Hostelworld needed to automate the online booking of hostels because there just wasn't enough money in it if employees or call center agents had to handle bookings over the phone. The company gave away free software to attract owners and then came up with a business model that was midway between Expedia's prepay model and Booking.com's pay at the hotel formula.
Skift launched its largest and most ambitious project yet, The Definitive Oral History of Online Travel, on June 1.
In nearly 40,000 words founders, CEOs, other executives and insiders tell a story in their own words about the creation of Internet giants such as Expedia, Priceline, Travelocity, Orbitz, TripAdvisor and more.
Not all of the interviews fit into the big story so we are publishing standalone stories that offer deeper insight into information we collected during the three-month research process.
Feargal Mooney, who currently is CEO of Hostelworld Group, the largest standalone hostel-booking platform on the globe, joined the company as COO in 2002 when he says “there were 12 people working out of a bedroom or two or three bedrooms in a house” in Dublin.
The company, founded by software developer Ray Nolan, brought hostels online by offering them free property management system software and only charged them 10 percent commission. Hostelworld developed a business model that niftily resolved commission payments and collection by making consumers prepay 10 percent and forking over the rest when they got to the hostel.
Nolan tells Skift about the founding of the company in Dublin. “I’m a coder, had written the in-hostel software used by hostels in Ireland, and saw that connectivity with the Web was the only way forward. The business model was entirely my creation. And it was the 10 percent deposit-based business model that was most important: We could grow without having to build administration systems to repatriate money to hostels, and of course they would never worry that we be slow payers. It was in place from the first booking and never changed.”
Nolan adds: “The first booking was made August 3rd, 1999. Coding began in February of that year. I know because I sold 10 percent of the company for 30,000 Irish pounds to fund my wedding on April 16th that year. You don’t forget stuff like that.”
Along the way, in late 2002, Hostelworld offered by fax to acquire a rival, San Francisco-based Hostels.com. After the offer was accepted — again, by fax — the team went out and celebrated an extended Christmas and New Year’s holiday, and when they returned to the office in the second week of January 2003, they realized they neglected one little detail — they didn’t have the money to pay for the acquisition.
Skift spoke with Mooney as part of Skift’s The Definitive Oral History of Online Travel project, about saving that acquisition and how the founders and early employees went about building the largest online booking platform for hostels in the world.
Skift: Tell me about the creation of Hostelworld. What was going on?
Feargal Mooney: The business was started back in 1999 and unlike a lot of businesses it didn’t necessarily start off doing what it would eventually end up doing. It was started by a techie guy called Ray Nolan. He was a computer programmer and used to write all sorts of software packages.
And one of the hostels in Dublin came to him and said, ‘Will you write a software package to help us run our hostel more efficiently because we’re keeping all of our reservations in notebooks and so on? There are lots of property management systems, or PMSs, out there for hotels but they don’t work for our hostel because in a hotel you’re reserving a room where in the hostel you’ve got beds within rooms. And you’ve got beds in male dormitories and female dormitories, all those sorts of things that hotel systems don’t cater for. So can you write us a package to help us manage this?’
He wrote the package and then he realized if one hostel has this problem then all the other hostels probably have a similar issue. He then went out to all the other hostels in Dublin and sold them the same system. In some case he went in and said, ‘I’ve written a property management system specifically for hostels and I’ll sell you a copy of this software for … ‘ I can’t remember what the price was but it was big fee and ‘Here you go.’
Skift: Did this company have a name?
Mooney: The name of the company was called Raven Computing. And one of the hostels that bought it was a hostel called Avalon House in Dublin. The guy who owns that and ran that was a guy called Tom Kennedy. Tom bought a copy of the property management system software and started using it. After a couple months using it he said, ‘Look, this is great. We used to have notebooks and people would bring them to cancel reservations and if they booked for three nights we might scribble it out on one page but forget to cross out the other pages and so on. But now we have it all logged by the system. It’s great but I still have a couple of people full-time employed who are either answering the phone or responding to emails from customers who are saying, do you have availability from the 23rd of June to the 27th of June and if so what’s the price? I know if I respond to that email 10 other hostels in Dublin probably got the same inquiry from the same customer and we’re all putting effort into responding to these email inquiries and only one of us is going to end up getting a booking from it. So is there a way that we can integrate the email inquiries with the property management system?’
That was where the idea came for what started off as HostelDublin.com. When you start a business in Ireland in a city as small as Dublin you realize fairly quickly that Hostel Dublin just isn’t big enough. The market in Dublin isn’t big enough. A couple weeks later it became HostelIreland.com and then again in a month realized that Ireland isn’t a big enough market either and it became Hostelworld.
Skift: Are you talking about around 2000 or what year are you talking about now?
Mooney: The second half of 1999. Effectively what they did was say was, ‘OK, let’s start this business. Let’s change it around.’ At that time there were online travel businesses there. The big guys then were Expedia, Hotels.com, or Hotel Reservations Network, as it was called at the time. Travelocity and then Orbitz and Priceline were kind of small players. And, effectively there was no one that was doing online reservations for hostels because the economics of it just didn’t make sense. The economics didn’t make sense for the OTAs because the price point of a hostel bed was too low. Remember at that stage most of the OTAs that were there had a lot of their business still in call center reservations. Even though people might come and see the hotel on the websites they’d ring up to make a reservation and the payment processes were fairly manual. There was a lot administration follow up, which is fine if you were booking a $250 to $300 hotel room and you’re taking a 30 percent commission off it but for the price of a hostel bed it doesn’t make sense. And it wouldn’t have made sense for the hostel operators either because again the price point is lower their and their margins are lower. They couldn’t afford to pay the OTA commission rate.
Skift: Who were the customers at that time?
Mooney: [The customers] would have been students. Before Hostelworld developed what hostels would’ve done to get business — their marketing and so on — would have been going down to the ferry port or the railway station or the airport and handing out flyers, making sure they were included in the Lonely Planet guidebook or Let’s Go or whatever. Maybe going to and or handing out flyer or posters out to universities and colleges because it would’ve been very much a young and student-based customer audience at that point. Effectively what the guys did was say, ‘OK, let’s change the model here. Let’s start getting hostels online,’ and they developed what eventually was an OTA dedicated to and focused on hostels.
- The Definitive Oral History of Online Travel
- Launching Skift’s Biggest Project Yet: The Definitive Oral History of Online Travel
- The Never-Before-Disclosed Details About the Birth of Online Travel
- Skift Podcast: The Invention of Online Travel and How It Changed the Future of Travel Forever
- Oral History of Online Travel: Booking.com Succeeds Despite Doing It ‘Wrong’
- Oral History of Online Travel: Ctrip’s Different Path to China’s Consumers
There were two issues that needed to be resolved. One, how do you get hostels onboard and signed up to your site? With any of these businesses it’s a marketplace. It’s a two-sided market. You’ve got the traveling customers that want to book somewhere to stay, and you’ve also got to get the accommodations to sign up. Without products to sell you can’t get customers and without customers it’s hard to get product to sell. They needed to figure out how they were going to get hostels to sign up and get them beds to sell on the site.
They also needed to figure out a revenue model that number one was going to be attractive to both sides, but number two, a model that was going to be highly efficient and automated. Because, if you’re selling a hostel bed for, at that point in time, it would’ve been, $10 to $15 you can’t have somebody answering the phone to take that reservation because the economics of it just don’t work out. What they did was they said, ‘Let’s start giving out the property management system for free.’
The property management system, when they finally put a name on it, was called Backpack. Instead of charging hostels for a copy of the software they said, ‘Let’s give out Backpack for free and the condition is that Backpack is integrated where it’s the Hostelworld back-end booking system. If you were running your hostel on Backpack it means that we get visibility and access to your beds to sell. And you don’t have to pay us anything unless we sell a bed or process a reservation for you. If we process a reservation then we take a commission.’
The commission was set at 10 percent, which at that stage was significantly lower than most of the OTAs [online travel agencies]. At that point, [the OTAs] would’ve been charging 25, 30 and sometimes higher, up to 35 to 40 percent commissions. It was a very attractive commission rate to try and encourage hostels to come onboard. Remember again with hotels you’ve got lot of chain hotels. If you were Expedia, Hotels.com, or Travelocity, if you got a contract with Hilton Hotels and Marriott and InterContinental and other chains you probably had 30,000 or 40,000 hotels on you site. Whereas with hostels you are dealing with individual hostels signing them up one by one. There just weren’t any chains of hostels. Things have changed very significantly in the last few years but at that time most of them were single owner-operators. They weren’t online. A lot of the original hostels that we signed up meant we had to buy them computers. We had to install the Internet connection lines for some of them to get them going and get them up and running.
Skift: What was the reaction from the hostel owners once you started to get them online?
Mooney: We were saying to hostels, ‘We’re not going to charge any listing fees. You don’t pay us anything unless we deliver a booking. If we don’t deliver bookings you don’t have to pay us.’ That helped up get the hostels onboard and on the site. It was very much a case of going around kind of door-to-door, doing the hard sell, and explaining to them the whole Internet thing and online reservations and so on. Like any startup, we had a small team. We had a couple people out in Australia. Australia has a big backpacking culture so they could buy a second-hand car and drive around Australia signing up every hostel there is in Australia.
The key to success was the model that we developed. The models that were in operation by the mainstream OTAs at that stage — what I would refer to as the Expedia model — was where you pay the full price of the stay to Expedia and then they settle with the hotel. Alternatively, what’s now the Booking.com model is travelers don’t pay anything to Booking.com; they pay the full price to the hotel when you arrive and then Booking.com invoices the hotel for commission. Those were the two models. They were fully pre-paid or fully post-paid and both of those involved a huge amount of administration. All this stuff with a 10 percent commission on a low-price bed, you’re not going to be able to make any money with that.
The model we developed was one that was new and fairly innovative and the one that we still operate today. The customers come to the website, find the hostel they want to stay in and they enter the credit card details. We process the 10 percent deposit non-refundable and the customer pays the balance of the 90 percent to the hostels when they check in. What that meant was that 10 percent deposit was effectively our commission and we kept that and the hostel got their 90 percent when the customer walked in the door. We didn’t have to do any of the administration of invoices for commissions or collections. It meant that the whole booking process was 100 percent automated.
The search engines, even Google when it came along, weren’t that smart and there wasn’t anybody in the whole world who was doing online reservations for hostels. So, what we did was we registered about 700 different domain names. We had a hostel domain for every city, every country, every continent in the world. For example, if you had a hostel in San Francisco you would be featured on HostelSanFrancisco.com, HostelUSA.com, HostelAmerica.com, HostelNorthAmerica.com, and on Hostelworld.com. So we had for every city, every country, every continent a specific domain name that was localized to that. That was really because if you went on to any of the search engines and searched for any hostel-related term all 10 of the first 10 listings that would come up would be one of our websites.
I met the guys in late 2001. At that stage they had the website up and running. They were processing bookings. My background was on the finance side of things. I had worked as a financial analyst with a number of organizations including technology companies. I’d also run a guesthouse at an earlier point in my career. I was introduced to the two guys. There was a techie guy and there was a hostel operator. They needed someone with a finance background to come in and sort the business side of things. So I met them and I started working with them in the beginning of 2002. Still in the early stage, I remember when I joined it was like a startup. There were 12 people working out of a bedroom or two or three bedrooms in a house. It was very much at the stage of can we afford to pay the bills at the end of the week? Nobody was getting paid a fixed wage. It was a case of, well, do we have any money to pay wages at the end of the week or not. If we don’t let’s go to the pub for a few beers and so on. That was the stage we were at. I think shortly after I joined we had a big celebration. It was the first day that we did 400 reservations in one day and that was a massively big record for us and we all went out and celebrated that.
It was also at a time when the idea of raising significant capital to drive this wasn’t really an option. Some of that was related to the fact that there’s quite a difference in U.S. — and particularly Silicon Valley-funded models — compared to the funded models they’re operating in Europe. We don’t have the same sort of VC infrastructure that might be in place in Silicon Valley. You have the whole 9/11 thing and people saying they’ll never want to travel again. The appetite just wasn’t there. Effectively what that meant was this was a business that was funded by friends and family and we knew that we had to get to break-even and profitability very quickly. We did that. I started with the guys in early 2002 and we got to profitability by July of 2002.
My first title was chief operations officer, which was a very fancy title in the start of an organization working with 12 people out of a bedroom. I was chief operations manager. The techie guy was CEO and the hostel guy was director of sales and marketing. Effectively we built it up, the three of us together. What was also interesting was the other two guys had looked at this and said, ‘We think it’ll be great. This has got huge potential. I think it’s a great opportunity. We kind of got into it by accident. We want to build this up. We want to sell it in a couple of years and make a fortune and retire and live happily ever after like a lot of dot-com people at the time.’
What it meant was that their focus was always on once we got to profitability, how can we start extracting cash out of the business? This was a business that the total sum of investment was less than a million euros. It was giving significant returns to the founders. Both of them left the business. The hostel guy, Tom, left in 2004 or 2005, then Ray Nolan left in 2008. In 2002, we got to profitability. At that point things kind of took off over the course of the next couple of years. We were seeing triple-digit growth. It was flying.
There was one other site at the time founded by a guy in San Francisco who owned a hostel and who had set up a directory site, kind of listing site of hostels, called Hostels.com. Around 2002 — it might have been 2001 — we took a look and said, ‘Why don’t you put our booking engine in?’ You’ve got all these hostels. He had this idea of having every hostel in the world listed on the site with directions and phone numbers and everything. We said, ‘We’ve got a booking engine for hostels, why don’t we do a partnership? You use our booking engine and you can make some money from this.’
With a domain name with Hostels.com he was obviously driving a significant amount of traffic. We then approached him and said, ‘We’d be interested in buying your business, your domain name or website.’ We made him an offer to buy the business. It was Christmas Eve of 2002. We sent him a fax offer to buy Hostels.com. He faxed back and said ‘offer accepted.’ In the terms we said that we would close the transaction by the 31st of January. He accepted the offer and we said great. It was Christmas Eve. We went off and we celebrated Christmas and ate our turkey and ham or whatever. In Ireland, Christmas is a fairly extended holiday so it goes on for a couple of weeks. We arrived back to the office probably the 6th or 7th of January and said, ‘We’ve got to get this deal sorted.’ We contacted our lawyers and said, ‘Look, we need to get legal agreements, well we want the money.’
We didn’t think that was going to be a problem because we thought we’d go to our local bank and borrow the money from them because now we were a profitable business. When I say we were profitable, in the full year of 2002 we probably turned a profit of a couple hundred thousand dollars or whatever. We went to our bank and put together a presentation saying, ‘Here’s a great opportunity for us to buy Hostels.com and here’s all the reason we think we can do a better job to drive revenues and so on’ and the bankers sat and listened to our presentation. At the end of it they said, ‘That’s all very interesting but there are two problems with it. One is hostels’ — because they just didn’t get the hostel thing as a legitimate business. So, ‘one is hostels and the other is dot-com’ because that was after the whole dot-com bubble had burst. Surely this wasn’t going down well. Then they said, ‘Next time you come looking for a multi-million dollar loan from a bank it might help if you put suits and ties on.’
So that didn’t work. They didn’t give us the money. At that stage our lawyers were saying, ‘Look you’ve got a legally binding contract here. If you don’t find the money by the 31st of January then the guy who owns this will sue you and then your business will be ruined.’ We effectively had less than three weeks to find the money. I put together a loan-note instrument and went round Dublin city to everybody and anybody that I knew or I’d ever heard of that was anywhere reasonably wealthy and offered them an opportunity to subscribe to some of the loan notes and put a fairly effective coupon, — I think it was a 12 percent coupon –on the loan notes and through that raised about one third of the money. With this we then next went to another bank and said, ‘Here, we’ve raised this ourselves,’ and we ended up getting the balance and completing the deal. That was a fairly significant milestone for us. It was a little bit scary in the outset in terms of whether we were going to get that or not but we did. Hostels.com returned the full purchase price in profit for us in the first 18 months.
We were probably 30 to 35 people by 2004. In terms of the destination markets, Europe would’ve been the biggest piece because there are more hostels in Europe than anywhere else. Europe would’ve been probably 75 percent of the destination market. Although in terms of sources of customers it would have been pretty global and the U.S. has always been our biggest nationality of customers.
Skift: By 2004 had competitors emerged and had the OTAs started doing anything?
Mooney: There wasn’t really much competition until about 2004. Hostelbookers started up and was started by one of the hostels in London. The Generator Hostel, which has since been acquired by a private equity firm. There are now eight or nine Generator Hostels in various cities. Generator started off with one hostel in London. They were on our website, on our system. The guy who owned this looked at what we were doing and said, ‘OK, this seems interesting and Hostelworld is the only one in the space.’ He hired a guy and said, ‘Look you walk down into a basement room here and copy Hostelworld,’ and they launched the Hostel Bookers site. When Hostel Bookers launched it was an absolute copy of Hostelworld — even the terms and conditions had been copied and pasted so it still said “Hostelworld” in the terms and conditions.
Skift: That’s funny.
Mooney: When Hostel Booking launched it didn’t charge a customer booking fee. Our model was the 10 percent commission from the hostel but we also charged a $2 dollar customer booking fee… Hostel Bookers had wa a big banner saying, ‘We’re cheaper than Hostelworld. We don’t charge a booking fee.’ It was fairly direct competition. At Hostelworld we probably took our eye off the ball a little bit at that point because we were growing very, very strongly at this stage. We had the whole space to ourselves with no competition really. It helped that our model was a lot more efficient than the generalist OTAs. We had this idea that we can move our business model from hostels into hotels and all those sort of things and we took a little bit of a detour into the hotel space.
We bought an OTA called WorldRes, which was in the hotel space. We subsequently sold that again a couple of years later realizing that the hotel space is a different beast. It’s much more conventional. We were better off to focus on hostels, which we know we do well. While we were distracted with WorldRes and hotels and things, Hostel Bookers managed to get up and running. There were lots of other sites that started to compete in the space, as well, that couldn’t get any traction but Hostel Bookers fully executed better and had that no booking fee. Hostel Bookers managed to get some traction while we were distracted with hotels. A couple years later we came back to hostels. That’s what we’re all about. We obviously ended up acquiring Hostel Bookers later on in the journey.