Helping travelers use their mobile devices to book hotels on short notice has been a heavily hyped niche business. Now a start-up that launched in San Francisco in 2011 is aiming to become the most "geographically ubiquitous" brand in this travel category.
HotelTonight announced today that it has raised $45 million in its fourth round of venture capital financing, led by Coatue Management, a hedge fund in New York.
GGV Capital, a specialty venture shop with dual headquarters in Shanghai and Menlo Park, also contributed. Existing investors Battery Ventures, Accel Partners, U.S. Venture Partners (USVP), and First Round Capital raised their stakes.
From its four rounds, HotelTonight has brought in a total of $80.35 million in funding.
Strong growth
The numbers suggest that HotelTonight, the pioneer of last-minute mobile hotel booking, is the most successful of the players in the field today. It says it has achieved 300% revenue growth in the past year, and that it had doubled the downloads of its apps to 6.5 million.
Since June 2012, the company has doubled its headcount to more than 100 and tripled the number of destinations it covers to more than 120, with Bilbao its latest addition.
None of its rivals, such as Spain's Blink Booking, Hong Kong's HotelQuickly,Germany's JustBook, the UK's Hot Hotels, or US-based Priceline's Tonight-Only Deals app have claimed growth figures approaching that.
Why does HT need so much money?
The company says it will use the funding in the next year to double its product, sales, and support staff and to open more offices. The plans are for geographical expansion and for greater saturation of its coverage within existing markets.
The company will also invest heavily in the fine-tuning of its product, according to CEO Sam Shank, who spoke by phone with Tnooz.
"The hotel-facing product/extranet is an equally important part of what we do as the consumer experience, even though the public doesn't see it. We'll be refining that."
Some industry veterans may question why HotelTonight -- by all accounts, a relatively low-cost and efficient operation -- needs $45 million to hire some staff and open some offices.
Shank scoffed when presented with the notion that his need for mammoth funding may be a bad sign that his company has a high burn rate, or that the company is blowing through its capital in its race to expand.
"It's a time value/money proposition. Our most mature and largest markets are very profitable right now. But if we were to wait for the other markets to develop to get to that profitability level to fund new expansion, there would be a lost opportunity.
We'd rather expand more quickly. It was opportunistic funding, from investors attracted to our solid business fundamentals."
The company previously did an acqui-hire, purchasing a restaurant-reservation start-up called PrimaTable. This raises the question of whether the new funding round might be used to either scale by buying other companies or by expanding into other product lines, such as restaurant reservations.
Shank discouraged such speculation.
"We didn't raise this money to go spending on acquisitions. And we're laser-focused on on demand lodging -- on helping you get into a hotel when you need it and to make the process efficient for hotel owners."
Star investor
HotelTonight's lead investor in this round is unusual. The New York hedge fund Coatue invested out of the $375 million fund dedicated to investing in private technology companies that it debuted earlier this year.
Coatue (pronounced "co tu", after a beach in Nantucket) claims to differ from the approach of most Silicon Valley venture capital funds in that it has a Wall Street mindset. Like the hedge fund managers who run the company, the fund is focused on valuations and competitor set comparisons.
Coatue's fund is fully invested in the public markets, and only withdraws capital to invest in companies when it believes it can beat market returns, according to a profile by PandoDaily. In theory, this structure creates an incentive to avoid investing in start-ups just for the sake of parking cash somewhere.
In the case of HotelTonight, Coatue did its due diligence by deploying its researchers to vet the start-up and its ecosystem thoroughly, by verifying supplier happiness, adoption growth, utilization rates, app rankings, and rates of mobile penetration.
Its researchers, led by Daniel Senft, were familiar with the travel vertical. Coatue's parent hedge fund, managed by Philippe Laffont, has invested in Expedia and Priceline.
Coatue is giving access to HotelTonight to its proprietary research on other companies, which may help the start-up achieve its business development goals more quickly.
Heading to Asia?
The investment from GGV Capital may suggest to some industry veterans that Asia is the next regional focus for HotelTonight's expansion.
GGV has invested heavily in Asia in general and in Chinese start-ups in particular (such as Reebonz).
It is familiar with the travel sector, participating in a funding round for Chinese travel site Qunar earlier this year, as well as with the mobile space, having invested recently in Square, a credit-card-accepting accessory for mobile devices.
When asked if Asia was its next expansion target, HotelTonight said that it doesn't reveal its plans. The company says it is aiming to be "geographically ubiquitous" and that "GGV’s experience is perfectly aligned with HotelTonight’s global growth aspirations."
Sticking to last-minute?
Each day at noon local time, HotelTonight's app posts a fresh set of same-day hotel booking offers. But some industry veterans may wonder if the company will stick to this strict model as it grows.
Tnooz noticed that HotelTonight, as recently as July, described itself in press releases as "the leading last-minute hotel booking app". But now it refers to itself as "the on-demand mobile hotel booking app."
The jargon "on demand" has been used by the company's CTO, Jared Simon, to describe a trend in mobile device users expecting instant gratification for consumer services, such as by ordering pizza delivery with just a few taps on a tablet.
Yet "on demand" is also a term that's vaguer than "last minute", and perhaps that gives the company leeway to expand its lead generation model and not necessarily be limited any longer to hotel bookings within a window of roughly 12 hours.
Shank told Tnooz:
"We don't see any limitation in what we're doing today that means we'd need to move away from our focus.
We're staying very focused on our vision for on demand lodging, helping you get into a hotel when you need it and get you what you want very efficiently into the right hotel. We see an enormous opportunity, and we are just getting started in terms of the vision for where we see that going and where we want to be in four or five years.
I've been involved in a number of startups [Sidestep, Travelpost, DealBase] and I've looked at many other startups very closely and the biggest problem is often a lack of focus."
Maintaining company culture
Shank said that the company's executives will need to work extra hard at maintaining the corporate culture as its staff expands in size and disperses around the globe.
It plans to deploy various tactics and technologies toward the goal of encouraging collaboration and knowledge-sharing.
For example, similarly to its new investor GGV, HotelTonight has instituted a weekly all-staff virtual meeting that pulls in all workers worldwide to participate.
Quite a journey
It's a long way from 2010, when Shank first came up with the kernel of the HotelTonight idea. As he recounts it:
I was brainstorming ideas on a whiteboard and I kept looking at the whiteboard for days. The intersection of the adoption of mobile devices and other factors was clear. It became obvious to me this is the way the world is moving.
It was so obvious, in fact, that I almost didn't move forward with product. I thought everyone else would see the same opportunity and I would be outgunned.
But I'm glad we did go ahead with it.
Large companies have been slow to embrace this industry change. They face an innovator's dilemma. Established players in travel have had a web-based focus and desktop-based biz models and marketing channels. Plus there's the inertia of large companies as another factor.
Only about 10% of companies that receive venture capital funding make it to a Series D round. So this is a milestone to mark.
Shank said the company will probably have a low-key event for its staff at one of its hotel partners in San Francisco.
NB: Disclosure - Tnooz is hosting its THack San Francisco at the offices of HotelTonight on September 19.