to keep founders alive for three months, but I would argue is sub-par for early marketing and development. A good domain name alone can cost $2,000-$20,000+ and is painful to change after release. Getting good early design can cost another $2-5k.

I should note that I may be biased because I am not YC’s market. I have been doing startups for a while and am fortunate to have a decent entrepreneurial network. YC provides a faster lane for first-time founders than I had.

I do think an important metric is how Y Combinator alumni view the terms afterward. The majority seem quite happy with it. Y Combinator is empowering hundreds of entrepreneurs and some very cool startups, and for that, I cheer them whole-heartedly.

Update: I see Sarah Lacy makes a similar argument. It’s interesting to see the backlash.

Update 2: Tweaked some of the #s to be current.

Update 3: Two things happened since I first wrote this post:

a. Y Combinator announced the Start Fund to give an additional $150,000 to every YC company at very good terms.

b. I decided to apply to Y Combinator. The extra funding does make the equity calculation more compelling, but the biggest reason is that several YC friends and the thoughtful replies I received convinced me that I was underestimating the value of YC’s network and advice. We will see what happens. 🙂