TT-898 (Tourism Edition) -- Activities Market Evolution Results in a Lawsuit

Japan Travel
* * * * * * * * TERRIE'S (TOURISM) TAKE - BY TERRIE LLOYD * * * * * *
A bi-weekly focused look at the tourism sector in Japan, by Terrie
Lloyd, a long-term technology and media entrepreneur living in Japan.
(http://www.terrielloyd.com)

Tourism Sector Edition Sunday, May 28, 2017, Issue No. 898

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+++ Activities Market Evolution Results in a Lawsuit

An interesting peek into one slice of Japan's travel industry future can
be found from a pair of law suits going on in the USA presently. The two
actions, which are counter-suits between the parties, are between the
ex-CEO of Zozi.com, TJ Sassani, and the company's largest shareholder,
KLP Enterprises. KLP is the trading name of the Pritzker family's
investment office, and the Pritzkers, as you may know, are one of
America's wealthiest families. The Japanese connection is that one of
the Series A shareholders was Tokyo-based Global Brain, an early-stage
VC in Tokyo. And the business space that Zozi.com is in, Activities, is
one of the hottest (fastest growing) travel sectors here.

Sassani is a visionary who did an amazing job of taking a very difficult
and fragmented sector, that of retailing "Mom-and-Pop"-run activities
for travelers. He took a simple idea in this logistically complicated
area, and built it into a business that until recently had a valuation
of US$125m and had attracted money from such notables as Richard
Branson. He believed that he could aggregate hourly and daily
activities, ranging from kayaking to photography lessons, into a global
online supermarket for customers to search and buy just as they would
hotels or airline tickets.

His timing, getting started in 2007, meant there were very few
competitors, and thus his first seed round of US$1.3m in 2008 grew over
the following 7 years to US$44m in equity as well as a US$15m line of
credit. But while Sassani had the vision, details coming out of the law
suit indicate that he was unable to connect it to the efforts and
expenses of the business itself, and coupled with a debilitating
disease, in January 2017 he was fired by the board.

After firing Sassani, the board quickly sold the Zozi.com business to
competitor Peek for an undisclosed sum, but which basically merges both
companies. Although a smaller company, given that Peek has grown about
10x in the last 2 years, I imagine that their trajectory gave them a
vastly superior valuation in the deal. My guess is that Zozi.com was
probably sold for less than US$10m and for equity not cash. The
rationale by the Zozi.com investors for the huge valuation drop is
probably that they hope the combined business will become a unicorn and
go public in 5 years time, in which case they will get their money back
with some handy interest.

[Continued below...]

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You have to wonder why a smart fellow like Sassani would dissipate his
company by engaging in non-core businesses that used up its funding so
quickly. I believe the answer is that when he and his partner first
started the company they had a dream but little practical experience -
not an unusual combination for new entrepreneurs. Then as they gained
expertise in the sector they realized that: a) the Activities reselling
business is not that profitable - which is true, and b) the real
opportunity is in providing the "shovels to gold miners" strategy, which
means supplying the industry's tens of thousands of Mom-and-Pop
operations with low-cost, easy-to-use software to manage their
businesses. The realization that they needed to change direction
probably came in 2014. I remember talking to Sassani about his plans for
Japan in 2015, thinking that the web portal was his main focus, and he
explained to me that in fact the company was segueing to providing a
SaaS tool set instead.

In my opinion, and although I understand that the other investors wanted
to stay in the original business of retailing activities - it is a
US$150bn market worldwide after all, Sassani was correct in assessing
that the real opportunity was in providing shovels and not doing the
gold digging. His problem was that he was on a funding rocket ride that
had sold a particular vision based on retailing leadership, and to pivot
at such a late stage and high valuation would have seriously undermined
his own credibility. So instead, he needed to keep growing the original
business while growing new capabilities alongside. I think that if he'd
been able to successfully do another fund raise, which he was apparently
trying to do in 2016, he probably would have pulled it off.

Pivoting after practical market experience is a huge challenge for
entrepreneurs who get funded too quickly. They build up a story then
can't reveal that they no longer believe in it. I see very similar cases
here in Japan, such as GoVoyagin for example, which I'm sure didn't get
sold to Rakuten because it was doing too well. Initially they promoted
themselves as an Inbound Activities portal, only to find that the market
wasn't there (too many tours and not enough FIT travelers). By 2014 they
had to pivot to targeting Outbound Japanese wanting activities in SE
Asia. But this is also a very congested space, and so in 2015 they got
sold. Ironically, if they'd been able to hang on a bit longer, the
owners would have caught the 2015/16 surge of repeaters looking for more
value. Instead, Rakuten has been the beneficiary of that development.

BTW, despite its travails, GoVoyagin has been a good supplier that
appears to have stabilized and improved its services thanks to the
economic muscle of Rakuten.

Today the Activities business is a hot space. In the last 6 months in
Japan we have seen some of the world's biggest players, such as Expedia,
Airbnb, and (rumored) Booking.com, jumping into Activity bookings. They
are doing this because Activities is a great way to differentiate the
otherwise commodity business of hotel bookings, and to add some useful
and logistics-free extra revenue. A popular local activity will cause
repeat travelers to choose a particular location and the Activity first,
then book the hotel as a secondary consideration.

Activity-based travel is a mature market phenomenon, and is most
effective with repeat and jaded travelers for whom the usual tourist
attractions have lost their appeal. For this reason, the biggest users
of activity booking services in Japan are from first-world economies and
countries like Hong Kong. These people either know Japan from previous
visits or they have been to so many countries that they are looking for
something to make their journey to Japan more memorable. Understanding
this, I think we can see that the Activities business undergo a lot more
growth, from China, Thailand, and other nearby countries.

While being an aggregator is a tough way to make money, they only
receive 10% of the selling price to the client and yet have to bear 10x
inquiries before closing an actual activity booking, there is money to
be made by the Activity suppliers themselves. I have personally seen
Mom-and-Pop and other small suppliers to Airbnb and other OTAs grow 100%
a quarter, especially as they get their marketing and product mix right.
The idea is to come up with something different, turn it into a
memorable experience for users so that the socialize it, and to make
sure that your operations are reliable enough to handle the growth. The
Mario Kart guys would be a good example and although they have had a
number of customer accidents that pose business risk, their excellent
operations and deft handling of the Nintendo lawsuit (they are now
licensed) have meant that they continue to expand dramatically.

But then of course it is also a highly competitive world and I heard
that there are now five different karting companies competing in the
market. Which, I guess, is why ticket prices are falling.

...The information janitors/
-----------------------------------------------------------

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-----------------------------------------------------------

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