Trip-planning startup Utrip, which raised $4 million from investors in 2017, shut down this May. Several employees and investors are still puzzling out what went wrong, including the mystery of why its acquisition by a larger company fell through at the 11th hour.

Utrip’s failure offers some important lessons for other startups in travel. These include a need to prioritize the drivers of fast revenue growth and a need to bring street smarts when seeking an acquisition by large suppliers or tech companies.

Back in February 2017, Utrip’s Series A round underscored investor faith that the Seattle startup had found a business model that worked.

The company provided recommendations on things to see and do after collecting a few basic facts about a traveler. The more information consumers volunteered — by using its consumer and third-party tools — the more accurate its predictions became.

Utrip signed up partners to use its tools, including Starwood, JetBlue, and Holland America as well as destination marketing organizations like New York City & Company and Visit Las Vegas.

The Revenue Question

In early 2018, Utrip sought another funding round of about $8 million. At the time, its performance was mixed.

The company was at its peak, with about 80 clients providing recurring revenue from licensing with a claimed low cancellation rate. However, many of those clients had small budgets and only engaged in limited use of the product.

The company wasn’t profitable. But it thought it had a path to profitability. It aimed to flip clients from tests into full usage. It was already gaining traction with clients with bigger budgets, too.

The company felt caught in a bind, though. It needed funding to fuel both sales and marketing and data science work. But its early pilots generated little revenue.

Venture capitalists balked at a Series B. They wanted to see more recurring revenue and a faster pace of growth in that revenue.

“We heard from the VC community that when they compared our revenue against A.I.-based startups in other industries like finance, the revenue started much higher,” said CEO and founder Gilad Berenstein.

To learn more details, Skift communicated with a handful of investors and former employees who spoke on a condition of anonymity.

Two sources said the company had about $1 to $1.5 million in annualized recurring revenue at that time.

“Other industries had much larger initial pilots in the half-million dollar range which allowed them to grow revenue more quickly,” said Berenstein. “Our clients often ran much much smaller pilots in one or two destinations or one or two inventory types.”

The company had about $700,000 in the bank in reserves. With 23 employees, it kept a lean staff. Another funding round might have helped with recruiting because startups often pay employees in part with stock options.

Seeking a Lifeline

With venture capital unavailable, Utrip turned to its largest clients and prospects to seek a strategic investment. However, these companies balked, too. Some said they worried about investing in a service that could then be used by their competitors, Berenstein said.

In June 2018 Utrip’s expenses exceeded its revenue at a pace giving it a runway of about a year. At that time the company raised a convertible note of about $250,000, said Berenstein, and it hired an investment bank to find a potential acquirer.

Utrip drew some interest. TripAdvisor, for example, looked at the technology and books, a source said. However, the company expressed concern about the cost of maintaining a Seattle office for six engineers, even if the remaining staff was laid off, the source said.

A corporate development representative from Booking.com begged off but said it might look more closely at Utrip around spring 2019, a source said.

TripAdvisor and Booking.com said they don’t comment on mergers and acquisitions discussions as a rule.

A Serious Buyer Emerges

In October a buyer became interested. They liked the idea of having an engineering office in Seattle, and a few of its operations people visited three times and liked what they saw, a source said.

Skift suspects a cruise line was the unnamed buyer due to the clues we uncovered, but we didn’t confirm this hunch. Berenstein declined to name the buyer or detail the discussions. Others weren’t forthcoming, either.

Let’s call the prospective buyer a public company instead, as more than one source familiar with the discussions referred to it as a public company. The public company worked with Utrip to prepare a 94-page acquisition document. Two officials even booked travel to Seattle for a planned March 1 on-boarding, a source said.

However, three days before the signing, lawyers at the public company raised the alarm, a source said. A patent search had dug up a few patents, filed by rival tech company WayBlazer, that might conflict with some aspects of Utrip’s technology.

WayBlazer had similarly attempted to build a business by trying to use data science techniques to provide travel recommendations. In late 2018 it filed for bankruptcy. The patents fell in the hands of one of WayBlazer’s creditors, a real estate company called RealPage, a source said.

Utrip worked to get a hold of the patents, plus other workarounds, through a variety of methods.

However, for whatever reason, the public company became evasive even after Utrip addressed their concerns, a source said. After seven weeks, Utrip shut down.

“In hindsight, we know better,” said Berenstein. “By the time Utrip’s board approved moving forward with a sale, the company had about six months worth of cash on hand, but we didn’t think the exclusivity period would take six months. We hired a professional investment bank to read the signals, and we had board members and advisors with a fair amount of experience in M&A. We all believed. We were wrong.”

Mistakes Were Made

Could Utrip’s fate have been avoided? Maybe.

“It took us too long to grow material amounts of revenue,” said Berenstein. “One of the mistakes is that we should have probably charged more from the start. Many startups make that mistake.”

However, Berenstein remained partly unconvinced his company could have charged much more than it did. When speaking on a different point later in an interview, he said, “We got pushback from clients in travel for the price of our pilots.”

Berenstein said he might have also have made a mistake in prioritizing investment in engineering over sales and marketing. More sales might have produced faster revenue growth early on.

Other people we spoke with had other opinions.

Some thought Utrip should have cut expenses and continued operations.

Berenstein countered that this belief misunderstood a fundamental dynamic: A company that needs data scientists for its core product must continue to invest in a spending arms race because the alternatives are always getting better.

Critics Emerge

A few smaller investors remain frustrated.

One investor said anonymously, “There was little to no communication with the investors in recent years, and the governance structure gave outsider investors little or no visibility into the companies finances, cap table, or strategy around the acquisition.”

When asked about this, Berenstein said, “I’ve talked to all of our big investors, and I haven’t heard that complaint from them. But all of the investors had my email, phone number, and knew where I lived and could have contacted me at any time if they felt they were uninformed.”

The acquiring company had only been interested in the Utrip’s technology and engineering team, a source said. One former employee claimed in interviews that Utrip responded to this dynamic by pulling back on some of its sales and marketing. But no other employee we could reach would confirm or reject this. Board members declined to speak to us.

Berenstein said there was no marketing pullback other than letting go of one business development person during this period.

Two other investors said there was a misalignment between the interests of management and investors. To support this point, one of these investor said the CEO had not cut a check to buy equity himself.

When asked about this, Berenstein said he was 23 at the time he founded his company and didn’t have wealth then to pour into the business.

“Everything I’ve done since the age of 23 has been for Utrip,” said Berenstein. “This outcome is devastating.”

Another investor said Berenstein failed to demonstrate “stick-to-it-ive-ness” and that he instead “cratered at the first point of resistance.”

Berenstein responded to this comment by saying he remained fully engaged as CEO until the end. He added that a board of directors and fellow managers joined him in having to make tough decisions. They did the best with the information they had available, he said.

Skift reached out to a half-dozen former Utrip clients. None agreed to speak.

When asked for an overall message to clients and investors, Berenstein said, “I’m sorry.”

Looking for Larger Lessons

“Early-stage investing is high risk, which drives a commensurate need for high potential return specifically because many of these companies fail,” said Susan Preston, managing member of SeaChange Fund, one of the small investors in Utrip.

However, the travel industry’s structure may make the chances of high returns slim in cases of startups that aren’t directly involved in aggregating commissionable-inventory, Berenstein said.

“Some VCs we spoke with had a concern that the travel industry has an oligopoly with a concentrated number of suppliers and aggregators that do a lot of M&A,” Berenstein said. “Some VCs feared that a company they invest in will get acquired before it can really scale and that the VC model of needing high returns sometimes doesn’t work in travel, at least outside of the startups that focus on inventory building, like the GetYourGuides that can raise a lot of money.”

Perhaps one lesson for other entrepreneurs to draw from Utrip’s story is not to fetishize venture capital. A dependence on investors can be as much a curse as a blessing in more ways than one.

One lesson: Trip-planning startups continue to have a poor track record. As a broad category, they’ve failed more than any other type of travel startup Skift has tracked in its seven years.

Many trip-planning startups try to be like Netflix and get traveler data from a broad set of demographics and product types, from hotels to activities. However, this approach often keeps companies stuck at a development stage as each sector is difficult to crack from both sales and data science angles. Maybe by focusing on a single category and a single demographic, such as activities for cruise-goers, the concept might have gotten farther along faster.

“We spread ourselves too thin in serving a lot of small clients,” Berenstein said. “But we had to experiment to try to figure out what the best, highest-value use case for our technology would be…. The thing with data science is you need a lot of data.”

Overall, Utrip’s success in working with more than one cruise brand suggested an alternative fate. A focus on a narrower customer set of, say, cruise-goers to obtain data and a reliance instead on a significant supplier for investment rather than venture capital might have pointed to a more satisfactory ending.

The company’s representatives aim to sell its assets.

Photo Credit: Shown here Utrip CEO Gilad Berenstein during a visit a few years ago to Facebook's offices in San Francisco. Utrip