Venture capitalists such as Institutional Venture Partners are pouring $250 million into the startup, which already is turning a profit
There's no place like a second home. Or so the backers of vacation-rental startup HomeAway believe. Venture capitalists are so enamored of the three-year-old Austin (Tex.) company, in fact, that they're plowing a staggering $250 million into HomeAway—the biggest investment in an Internet outfit since the height of the dot-com bubble in 2000.
"This thing is a very well-kept secret," says Todd Chaffee, general partner with Institutional Venture Partners, a VC firm that ponied up $45 million in the investment round, announced Nov. 11. The rest of the financing came from Technology Crossover Ventures and Redpoint Ventures. Previous investors include Trident Capital and Austin Ventures, which remains the largest shareholder of the company. "It's time to unveil it and turn this thing into the next eBay or Expedia or very high-profile Internet company," says Chaffee, who led his firm's investments in Yahoo!, Netflix and Verisign.
While many startups are handing out pink slips and scrambling for money (BusinessWeek.com, 10/12/08), HomeAway's investors and executives say it had an easy time raising money for a higher valuation. The reason? HomeAway is one of those rare startups with a high-growth business model that is producing an operating profit. The company is on track to hit revenue of almost $100 million this year, says Chief Executive Brian Sharples. In February 2005, Sharples founded the company with Carl Shepherd, the former CEO of Hoover's, who now is HomeAway's chief development officer. "This just happens to be a segment that everyone overlooked," says Sharples, former president and CEO of IntelliQuest Information Group. "We see a terrific opportunity to build a great company."
While the economic slump is forcing many consumers to cut back on travel, HomeAway thinks its service could prove resistant to the recession. Renting a home often is cheaper than staying in a hotel. And for second-home owners who don't use their houses that much, renting can bring in extra money when times are tight. "As consumers seek value the category of vacation rentals is appealing," says Henry Harteveldt, vice-president at Forrester Research (FORR).
Thanks to this latest, head-turning investment round, HomeAway is sure to attract a lot more attention—and rivals. Analysts say competition is already growing from property managers, real estate companies, and a host of online players. HomeAway became the world's largest Internet vacation-home service through the acquisition of 10 online vacation-rental sites. Among the next-largest rental sites are Forgetaway.com (owned by Weather.com), Hotels.com, and Group RCI, a division of Wyndham Worldwide (WYN). "There are some new entrants in the market that will pose a credible threat," Harteveldt says.
Other hurdles include the weakening travel market and the increasing need to earn the trust of consumers wary of giving a stranger thousands of dollars to rent a home. "The biggest challenge they have to overcome is in safeguarding that customer experience," says Douglas Quimby, senior director of research for PhoCus Wright, a travel-research company. "It's an unbranded world."
Sharples says the cash infusion will put the company in a position to strengthen its business. Before this round, HomeAway had raised $405 million in equity and $110 million in debt. Of the $250 million, $88 million has been used to retire remaining debt, much of it incurred amid the acquisition spree. The rest will be used to buy more companies, strengthen marketing, and create a stock buyback program for a small number of longtime employees. To devise a new marketing strategy, the company earlier this year hired Mike Butler, the former chief marketing officer of T-Mobile USA (DT). Two weeks ago it brought on Publicis (PUBP.PA) to help craft a new advertising campaign. "We want to have a $10 billion market capitalization in five years," says Chaffee.
Following the purchase of five of the 10 largest vacation-rental sites in the U.S. and several in Europe, Sharples wants to expand into South America, Canada, Asia, and Eastern Europe. "Travel is worldwide business," he says. "To lead this category we have to make sure we have homes all over the world and travelers from all over the world."
Like eBay (EBAY) or Amazon.com (AMZN), HomeAway is trying to create a simple yet efficient consumer experience on the Web in a highly fragmented market. Homeowners pay $275 annually to list their property for one year. The company expects to end 2008 with 325,000 paid listings, up from 250,000 last year. Vacationers use the site to browse listings and user reviews, view pictures, and check pricing and availability. The site also guarantees transactions up to $5,000 in case of a rip-off. In the next few months, Sharples says, the company is going to introduce a payment service that will allow consumers to pay for the rental through the site with a credit card or via eBay's PayPal.
"We want to make it as easy as booking a hotel room," Sharples says. "We invested pretty heavily in staff and technology to scrutinize the listings."
With a dead market for initial public offerings, Sharples says HomeAway is not interested in selling shares to the public soon. But he did say an IPO in five years could happen. "My best guess is this funding will take us through an IPO," he says. Asked if he was open to being acquired, Sharples simply says, "No."