Last summer, Sam Shank set out to raise a new round of funding for his last-minute hotel booking startup, HotelTonight. He was confident. He'd never had trouble raising money before, and though his company wasn't a unicorn, it was something of a travel industry darling. Besides, growth was up and to the right. Yet in meeting after meeting, venture capitalists ignored the growth numbers Shank provided and kept asking him about the company's finances, especially the $2.5 million-plus HotelTonight was burning every month. He couldn't get them to agree to a valuation he felt the company deserved.
Shank, 43, was like a lot of other startup CEOs, flush with cash from earlier rounds and so focused on the day-to-day he didn't notice that VCs had suddenly become parsimonious. "As a CEO, you never get told the world has changed," he says. Once he realized raising a new round was going to mean a low valuation or a complicated term sheet, he walked into his Monday morning executive team meeting in October and told them there was a new plan: getting to profitability with the resources they had left. That meant cutting staff—fast. "I remember telling them, 'Okay, there's going to be a change—we're going to have to do layoffs,'" he says. "It was one of the first times I had to vocalize it. I had trouble even completing the sentence."
Almost a year later, HotelTonight has cut 20 percent of its staff and reassessed other expenses. While some analysts say the company faces increasing competition from larger rivals that have stolen its playbook, HotelTonight says it became profitable in April, continues to grow and is even eyeing a possible public offering.
Not so long ago, joining the "unicorn club" of companies valued at $1 billion or more was the most sought-after bragging right in Silicon Valley; now startups are just as eager to proclaim profitability. Often that means cutting corners when discussing earnings. HotelTonight, for example, excludes a few non-cash expenses related to hotel occupancy taxes. But the company's backers say any kind of move into the black is rare and to be applauded. "The partners in our firm meet with about 1,200 companies a year among the six of us, and I can count on one hand the companies that have gone from burning millions nine months ago to profitable today," says Jeff Richards, of GGV Capital, one of HotelTonight's investors.
HotelTonight's most recent valuation in 2013 put the company at $300 million, but things are going well enough that Shank is ready to say what much bigger startups continue to duck: He wants to take the company public, possibly by late 2017. "Once we got to profitability," he says, "it became clear that's our next path."
He's all smiles now, but Shank remembers last fall as a period of agonizing pressure. Once the staff cut plans were finalized, he and some team members came into the office on Nov. 8, a Sunday, to do a practice run. Two days later, they dismissed 37 people in the morning and then held the regular all-hands about an hour later. Shank sat on a stool at the bar area in HotelTonight's San Francisco headquarters and promised the rattled survivors that no more layoffs were coming. He accepted blame for having hired too fast and not recognizing the funding environment had shriveled. Then he told them the company was aiming to become profitable by August without killing growth. In true startup fashion, the plan had an overly earnest name: "Build To Profitability," or B2P.
Employees started making decisions based on whether it improved the company's earnings. They slashed marketing, stopped wasting money on discount sites and coupons, and added features that led to more app users booking rooms. The company cut its annual infrastructure costs by $500,000—a 40 percent drop—by renegotiating licensing deals, moving from one software platform to another and so on. One employee won a weekly "Frugal Not Cheap" award by simply telling a credit card processor they wanted to pay less, saving $8,000 per month.
Every week, Shank updated the company on its burn rate, and every morning, employees got an e-mail with such key metrics as gross bookings value, year-over-year growth and gross margin. Shank put a bottle of Johnnie Walker Blue Label on the office bar and stuck a Post-It ultimatum on it: "Don't drink until after B2P."
When HotelTonight hit its profitability target in April, the Blue Label "lasted about 10 minutes," Shank says. "There were a lot of high fives." At an all-hands meeting the following month, he revealed the plans to go public. Shank says HotelTonight is on track to double its revenue this year. Last quarter, it had about $25 million a month in bookings. Analysts estimate HotelTonight's commission on those bookings to be about 15 percent. Shank said that going public depends, of course, on the market being receptive to new tech stocks. "This is the next mountain to climb," he says.
Analysts aren't sure HotelTonight is up for the trek. "It would be a very small play," says Douglas Quinby, of travel market research firm Phocuswright. Industry behemoths Expedia, Inc. and Priceline Group Inc. each command more than $55 billion in gross bookings a year; analysts estimate China's Ctrip does about half that. Given HotelTonight's bookings and self-reported growth rates, it could have a $400 million to $500 million IPO, estimated Morningstar analyst Dan Wasiolek.
For a long time, HotelTonight looked like a perfect tuck-in acquisition for one of the big players. It excels in two growing trends in online travel: mobile purchases and last-minute booking. But in the last few years, giants like Priceline have built similar offerings, and HotelTonight has started to let users book up to a week in advance, which some analysts worry stretches the company too thin and makes it look less attractive to buy. "They start to look just like a junior version of a hotel-focused thing with a strong mobile component," says travel consultant Stuart MacDonald.
When asked if he'd sell, Shank deflects and says the company's priority is building a great business. For now, he's just happy to be able to put the profitable label on HotelTonight. His investors are asking him to advise their other portfolio companies on how to stop burning money. "It's a measure of credibility that really stands on its own," he says.