Growing a Start-Up in Recession
21 May 2010 Brian Sharples
Businesses can, and do, grow during a downturn. Brian Sharples, CEO of HomeAway, speaks about the rapid expansion of his business from an unknown start-up to the world's leading holiday rentals company, all against the backdrop of a global recession.
A successful start-up is based on three things: spotting a gap in the market, finding a solution to fill it, and building a business around that solution. It also helps to have solid financing, good timing and a healthy dose of luck. I've been involved in starting or managing the growth of companies for most of my career, with successes and failures along the way. HomeAway has been the most enjoyable of all these experiences, in part because after five years of extraordinary growth, I believe our best years are still to come.
When starting a business, it helps to have a personal passion about the product or market. My family had discovered long ago that a holiday rental gives you more space, privacy and value than a hotel. But owing to the fragmentation of the market it was difficult to find, compare and book properties without a lot of research. The holiday rentals market was still highly fragmented, and this presented a great business opportunity. The market was huge, estimated at close to $100bn worldwide, and yet there was no recognised brand in the category in either the US or Europe. So HomeAway started with the simple idea of creating the world's most complete marketplace for holiday rentals. I figured that if we could make holiday homes as easy to find and secure as hotels, we would have a great business. There was a gap in the market and I thought we had found a way to bridge it.
This is where luck and timing played a big role, as it turned out that I wasn't the only person with this idea. Many clever entrepreneurs had already begun to consolidate this market via the internet, in both the US and major European countries. After some research, it became clear that the early winners in these national markets had taken the same approach: a simple subscription model allowing owners to list their properties online and potential renters to search and select. Taking a Darwinian approach to business, we acquired the leading rental sites in each national market, unifying them under one global brand and therefore consolidating the market.
A recession-resistant business
Consumer behavior and wider economic trends have a symbiotic relationship and this is never truer than during a recession. The travel industry was no exception; with finances tight people started to change the ways in which they shopped for holidays. Crucially, they didn't stop buying holidays - they just started to look beyond traditional options in the search for a better value alternative, and HomeAway was there. Products that deliver a good deal will always do well in a recession. Fortunately, our model was one that transferred well from boom to bust, enabling us to not only weather but benefit from the recession. Those companies designed for times of economic stability must be prepared to be flexible and adapt to the changing market if they are to survive.
I personally believe that recession is never an excuse for not growing a new business - there are always opportunities in financial chaos and investors recognise that as well. We raised nearly $250m in equity in November of 2008, one of the worst days of the market.
A recession doesn't mean that all available lines of credit are cut; investors know the recession can't last forever so look for ways to continue investing, but minimise risk by investing in 'safe' companies.
A recession can be a good time to raise money if your business is performing well. It's true that credit is harder to come by, but as very few companies show strong growth in a recession, the pool of good investment opportunities is significantly reduced. If you can demonstrate that your business is one of the survivors, then even when credit is sparse you will look like a solid investment.
As well as thinking about growth opportunities, any business operating in a recession needs to focus on delivering value to its customer base. For example, our owners see, on average, a 50X return on investment from a single listing on HomeAway, and usage for travelers is free.
A good part of our business growth has come from acquisitions. Most of the companies we acquired were under-investing in marketing and product development, mainly due to their own capital constraints. Undercapitalisation is a common pitfall for start-ups; it is inevitably going to limit growth and stall your business.
Key the success of any acquisition is the assimilation of the new company into your existing brand. Taking over a company is about more than just a name change, and it is vital that steps are taken to ensure a smooth transition. As a general rule to preempt any potential problems, look for companies with a similar ethos and business practices. That way, any changes will be minor. Sharing the same technology infrastructure is important, too, especially in the case of internet-based companies. Insuring trustworthiness and continuity of service is also important - this new company is representing your brand and must comply with all the same values and standards held by the wider business. This is especially important in a recession when companies are competing harder than ever for their share of a shrinking customer base.
Running a business in a recession can be both rewarding and successful if you go about it the right way. As long as you're growing your share within a market category, the overall impact of the economy isn't particularly relevant. Financial investors are generally smart enough to see that, and there will always be capital available for firms that have demonstrated growth and profitability.