Transcript – 4 Big Exits, 1 Smart Entrepreneur
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John Warrillow: Once a year, you go to the doctor, right? They take your blood pressure. Maybe they prick your finger and they take a little blood, and they give you a sense of your cholesterol level. Maybe if you go to one of those fancy health care facilities, they get you to run on a treadmill for a while, see how your heart’s doing. You get a checkup. The same thing should be true of your business. When we look at your business through the Value Builder Score, we’re gonna look at it through eight key drivers that acquirers care about. Whether you want to sell your business immediately or in 10, 20 years from now, these are the eight factors that business buyers care about. Knowing them now will help you maximize the value of your business going forward. Just to to ValueBuilder.com and take the questionnaire.
John Warrillow: Well, you’re in for a special treat, because next up you’re gonna hear from a guy named Steve Murch. Steve Murch sold BigOven last year. BigOven is a recipe app company, but it’s much more than that, as he will describe to you. What’s really interesting about Steve is it was not his first rodeo, and as we talk about in this episode, he sold a company called VacationSpot to Expedia for a cool $82 million, and he will tell you the entire story. It is an incredible story, and I’ve took away a ton of notes.
John Warrillow: A couple things to remember from Steve’s story. Early on, he talks about how to get Microsoft to write a check, and it’s tough, but there’s a decision you can get Microsoft to make, in his case, he got Microsoft to make, which was easier than getting them to write a check. I think when you’re dealing with partners, it may actually be easier to get them to make a decision than to write a check, and Steve does a great job of describing that at Microsoft. He talks about the pros and cons of bootstrapping versus seeking venture capital, and a way to sort of think that through in your own case, which I think is great. He talks about some of the hidden tricks and things to look out for, the gotchas, with taking venture capital money, and he also really talks a lot about partnerships and how people in the adjacent space to you may be the perfect buyer for your company. Here is Steve Murch.
John Warrillow: Steve Murch, welcome to Built to Sell Radio.
Steve Murch: Thanks, John.
John Warrillow: We first met in France. I can remember you walked into a party that someone else was hosting, and I kind of heard you out of the corner of my eye, or the side of my ear, and saw you out of the corner of my eye, and you were regaling someone about World War II history. I’m like, “Who is this? Who is this geek talking about World War II history?” It turns out it’s Steve Murch. Do you remember that?
Steve Murch: Yeah. I’m a bit of a World War II buff, and being actually in France, it was great to kind of see some of those things, but sure. I could totally believe that. Also, I guess the American accent is a bit hard to avoid. When you’re a Canadian, you listen for those.
John Warrillow: Right. Right. I can remember we were both there because I think we’d recently had exits of sorts, and we were kind of on a bit of a break. I remember you were working on BigOven, and I think you said it was like a big sandbox for an entrepreneur. You get to try things and experiment. Do you remember that conversation?
Steve Murch: Exactly. Yeah. Yeah. That was very much what the BigOven project really was for me. It was a labor of love. I love to cook, and I started a recipe site, and then the iPhone came out, and it seemed like a pretty good thing to have a bunch of recipes on a phone, and we were the first recipe app for the iPhone and for Android, and it kind of took off after releasing it on mobile. Yeah. It was largely, throughout the process, mostly an exercise to force me to stay current in technology, and it was a really fun project to work on.
John Warrillow: I want to talk to you about Big Oven, but there’s a story before BigOven, which of course is VacationSpot. Take me through VacationSpot. What was the business idea that you were chasing in this company?
Steve Murch: Right. VacationSpot was really one of the first, and we started I think roughly the same month that VRBO.com started.
John Warrillow: Sure.
Steve Murch: Which many of your listeners might know. It was a vacation rental site that I started in 1997. I was at Microsoft at the time, and leading the internet games group there, and I really wanted to start a company, and I had two main ideas. One was because my wife and I had just gotten married. The process of finding and reserving event space was incredibly cumbersome, and I really felt that in the age of the internet it should be easy to say, “Show me all the event spaces in the Seattle area that are available for this particular weekend, with these facilities, that can have this many people.” That problem is still, by the way, one that’s not well sorted, I think.
Steve Murch: But also, my dad at the time, my mom and dad both owned some vacation property, and they owned it in particular in Florida. They lived in the Northeast, and when my dad would go talk to the property managers, saying, “Hey, how are you renting out this vacation home?” The property manager would say, “Well, we’ve taken out ads in the local newspaper.” It was in Marco Island, Florida, and my dad would say, “Well, that’s kind of crazy, because most of the people who want to reserve are not gonna get a copy of the Marco Island Times. They’re generally in kind of the Northeast or the Eastern Seaboard.” He and I were talking kind of for a year or two, as the internet revolution started, and I really felt that that would be an interesting space to explore.
Steve Murch: From a consumer standpoint, there’s a high cost of getting that decision wrong. I love the markets where the cost of failure is quite high, and if you plan a vacation and spend a lot of money, and get on an airplane, and go somewhere, and the lodging isn’t right, that can ruin your week, or your overnight, or the vacation that you’ve saved up for. Then from the property owner’s standpoint, it’s got a lot of economic functions that are really interesting, because it’s perishable inventory, and it’s expensive. Economically, you should be willing to … Right now, in Maui, there are probably many, many condos and apartment and vacation homes that are gonna be vacant this weekend, that the owners are probably willing, economically, to sell you for roughly the cost, their variable cost, which is slightly more than the cost of housekeeping, or air conditioning.
John Warrillow: The air conditioner bill or whatever.
Steve Murch: Yeah. Having studied business in business school, and kind of particularly being fascinated with the efforts of Robert Crandall and American Airlines to do some yield management, the idea of kind of getting the extra marginal dollar out of expensive things-
John Warrillow: You’re geeking out again on me.
Steve Murch: Yeah, totally.
John Warrillow: “Marginal dollar.”
Steve Murch: Yeah. Yeah, yeah.
John Warrillow: Okay. [crosstalk 00:07:43].
Steve Murch: Well, it’s really, it’s a lot of dollars. Yeah. Sorry. We can talk about World War II.
John Warrillow: No, no. No. I don’t want to talk about World … No. I’m just joking with you. There’s this inventory that’s gonna perish, and so that’s what you guys were offering on the vacation owner perspective, from that side of the marketplace, if you will. The ability to list that property and dynamically price it based on demand. Now I’m geeking out.
Steve Murch: Yeah. That was kind of the longer term vision. This is back, rewind the video tape back to 1997, and really we were competing against newspapers and classified advertisement at the time, and Craigslist was only then getting off the ground, and even that’s still not a very good place to do high end luxury vacation rental properties. We really felt that having looked at the hotel market, there was a pretty good space for us to get into, where if we could amass enough listings, initially via a listing style model, a newspaper style model where property owners and-or property managers would pay us $200 a year for a standard listing and then some extra dollars for promotion within that, that we could transition that into an e-commerce business where we basically took that inventory and then provided a realtime reservation platform. Somewhat akin to OpenTable today.
John Warrillow: Yeah.
Steve Murch: It would require some sort of software on the property manager’s premise, whether that’s a browser-based piece of software, or whether it’s a downloadable kind of desktop piece of software, which is what we initially started out with. Because again, in 1997, these are the days of America Online, and you know, [crosstalk 00:09:37]-
John Warrillow: Getting the CDs in the mail from Steve Case.
Steve Murch: Yeah, exactly. Yeah.
John Warrillow: Let me see if I got the economics right. You’re essentially charging the owner of the property to list it on VacationSpot, so that you get some money from them.
Steve Murch: Correct. Owner, and-or property manager. Yeah. Correct.
John Warrillow: You get a chunk of money from them, and then do you also take a transaction fee from the vacationer who is booking the property?
Steve Murch: It was an either-or kind of model. There are generally kind of three different models that are tackled in this space. The first is a listing style model, where you go after the … It’s an advertising, kind of brochure-ware type platform that’s searchable. That’s a fairly easy one to understand. It’s kind of a classified ad style model. Pay us a listing fee, and we would be happy to accept those dollars from a property manager who is entrusted with marketing the property, and holding the key and reserving it, or we’d certainly be happy to take that from the property owner themselves if they act as the manager for that property.
Steve Murch: The second model that kind of takes place in the travel world is the agent model, where when a booking happens, and in lodging this is the traditional way that this is done, is when a booking happens, the booking information is confirmed. There may be a deposit that’s involved, but generally on the backend, once the stay has been completed, there’s payment. There’s some sort of agent-based commission, usually on the order of 10%, 6%, somewhere in there, depending on what’s been negotiated, that gets paid back to the travel agent that books that. That sends that paying customer that way.
Steve Murch: Then the third, which is kind of the revolution that Expedia really started, that actually kind of began the moment that Expedia ultimately bought us, and it was one of the reasons that they were buying us, is the so-called “merchant model,” where Expedia, in this case, or the travel merchant, actually is the one that accepts the payment at the time the booking is made. They collect the cash. They collect, let’s say, $1,000 for it. They hang on to that. They communicate with the owner of the property, saying, “We’ve got this booking. This person’s arriving on this date, departing on that date. We’re gonna hold onto this money, and then when the booking happens, we’ll send you 80% of that money or 90% of that money.” That’s the merchant model, where the merchant in the middle is making that transaction.
Steve Murch: That has, as most of your listeners and I’m sure you kind of immediately can figure out, that has a lot of economic niceties to it. Not only are you getting the cash upfront, you benefit when there’s so-called breakage, when there’s a cancellation, when somebody doesn’t … Occasionally, somebody will make these bookings, and this happens all the time in the destination services market, the so-called sunset cocktail hour cruises, or horseback riding or whatever. Somebody might book the activity ahead of time, and then say, “You know, I’ve kind of got a hangover. I don’t really feel like it. I’m not gonna capitalize on this service.” That’s 100% margin for travel providers. Cruise ships make a lot of money in that kind of role.
Steve Murch: But it also allows you to do bundling. It allows you to price areas, put things on sale. Once you’re actually in control of the pricing, it becomes a really … And you collect the cash sometimes a couple months, or even a year in advance.
John Warrillow: Yeah. You’ve got the float.
Steve Murch: You’ve got the float.
John Warrillow: Yeah. Yeah.
Steve Murch: It’s enormously beneficial.
John Warrillow: Got it. Okay. Which of the three did you guys start, and how did it evolve over time?
Steve Murch: Yup. We started with the classified listing model, and that still, at the time that we were acquired, was probably 60 plus percent of our revenue. We didn’t really have enough market power to establish the merchant model, because in order to be a merchant, you really have to have enough … At Expedia, we called this the fire hose of demand. You need to have enough people. To be the fireman or the firefighter holding the hose and directing it at the right property, you need to have enough demand coming to your kind of site in order to marshal that kind of power, for economic rent, effectively. But we did, at VacationSpot, we did implement the agent model, and that actually worked fairly well, although collections initially, as we began to roll it out, became a little bit of a hounding effort, where you’d have to kind of hound the property manager, and we implemented various things that would sort of improve their search engine presence if they were good citizens, and all these different aspects that the internet and now mobile apps kind of let you do to encourage good, neighborly behavior.
Steve Murch: If property managers or property owners kept their availability calendar up to date, that would bump them up in sort order, so that when you searched for “Tuscany vacation rental,” if the property manager of that didn’t happen to update it for three or four months, and it got stale, then it would begin to drift that property down. We had various kind of rewards. We also implemented, some of the early things that came out during that period were, “Review this property.” Followups when they get there. Putting them directly in touch if there’s a problem. A lot of those things were somewhat new in the classified newspaper age of 1997-98.
John Warrillow: Yeah. Fast forward a little bit. How were you financing the business? You refer to a “we.” Were there investors in the company? Was it just you?
Steve Murch: Yeah. The way it started, really, was … I have to probably take maybe two months prior to departing Microsoft. Well, actually even in ’95, ’94 and ’95, I shared an office with a guy named Rich Barton, who was off working on … I was working on some CD-ROMs at Microsoft in the area of wine and film, which was the biggest boondoggle, I think, [crosstalk 00:16:06].
John Warrillow: I was just gonna … “How do you get that gig?”
Steve Murch: It was great. Whole separate podcast, there.
John Warrillow: Unbelievable.
Steve Murch: That was just great. It was age of kind of the CD-ROM era, and Microsoft wanted to produce 100 CD-ROMs in the consumer space. We had things like dinosaurs. Microsoft Dinosaurs, and encyclopedias, and we had a thing called Cinemania that I worked on that was a Roger Ebert film directory. We had a wine guide. We had a bunch of CD-ROMs, and my office-mate, Rich Barton, was working on a nascent effort that would be a bunch of CD-ROMs about travel. That was what became Expedia, was called Microsoft Travel initially, and it was envisioned as a series of CD-ROMs, the first one actually being France, and then included in that CD-ROM would be a travel agent that would help you get to France.
Steve Murch: Greg Slyngstad, who was a long-time Microsoft veteran, worked on things like Microsoft Word, and ran the Microsoft Japan office, and a bunch of other things. A great veteran. Really great guy. He came in and he and Rich Barton basically birthed the product that was gonna become Expedia, out of the very group that produced all those CD-ROMs. It was the most successful, definitely the most successful spin-out that Microsoft’s ever had, and making that friendship and those connections with the Expedia team in that time turned out to be really fortuitous, and really useful to VacationSpot’s life.
Steve Murch: I really wanted to build the vacation rental business. I ended up moving from the Cinemania project to the Internet Games Group, and worked on that for a couple of years, and worked on what is now Xbox Live, basically kind of internet matchmaking, and avatars, and other stuff. That was great, but I really wanted to start a company, so I left and started this vacation rental thing, and I built a prototype website, and then the first person that I sought out to get some feedback was Greg Slyngstad, and also Rich Barton, just to kind of … Because Greg had just left Microsoft as well, and because he had officially retired, but one of the things with Greg is that he never really fully retires. He always does these amazing different things.
Steve Murch: Anyway, I sought out his advice, mostly to try to get him to tear apart the advice and tell me all the ways that he thought it was wrong, which he certainly did, and he was right in the ways that he described all the ways I was wrong. But to my surprise, about a week, a couple days after we met, he said, “Hey, do you want a partner?” I said, “Absolutely.” The kind of founder of Expedia, I’d love to have aboard, and he had a lot of knowledge, and we were partners from then on. Technically, I guess, I was CEO and chairman and he was COO, but he was as much an equal partner, if not more so, in kind of all the insight that he brought into the business.
John Warrillow: Greg? This is Greg?
Steve Murch: Greg. Yeah. Greg Slyngstad.
John Warrillow: Got it.
Steve Murch: Once Greg left, Rich was in charge of what became Expedia, and Rich was the instrumental guy in the spin-out of Expedia from Microsoft. As a side note, it was sort of a dramatic moment where Rich actually had some travel cards, travel ID cards printed, travel agent ID cards printed, and kind of slammed them down at a Microsoft board meeting one time, and said … They had Bill Gates’ picture and Steve Ballmer’s pictures on them, and he said, “Do you guys want to be travel agents? Because that’s what we need to be.” Ultimately they decided, “You know, we’re kind of a software company, and we think this is probably better to spin out as its own separate thing.” That spin-out happened in 2000, or maybe 1999.
John Warrillow: How did you and Greg get the money to kind of float VacationSpot?
Steve Murch: Yeah. Thanks. Returning now to your actual question, because all of that hopefully, all of that was simply background for what might make sense now.
John Warrillow: Super.
Steve Murch: Greg and I were fortunate enough to have been at Microsoft, so we could do some initial seed capital. I think I put in $130K, and Greg put in $70K, so we had sort of $200,000 initially to work with, and then we continued with the initial hiring effort and getting an office, and building out a team of maybe … It was probably about a dozen people. Meanwhile, we were talking to angels, angel investors in Seattle. Ran into a great guy who had worked at Getty Images, Tom Hughes, who’s quite a well known entrepreneur in the Seattle area. He became pretty interested, and his VC company, Cedar Grove Investments, made the initial kind of seed investment in us. Then we wanted to raise more capital. We had maybe, at that point, $700,000. I’m not sure what the numbers are exactly, but maybe $500K to $700K at that point in an angel round.
Steve Murch: I should probably pause here and say that we very much wanted to be Microsoft’s … At the time, Expedia wasn’t spun out, but we very much felt that online travel, whether it was Preview Travel, which was AOL’s online travel offering, or Travelocity, or Microsoft Travel, which really became Expedia, were all going to be pretty important, and we wanted deals to be their exclusive vacation rental provider. Getting back to that kind of fire hose of demand point, if we can harness enough consumer demand, shopping for vacation rentals, we thought we would have a pretty powerful position to be able to shift the model, ultimately.
Steve Murch: Having been at Microsoft, I knew that there was kind of some complexities around … There’s a decision making process that involves Microsoft writing a check that’s very complex, and there’s one that’s very easy, where a group manager, in this case Rich Barton, could kind of make a decision without having to get Microsoft’s financial wherewithal to approve all the way up the chain. We said, “Look, how about if you guys take a … We’ll give you …” I think it was even 20% of equity in this fledgling startup company, in return for a perpetual agreement to be their exclusive vacation rental provider, with some stipulations around what that kind of definition meant. For no cash, we became Microsoft’s vacation rental, kind of exclusive vacation rental partner, which allowed us to then build the business. Rich joined our board of directors. He was always an advocate and a great ally to have, and certainly Greg as the COO of the company. We had pretty strong roots back with that mothership, if you will.
John Warrillow: Wow. So many questions around that. When Microsoft spun out Expedia, were you at risk at losing the exclusive deal?
Steve Murch: No. No. To my knowledge, we were not, and I’m sure our investors and lawyers would have, and I would have been alerted to that fact. I think the deal was fairly … Because we gave them a fairly substantial stake essentially for that agreement, so the consideration on our side was a fairly large chunk of the equity of the company, and we valued that pretty highly. But everything was also, at that time, and still is, moving really fast, so we knew just strategically, it was pretty clear that Microsoft cared a lot about the airline and large hotel space, and they cared about international expansion. They didn’t really care that much about our space at all, and they knew that we were the box that got checked, and they were really anxious to help us in any way kind of capture that for them. I think it was a really beneficial … It was one of those cases in technology, and they’re sometimes pretty rare, where the incentives really did align pretty well, and it was that kind of exchange of a fairly substantial chunk of equity that I think caused that.
John Warrillow: Love it. It’s a very … Obviously foreshadowed the ultimate acquisition, but was a key component of that. I find it fascinating.
Steve Murch: Yeah. Absolutely.
John Warrillow: Steve, I know a lot of our listeners struggle with putting a value on an early stage business. Here you guys are. It’s you and Greg. You each kick in, in total, a couple hundred grand, so you’ve got some stake in the business, or some equity in the company. What advice would you give for other early stage entrepreneurs to try to stick a value on their company? Because in the beginning it’s, I mean, put your finger in the air. It’s a guess, isn’t it?
Steve Murch: Sure is. Yeah. The MBA in us would kind of say, “Well, you’ve got to do a net present value of future cash flows,” and that’s really ultimately what it comes down to, and what’s your discount rate, and whatnot. In spaces with a lot of … It’s hard to do an expected value calculation on the quote-unquote “capturing the vacation rental market,” and as we found out from 1997 until now, we didn’t adequately anticipate, say, the Airbnbs of the world, and the other ones. We actively considered becoming a merchant for those property owners. We felt there were a lot of legal risks in doing that, so we always kind of shied away from that.
Steve Murch: On valuation, we had certainly spreadsheets that were pretty useful in figuring out what our going forward revenues and profitability would be three years, five years from now, or from 1997, and we tracked those, and we adjusted them. We also had the market, in this case the investor market, speaking pretty loudly to us, so this was 1997, and 1998 and ’99, and we did a couple of capital raises. We did the first ones, which I described, that set a valuation on it, and part of it was, “We want the best partners, but we also want a pretty good valuation.”
Steve Murch: We had, in our main … I guess we called it a B round, but basically we had institutional VCs. We had sort of the name brand, one of the big name brand VCs in the Northwest is Madrona Venture Group. We had them leading around that … It came down to selecting either … We had term sheets from both Kleiner Perkins, Caufield Byers, and one from a lesser known VC company called Technology Crossover Ventures, or TCV. One little correct parenthetical note was the associate who was doing the due diligence on us came up and stayed with us for a couple of days, and he kept talking about this company on off-time, at coffee break. He’s like, “You know, this other company that I’m looking at, it really wants to send DVDs via mail. I don’t really know. It’s this company, Netflix. What do you think about … Blockbuster sure is a powerful company, aren’t they?”
Steve Murch: Luckily, well not luckily, but to their great foresight, TCV invested pretty heavily in the initial several rounds in Netflix, and Peloton. They’re kind of an amazing … If you look at their portfolio of companies. We chose those guys because we liked them, not because the valuation was better, but because their partnership was a lot better. Kleiner Perkins set a valuation and TCV kind of matched it, and it was based on, “If we’re successful, we think we can do this,” and it was also partially based on, “We don’t think we need capital right now, but if you want to be a part of this …” It was a seller’s market of equity back then, that’s for sure.
John Warrillow: To what extent is Rich and the team back in Microsoft going, “Oh, man. Did we just give away the farm here? This 20% stake in this company I guess is being valued higher and higher, but at the same time, maybe we left a chunk of money on the table. Why didn’t we start VacationSpot instead of giving all this to Steve?” Was there any sentiment like that?
Steve Murch: I don’t think Rich ever thought that. Rich had his sights on a much bigger, kind of overall global travel marketplace, was what it was called at the time. Expedia now does billions of dollars in online travel sales. They were happy with their growth, and I think they were probably also thinking, “This isn’t something we can also take on and do it well.” Microsoft, at the time at least, and I think they’ve now rekindled that, but they had a real focus on core competence, and, “If it isn’t really something that you want to be number one or even number two at, don’t do it.”
Steve Murch: I think in Rich’s case, he was actually really happy. On a personal level, I think he was happy being an integral part of his first of many entrepreneurial successes. He ended up, of course, staying at Expedia through the IPO, was a phenomenal CEO, then left after Barry Diller bought controlling interest in Expedia, and he left and he started Zillow.com, and then he also had an idea at a lunch break, and that started GlassDoor.com. He’s had three or maybe more, I don’t even remember, at this point, multi-billion dollar, literally, I mean, that’s not an exaggeration. Multi-billion dollar successes of notches in his belt, with partners and friends, but he’s a guy who’s been really interesting, and I’ve been happy to know for a while.
John Warrillow: A smart cat, for sure, whom I’ve never met, but sounds just the way you describe him. He’s a smart cookie, for sure.
Steve Murch: Yeah.
John Warrillow: Here’s another question. As I understand it, and tell me if I’m asking a question that’s too private, but you’ve had, with BigOven, you didn’t go the venture capital route. As I understand it, you sort of kept the equity more closely held. Is that right?
Steve Murch: Yeah. Yeah. Totally.
John Warrillow: You’ve done both, and I know there’s a lot of listeners out there going, “Sounds like a lot of hands in the pie.” By the time you get diluted, you’re doing A rounds and B rounds, and sharing all this equity with Microsoft, you’re down to something less than 100% for you, versus the BigOven experience, where you were able to retain that. How would you coach an entrepreneur trying to decide, “Do I go big, take on a bunch of outside investors, versus do I keep all of the equity but know that I might grow something smaller than …” How would you coach someone through that decision?
Steve Murch: Yeah. That’s such a great question, and it could probably be an episode or two of a podcast alone, but I have a couple thoughts on that. I mean, I’ve loved both of those kind of ways of doing it. The kind of VC, wind at your back, raise a bunch of capital, and just to peg it, in VacationSpot’s case, I think we raised a total of $13 million in the life of the company, and when we sold to Expedia, we still had $11 million in the bank, so we were still fairly frugal spenders. In fact, the main reason that we turned down Kleiner Perkins was they were very interested in the business, they thought it was great, but this was during the era of raise a bunch of money from VCs and do some Superbowl ads, kind of thing. We got that vibe from them, like, “How quickly would you be ready to have a $30 million marketing budget?” Or whatever. Greg and I were both saying, “Hold on. We only have 10,000 properties. We don’t even have properties in …” I don’t know, Orlando at the time, or whatever it was. We just didn’t think we could fulfill the demand, so we sensed at that point we had more of a demand side driven partner or prospective investor partner that was not aligned with kind of the more even growth that we wanted.
Steve Murch: Back to the kind of bootstrapping versus VC. I see it, I guess, a little bit like maybe … You know those slider bars that you see in user interfaces? You’ve got a slider bar, and you can kind of only choose, “Where do you want to be on the spectrum?”
John Warrillow: Mm-hmm (affirmative).
Steve Murch: On one side, the bootstrapping side, I’d probably label that, “Maximum control.” On the VC side, if you’ve got the slider bar all the way over on the VC side, you really have accelerated impact. The benefit of that is, accelerate your impact. Assuming one doesn’t have access to infinite capital oneself, you’d have to go to outside parties, and if you really are in a market where you want to accelerate your impact quickly, and in the case of VacationSpot, the market that we were in, there were absolutely first mover advantages to getting a property, or getting 90% of the Lake Tahoe ski condos on our platform makes it that much more difficult for the next vendor who came along. We thought there was a market window. Markets like OpenTable’s restaurant market, and many kind of tech-related markets have that property, but not all of them.
Steve Murch: The recipe space, the kind of consumer cooking space I wouldn’t say has that as much, because the incremental cook to get your grocery list installed isn’t necessarily gonna be absolutely locked in. We aren’t even locked in to office suites or word processors the way that we, at Microsoft, maybe 15 years ago would have guessed that people are. People are bouncing back and forth between Google Docs and Microsoft Word, and other things. It’s becoming a little more fluid in some spaces, in the consumer space. But on the supplier side, particularly the kind of marketplace businesses like VacationSpot, if you’ve got a supplier that has pretty high switching costs to either put all their inventory and accounting system in one platform, namely yours or your competitor’s, it’s probably a good idea to accelerate your impact in that business. I’m not sure I would recommend bootstrapping for a kind of a lodging, marketplace business.
John Warrillow: Where there’s a need to capture market share or mind share quickly, the VC space is probably the way to go?
Steve Murch: Yeah, and there are maybe two other layers on this. The second one is a personal one, and the main reason that I chose to bootstrap my BigOven business was I knew at the time that my wife and I wanted to live abroad, and it became France, where we met you guys and many other great people. I really didn’t want the guilt or responsibility … When you take money from outside parties, you have the responsibility, and I didn’t really think it was right for me to accept money from outside parties and then say, “You know what? I’ve had this lifelong dream to live abroad, and goodbye.” That’s just not fair, nor did I really want to necessarily have it, establish an office, and phone in every now and then, and still have that kind of CEO on hiatus kind of thing. I really just wanted to have it live or die under my own control, and it wasn’t so much a, “I need the greedy control of doing it.” It was more minimizing the regret of mishandling capital, or not being responsible with people’s dollars that they’re investing in things. That was a personal freedom aspect to it.
Steve Murch: Then the last, I guess, is that we’re told, of course, in business school that the kind of business that you decide is gonna determine your capital requirements, and you kind of go and figure out what sort of capital requirements you need by doing a cash burn thing. I get that line of reasoning. What I way underestimated was the reverse is also true. The kind of capital that you raise also impacts the kind of decisions that you make in the businesses that you do build. In VacationSpot’s space, because there were times that we had $10 million in the bank, and even a fairly aggressive hiring spend, that would be pretty adequate probably before the next capital raise, it allowed us to be a little bit more aggressive in market testing and doing some other things.
Steve Murch: In the case of BigOven, where it was all needed to kind of run from its own capital, it forced a kind of parsimonious decision making on different things. That kind of discipline is also a good one, I think if you’re in the right mindset to do that.
John Warrillow: A sort of followup question around … I know you’ve also been an advisor to a number of businesses. You’ve seen a lot of term sheets, I think, in your career. What are some of the gotchas, the sleazy terms that VCs try to pull the wool over first time entrepreneurs with?
Steve Murch: I guess first I’d make a little asterisk of a note and say, “We entrepreneurs, on the kind of entrepreneur side, need to probably caution ourselves with ascribing motives to …” There are probably some, and I’m sure there are some. I’ve certainly heard of some unethical VCs, but it’s a reasonable assumption that a VC puts dollars into a business believing in the team, and believing in the opportunity, and they’re not just necessarily trying to be jerks or steal control of the company. I’m not saying you’re implying that. I’m just-
John Warrillow: Oh, I was implying, actually.
Steve Murch: Some of your listeners … Well, to any listener who has that [crosstalk 00:39:30]-
John Warrillow: I said “sleazy.” You didn’t say that.
Steve Murch: The vast majority of VCs that I’ve run into are ones who really are like, they want the best for the business. You may disagree on what is the best for the business, but I think we entrepreneurs need to sometimes be open to the idea that they may be right, that they have seen a lot of things. They’ve seen this movie before, and they might actually have the right idea. Having said that, yeah. A couple things I’d say. Probably liquidation preference is one of the big gotchas. I was chairman of the board after the VacationSpot experience. We were acquired by Expedia. I was a VP at Expedia for a while. I really enjoyed that. I was approached by another company in the vacation rental space named Escapia, somewhat confusingly named.
Steve Murch: Escapia, which was basically building a VacationSpot 2.0, and still has a very good vacation rental property management system that’s web based, that’s a very good product. We ultimately were bought by HomeAway, and HomeAway in turn was bought by Expedia, but in the Escapia process, one of the lessons that I’ve learned is the liquidation preferences can be areas of the term sheet that you really want to kind of look into when you’re acquired for something that isn’t necessarily at the level that all investors have put dollars into. You want to be sure to do that math before you do additional rounds. There can-
John Warrillow: I’m confused. Sorry. Let’s take Escapia out of the equation. Let’s imagine just ABC Widgets. Explain in a layman’s terms what you mean by “liquidation preference,” and what’s the gotcha? What do we need to watch out for?
Steve Murch: Yeah. There are provisions in term sheets often that are liquidation preferences that basically are preferred rights for investors in, say, the third round, the C round or the B round. They can exist in any round, but you typically see them get more and more aggressive as the rounds go on, and they say, “In the event that the company is sold for below what investors have put into it over the time, we get our money first before anybody who is in prior rounds gets money back.” In some cases, they get it back at a multiple. An investor in the C round might say, “Okay. Well, I’m willing to put in another couple million dollars into this business, but in the event of a sale, I get the first couple million dollars back, and by the way, I’m gonna put a 3X liquidation preference on us, so I get $6 million back before anybody else does, before prior rounds do.” That, as you can imagine, can be … Often it’s employees who are kind of last in line, which is quite a shame, because employees get common shares typically, some of the first shares that are issued. It becomes an equity issue, and equitable issue, in terms of something that the whole board should be very cognizant of.
Steve Murch: Also, when you have a company that is somewhat capital short, where investors say, “We don’t want to continue to put money into this,” but you find yourself needing the support of service providers, sometimes service providers, whether they be marketing companies or ones that provide product support, or design, or partners, might say, “Well, I’ll take my money in equity, thank you very much. That’s great.” Those terms, those equity terms may sometimes come with extra little clauses, like those liquidation preferences that you really need to do the math on it. You need to do some sort of … I can’t recall the name of it, but you basically need a spreadsheet that shows you, for any given sale price of the company, “How does that cash get allocated, and do you think it’s fair?” In a likely scenario, in a disaster scenario, or in a home run scenario.
John Warrillow: Awesome, so watch out for the liquidity preferences.
Steve Murch: Yeah.
John Warrillow: Great stuff. Was there a second-
Steve Murch: I guess just related to the service providers.
John Warrillow: Got it. Okay.
Steve Murch: Yeah. That’s somewhat of an ongoing thing, and some businesses can have service providers join, and the board isn’t necessarily always aware of or kept apprised of the drain of that service provider on things like the dilution of the stock in the company, so that’s important to monitor, and the board should place some very clear limits around, “Hey, don’t keep using this service provider who’s not costing us any cash.” Because when you go to a board meeting, sometimes the emphasis is all on the revenue and the profits, and the customer pipeline, and new products in development, and the cap table, the capitalization table is also something that very much needs, I think, and update it every single board meeting, and you should really keep an eye on. Like, “Okay, how many new shares have been issued due to this kind of partnership,” let’s say, “that might exist?”
John Warrillow: That’s super helpful. I want to go jump forward to the kind of rest of the story as it relates to VacationSpot. You have this partnership with Expedia. In return for a 20% stake in the company, they’re basically turning their marketing funnel onto you, and any vacation rentals are getting punted your way. How big do you get the company before you decide to sell it, like in terms of revenue, or number of employees or whatever?
Steve Murch: Yeah. We actually, in the course of VacationSpot, in the course of really just a couple of years, we acquired seven different companies. We were getting to scale as quickly as possible, so we were wanting to get to scale. We acquired some of the early vacation rental companies. It was a model that HomeAway ended up using very soon thereafter, after we were then part of Expedia, to do what’s called a roll-up in the category, of just kind of picking off all these different vacation rental directories. We got it to 25,000 properties listed on our platform, some of which were using the agency model to book, some of which were just paying us a flat fee, and at that time, I can’t remember exactly how the conversation went, but because Rich was part of our board, he saw the growth in listings, and Expedia had made a strategic decision at that point to really double down on lodging, and make a pretty big push on lodging as a thematic push for a couple of years, and wanted to get aggressive in that space. We were part of a two-company acquisition that Expedia did in January of 2000.
John Warrillow: You’re 25,000 properties. How many employees working at VacationSpot at the time?
Steve Murch: I think the number was 65 at the time.
John Warrillow: Okay. Got it. Got it. Rich obviously wanted to make a play for VacationSpot. Did you guys do kind of a proprietary deal where you and Rich worked it out together? Did you hire bankers and take the company to market? How did that work?
Steve Murch: No. We did not hire bankers. We did have very good venture capitalists on our side, and we asked Rich to stay out of those conversations, and we had a very good legal counsel focused very much on the kind of high tech space, and was quite expert at that, between our venture capitalists, and we’ve also had a few other partnerships. We may have … It’s been now 20 plus years, 21 years. God. Well, yeah. 18 years, I guess, since the acquisition, but I’m sure that I made a few calls to the Preview Travels of the world, or Travelocity, or some others, saying, “Can’t tell you anything specific, but would you be interested in making an offer?”
Steve Murch: I think I may have alerted the other likely candidates, but it also might have been true that … I know that having been on the other side while I was at Microsoft, and Expedia inherited a lot of the kind of same DNA from Microsoft, but there were generally no shop provisions that happen when somebody puts a term sheet and says, “Hey, we’d like to take a detailed look at your business. Here’s a tentative offer. If you sign this, you have kind of a no shop period of two weeks or three weeks, because we don’t want you to go then take this information.” We abided by that, but I imagine if it were not in place, I would have picked up a phone and talked to a likely other supplier. As you can probably tell from my story, and we’re Seattle-based, I have always been very interested and caring about the lives of the employees that entrust their work life in the ventures that I work on, and so staying in Seattle was a pretty big part of the desire as well.
Steve Murch: The question, as I recall it, came down primarily to, “Should we stay independent and continue to either rely on the capital that we do have, and-or raise more capital, or should we be part of Expedia?”
John Warrillow: And how-
Steve Murch: And-
John Warrillow: Sorry. Go ahead.
Steve Murch: Yeah. Sorry. And Expedia had fairly recently gone public, and it was a pretty natural way to convert our equity into something that the public market valued well, and I guess it is public in the press release that the price was $82 million in Expedia stock, and we really lucked out in timing because the time of that conversion was within one week of the all-time low of Expedia shares in its history, so it went on to do about a 10X on that number from probably over the next three years or four years. It was pretty fortuitous, and was a sleepy home run that not a lot of people quite know about.
John Warrillow: Well, now they do.
Steve Murch: Yeah, I guess. Yeah.
John Warrillow: Fantastic. They bought the company for $82 million at a time when their stock was in the toilet.
Steve Murch: Right. All stocks were. Yeah. Just-
John Warrillow: Yeah. No. I didn’t mean to suggest it was in a-
Steve Murch: Yup. Yup.
John Warrillow: It was just the times, if you go back to 2001. This is an interesting point of view, because there’s a lot of people out there who are wondering about stock offers, like accepting some of their compensation in the form of stock as opposed to cash. What were the provisions around you guys being able to sell that Expedia stock? As it turns out, you probably wouldn’t have wanted to, but would you have been able to? Or how did we think through that?
Steve Murch: Yeah. That’s a really interesting … It’s been 20 plus years, so it’s hard to know the exact details, but I do know that for executives, certainly, there was a lockup for a couple of years, and there was vesting over time. Microsoft certainly, their general vesting philosophy is generally over a four to five year period. It might be currently four and a half years, but basically they sort of traunched that out over four-ish years or so. I think we were probably unwilling to put it on that full clock, but I imagine that it was more like a year and a half or something. What Expedia was building at the time was very exciting to me, and to Greg, and to other people to be part of, so we were happy to … And we really liked the team, and it was a lot of fun, so there was really not much downside for us personally to sign up for that.
Steve Murch: The larger team, we presented … Everybody had an offer basically at Expedia. That was an important part of the deal, that they had an offer that they could evaluate and either accept or decline. They may have had more loose … I know that I would have argued for it. I don’t know if we got it. I don’t recall if we got it, but they may have had more easy restrictions around when and how to convert that. Then the decision on when to do that would, of course, be their own. I was certainly of the mindset back then that it was day one of online travel, and that it was probably worth a shot to hang onto it for a little while.
John Warrillow: Yeah. Sounds like it worked out well. I could talk to you for hours. Let’s wrap with a quick conversation around BigOven, because you’ve now sold a number of companies, including VacationSpot and Escapia and others, but BigOven was your most recent. I guess it was acquired last year. Is that right?
Steve Murch: Yup. Yup. That’s right. December of … Yeah. Coming up on a year.
John Warrillow: I understand there was a lesson here that you learned in the VacationSpot/Expedia about kind of keeping your potential acquirers close. Maybe talk a little bit about that lesson [crosstalk 00:54:10].
Steve Murch: Yeah. Yeah. Absolutely. Many of your listeners who work in the kind of tech space know that there’s a thing called an API, an application programming interface. BigOven, you can go to BigOven.com and kind of check out what it is. It’s a recipe app for home cooks. It’s a social network where home cooks can post recipes, but they can also make grocery lists, menu plans. One of the cool things is you can drag and drop recipes onto a calendar and then generate a grocery list for any date range. One of the kind of long-term visions of the business was to enable online shopping, that if we could kind of own America’s grocery list, it would be a pretty useful economic thing to have, if we had the ability to have … We got it to the point where, and it still is a pretty heavily used app. It’s about 13 million downloads of the app, and many millions of grocery items are sitting on a BigOven list right now, ready to buy.
Steve Murch: We offered an API, which is this kind of pipe. It’s a data pipe that connects into our system. We have vendors like Samsung that uses the API for some of the work that they do in their devices. We also have a partner called Aisle Ahead, “Aisle” as in a grocery aisle, and they make technology for grocery stores. Among the things they do is build grocery store websites, and they of course have a need and an interest in recipe content as well, and shopping list information. They were an API partner of BigOven’s, and I came to know the founder pretty well, and in a similar story, I guess, to the VacationSpot/Expedia story, that partnership, which was always very friendly, and a kind of a collaboration, because at BigOven we were consumer-facing entirely, and Aisle Ahead is kind of, if you think about it, retailer-facing, really. They’re interested in selling a platform into as many grocery stores that want to enable shopping from home, or curbside pickup, or a lot of the things.
Steve Murch: That turned out to be a really natural partner to combine with, and it’s, I think, maybe another story that I’d encourage your listeners to think about the partners that they have, the biggest partners and the ones that can be their biggest partners, and the most collaborative ones. The ones that are in sort of the adjacent space, maybe. In the case of Aisle Ahead, it was an adjacent space. In Expedia and VacationSpot, it was an adjacent space to where we were in, but in the Expedia case, it was the most important demand supplier, and in Big Oven’s case it was a new market. It was a new way to kind of repurpose a lot of the technology that we had already built, to kind of augment it.
Steve Murch: Yeah. I’m a board member there, and I’m contributing some ideas every now and then, but largely it’s been a handoff, kind of great new home for that business, and I’m excited to see what the team’s gonna build.
John Warrillow: Now what’s next for you?
Steve Murch: Yeah. I’m kind of back to sandbox mode, John. I think I’ve had a whole lot of fun learning and relearning things like machine learning and artificial intelligence voice services, like the Echo, Amazon Echoes of the world, and Siri.
John Warrillow: Sure. Yeah.
Steve Murch: It’s been phenomenal. I’m kind of at ideation phase right now, trying to see what kind of areas are most interesting.
John Warrillow: Well, I know you’re gonna have a ton of people who want to reach out and say hi. Is there a place that people can say hi if they’ve heard this and wanted to do that? Is it okay to connect with you on LinkedIn, or do you have a Facebook page?
Steve Murch: Sure. Yeah. For work-related stuff, LinkedIn is probably the best way to go. Yeah. My name is Steve Murch, M-U-R-C-H, and maybe you’ll put it in the show notes.
John Warrillow: Yeah. We’ll put that in the show notes. Steve, you are an incredible entrepreneur. I was talking to my kids the other day, and I was trying to describe to them intellectual curiosity, the desire to just learn for the sake of learning. I actually used you as an example. I’m like, “Do you remember that guy, Steve? Do you remember he’d ask you questions all day long?” They said, “Yeah. Yeah. I kind of remember him.” I just think you’re so-
Steve Murch: “The World War II guy, right?”
John Warrillow: Yeah, yeah, but much more than that. I think you’re an incredibly curious soul, and it obviously serves you so well in business and in life, and I’m just so grateful for you to take the time to share with us today.
Steve Murch: That’s awfully, awfully nice, John. You’re doing a good service to the world that believes that Canadians are always nice. You’re helping that reputation. I’m half-Canadian, so that’s the half of me that’s nice. Thanks, John.
John Warrillow: Listen, Steve, thanks for doing this.
Steve Murch: You enjoy that. Take care.