Interview

Stephen Kaufer

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Stephen Kaufer, the CEO of travel giant TripAdvisor sat down with Eric Paley in the thirteenth installment of the Founder Dialogues series. The conversation touched on the company’s early struggles to get traction, the importance of building a business near a source of money, and why speed wins at startups.

Stephen Kaufer has the demeanor of a friendly Vermont bed & breakfast operator, but is responsible for building TripAdvisor into the world’s largest travel website. His company has a $11B market cap, is the 51st most popular website in America, and counts nearly 200 million app downloads. Their database contains 250 million reviews of 5.2 million businesses in 123,000 destinations across the globe. They’ve become the key rating source for over three million restaurants, 950,000 hotels, and 560,000 attractions. Beyond the stats, they’ve got a community that responds to 85% of posts in their forums within 24 hours.

Despite all this success the company exhibits few of the trappings of a big business. There is no reserved parking space for the CEO in front of the company’s new 282,000 square foot headquarters. Instead that prime real estate is reserved for expectant mothers and potential employees visiting for interviews. Kaufer sits in a corner office, but is surrounded by a gaggle of junior engineers instead of VPs and assistants.

Popular culture has conditioned us to expect a certain amount of bravado from CEOs. It manifests in different ways—Steve Jobs’ imperiousness, Mark Zuckerberg’s petulance, or Elon Musk’s Iron-Man inspired exertions, but Kaufer is the exact opposite of those stereotypes. Kaufer has demonstrated how it’s possible to build a thriving, iconic tech business while retaining the charm of a friendly traveler.

Founding Myths

Most startup founders have a story about starting a business at young age, be it a humble lemonade stand or a contraband candy concern in grade school. Kaufer’s earliest foray into entrepreneurship was starting a fencing club in high school where he learned the value of a sales pitch by asking classmates “Wouldn’t it be fun to learn how to stab your friends?”

After attending Harvard University where he graduated with one of the first computer science degrees the school offered, Kaufer started a company because, he says “It seemed more fun than getting a real job.” For the next dozen years he grew a company called Centerline that provided QA tools to the nascent software industry. The company grew to $20M+ in annual revenues, but Kaufer admits that the management team missed some key market transitions which eventually led to a sale disappointing company.

Once his contract with Centerline’s acquirer was complete, Kaufer began looking for new challenges. His only requirement was that it had to be in a business other than QA software. While planning a vacation to Mexico with his wife, he became frustrated by the paucity of planning resources. A few pieces of brochureware popped up repeatedly, and emboldened by Google’s success, Kaufer set out to build a travel search engine that would index the best reviews from travel experts. He met Langley Steinert, a fellow entrepreneur with a background in venture capital and marketing, they raised funding, built a team, and in February of 2000 got to work.

Then 9/11 Happened

The team had been plugging away for about a year and a half and had a functional app. Their original plan was to do B2B sales embedding their travel search engine into major websites. They reached out to all the travel companies, media giants like Yahoo, and were in the early stages of selling their product.

Then disaster struck. After 9/11 the travel industry was in shambles. TripAdvisor wasn’t sure if their champions at these companies would even have jobs in the coming days and months. In addition to the terrorist attack, the financial markets had collapsed since the company’s founding and TripAdvisor was on the verge of running out of money.

The team had a cool product, but little traction and was on the verge of running out of money. Kaufer offered the investors their money back. They declined, and he resolved to sail to victory or go down with the ship. He asked the team to take pay cuts and gave them more equity. The investors gave him a small bridge of capital to create enough runway to find a business model with promise.

The team experimented with banner ads, but quickly realized they lacked the hundreds of millions of page views required to turn that into a thriving business. A Yahoo-inspired directory didn’t pan out. Finally, the team experimented with a cost per acquisition revenue sharing deal with Expedia.

B2B Goes B2C

The company had a temporary reprieve but needed to find a way to make money. Their strategy changed from B2B to B2C. Expedia was willing to pay TripAdvisor for each referral that turned into a booking—with no limit on the payment. This turned Kaufer’s problem from an abstract one, “how do we make money,” to a more concrete query “How do we get more traffic?”

One of the experiments they tried was embracing user-generated content. In the early days of TripAdvisor, Kaufer’s goal was to index the “best” travel content. Reviews from Fodor’s, the travel writers from the New York Times, and so forth. Someone on the team suggested that the site have an option for travelers to leave reviews.

Amazon had popularized this practice years before, but Kaufer was unsure. He wondered why anyone would take the time to write anything other than a negative or nasty review. Despite his concerns, the team decided to experiment and the “leave a review” feature quickly became popular even though it was hidden at the bottom of the page. When reviewing the analytics, Kaufer and company noticed people were spending more time on the amateur reviews than the professional content and reshuffled the pages. Traffic quickly took off, revenue began to pour in, and the company quickly reached cruising altitude.

Why Selling TripAdvisor for $200M was the Biggest Mistake of Stephen Kaufer’s Life

Kaufer raised only $4.2M to fund TripAdvisor, a laughably small amount in the modern context. This meager investment allowed him to reach profitability with high levels of growth and this traction earned him an acquisition offer for $200M just four years after the company was founded. With $40M in revenue and nearly 50% of that in profits, TripAdvisor had the option to keep growing independently, but this offer represented a windfall for his investors and provided wealth for his co-founders and team. But in the face of the company’s current valuation it looks short sighted.

Kaufer says bluntly “Selling TripAdvisor for $200M was the biggest mistake of my financial life,” he says. “But only in retrospect.”

IAC was the parent company of Expedia, TripAdvisor’s largest customer, which gave them serious hesitation about turning down the offer. If Kaufer played hardball or declined the sale, Expedia could have wreaked havoc with his topline. Memories of the company’s near death were still fresh in mind and the purchase price was a windfall so Kaufer opted to sell.

The Next 8 Years

Kaufer was originally hesitant about the prospects of staying at IAC long term. During the acquisition process IAC was saying all the right things about autonomy, but Kaufer was skeptical. It turned out that they were honest and Kaufer wasn’t burdened by the corporate bureaucracy that he expected. So he stayed with the company, steadily growing users and revenue to the point that Expedia’s CEO thought TripAdvisor might be valued better if it was spun out as a standalone entity. Kaufer was excited by the prospect of going public and led the company to a massively successful IPO and continued growth over the past three years.

Lessons Learned from Stephen Kaufer

Speed Wins

Kaufer speaks with the measured cadence of a CEO in charge of 3,000+ employees in 42 countries, but his personal mantra is “speed wins”. A handwritten note with this mantra is taped to his office door, one of the few decorations in sight which has traveled from office to office over TripAdivsor’s 14 years. This simple phrase reverberates through the culture.

Weekly Releases—No Questions Asked

Kaufer’s “speed wins” mantra is best seen in the fact that for the past 14 years TripAdvisor’s engineers have shipped a new version of code every week. At one point the product team, feeling overwhelmed by the size and complexity of the codebase, petitioned to make releases bi-weekly. The request was summarily denied with a flat no. Further pleas were made and met with flat no’s.

Kaufer credits the decision to his background in computer science, but are also an important reflection of his managerial sensibility. “It’s not like we’re building embedded software that’s shipping out on a chip,” he says. “If the site goes down we can revert. I don’t slap the team around if there’s a bug. That’s software.”

Cheating with 404 Tests

Kaufer encourages engineers to run “404 tests.” Essentially, before coding a feature, create a link to that feature from a popular page, without actually linking to anything. A small subset of users will see a 404 page, but engineers will get an invaluable perspective into whether or not that feature is actually attractive to users before writing a single line of code.

Be Stubborn, Not Stupid

TripAdvisor is the undisputed leader in travel, but it’s not for lack of competition. Kayak was a contemporary company that never encroached on TA’s core business. Airbnb competes with TripAdvisor, but only on a subset of properties. However, upstarts like Trivago have taken aim squarely at TripAdvisor’s core business. Trivago’s product is comparable, but lacks the engaged community, decade and a half of user generated content, and many of TA’s features. However, their traffic and market share has grown steadily on the back of television commercials.

Kaufer had dismissed the concept of TripAdvisor doing TV advertising for the better part of a decade, but in the face of a competitor’s success with the advertising medium, he was willing to reconsider his prior beliefs. “I’m stubborn, but I’m not stupid,” he says.

Stay Close to the Money

Travel is a sexy category and many startups have tried to turn a passion for exotic locales into an enormous business, but most have struggled. The travel industry is massive, with $7.6 trillion dollars of economic impact, but the opportunities to meaningfully take money from that pie is small.

Kaufer’s brilliant original insight was to stay close to the money. In this case, the money amounts to the fees that hotels bake into their pricing structure. Travel agents used to benefit from these fees. OTAs made their fair share in the transition to digital, but TripAdvisor locked onto that piece of the revenue pie.

Kaufer realized that hotels are a honeypot, while ancillary services like flights, restaurants and activities are a business fraught with low margins, huge amounts of competition, and low loyalty. TripAdvisor didn’t ignore these areas. Even with low revenue potential they represent a big piece of the customer experience, but they were looked at critically in relation to the core business.

One of the reasons TripAdvisor has thrived while competitors like Yelp have struggled recently is that it has prioritized the parts of the market that had the highest payoff.

Turn Your Customers into Cheerleaders

TripAdvisor users who own hotels or venues are fiercely protective of their ratings and guard them zealously. One of TripAdvisor’s secret weapons is that they’ve created a brand that their customers are incented to share and defend. Like Fodor’s, Zagat, and other tastemakers before them, TA is a trusted editorial mark of distinction in addition to being a wildly profitable tech platform.

No Drama

When starting TripAdvisor, Steve planned on being the CEO. One of his VCs sat him down and said that they’d seen technical people struggle in leadership roles due to the different skill sets required. Steve acknowledged that there might be a time when he’d be asked to step down and was willing to do so if required. Fortunately, the conversation never came up again.

Press is Important, Profits More So

Kaufer has few laments, but one small complaint was the relative lack of attention that TripAdvisor gets in the media and the broader tech discussion.

For instance, TripAdvisor is bigger than Yelp by almost any metric that counts (users, pageviews, revenues, and profits), but in terms of attention from the media, Yelp outpaces TripAdvisor significantly.

Startups often chase press thinking it’s a necessary pre-condition for success, but as TripAdvisor shows, there is certainly a path forward for the more introverted organizations.

Innovate When Times are Good

Kaufer attributes the failure of his first company, Centerline, to missing a key shift in the tech market. That mistake cost him 12 years of his career, but informed his thinking for TripAdvisor’s approach to new platforms.

One of his mottos is to “innovate when things are going well.” His point is that when times are good, failed experiments aren’t fretted over. You have enough time to find the next product. However, once the market turns, it’s probably too late. You can experiment, but those efforts will be looked at like flails or last ditch efforts.

TripAdvisor eagerly anticipated the iPhone platform and were early to launch an app. They embraced Facebook advertising so eagerly that Facebook included TripAdvisor as a model in their pre-IPO S-1 filing. And with location critical to their business TripAdvisor figured out what to put in an Apple Watch before ever wearing one.

These experiments have a cost, both in terms of cash and focus, but they ensure that the company won’t be caught flat-footed. Kaufer even talked about pilot projects like drones flying over picturesque sites, like a volcano crater, to capture video for even more versatile TripAdvisor profiles.

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Eric is a Managing Partner at Founder Collective.