Honesty is the best policy. Even if it clashes with a nice FareHarbor bootstrapping story that seemed too good to be true.
Lawrence Hester, co-founder and CEO of tour-booking software company FareHarbor, which became part of Booking Holdings in 2018, is fond of recalling the company’s humble beginnings in Hawaii.
After taking over the operations of North Shore Catamaran in the 50th U.S. state, brothers Lawrence and Zachary Hester launched FareHarbor there in February 2013. Talking about the decision to go with a bootstrapping strategy, which generally means raising money from friends and family only, Lawrence Hester wrote a LinkedIn post two-and-a-half years later describing how he had slept on his brother’s girlfriend’s couch to be frugal in the company’s early days.
“FareHarbor is like many other bootstrapped companies,” Lawrence Hester wrote in that post in August 2015. “We put everything into our business.”
And, in an appearance at a travel industry conference in November 2017, Hester kept the narrative going. The FareHarbor CEO said he “slept on the floor for a whole year” when the startup set up headquarters in Denver, and Hester even described how the startup’s salespeople were forced to use makeshift materials to create semi-private areas in the office to make phone calls during that period.
So it’s all true that FareHarbor started out as a family-run business and managed to scale its operations until early 2016 by apparently taking money mostly from friends and family.
But the problem is that by early 2017, FareHarbor had raised around $11 million in funding — including around $7.5 million from investors — yet kept the myth going, and misled people to give them the impression that the company had taken no outside money because it was growing organically and really didn’t have to go fundraising.
However, largely because of an amended lawsuit filed in March against FareHarbor by a limited liability company with ties to tour operator and FareHarbor client Roberts Hawaii, we now know to the contrary that:
- By the end of September 2016, FareHarbor had taken investments and issued preferred stock worth $3.45 million, likely held by friends and family, and perhaps others.
- FareHarbor had also taken out a $2.5 million loan from Costella Kirsch, a Silicon Valley-based investment fund that has financed at least 90 other companies. It’s our understanding that FareHarbor issued warrants to Costella Kirsch in connection with this financing that gave it the option to take equity in FareHarbor worth 3.59 percent of the startup’s capitalization.
- And, around January 2017, FareHarbor raised some $5 million in funding from RSMCFH, the investment vehicle tied to Roberts Hawaii, which is the plaintiff in an ongoing lawsuit against FareHarbor.
The comes to around $11 million in funding, including from friends and family; it includes at least $7.5 million that came from outside the company.
In response to the details of FareHarbor taking $7.5 million in funding, a spokesperson for its parent company Booking Holdings told Skift that FareHarbor executives’ comments on not needing outside funding referred specifically to “institutional venture capital funding,” which the company never took.
Of course, nothing is wrong with raising money beyond friends and family. And raising $7.5 million in outside money is a fairly modest amount of money compared with some of the outsize funding rounds that we are seeing these days in the tours and activities sector from Europe to Asia.
But the issue we’re bringing to the fore is not about legalities, but one of transparency about a company’s trajectory.
It all culminated in travel industry powerhouse Booking Holdings acquiring FareHarbor, which is considered the largest vendor of tour company booking software in the United States, in April 2018 for $249 million in cash and stock.
Jason Morehouse, co-founder and CEO of FareHarbor competitor CheckFront, based in Victoria, British Columbia, acknowledged that FareHarbor achieved a nice exit into the hands of Booking Holdings. But Morehouse, like others in the tours and activities sector, was taken aback by the funding news.
“They raised [funding], which was completely opposite their story,” Morehouse said, referring to FareHarbor. “And they took on a lot of debt, but the story was twisted. They claimed organic growth, but it doesn’t sound like it was.”
In fact, FareHarbor, whose executives have disparaged competitors that have taken huge venture capital rounds, used some of Silicon Valley-based Costella Kirsch’s money to acquire Activity Link Systems, a tour software provider, in November 2016.
A very Misleading Funding Narrative
FareHarbor’s telling of its funding deals, or lack thereof, is a fairly fanciful story that much of the media, and the travel industry at large, has understandably fallen for because it’s often difficult, although not impossible, to discern the financials of a privately held company.
FareHarbor executives have repeatedly portrayed the startup as lean and bootstrapped and having taken only money from friends and family — with no outside benefactors beyond that.
At a travel industry conference on November 7, 2017, which was at least 11 months after FareHarbor had capped off its funding with $5 million from the Hawaii tour company, Hester was asked onstage about FareHarbor’s funding. The relevant exchange occurs at around 21:40 of the following video. (Lawrence Hester is shown at right in the background in the still from the video below.)
Hester was asked why FareHarbor hadn’t raised any money.
“Yeah, I think for us taking friends and family, at one point I ran my Amex to about $250,000 and had the full-on night sweats that you see on Silicon Valley. In the beginning, if we had fundraised, it would have been for an idea that we truly didn’t understand. We didn’t know what we were getting ourselves into. I think we are pretty lucky to have gotten this far without it. But I’ll never say never. A goal of ours at FareHarbor is to continually grow our market share. If there’s an opportunity out there to find a partner to help us get to the next level … ”
Hester was then asked about a September 2017 Denver Post article in which FareHarbor’s current COO, Max Valverde, claimed the company had turned down funding offers from more than 25 venture capital or private equity firms.
“We’ve talked to a lot of people,” Hester said. “The reason we said no thank you is we look at our market on a domestic basis. There really is no need for us to find additional capital. We can do it all on our own. And as we start to look at the international market maybe it’ll make sense, but I heard an interesting thing from a founder recently, who said, why sell part of your company if you don’t need to. That’s sort of the same boat we are in.”
To be fair, during that interview, Hester was in a panel that included Oyo hotels CEO Ritesh Agarwal. By that juncture, Oyo had taken in some $450 million in venture funding so Hester could make the argument that his comments should be seen in that context.
So it is indeed true that FareHarbor did not take a big venture capital round as did Peek at $40 million, Zerve at $34 million, GetYourGuide at $170 million, and Klook at $520 million, but FareHarbor did take at least $7.5 million in funding from outside the company, including $2.5 million from a Silicon Valley investment fund, Costella Kirsch.
So $7.5 million isn’t SoftBank-type funding, or even the kind of funding that Benchmark or Sequoia would seemingly notice, but it isn’t a typical friends and family contribution, or seed money either.
In their defense, FareHarbor execs had a prior relationship with officials at Roberts Hawaii and socialized with them, so FareHarbor might have looked at the $5 million funding as coming from “friends.” Still, $5 million isn’t pay-me-back-next-week money, and investment rounds and friendships can often overlap anyway.
Meanwhile, RSMCFH, the investor associated with Roberts Hawaii, is the plaintiff in the FareHarbor lawsuit, and it is alleging that FareHarbor hid the prior $2.5 million Costella Kirsch investment, which may have diluted its payoff when Booking Holdings bought FareHarbor. However, FareHarbor denies the allegations, saying it indeed disclosed the Costella Kirsch investment before RSMCFH tossed its $5 million into the FareHarbor kitty.
Regarding FareHarbor’s bootstrap argument, by 2017 the startup had edged ahead of competitors in U.S. market share, according to industry research we’ve seen. But the company had used investor money to make a small acquisition, and had secured $7.5 million in outside funding several months earlier to boost its market share.
At an Arival conference in October 2018, six months after Booking Holdings acquired FareHarbor, Hester did nothing during an interview to push back and be transparent when an interviewer said to him: “You’ve been doing very, very well as an independent company, you’ve raised hardly any money.”
Hester doesn’t correct the statement, but merely replies “yeah.”
Using the phrase “family owned” has always been part of FareHarbor’s press material and being bootstrapped a portion of its narrative.
Toni Marie Davis, executive director of the Activities & Attractions Association of Hawaii, admires what FareHarbor’s co-founders, namely brothers Lawrence and Zachary Hester, have accomplished.
And now that she knows about FareHarbor’s outside funding, the startup’s trajectory “makes more sense to me” because the company could apply the funding toward its “sales and programming to expand their system,” Davis said.
Others are making sense of it all, as well.
CLARIFICATION: An earlier version of this story included a statement from a FareHarbor spokesperson. The story has been updated to reflect that that spokesperson actually works for parent company Booking Holdings and was speaking on behalf of FareHarbor.
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Tags: acquisitions, booking holdings, experiences, fareharbor, funding, lawsuits, m&a, mergers, software, startups, tours, tours and activities, venture capital
Photo credit: FareHarbor co-founders Zachary Hester (left) and Lawrence Hester several years ago. CEO Lawrence Hester has stated that the company took no outside funding, but FareHarbor now says he was referring to institutional venture capital funding. FareHarbor