As the original Room 77 liquidates the company, founder Brad Gerstner of Altimeter Capital and CEO Drew Patterson informed preferred shareholders that they would receive just 53 cents for every dollar invested, Skift has learned.

In a confidential shareholder update [see below] obtained by Skift, Patterson and Gerstner also indicated that common shareholders, presumably employees, would receive nothing from the proceeds.

“We are reminded that passion, good ideas, and tenacity are conditions required but not sufficient when competing in the entrepreneurial arena,” the duo wrote. “We desperately hoped and tried to build a financially rewarding business but like many entrepreneurs before us, had to accept the tough reality that our work while intellectually rewarding was not as financially rewarding as we hoped.

“At the start of this journey, we told the team that most start-ups fail; therefore, it is essential to work on something you are proud of, with people you can have fun with and respect. And most importantly, always remember that you are working with other people’s money, so make the best decisions you can along the way.”

Room 77, before it sold its metasearch technology to travel agent messaging app Lola this week, had raised some $43.8 million in funding from companies such as General Catalyst Partners, Concur Technologies, Sutter Hill Ventures and a host of travel industry angels, including Rich Barton, Erik Blackford, Hugh Crean, and many others.

Asset Disposals and Licensing

In addition to the $0.53-cent return on investment for preferred shareholders, there are several revelations in the shareholder letter.

For example, when Room 77 essentially wound down a lot of its metasearch business in 2014, Google paid $15 million to license the technology, probably for use with Google Hotel Ads. Google also hired the bulk of Room 77’s employees at that time.

Founded in 2010 and faced with the challenge of competing against Paul English’s and Steve Hafner’s Kayak, Google and others, Room 77 had become a skeleton of its former self since 2014. That’s when it entered into a technology licensing deal with Google and the bulk of Room 77’s workforce then moved over to Google. Room 77 shifted its focus to its Checkmate hotel-messaging services business and TrustYou acquired Checkmate in July 2016.

The letter also confirms what Skift exclusively reported earlier this week: In addition to selling the Checkmate hotel-messaging app to TrustYou in July 2016 and metasearch technology to Lola earlier this week, Room 77 also sold its pioneering room view technology, which enabled customers to view specific rooms while comparing hotel rates, to Expedia.

Room 77 was innovative in many ways, including its room view technology and the senior and military hotel rates it displayed, for example, but ran into the same buzz saw that many travel startups face: Deep-pocketed competitors.

And that dilemma for startups is even worse today because the big are now bigger, with more digital marketing dollars at their disposal, and Google has nearly liquidated organic search.

“Unfortunately, while our focus groups confirmed the value of the product, the reality of a brutally competitive travel marketplace made it impossible to profitably acquire new customers,” Patterson and Gerstner wrote to investors. “Expedia and Priceline quickly went from spending a couple hundred million on marketing to spending billions to dominate the Google marketplace.”

The investor letter follows:

Dear Shareholders (both Common and Preferred),

In light of recent developments, we want to share an important update with you. In summary, we have sold the remaining assets of the Room 77 and Checkmate businesses to Expedia, Lola and Trustyou. We are now returning capital and winding down the company. Preferred shareholders will receive a portion of their invested capital, but we unfortunately did not achieve a sale price that will provide a return to common shareholders – which is greatly disappointing to us. Now let us share a bit more detail about our journey.

Room 77 was founded over 7 years ago with the passionate belief that travel shopping could be transformed by combining the most comprehensive and fastest hotel search with much deeper content about the hotel and exact room you were renting. We believed then and believe now that real value is delivered when you combine a good price with an actual travel experience that exceeds expectations. We hoped that giving consumers specific information about their room and helping them better communicate with the hotel would drive them to shop on Room 77.

Early in this journey we found kindred spirits who were changing the way that people shopped for travel – leading us to acquire Optrip (founded by Calvin Yang), TripKick (founded by Bryant Waters), and Checkmate (founded by Drew Patterson).

We gathered an incredible team of engineers and business leaders in Mountain View. This team not only built a terrific product — but had fun and made lifelong friendships along the way.

Unfortunately, while our focus groups confirmed the value of the product, the reality of a brutally competitive travel marketplace made it impossible to profitably acquire new customers. Expedia and Priceline quickly went from spending a couple hundred million on marketing to spending billions to dominate the Google marketplace.

Recognizing this challenge, in 2014 we decided to license the technology to Google for $15M and have the engineering team join Google to continue its development. While this was not the financial outcome we were hoping for, it was the right thing to do for shareholders as the consumer business was far from profitability. In recognition of the team’s talent, they have gone on to lead and build Google Hotel Finder — a key product for Google.

Over the last two years, the remaining team focused more on the enterprise side of the business — where the Checkmate platform was a leading pioneer in mobile check-in and guest communications. The Checkmate platform made it as easy to talk to a hotel as to a friend — and gave hotels the tools respond in kind at every stage of the guest journey.

And while many hotels have successfully adopted the technology and raved about the results, enterprise sales are a costly road. As the Board assessed the risk-reward of continued investment on this path earlier this year, we decided to sell the business so as to avoid burning too much cash in the pursuit of profitability.

In July TrustYou, a leader in the review and reputation management space, acquired our Checkmate business. TrustYou provides 15K+ hotels with a comprehensive view of guest sentiment by parsing ratings and reviews – but they only tell a hotel about problems after the fact. Checkmate closed the loop for TrustYou, allowing their hotels to delight guests with timely, personal outreach, so they could fix service issues in real time. For Checkmate, selling into TrustYou’s existing customer base provides a faster, more attractive path to scale than as a stand-alone business.

At the same time that we sold Checkmate, we sold the remaining Room 77 assets to Expedia and Lola — these included our floor plan and view visualization tools as well as the brand and metasearch engine. Consumer choice around hotel room selection has long lagged airline shopping. Room 77’s assets provide the underpinnings of next-gen hotel shopping, where travelers can select their own room and have the context to make informed decisions. Expedia is hungry to innovate around hotel shopping, and with their scale, they are poised to drive industry adoption of our work.

Between these three transactions, and the Google transaction, we sold substantially all of the company’s assets and are now in the process of liquidating the company. Thanks to these deals, we can provide a partial return of capital to our Preferred Shareholders which we project (subject to indemnification obligations to TrustYou and Expedia) to be approximately $0.53 for each dollar of invested capital. Preferred Shareholders will receive an initial distribution in the coming weeks, and the balance will be distributed in April 2017. Common Shareholders will not receive any return of capital, especially frustrating as Common Shareholders are in most cases the very people who have poured their heart and soul into this venture. Unfortunately, this financial outcome is a huge disappointment to us all.

We are reminded that passion, good ideas, and tenacity are conditions required but not sufficient when competing in the entrepreneurial arena. We desperately hoped and tried to build a financially rewarding business but like many entrepreneurs before us, had to accept the tough reality that our work while intellectually rewarding was not as financially rewarding as we hoped.

At the start of this journey, we told the team that most start-ups fail; therefore, it is essential to work on something you are proud of, with people you can have fun with and respect. And most importantly, always remember that you are working with other people’s money, so make the best decisions you can along the way.

While we didn’t generate the desired financial results, we would like to believe that we made a lasting contribution to the travel space, and that we conducted ourselves according to these important principles.

Finally, we want to thank all our stakeholders and Board of Directors for their support and commitment. Our products have had real impact on the industry and we are incredibly grateful for all your contributions. Room 77 has been a special community, and we trust the bonds forged here will endure.

Regards,
Drew Patterson and Brad Gerstner

Photo Credit: Room 77 has sold off its assets to TrustYou, Expedia, and Lola.