HomeAway: A Find in Online Vacation Rentals

Venture capitalists such as Institutional Venture Partners are pouring $250 million into the startup, which already is turning a profit

By Spencer E. Ante

There's no place like a second home. Or so the backers of vacation-rental startup HomeAway believe. Venture capitalists are so enamored of the three-year-old Austin (Tex.) company, in fact, that they're plowing a staggering $250 million into HomeAway—the biggest investment in an Internet outfit since the height of the dot-com bubble in 2000.

"This thing is a very well-kept secret," says Todd Chaffee, general partner with Institutional Venture Partners, a VC firm that ponied up $45 million in the investment round, announced Nov. 11. The rest of the financing came from Technology Crossover Ventures and Redpoint Ventures. Previous investors include Trident Capital and Austin Ventures, which remains the largest shareholder of the company. "It's time to unveil it and turn this thing into the next eBay or Expedia or very high-profile Internet company," says Chaffee, who led his firm's investments in Yahoo!, Netflix and Verisign.

While many startups are handing out pink slips and scrambling for money (BusinessWeek.com, 10/12/08), HomeAway's investors and executives say it had an easy time raising money for a higher valuation. The reason? HomeAway is one of those rare startups with a high-growth business model that is producing an operating profit. The company is on track to hit revenue of almost $100 million this year, says Chief Executive Brian Sharples. In February 2005, Sharples founded the company with Carl Shepherd, the former CEO of Hoover's, who now is HomeAway's chief development officer. "This just happens to be a segment that everyone overlooked," says Sharples, former president and CEO of IntelliQuest Information Group. "We see a terrific opportunity to build a great company."

Recession-Proof?

While the economic slump is forcing many consumers to cut back on travel, HomeAway thinks its service could prove resistant to the recession. Renting a home often is cheaper than staying in a hotel. And for second-home owners who don't use their houses that much, renting can bring in extra money when times are tight. "As consumers seek value the category of vacation rentals is appealing," says Henry Harteveldt, vice-president at Forrester Research (FORR).

Thanks to this latest, head-turning investment round, HomeAway is sure to attract a lot more attention—and rivals. Analysts say competition is already growing from property managers, real estate companies, and a host of online players. HomeAway became the world's largest Internet vacation-home service through the acquisition of 10 online vacation-rental sites. Among the next-largest rental sites are Forgetaway.com (owned by Weather.com), Hotels.com, and Group RCI, a division of Wyndham Worldwide (WYN). "There are some new entrants in the market that will pose a credible threat," Harteveldt says.

Other hurdles include the weakening travel market and the increasing need to earn the trust of consumers wary of giving a stranger thousands of dollars to rent a home. "The biggest challenge they have to overcome is in safeguarding that customer experience," says Douglas Quimby, senior director of research for PhoCus Wright, a travel-research company. "It's an unbranded world."