Terrie's Take 898 (Tourism Edition) -- Activities Market Evolution Results in a Lawsuit

Mon May 29 00:29:09 JST 2017

* * * * * * * * TERRIE'S (TOURISM) TAKE - BY TERRIE LLOYD * * * * * *
A bi-weekly focused look at the tourism sector in Japan, by Terrie
Lloyd, a long-term technology and media entrepreneur living in Japan.
(http://www.terrielloyd.com)

Tourism Sector Edition Sunday, May 28, 2017, Issue No. 898

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+++ Activities Market Evolution Results in a Lawsuit

An interesting peek into one slice of Japan's travel industry future can 
be found from a pair of law suits going on in the USA presently. The two 
actions, which are counter-suits between the parties, are between the 
ex-CEO of Zozi.com, TJ Sassani, and the company's largest shareholder, 
KLP Enterprises. KLP is the trading name of the Pritzker family's 
investment office, and the Pritzkers, as you may know, are one of 
America's wealthiest families. The Japanese connection is that one of 
the Series A shareholders was Tokyo-based Global Brain, an early-stage 
VC in Tokyo. And the business space that Zozi.com is in, Activities, is 
one of the hottest (fastest growing) travel sectors here.

Sassani is a visionary who did an amazing job of taking a very difficult 
and fragmented sector, that of retailing "Mom-and-Pop"-run activities 
for travelers. He took a simple idea in this logistically complicated 
area, and built it into a business that until recently had a valuation 
of US$125m and had attracted money from such notables as Richard 
Branson. He believed that he could aggregate hourly and daily 
activities, ranging from kayaking to photography lessons, into a global 
online supermarket for customers to search and buy just as they would 
hotels or airline tickets.

His timing, getting started in 2007, meant there were very few 
competitors, and thus his first seed round of US$1.3m in 2008 grew over 
the following 7 years to US$44m in equity as well as a US$15m line of 
credit. But while Sassani had the vision, details coming out of the law 
suit indicate that he was unable to connect it to the efforts and 
expenses of the business itself, and coupled with a debilitating 
disease, in January 2017 he was fired by the board.

After firing Sassani, the board quickly sold the Zozi.com business to 
competitor Peek for an undisclosed sum, but which basically merges both 
companies. Although a smaller company, given that Peek has grown about 
10x in the last 2 years, I imagine that their trajectory gave them a 
vastly superior valuation in the deal. My guess is that Zozi.com was 
probably sold for less than US$10m and for equity not cash. The 
rationale by the  Zozi.com investors for the huge valuation drop is 
probably that they hope the combined business will become a unicorn and 
go public in 5 years time, in which case they will get their money back 
with some handy interest.

[Continued below...]

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You have to wonder why a smart fellow like Sassani would dissipate his 
company by engaging in non-core businesses that used up its funding so 
quickly. I believe the answer is that when he and his partner first 
started the company they had a dream but little practical experience - 
not an unusual combination for new entrepreneurs. Then as they gained 
expertise in the sector they realized that: a) the Activities reselling 
business is not that profitable - which is true, and b) the real 
opportunity is in providing the "shovels to gold miners" strategy, which 
means supplying the industry's tens of thousands of Mom-and-Pop 
operations with low-cost, easy-to-use software to manage their 
businesses. The realization that they needed to change direction 
probably came in 2014. I remember talking to Sassani about his plans for 
Japan in 2015, thinking that the web portal was his main focus, and he 
explained to me that in fact the company was segueing to providing a 
SaaS tool set instead.

In my opinion, and although I understand that the other investors wanted 
to stay in the original business of retailing activities - it is a 
US$150bn market worldwide after all, Sassani was correct in assessing 
that the real opportunity was in providing shovels and not doing the 
gold digging. His problem was that he was on a funding rocket ride that 
had sold a particular vision based on retailing leadership, and to pivot 
at such a late stage and high valuation would have seriously undermined 
his own credibility. So instead, he needed to keep growing the original 
business while growing new capabilities alongside. I think that if he'd 
been able to successfully do another fund raise, which he was apparently 
trying to do in 2016, he probably would have pulled it off.

Pivoting after practical market experience is a huge challenge for 
entrepreneurs who get funded too quickly. They build up a story then 
can't reveal that they no longer believe in it. I see very similar cases 
here in Japan, such as GoVoyagin for example, which I'm sure didn't get 
sold to Rakuten because it was doing too well. Initially they promoted 
themselves as an Inbound Activities portal, only to find that the market 
wasn't there (too many tours and not enough FIT travelers). By 2014 they 
had to pivot to targeting Outbound Japanese wanting activities in SE 
Asia. But this is also a very congested space, and so in 2015 they got 
sold. Ironically, if they'd been able to hang on a bit longer, the 
owners would have caught the 2015/16 surge of repeaters looking for more 
value. Instead, Rakuten has been the beneficiary of that development.

BTW, despite its travails, GoVoyagin has been a good supplier that 
appears to have stabilized and improved its services thanks to the 
economic muscle of Rakuten.

Today the Activities business is a hot space. In the last 6 months in 
Japan we have seen some of the world's biggest players, such as Expedia, 
Airbnb, and (rumored) Booking.com, jumping into Activity bookings. They 
are doing this because Activities is a great way to differentiate the 
otherwise commodity business of hotel bookings, and to add some useful 
and logistics-free extra revenue. A popular local activity will cause 
repeat travelers to choose a particular location and the Activity first, 
then book the hotel as a secondary consideration.

Activity-based travel is a mature market phenomenon, and is most 
effective with repeat and jaded travelers for whom the usual tourist 
attractions have lost their appeal. For this reason, the biggest users 
of activity booking services in Japan are from first-world economies and 
countries like Hong Kong. These people either know Japan from previous 
visits or they have been to so many countries that they are looking for 
something to make their journey to Japan more memorable. Understanding 
this, I think we can see that the Activities business undergo a lot more 
growth, from China, Thailand, and other nearby countries.

While being an aggregator is a tough way to make money, they only 
receive 10% of the selling price to the client and yet have to bear 10x 
inquiries before closing an actual activity booking, there is money to 
be made by the Activity suppliers themselves. I have personally seen 
Mom-and-Pop and other small suppliers to Airbnb and other OTAs grow 100% 
a quarter, especially as they get their marketing and product mix right. 
The idea is to come up with something different, turn it into a 
memorable experience for users so that the socialize it, and to make 
sure that your operations are reliable enough to handle the growth. The 
Mario Kart guys would be a good example and although they have had a 
number of customer accidents that pose business risk, their excellent 
operations and deft handling of the Nintendo lawsuit (they are now 
licensed) have meant that they continue to expand dramatically.

But then of course it is also a highly competitive world and I heard 
that there are now five different karting companies competing in the 
market. Which, I guess, is why ticket prices are falling.

...The information janitors/
-----------------------------------------------------------

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