Understanding the relationship between the consumer and the web is how Paul English grew Kayak and sold it for 1.8 billion dollars.
Dave Young:
Welcome to the Empire Builders Podcast, teaching business owners the not so secret techniques that took famous businesses from mom and pop to major brands. Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, word from our sponsor, which is… Well, it’s us, but we’re highlighting ads we’ve written and produced for our clients, so here’s one of those.
[Waukee Feet Ad]
Dave Young:
Welcome back to the Empire Builders Podcast. Dave Young here with Stephen Semple. And Stephen just told me that we’re going to talk about the travel website called Kayak. I don’t know their story. The name rings a bell, but I think over the years, I’ve shied away from most travel websites. Honestly, most of the travel I do is to go visit a client somewhere so I go right to an airline site and just find my ticket. So tell me about Kayak.
Stephen Semple:
Well, Kayak is a travel website that was started by Paul English and Steve Hafner in 2004. And in 2012, after eight years, it was sold to Priceline for 1.8 billion dollars.
Dave Young:
Ooh, a nice cash out for those guys. Yeah.
Stephen Semple:
Yeah. They did very, very well. And here’s the funny thing, when they launched, they got a whole pile of hate mail from Kayak enthusiasts who hated the fact that they called it Kayak.
Dave Young:
Because now all of a sudden you can’t find info about Kayaks without reading about trips.
Stephen Semple:
Exactly, exactly. So Paul grew up in a working class family in the south of Boston. He was one of seven kids who lived in a three bedroom house, so it was pretty tight quarters.
Dave Young:
Oh, yeah.
Stephen Semple:
His dad was a pipe fitter and his mom was actually sick for much of his life. She had this muscle disorder. And he struggled in school. His grades were bad, but he did tests really well, which allowed him to nail admission tests to get into schools like Boston Latin, which was actually a really hard school to get into. So anytime there was a contest that had a test involved, he nailed it.
Dave Young:
I can relate to this guy. Yeah.
Stephen Semple:
I figured you could. That’s why I had to share it. And I’m like, “Oh, this sounds like Mr. Young.”
Dave Young:
Yeah.
Stephen Semple:
So in 1981, his mom buys a computer, a Commodore Vic 20. I had a Commodore Vic 20, I remember them. But he took it over and he learned how to code and he started creating a video game. And making games became his first company. He created a company called Speed Games, and he coded a game called This Cupid Game, and he managed to sell it for $25,000.
Dave Young:
Wow. All right.
Stephen Semple:
Now here’s the unfortunate part. He licensed it to a company that went out of business. So of the 25 grand, he managed to get one check out of them for $5,000.
Dave Young:
Oh, those bastards.
Stephen Semple:
One of his challenge is, he would quickly lose interest in things because here he managed to sell this for 25 grand, gets five grand, company goes out of business, and he didn’t try to license it to another company. He just lost interest because he had moved on to the next thing. He didn’t even try to remarket it. So in university, he goes to Boston, Mass, and he did a lot of freelance work during college. He did a bunch of jobs and he loved it because he did some coding for a medical device company, he did some stuff for spy planes, whole bunch of things. And then at age of 29, he makes his first million dollars in stock options when a company he was working for at the time gets bought out, makes a million bucks. And he goes through, at this time, also a bunch of personal struggles. He got diagnosed as bipolar. But here’s the interesting thing. When he got diagnosed as bipolar, he actually felt good about the diagnosis because he said, “You know what? If there’s a name for it, probably somebody’s figured out how to fix it.”
Dave Young:
Right.
Stephen Semple:
And he went on lithium, but people noticed that his energy was down on lithium. So he spent 15 years on and off Lithium and trying to find other things that would work for him. And the good news is, he eventually did. 1998, he started this company called Boston Light Software, and basically, it was an early version of Shopify and it was to make e-commerce easier for businesses. But you know what? He was a little bit on the bleeding edge of technology when it comes to this because most stores didn’t even have a website. You got to remember that it was only four years earlier that Amazon started, and in Amazon, in ’97, sales were 147 million dollars. Amazon was basically this 200 million dollar business, most companies didn’t have website, e-commerce was like, really, this weird thing.
He went out, he literally had to go to store to store to convince people to do this e-commerce thing, and he suddenly realized he needed to pivot. He decided that the gap in the marketplace was to decide how to make online payments easier for the services businesses. So what he decided to do was to pivot his business that, making online payments easier. Here’s the cool thing is. Within a year, Intuit looked at that business and said, “We want to own your business,” And Intuit bought his business for 33 and a half million dollars.
Dave Young:
All right. So he’s seeding up.
Stephen Semple:
He’s seeding up.
Dave Young:
Now he’s able to seed himself into another business.
Stephen Semple:
Sold a business for a million, sold a business for 33 and a half million. Because big companies saw what was coming regarding the internet and web services. But he felt uncomfortable, actually, with the amount of money he made on it. He canceled a bunch of his options, gave extra to the engineers because he felt they didn’t get as much as they deserved.
Dave Young:
Okay.
Stephen Semple:
Now, got to remember this. This is going to come back to help him in the future. At the time his dad was ill, he liked selling into it, he liked the company, he was doing work for them, but he decide what he need to do is leave for a little while and help take care of his dad. 2003, he comes back into the workforce and he joins a BC company called Greylock Partners. And through a series of things, he meets Steve Hafner, and Steve Hafner is the co-founder of Orbits, which is a huge travel site, especially at the time. And Steve’s leaving because he had an idea for a different way of doing travel sites, and he needed a technology leader.
So Steve and Paul meet for lunch, and he gives Paul the pitch that he wants to create a travel search engine that has everything from everyone else’s site. So really, it’s the first search engine that has things from other people’s sites. And Paul thought this was brilliant because at the time, travel sites only sold stuff from their partners. So the travel site would go out and get a bunch of partners and sell their stuff. So there’d be some things on Orbits, and there’d be some things on Expedia, and it was all that idea.
Dave Young:
You might have one hotel chain on one and they’re not on the other one.
Stephen Semple:
Correct. Correct.
Dave Young:
Yeah.
Stephen Semple:
So his idea, Steve’s idea, was to create a site where you can’t buy anything, but you can see everything from other site searches. It would make searching easier. But here’s the radical idea, they weren’t going to sell anything. So it was a very radical idea. And there were others working on this idea at the time.
Dave Young:
So a commission, referral type site?
Stephen Semple:
Referral type site.
Dave Young:
Okay.
Stephen Semple:
And really, what they were leveraging was the idea of search at its core. Google had just launched five years earlier, right? Again, same idea, not selling anything, right? But Google figured out how to make money with advertising. These guys were going to make money using referral strategy. So Steve and Paul each put a million dollars in each, and they found an investor to put in 5 million. So they got a 7 million in seed capital, and they start hiring. Now, Paul needs good engineers, so what does he do? He calls the engineers who worked for him. Which, of course, how do you think they think about Paul?
Dave Young:
Well, he helped him out when he cashed out, and yeah, they probably liked Paul quite a bit.
Stephen Semple:
So guess what? He all of a sudden has this team of great engineers he worked with who are all like, “Yeah, Paul, whatever you’re doing, we’re freaking in.” And you see this all the time when people are even raising money where they go, “I’m going to raise money. Boy, the investors are going to get… Boy, they’re going to get a big payout when this works.” But the guys who are really smart understand that, you know what? If I treat you really well as the engineer or as the investor, and you get a big payout, guess what happens? When I phone you, you’re taking my call and you’re going to come work for me again. You’re going to invest with me again. Don’t be greedy, play the long game, treat people well.
Dave Young:
Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this.
[Empire Builders Ad]
Dave Young:
Let’s pick up our story where we left off, and trust me, you haven’t missed a thing.
Stephen Semple:
He gets these great engineers with them, and one of the first things they need to do is come up with a name. So they hire a firm to create a list of names, and they land on the name Kayak. Here’s one of the things Paul talks about is, it’s hard to take a word that means one thing and make it mean something else, that’s actually very hard to do, but when you do it, it becomes really powerful. Amazon.
Dave Young:
Caterpillar.
Stephen Semple:
Apple. When you are actually able to do it, now, it’s a high risk game because sometimes you can’t make it do it, but when you can make it do it, it’s really super powerful. So they land on the name Kayak. On May 5th, 2004, they release a beta test, so that’s, they give it to a limited number of people to use, and then in October of 2004, they do the public release. And again, this is a different model from other travel sites. It is, they get paid a referral fee. Now, what they had to do was call up everyone to set up the deals. So it was literally, “Hey, Mr. Hilton, can we do referrals to you?” And it literally took them two years to set up all these referral deals. But remember, he had done this before. He had gone out, pounded the pavement and done this before.
So initially, they had no revenue, and they’re scraping sites without permission. They’re going to the Hilton site, scraping it without permission. And they would run ads to attract traffic. Here was their business model. They would spend a dollar to buy someone to bring it to the site, and they would get, typically, 20 cents for that visit. So they’re paying a dollar to get you, and they’re getting 20 cents worth of revenue. Now, most people would sit back and say, “Well, that’s ridiculous.” Also, a couple of things. Do you remember back in the days when you could actually buy traffic for a dollar? Could you imagine getting travel?
Dave Young:
Yeah.
Stephen Semple:
And especially a high value keyword like travel. Could you imagine getting travel clicks today for a buck?
Dave Young:
No, that’s not going to happen.
Stephen Semple:
I mean, those are 30 and $40 clicks today. But anyway, they will buy traffic for a dollar, they would make 20 cents. So they were losing 80 cents. But here’s what Paul’s belief was, and this is what a lot of people get wrong when they look at businesses, especially businesses that are doing client acquisition and losing money in that client acquisition. Here’s Paul’s belief, if you build an amazing website with a great experience, they will remember you and they will come back. This is true for every business. The most expensive transaction with any customer is the first transaction. Why would jewelry businesses do we do these inexpensive feature items and spend lots of money marketing it? Company doesn’t make any money on that feature item, they lose money on that feature item.
Dave Young:
Exactly.
Stephen Semple:
But it’s the first transaction. Customer comes in, has a great experience, guess what they’re doing? They’re coming back. What is the lifetime value of that customer? Is what you’ve got to think about.
Dave Young:
Exactly.
Stephen Semple:
So how did he know it was working? He knew it was working because here’s what he looked at. He would continually look at how much of our traffic is self-directed. So what we mean by self-directed is, direct traffic, kayak.com, or organic searches where Kayak is part of the search term,
Dave Young:
Right, right.
Stephen Semple:
And what he knew was, as that was growing, that was a sign that A, word of mouth was getting out there and customers were returning. You could look at the returning customers. And they reached a point where 70% of their traffic was self-directed.
Dave Young:
That doesn’t cost you anything.
Stephen Semple:
That doesn’t cost you anything. Cost you to bring them the first time, and then each repeat one, that’s free, and there was a certain point where those repeat ones became the bulk of their traffic, and the economics started working huge. At this point, they were growing and very, very profitable.
Dave Young:
Nice.
Stephen Semple:
And that’s what they kept an eye on, what percentage of our traffic is self-directed? And they knew they had a hit. And we do the same with our customers. When we run mass media campaigns, one of the things that I look at, on an ongoing basis, is the website traffic. How much are we growing that direct search?
Dave Young:
Exactly.
Stephen Semple:
And that is a sign that it is working. We are bringing people into our universe. You know, they’ll tell their friends, they’ll find us, it’s working. Here’s one of the things they were really proud of. At one point, if you type the letter K in Google, the first word that came up was Kayak.
Dave Young:
Nice.
Stephen Semple:
That is how big they became in terms of the world at search. And then in July of 2012, they went public at a valuation of a billion dollars. So they took the company public for a billion, and at the end of that year, Priceline came along and bought them for 1.8 billion dollars.
Dave Young:
Does it still exist or did Priceline just roll it in?
Stephen Semple:
No, it still exists. If you take a look at… It’s an interesting strategy that the travel guys are doing because in the world of search, it’s not so much today. Search is weird today because the first things that come up are Google my business and keywords. Your organic traffic happens, now, in search, really down at the bottom.
Dave Young:
Yeah.
Stephen Semple:
Google has pushed it down and down and down. It used to be opposite of that. It used to be your search results came up at the top, right?
Dave Young:
Yeah.
Stephen Semple:
A few years ago. And you would have… Basically, the first page would be 10 and no company. It was very difficult for any company to control all 10 of those spaces. So what would happen is, you would have, a company would own multiple companies like Expedia was Expedia and Travelocity and hotels.com, and, and, and. So basically what would happen is, the whole idea is, you would try to have as many of your properties controlling page one, right? So they’re all doing the same thing of having these multiple companies and advertising and promoting all of them to try to squeeze everyone out. That strategy is not as powerful today as it would’ve been 3, 4 years ago.
Dave Young:
Sure. Yeah.
Stephen Semple:
But the real lesson here is that the most expensive transaction is always that first transaction, and you can’t necessarily measure the value of a campaign on, “I did this thing, I did this promotion, and I got an ROI on the first one.” Now if you get that, that’s great, but for a lot of businesses, you’ve got to look at what is the lifetime value of your customer, even if you’ve just got to guess what it is. You may or may not know what it is. Some businesses do, some don’t, but [inaudible 00:17:44] the average lifetime value of a customer, and that can tell you what you’re able to pay to acquire a customer.
And you may run a campaign such as a feature item campaign that loses money, but acquires new customers. And then it’s your job to make sure you give those customers a great experience so that they come back and they do future purchases. Now, there’s other strategic reasons why you do future items as well, but just as an idea. And I think not enough businesses keep an eye on what’s happening in terms of their website search. What I’m amazed at, the number of times I meet with businesses and one of the first things we do is get access to their Google Analytics and start sharing them, some things around their website search, and they’ve not been looking at that. How much return business traffic are they getting? How much direct traffic are they getting? A lot of those things are good indications of what’s going on with your business out there in the marketplace.
Dave Young:
Absolutely. And especially if you’ve got a web developer that is also doing your pay per click and that kind of marketing, they’re not going to share that kind of stuff with you. If they do, they’re not going to put it in the right context.
Stephen Semple:
And in fact, many of them control the data, which is a whole other topic.
Dave Young:
Don’t get me started.
Stephen Semple:
Absolutely.
Dave Young:
Yeah.
Stephen Semple:
I think it’s one of those things that not enough businesses think about. What is the lifetime value? And look, I also know there’s some customers that, maybe the only sale they’ll get is one because they sell very expensive things, but most businesses, customers come back. So what is that lifetime value of a customer, and then what are you prepare to spend to acquire new customers?
Dave Young:
Yeah, absolutely. Cool story. What’s the Kayak guy doing now?
Stephen Semple:
He’s an interesting guy. He starts a lot of businesses. His goal is to start two or three businesses every year.
Dave Young:
Nice.
Stephen Semple:
So he gets them started and he grows them to a certain stage, and then he hands them off to somebody and then he goes on to the next thing, and that’s kind of what he is doing.
Dave Young:
Well, and I’ll give him a hand for working with his neuro-divergency as opposed to against it.
Stephen Semple:
Yes. Yes.
Dave Young:
Right. If he knows that he’s always going to be engaged by something new and different, then that’s the best course of action for him.
Stephen Semple:
And that’s where he brings the value.
Dave Young:
That’s awesome. Great story. Thank you for sharing that, Stephen.
Stephen Semple:
All right. Awesome. Thanks, David.
Dave Young:
Thanks for listening to the podcast. Please share us, subscribe on your favorite podcast app and leave us a big fat juicy five star rating and review. And if you have any questions about this or any other podcast episode, email to questions@the empire builders podcast.com.
