Disrupted By Airbnb, Acquired By Expedia

Transcript

John Warrillow:                 My next guest Ross Buhrdorf was the funding CTO and investor in HomeAway, the owners of such brands as VRBO. They sold the company to Expedia for 3.9 billon dollars. There’s two things I want you to listen to in this interview, the first is when Ross puts on his acquirers hat. They bought 25 or so businesses at HomeAway and I want you to listen for the characteristics that he found most attractive in companies that they were acquiring, and some of things that would break off a deal in its tracks.

John Warrillow:                 Then I’ll have you think about or listen to Ross’s description of the Expedia acquisition of HomeAway as Ross went from the acquirer to the acquiree. And listen to in particular why Expedia wanted to buy HomeAway, some of the strategic reasons that they were interested in making a 3.9 billion dollar acquisition. Here to tell you the whole story is Ross Buhrdorf.

John Warrillow:                 Ross Buhrdorf, welcome to Built to Sell Radio.

Ross Buhrdorf:                  Hey John, I’m so humbled to be invited to your show and excited to talk.

John Warrillow:                 Awesome. Let’s get into it. So HomeAway, I know the media talks a lot about Airbnb, I’ve got to be honest with you, I’ve never used Airbnb. So I kind of know, generally the concept but you guys were actually before Airbnb, you were the pioneer in this space. Tell me about the business? What did you guys do?

Ross Buhrdorf:                  Absolutely, John. I think … You know, we created the marketplace but then Airbnb came in and disrupted us, which is great. I mean if you’re the one that gets disrupted that means you must of been the leader so certainly the leader in the vacation rentals, what Airbnb did was they created a segment … Carved out a segment in the urban area, so they were bigger in cities and still are today, HomeAway and now Expedia, really owns the vacation rental market so think of the vacation destinations, mountains, all over Europe, the vacation destinations.

John Warrillow:                 Yeah. So you’ve got like ski chalet-

Ross Buhrdorf:                  That’s it.

John Warrillow:                 You use four times a year, but you want to get some revenue, you might list on one of HomeAway’s properties. What properties did you guys … I think you own VRBO, is that right?

Ross Buhrdorf:                  Yeah. We do-

John Warrillow:                 Vacation Rental by Owner.

Ross Buhrdorf:                  Yes. VRBO is one of our early acquisitions so we own VRBO and a whole list of vacation rental destinations. We typically went in or we did go in and each country and we buy the biggest one or the biggest two, in the market. In the US we ended up buying the biggest four, in the US there was a couple regionals there so we did 25-plus acquisitions. And our real innovation was recognizing that what needed to happen is all of these smaller vacation rentals, VRBO being the biggest, needed to be rolled up into the single biggest marketplace, which then we sold to … You know, took it public, raised 453 million dollars, then took it public, five years later and then sold it to Expedia for 3.9 billion dollars so that’s the story.

John Warrillow:                 Not a bad little run. I’ve got so many questions for you so let me dig in. The business model at HomeAway, how did you guys make money?

Ross Buhrdorf:                  Oh, so that, I think … Early on the business model was a subscription model so the owners and I ate my own dog food, I had multiple and all of the executives ended up having multiple vacation rentals, so we ate our own dog food. So on the supply side or the vacation rental owner side, you would pay a subscription fee and then the traveler would come to the website, we had a very sophisticated search so that they could search for the property and then they could go through the booking process. Early on it was strictly a subscription model and then as we progressed, what we really moved the whole company to is what you’d call a transactional model or what Airbnb did right out of the gate, which certainly optimized their profitability for the company. We moved into a transactional model where we would get a cut of all of the revenue that ran through that vacation rental property.

John Warrillow:                 So the beginning if I was a home owner, I had a place in Vail, let’s just say and I wanted to put it on VRBO or one of the other sites, I would pay a subscription fee to access that and then if someone came in and rented my property you guys didn’t get a cut but you changed that model so that there was a subscription fee and you also got a cut of the actual rental property, is that right?

Ross Buhrdorf:                  That’s right. That’s right.

John Warrillow:                 And did you drop the subscription fee or did you keep the subscription fee and added the transactional fee?

Ross Buhrdorf:                  We did both. You could do a mix of it. You could either buy a subscription fee or you could do a transaction model where we’d have a cut. I mean there is advantages to both, the subscription fee was always cheaper, I don’t want say always but mostly in general cheaper for the vacation rental owner, especially, if you’re in a high volume area because getting an override on the transactions in a high volume area, would cost you a lot more money. But if you had a vacation rental in a low volume area, it could be better just to do a transactional model. Now, we had on our front page of our website, a little calculator where you could pick and decide what was best for you.

Ross Buhrdorf:                  Now, the company that we sold to Expedia we had told all of our customers, hey, we’re moving to a transactional model, and the reason was is that we were the only ones at the … Or we were the biggest, and I think still are the biggest today as far as book nights moving to transactional model it just has much more margin, much more profitability for HomeAway. So we were moving there and Airbnb was right out the gate transactional and them being the … And everybody else in the industry is transactional so although, we added the most value for customers, at some point if you can’t beat ’em, you got to join ’em.

John Warrillow:                 So talk to me about your acquisition strategy because I think a lot of our listeners would benefit from getting inside your head a little bit in terms of what you looked for in a company to buy. Now, keep in mind Ross, our listeners are people … You know, some of them are technology companies but many of them are not. They might be auto mechanics or they might own a dental practice, whatever, they’re businesses from all different industries so as you put on, as I ask you put on your acquirers hat, I’d love to know sort of things that are independent of the technology industry, what you look for in companies that you went out and bought?

Ross Buhrdorf:                  Well, I mean I think … First of all, we wanted to make sure that it was good fit for what we did. I mean I think that seems obvious but certainly for your listeners, you want to be looking at who are your potential acquirers, right? So if your auto mechanics, you want to … Who are the big acquirers in your area that can buy and so we were looking of course, for the vacation rental business and then we were looking for … Given that we were a global company we were looking for global reach so we would be looking for as I said who’s the number one, number two, maybe even number three, in this area of the world or region that we could purchase and that would make our inventory bigger. So with the thought of if you view the travelers or the people that book the vacation rentals, if they’re your primary customer, how can we get them more properties that they want to stay in.

Ross Buhrdorf:                  So I mean I would generalize my answer to say as a small business owner what do you have that potential acquirers would want to purchase in smaller businesses, I’m guessing its customers, right? And it was certainly the case for us, that they had customers in those regions. The reason they had customers is because they have this great inventory. So if you think of in France we bought Abertel and Abertel was one of the biggest vacation rental marketplace websites in France and so it was an obvious purchase for us.

John Warrillow:                 Ross, how did you value these companies? How you come up with an offer price?

Ross Buhrdorf:                  So I think … Good question and one way we can ultimately value them is by their customers. So you can value them by their revenue, right. And then you can do a multiple of revenue, multiple of margin, however you want to do the value of the company. But we also would try to get a valuation on non-overlap customers because we had … Maybe we had another website in France, we wanted to make sure we weren’t buying the same customers. Right. So we would look to see if we weren’t buying the same customers and checking, you know, do the math around customer overlap.

John Warrillow:                 And so how would you calculate the value of a customer?

Ross Buhrdorf:                  It depended on … I mean then we’d come down to what are those customers driving for, revenue per customer, I think at the end of the day, you have to just strictly be thinking about a revenue purchase point of view as far as a valuation and I think when you’re in our business where you’re creating a marketplace and you’re disrupting the industry, then you’re worried about the competition, right. So we paid more for some companies because we were worried about our competition purchasing them.

John Warrillow:                 Who did you see as your competition?

Ross Buhrdorf:                  Well, I mean before Expedia bought us, we thought Expedia and all of the big travel websites cause they were eyeing us, not only and this is good for your customer … For your readers and listeners is if you can create some competition for being purchased then that’s a huge advantage, right. So if there’s a bigger player in the market and you have multiple buyers, they might not want their competition to purchase you so you can get a premium.

John Warrillow:                 Still wearing your buyer’s hat, were there times, Ross, where owners overplayed their hand meaning they were trying to create this auction, they said, get in line, give us your bid by this day, and you just said, screw off, I’m not gonna be … Like, we’re the number one player, we’re not gonna be dictated to by some 10 million dollar company on the terms. Did you guys … Did people try to overplay their hand and essentially lose you as a bidder?

Ross Buhrdorf:                  Yeah. I mean, I don’t think we ever got emotional about what we were doing cause we just did too much of it and so I mean, sure they would … People could do all kinds of wacky stuff and they did. So I guess the straight forward answer to you is yes. But you know, when you get to be … There is a risk and this is useful for your listeners is that if you overplay it and you’re the biggest and you’re selling to the biggest player it’s like well, I can either sell to them or I can sell to second tier player but that second tier player can’t pay what the big player can be. So you might be shooting yourself in the foot, if that makes sense.

John Warrillow:                 Yes.

Ross Buhrdorf:                  But we never … I mean we never really went for those tactics and we were never vicious on the other side of purchasing.

John Warrillow:                 Of the … You said you did 25 acquisitions how-

Ross Buhrdorf:                  20, I mean we did a lot of small technology acquisitions too, it was over 25.

John Warrillow:                 Okay. And of those, I assuming they were deals that you kind of sniffed around at but chose not to make offers on?

Ross Buhrdorf:                  Oh, there was plenty of those also … I mean good … I mean I’m starting my own company right now and it’s up and running and a most likely exit for me, it be … A most likely exit for all companies really even the field I’m in, high technology startup is it’s purchase, or be purchased, or go public. And being purchased is for more calm and likely even in my space and certainly for your listeners. So you should always be, I think be talking to … We were always talking to people that we were gonna potentially buy, right. So we always had a conversation and were always engaged with them at multiple levels and-

John Warrillow:                 How would you approach those conversations? I’d be curious to know were you as explicit of that saying, look Bob, we’d like to buy your company one day or were you a little bit more cagey and veiled about the conversation?

Ross Buhrdorf:                  Nah. I think, I mean if we were interested in buying them, we would have a conversation with them and if their price was out of line with what we were gonna pay, we didn’t stop the conversation. We said, gee, we don’t think we can come together on this price but let’s keep talking. You’re gonna grow, we’re gonna grow, maybe you’ll become more important or less important but we should have open lines of communication so that if things change for either of us, we still have a conversation.

John Warrillow:                 What was a deal breaker for you? Like, what would make you walk away from an acquisition?

Ross Buhrdorf:                  If we felt like the seller was dishonest or there was something that we were uncomfortable with from a honesty point of view that would make us not want to do it, right. Regardless of the circumstances and then of course, if it didn’t make sense, if we couldn’t come together on the price, those would be a … Or went through due diligence, and we found out that there was nothing that … What we thought was there, wasn’t there, maybe they were over representing it, you can always back out in due diligence. We would typically try to get letters of intent that were exclusive and gave us time to look at the deal and decide if we were gonna do it.

John Warrillow:                 That’s helpful. Let’s turn our attention and kind of flip your hat here cause I’m asking you to wear both hats as an acquirer but now also as the failing CTO part owner of HomeAway, let’s move to the decision to ultimately exit and sell to Expedia. Lets kind of catch everybody up in terms of timelines, what’s are the key dates in your mind leading up the Expedia acquisition? You mentioned you went public, maybe just give us the chronology of what you see as the key dates.

Ross Buhrdorf:                  Yeah. I mean this happened over a 11-year time frame so go back … Let’s go backwards, two years ago we sold to Expedia, two Decembers ago we sold to Expedia and you can read the press, I think it’s been their best acquisition, most profitable, so we’re proud that we handed over a great company and built a great company that had a lot pent up revenue and margin for them so that’s great to be a part of that. Prior to that we had taken it public, I believe that would have been right around four or five years prior to the sell, we took it public and then six years prior to that we had through multiple venture rounds ended up raising 453 million dollars. So raised a bunch of money, built the companies, did lots of acquisitions, took it public and ran it as a public company, did some more acquisitions and then sold it. Which is really the life cycle, at least if you’re in my business, that’s the best possible outcome and scenario you can have.

Ross Buhrdorf:                  I mean I guess a better one would be, we were considered a unicorn so we had over a billion dollar valuations that what it takes to be a unicorn so we were up there with all the other unicorns, Facebook, Google, certainly not in valuation but we were a unicorn, which is great to be a part of a fast growing company and I guess the thing that could have been better is that we’d still be at the helm and the company would be … I don’t know. A 50 billion dollar valuation but really the best thing for us to do with where we were in the market was to sell to Expedia. It was a perfect match, both for us and for them.

John Warrillow:                 What was it that made it such a strategic fit? Cause I think of Expedia, I think sometimes I’ll go book a hotel on Expedia, and that become my limited exposure to what Expedia does so catch me up as to why HomeAway was such a strategic fit for them?

Ross Buhrdorf:                  Well, I think it was, it’s a strategic fit for multiple OTA’s so-

John Warrillow:                 Sorry, what’s a OTA?

Ross Buhrdorf:                  Online Travel Agency.

John Warrillow:                 Okay.

Ross Buhrdorf:                  So you think of all the big OTA’s or maybe even if Google had gotten more into travel and become more of OTA, then what HomeAway had and what now Expedia has, is they have this unique inventory and that unique inventory is these vacation rentals, right. So we were the world’s largest vacation rental, they have that unique inventory travelers want that unique inventory because I think you said, you’ve done before John, it’s a far better experience for a family vacation to have a vacation rental then to have a hotel room. All right. So it’s just a better experience, it’s cheaper, it’s just all the way around but the OTA’s needed the inventory so we had something that they didn’t have, we had established a brand, we had established … Had control of all that inventory and so they were buying that inventory so that they could present it to their customers, which were our customers, right.

John Warrillow:                 Because a lot of people I guess, you know, there was a trend where in the early days of online travel agencies where the likes of Hotels.com, whatever, it was way better, way cheaper to buy your hotel room, to reserve your hotel room on a Hotels.com. And you go the Westin.com and they’d be charging like two or three times more for the same room but that’s changed now, right. Like now, the rates seem to be really more at parity. Like, I’ve done test of my own, I’ll do a site search on Expedia and then I’ll just go over the brand, whatever, the Westin’s website and I’ll find that the prices are virtually identical now.

John Warrillow:                 Was that part of that the benefit of Expedia’s sort of searching the web and finding the best price, that benefit was becoming diluted, is that fair to say?

Ross Buhrdorf:                  Well, I think the answer is yes, it’s fair to say or another way to say it is that it’s becoming more and more competitive. Not only are they competing with their own supply but then of course, they’re competing with the other big OTA’s, and the other big OTA’s want unique inventory that will pull in more customers and as more customers come to the brand and the site, then they buy more of everything. You know what I mean? You want to be … An OTA’s got to be big and drive a lot of traffic and so if you’ve got the one stop shop for everything, hotels, vacation rentals, car rentals, travel insurance, you become the one stop shop then that’s an advantage over the competition.

John Warrillow:                 So Expedia had traffic but they wanted more inventory.

Ross Buhrdorf:                  Yeah.

John Warrillow:                 When you guys were buying companies, you were buying them as you mentioned earlier for different reasons, you were buying the customers and that was your most important asset but for Expedia, their most important strategic reason to buy you guys was you had the inventory.

Ross Buhrdorf:                  Well, both. I mean, yeah. Certainly, for Expedia because you couldn’t say, geez, Expedia doesn’t have the brand and they don’t have the traffic or they don’t have the travelers. They definitely had that. We certainly had … When I say traffic, we certainly had travelers that were coming to our website and they certainly got the advantage of that but if you looked in the grand scheme of thing, they wanted our unique inventory to monetize the travelers that they already had coming to their website and they certainly were happy to have our incremental travelers also.

Ross Buhrdorf:                  But they already had the traffic and that’s why it was such a good fit for us because although we were in the top 10 travel websites, from a traffic point of view, we paid for a lot of that traffic through Google. We had a lot SEO, it costs a lot to create that traffic. Well, they already had that traffic so in a sense from their perspective they needed to monezite more of that traffic and one way to monezite that traffic was to be able go into a new vertical called vacation rentals. And in order to do that … They tried to compete with us by doing their own thing but they never could effectively so at the end of day they ended up purchasing us.

John Warrillow:                 And do you know, Ross, if Expedia did some sort of normalization calculation to say if we stripped out all of what HomeAway spends on search engine marketing and SEO, if we strip that out because we wouldn’t incur the same degree of cost, how much more profitable HomeAway would be in our hands, do you know explicitly if they did that math?

Ross Buhrdorf:                  They should have. I’m sure they did that.

John Warrillow:                 So talk to me about the numbers themselves, I know it’s all public so I’m sure we could Google it but just give me the headline numbers so it was 3.9 billion dollar transaction.

Ross Buhrdorf:                  Yeah.

John Warrillow:                 What did that represent as a multiple of your revenue, your EBITDA?

Ross Buhrdorf:                  Oh, man. You know, you’d have to look up that. I can’t tell you that off the top of head. I’m sorry.

John Warrillow:                 All right. We’ll get into the show notes.

Ross Buhrdorf:                  When they said, 3.9 billion, I just kind of said, yes, let’s do that.

John Warrillow:                 That’s sounds like a lot of money.

Ross Buhrdorf:                  It is interesting. And this some inside information, I mean the … In the case of us, the good news is that we had multiple acquirers or multiple folks that wanted to purchase us but at the end of the day, we took the highest bid because they were … I mean there was no … It wasn’t like, one of these big OTA’s was worse or better than the other, so I guess what I’m trying to get for your listeners is that … And certainly we … Some of us stayed around with Expedia but when it’s a company that big, and they buy you they don’t want the executive staff there, they’ve got their own staff that can run the business and help take it to the next level.

Ross Buhrdorf:                  So I guess what I’m saying is that many of your listeners, they probably don’t … They might do some level of earn out, but they also are probably leaving the company after a certain amount of time, so it comes down to regardless of what your revenue multiple is, it had to be what? Who could buy and what they could buy for?

John Warrillow:                 Who else was at the table?

Ross Buhrdorf:                  I don’t know if I can disclose that but the other big OTA’s.

John Warrillow:                 Got it. Got it. And was there … I’d be curious to know how much back and forth there was on the price given the competition was sort of heating up for HomeAway, were you guys able to ratchet up the multiple or the value through sort of a bit of bidding war at times?

Ross Buhrdorf:                  Yeah. I think that you could say that, that that happened. But here again, I come back to and I think it’s important for or maybe it’s easier for smaller companies to do that but at the end of the day it’s what is someone gonna pay for your company and what can they pay for your company? So I think you could probably … There’s a little bit that but here again at the end of the day it’s … What we did at HomeAway was we had a super valuable asset that was very unique that was throwing off a ton of cash flow and a ton of revenue and margin and it had unique content that these other two players in the market really needed and one of those players needed it worse than the other player. And they were willing to pay more of it, more money, because they needed that.

Ross Buhrdorf:                  So there is this piece of who needs it more and they’re willing to pay a little bit but they only have to pay a dollar more than the other player, right, so to be clear.

John Warrillow:                 Ross, take me inside your kitchen table on the night you heard that Expedia was going to acquire HomeAway for 3.9 billion dollars. I’d love to know the conversation you and your wife had about what this meant for you personally. We can’t underestimate the fact that this was a life changing event for you, take me into your kitchen table as you talked about it that night.

Ross Buhrdorf:                  Yeah. I’m mean, it’s a good thing you brought up my lovely wife, I’ll do a shout out to her, Paula, who has been with me through all of these multiple startups and certainly was a big part of HomeAway and my current startup, she’s worked at my current startup for no salary when we had such wild growth but we couldn’t keep up so she’s been my teammate during all this stuff and I do big shout out to Paula for everything she’s done.

Ross Buhrdorf:                  And I think the conversation was one … We knew it was gonna happen. We knew we were gonna sell the company and it was one of relief and of joy. We had already had a lot of financial rewards out of HomeAway through the IPO and the stock was public for a long time and the purchase of HomeAway was structured stock and cash so it was … I mean it was good for us financially obviously. I think it’s just fantastic when you can sell a company, feel good about who’s buying it and feel good that you have handed over a valuable asset and that it’s the right thing to do. We sold the company to Expedia, they could make even better for their shareholders and it’s really turned out great for them so I could feel good about like I didn’t dump this company at a fire sale, in fact, it was the opposite. We sold this company that still to this day is generating a ton of value for them and will continue into the future.

John Warrillow:                 I appreciate you sharing the story with us. I don’t want to end the interview without talking a little bit about your current company, tell me about what you decided to go do cause you didn’t hit the beach, I understand.

Ross Buhrdorf:                  No.

John Warrillow:                 You’ve gotten right like into other stuff. What are you doing now?

Ross Buhrdorf:                  Yeah. I jumped right back into it, I took a little bit of time off, I was gonna take a year, I made it 10 months and then I just got so intrigued by completely underserved market and so I started a company it’s called ZenBusiness and I’m the CEO and founder there. I’ve got a couple other founders with me, some of them from HomeAway so I’m pulling the team back together. And our goal is to help entrepreneurs create a million new businesses by 2023, and we’re well on our way to doing that. When Jeff Bezos started Amazon, he started with books and when we started ZenBusiness we started with the corporate formation, so you’re not a business until create an LLC or C corp or S corp. You really need to do that from a legal point of view to protect you and your family.

Ross Buhrdorf:                  So that’s where we started, and we always had the vision and continue to have the vision, much as Amazon does is that we want to sell everything that a small business needs to get up and running, so we are the small business platform that you need as an entrepreneur to get up and running from formation to banking, insurance, accounting, taxes, website, eCommerce, everything you need to get up and running, we’re the back office for you. So you can spin us up in the cloud as your small business back office. You know, be bigger than you are, we’d love to be providing, we’ve been talking about it we should look at your book and provide it to all of our customers, they need education. This is very daunting task to start a small business and we’re here to help them. We have world class support.

Ross Buhrdorf:                  And then we offer them the products and services that they’re asking for right from our digital dashboard, everything’s integrated into a single platform. So we’re super excited about that. I’m more excited about this business than I was at HomeAway and I was very excited about HomeAway. Really having a great time and customers are happy and we’re doing this rapid growth right now.

John Warrillow:                 That’s awesome. And it just occurs to me that you are the perfect guy to answer the following question, which will be my last.

Ross Buhrdorf:                  Okay.

John Warrillow:                 Is it better to own a 100% of a small pie or a small piece of a large pie?

Ross Buhrdorf:                  A small piece of a large pie.

John Warrillow:                 Tell me why?

Ross Buhrdorf:                  Because I think it’s a more marketable business. I think as a small business owner and I’m a serial entrepreneur so I’m around this all the time, it can be very difficult to exit a small business and if you’ve had and built it up all your life, you can have trouble transitioning out of it. I mean that’s why I think I love … What you’re doing is helping people get ready for that because it can be a difficult transition, whereas if you’ve got a bigger business it’s much easier to market that.

John Warrillow:                 So I’ll grant you that for sure that obviously, bigger business are more marketable. However, you see the energy you’re now bringing to ZenBusiness, which is that sense of total ownership, total control, and I’m assuming at HomeAway, I mean you guys got to a very, very large company, a publicly traded company in fact, at some point you lost some of that autonomy. Was that worth giving up?

Ross Buhrdorf:                  No. Absolutely. But being the entrepreneurs that we were, I mean that’s why we sold it. It’s like, geez, we’re not the guys to take so your question is Ross, do you still wish you were at HomeAway and Expedia, the answer is no, because I’m a guy that starts stuff up and gets it bigger and takes it public or sells it. But HomeAway was a multi-billion dollar unicorn so that’s a big company and was in a small group of companies that are public so I’d still say that it was far more lucrative and life changing for me to have a small piece of that big pie.

Ross Buhrdorf:                  Early on what I’m doing right now I want to make this … Turn this into a big business. We’re well on our way to do that but yeah, I love small business. And being able to have a big impact is very exciting.

John Warrillow:                 What’s the best way for people to learn more about you or ZenBusiness, where would point people to?

Ross Buhrdorf:                  Well, I would just simply go to ZenBusiness.com, and we can help, our goal again, is to help start small business and provide them with everything they need, they’re back office so think of us as Amazon for small business, get you up and running with everything you need, right there for a monthly subscription fee.

John Warrillow:                 And Ross on social media, are you on Twitter, do you accept LinkedIn connections? What’s the best way if people want to-

Ross Buhrdorf:                  Yeah. You can just look for me Twitter, it’s a RossinAustin, my email is Ross@ZenBusiness.com. And there’s not too many Ross Buhrdorfs in the world.

John Warrillow:                 We’ll have it all in the show notes as well so.

Ross Buhrdorf:                  On LinkedIn, I think you got all that stuff.

John Warrillow:                 Yeah. Yeah. Well get it all in the show notes so folks can check it out at Builttosell.com/blog. Hey, Ross, this was fun. Thanks for joining us.

Ross Buhrdorf:                  Hey, thanks so much, John. I super appreciate it.