Is It Crisis Time for HotelTonight or All Systems Go?

Has HotelTonight missed its moment?

Some, but not all, of HotelTonight’s competitors and travel industry prognosticators make that argument.

As HotelTonight approaches its fifth birthday in December, skeptics see its brightest days as being behind it as big competitors have caught up. After disclosing more than $81 million in venture funding through early 2014 and attracting a post-money valuation of perhaps $320 million or so, HotelTonight can’t possibly grow fast enough in the face of such competition to bring substantial returns to investors and make a successful exit, critics charge.

But the jury is out and likely won’t issue a verdict on the exit strategy issue for several years, and some admittedly bare bones performance statistics from HotelTonight tell a different story.

HotelTonight burst on the scene in late 2010 as a same-day hotel-booking service built from the ground up as a mobile-only app, and it was indeed the fastest hotel-booking app on the planet. It was a fairly radical approach to go mobile-only at the time and HotelTonight’s curated roster of hotel partners included just 50 properties in three U.S. cities at the time.

Fast-forward and HotelTonight has expanded beyond same-day bookings to include reservations a week out. Some view this as a sign of weakness, an indication that the same-day or last-minute market amounts to just a feature and is too small to support a full-fledged business. Meanwhile, HotelTonight, which has around 200 employees, now offers rooms in 36 countries and more than 1,900 cities in North America, Latin America and Europe, and the company states it has worked with more than 15,000 hotels since its founding.

Skift spent the last few weeks engaging with 15 to 20 hoteliers, investors, HotelTonight competitors, and online travel experts to get a feel for private-company HotelTonight’s current status and where it’s headed.

While HotelTonight has its share of doubters among some competitors and big hotel chains, it gets fairly good reviews from many of the independent hoteliers we interviewed who have offered their rooms through the app.

Importantly, HotelTonight co-founder and CEO Sam Shank cites figures to show the company, which indeed has built a brand among tech-savvy travelers and other consumers, is getting some traction and growing.

Shank says HotelTonight notches gross bookings “in the hundreds of millions of dollars” annually and increased its gross bookings, room nights and revenue some 100 percent in 2014 compared with the previous year. It is important to keep in mind that gross bookings are the full value of the hotel booking — including the portion that goes to the hotel and the smaller part that goes to HotelTonight.

Shank adds that the company, which he says had its best month ever in July, is on track to post similar growth numbers in 2015.

Some major online travel agencies, such as Priceline and sister company Booking.com, as well as smaller competitors like Jetsetter, Hipmunk, and Spain’s Hot Hotels, were quick to launch their own same-day or last-minute hotel apps within a year or two following HotelTonight’s debut.

And some of the larger competitors have much bigger marketing budgets than HotelTonight. The U.S. site Priceline.com, for example, spent more than $8.1 million for more than 5,700 airings of its Stranded advertisement touting its tonight-only hotel deals on U.S. national TV in the seven weeks between July 6 and August 23, according to an analysis by iSpotTV.

On the subject of the big players closing the gap, Shank counters that competition has been around since HotelTonight’s early days. “We went in fully aware that we were entering one of the most competitive areas of e-commerce,” he says. “The business has flourished and we’ve done well.”

Shank says that some of HotelTonight’s hotel partners indicate that HotelTonight delivers more same-day bookings than everyone else combined. “We are the same-day channel,” he boasts.

Hoteliers Have Their Say

In interviews with hoteliers that have used HotelTonight to sell last-minute rooms, the majority sentiment was that HotelTonight does a very good job in carrying out its mission to sell rooms at the last-minute that might otherwise go empty.

“If the expectation is that you have 100 rooms to fill that is not going to happen,” says Kim Nugent, vice president of revenue management at Benchmark Hospitality, a hospitality management company headquartered in The Woodlands, Texas. “But if it is a few rooms to fill the last minute, then HotelTonight does a great job for us.”

Nugent calls HotelTonight a great secondary resource that works particularly well for properties in drive markets. But Benchmark Hospitality doesn’t use it for business travel-oriented properties.

“It is another channel to utilize and you have to make sure you utilize it correctly for what it’s for,” Nugent says.

Similarly, Adele Gutman, vice president of sales, marketing and revenue at the Library Hotel Collection in New York City, says HotelTonight has been “really effective” in generating stays because the collections’ websites are more oriented toward an Australian couple planning a honeymoon seven months in advance.

Guzman says the Library Hotel Collection has tried Expedia and Booking.com’s BookingNow app to distribute last-minute rooms but found HotelTonight more effective.

HotelTonight’s auction/marketplace is actually very competitive, Guzman says, adding that it is not unusual for one or more of her properties not to make the cut at a particular time but the property may find its rooms in the app later in the afternoon or evening.

Although Guzman appreciates the role of HotelTonight, like several hoteliers interviewed, she isn’t a fan of the commoditization of hotels and travelers getting into the habit of booking last-minute. “I don’t think that is a genie that is going to get put back in the bottle,” Guzman says.

Another revenue manager at a small hotel group, who declined to be identified, says HotelTonight’s price points aren’t dramatically lower than its competitors. But she and other hoteliers say HotelTonight is winning points with hoteliers by pre-buying rooms during peak periods, setting the price and sharing any upside above the net rate but minus HotelTonight’s commissions, with the properties.

Other than tour operators and wholesalers, online travel agencies and other booking sites don’t make a habit of pre-buying rooms but Shank confirms HotelTonight is indeed doing so at various times.

“This is cool except that it still indicates that HotelTonight is better at marketing hotel rooms, even during highly compressed periods, than the hotels themselves, which is depressing,” says hotel industry veteran Tom Botts. “But at least they are getting good guy points for sharing the increased rates they are charging.”

Kelly Keegan, revenue manager at The Godfrey Hotel Chicago, says she started using HotelTonight about a year and a half ago and found it to be an “instant success.” She incorporates HotelTonight into her everyday strategy.

Like a couple of other hoteliers, Keegan favorably mentioned HotelTonight’s “pre-buys,” which did well for the property during the July 4th weekend when the Grateful Dead performed in Chicago.

Keegan finds the HotelTonight’s extranet easy to use and from a consumer standpoint thinks the app “flows quicker” because it is well-written, visually oriented and not bogged down with heavy content.

Hoteliers’ Opinions Vary

The hotel industry is vast, of course, and not all hoteliers are HotelTonight boosters.

Manny Chohan, senior vice president of the rooms division and revenue at Hampshire Hotels & Resorts, says the chain has used both HotelTonight and Booking.com’s BookingNow apps and finds that BookingNow is far more effective in attracting international travelers, such as those from China and Brazil.

“There’s no comparison when talking of the volumes,” says Chohan, acknowledging that the chain, which manages brands including Debut, Augustus and Dream hotels, has worked with Booking.com for a decade and has a preferred relationship.

A distribution official at a major global hotel chain, who declined to be identified, says HotelTonight isn’t an approved channel and franchisees would get admonished if they used HotelTonight.

“Most hotel companies are not going to spend the time and energy to go from 72 percent occupancy to 73 percent” using such last-minute apps, the distribution official says. “Last-minute couldn’t save Travelocity and it couldn’t save Orbitz.”

Still, for at least one of HotelTonight’s smaller competitors, HotelTonight is “absolutely someone to be reckoned with,” says Hot Hotels CEO Conor O’Connor. “They have a very strong team, and they are very well-financed.”

Hot Hotels, which recently has set up shop in Boston at TechStars and is looking toward expansion in the U.S., sees competition as good because it brings more recognition to the last-minute category, O’Connor says.

“Travel is not a winner-take-all market and certainly last-minute isn’t either,” he adds.

Is HotelTonight Potentially a Billion Dollar Company?

There are some industry insiders who argue that HotelTonight should have looked for an acquirer a couple of years ago before its latest fundraising rounds and that it may have missed its exit opportunity.

These critics concede they don’t know HotelTonight’s actual numbers but express doubts that HotelTonight can be growing at a pace to satisfy investors, who would normally expect at least a “2x or 3x return.”

All of the major players are offering last-minute hotels so HotelTonight, while a very good product, doesn’t have any needle-moving differentiation and its pivot into a seven-day booking window was a concession that the tonight-only market was too small, these critics say.

If major players were potentially considering acquiring HotelTonight or one of its knockoffs several years ago or building their own competitive product, they wouldn’t have been able to justify HotelTonight’s lofty price tag at the time, says one critic, adding: “It’s not a $1 billion company.”

As a signal that HotelTonight might be in trouble, one observer wondered whether EquityZen’s July 2014 investment in HotelTonight for an undisclosed amount might have been a down round at a valuation lower than the valuation when prior investors got in.

For the record, Shank says HotelTonight has never had a down round. “This was a small, secondary transaction with Equity Zen buying shares from a former employee,” Shanks says. “HotelTonight didn’t have any participation or involvement with this transaction.”

Valuations Are in the Eyes of the Beholder

One experienced travel industry investor says HotelTonight has a first-mover advantage in the tonight-only space that allowed it to build a brand and considerable scale. The company has a “first-rate team, and a valuable brand in a growing category,” the investor argues.

With major online travel agencies seeing their last-minute bookings growing at perhaps a 30 percent clip, HotelTonight is growing as competitors are growing, too, the investor says.

“It is a giant, freaking market,” he says.

Several observers argued that critics shouldn’t get hung up about HotelTonight’s valuation as valuations are often in the eyes of the beholder, especially for a strategic acquirer.

“There are many more preposterous valuations out there with lousy management teams,” the investor says.

The Road From Here

Shank of HotelTonight acknowledges that the company has ample competition, but points to what he says is 100 percent growth in 2014 and gross bookings “in the hundreds of millions of dollars” annually as proof that the momentum is there.

“The business hasn’t stagnated at all and certainly hasn’t decelerated,” Shank says. “We are growing at the same rate as last year but off a much bigger base. The business has never been stronger on the product innovation side and in financial performance.”

Shank doesn’t see the company’s embrace of a seven-day booking window as a retreat but as a move to give its customers more flexibility. “We realized our unique place in the industry was more of an emotional mindset and a change in customer behavior toward embracing spontaneity and serendipity,” he says.

It is hard to gauge the motivations of the company’s critics who are questioining whether HotelTonight has what it takes to succeed, Shank says, adding that they haven’t seen the company’s financials.

Referring to his prior stints as founder and CEO of both TravelPost and Dealbase, Shank refers to HotelTonight as his “third rodeo.” The prior two companies didn’t raise a whopping amount of venture capital funding and Shank says he prefers HotelTonight’s fundraising strategy.

“I look at the capital we raised as essential” to scaling the business, Shank says.

So will competitors end up crushing HotelTonight, or could we one day see a substantial IPO or perhaps a purchase by a strategic acquirer?

HotelTonight will certainly face pressures but It’s really too soon for a definitive answer.

Says Shank: “We are in it for the long term. We are building the finest mobile-oriented travel company and we are excited about making this happen.”