Executive Cases: Interviews with Senior Executives of Early-Stage Companies:
Inspirato – USA
Prepared by Justin Randolph and George Foster
Designed specifically for a new generation of intergenerational luxury travellers, Inspirato is a Denver-based destination club – launched in 2011 – that offers its members access to a portfolio of luxury homes in many of the world’s best global destinations. By leasing rather than owning vacation properties, Inspirato manages to keep membership fees low, offer significantly discounted nightly rates and quickly add homes and destinations as demand increases, which places the company at the forefront of the “luxury for less” movement. Inspirato’s model combines the best of vacation rentals – flexibility and pay-as-you-go structure – with the merits of private vacation clubs – company-controlled luxurious accommodations, custom designed interiors, dedicated on-site concierge service and world-class amenities. Importantly, the Inspirato model does so without the six-figure upfront fee, long-term commitment or restrictive booking policies of legacy destination clubs. In its first year, Inspirato sold more than 1,200 memberships. Today, Inspirato is rapidly growing with over 4,000 members hailing from more than 20 countries.
Inspirato was founded by Brad and Brent Handler who had previously founded, run and sold the successful first-generation destination club, Exclusive Resorts. To have access to the Inspirato destination portfolio, Inspirato charges members a one-time initiation fee, an ongoing annual membership fee and a below-market nightly use fee during members’ property visits. In March 2013, Inspirato announced a partnership with American Express to deliver the club’s unique vacation experiences under the new brand “Inspirato with American Express”.
Brad Handler is co-founder and Chairman of Inspirato. Brad started his career at Apple and later served as eBay’s first attorney during a time of tremendous growth in the online world. In 2002, he founded Exclusive Resorts with his brother Brent and served as the company’s Chief Executive Officer and Chairman. Brad continues to bring his passion for entrepreneurship to a number of private companies. He is a lecturer at Stanford Law School. Brad earned a bachelor’s degree from the University of Pennsylvania, a bachelor’s degree from the Wharton School at the University of Pennsylvania, and a juris doctorate from the University of Virginia.
Q1: What was the source of the initial idea, and how did that idea evolve into a viable growing company? How did it change over time?
Handler: “My brother and I were the target customers for Inspirato. After all, that’s why we started Exclusive Resorts in the first place – we needed a place where we could take our family and friends. Back then, we had a family house outside of Vail, and we were looking to find one in Hawaii. My brother and I looked at each other and said, ‘This is stupid – let’s figure out a way to make this more efficient.’
“First of all, after leaving Exclusive Resorts, we continued to get feedback from people that were familiar with ER, saying, ‘I wish there was a better way. Can’t you make it more affordable? Can’t you make it easier? Can’t you make it better?’ So that was the first key.
“The second key was realizing that in our old company we had a lot of rules – when you could book, how you could book; the list goes on. There was a lot of structure in place that was frustrating to our members, so we began thinking about how to abandon all the rules. Instead of rules to regulate occupancy, we thought we could go to a market economy and just use dollars to regulate occupancy.
“The third insight was realizing that we didn’t have to own the property assets. We could simply long-term lease these assets the way management companies in luxury hospitality do. After all, the Four Seasons doesn’t own a Four Seasons – someone else does and Four Seasons is just a managing company. So realizing that we didn’t have to own the real estate – in our old company we owned the real estate – was a very big breakthrough. And that came about by trying to figure out how we could dramatically lower the price of entry. We realized our old company was in two separate businesses – the hospitality business and the real estate business. The goals of those businesses are often not aligned. So we decided we didn’t want to be in the real estate appreciation business because trying to time the market often hurts the hospitality business. So we decided to focus solely on the hospitality business. And so that was a big moment.
“We then sought to make the annual fee as small as possible because the recurring revenue that we generate on the annual fee turns out to be one of the most profitable pieces of the business and it ties people into booking. It’s a volume strategy in a sense. We try to get that annual membership fee low enough so as to get as many people in, which allows us to build up the property network and make the experience better. The more destinations we have, the more buying power we have to get better destinations and the more services and amenities we can provide to members there. It all works at scale. The power of the recurring revenue stream is much more powerful than a higher individual renewal rate. So our goal was to make the annual fee low enough that it doesn’t become a discussion every year. It shouldn’t be a conversation between a husband and a wife about paying another US$ 10,000 this year for the privilege of making reservations. Instead, we wanted it to be seen as, ‘Oh, US$ 3,000 so that we can experience everything there is to experience in the club.’ And that price for our demographic is generally not a consulted decision – one spouse just decides to write the check and does it. You don’t have to have a team meeting over it. So we knew that people were interested in the idea of multifamily or intergenerational travel, but the question was how to make it more accessible, and our grand vision was, ‘Can you have the same quality or higher than we were able to provide in our last company?’
“So our members not only have a lower price point, but also receive a higher quality experience relative to what’s in the market, and I think that’s unique with this business. Because there’s one big cost we don’t pay. If you net everything else out, the one cost we don’t pay that our competitors pay is property acquisition (the down payment for an asset) and interest on the debt.
“So we felt we had a good idea with our model, and we recruited a core team around it, and we could certainly roll out our idea and fund it ourselves, but we decided to see if we could get a small group of people who believed in our idea and wanted to help fund it. And so we amassed about 40 initial investors in our first round of funding. Those 40 investors, who were all target customers, helped us refine the idea. And that was important, because I’m a big believer in cross-pollination of everybody else’s ideas to make any idea better. And my brother and I could have just gone out there on our own – deluded in our own self-confidence – but we decided to make sure that what we were going to offer would be welcomed in the market. So making that decision was a critical one that could have easily gone the other way.
“In our first year of operations, we generated just under US$ 20 million of revenue, which is almost unheard of in the travel sector or in Silicon Valley. We began using those proceeds to help fund our growth. At that time, we were fortunate enough to meet the team at Kleiner Perkins Caufield & Byers and to have a solid-enough business model they were interested in. That really wasn’t part of the plan. But, when institutional capital entered nine months into operations, the capital allowed us to further expand our efforts. It was one thing to announce Inspirato as a company from the founders of Exclusive Resorts. Yet, it was a very different story to represent us as the first and only destination club that has institutional capital behind it. It provided validation and credibility and helped build our brand.
“Getting American Express to buy into the concept was a huge win for us. We’re the only business American Express has licensed its name to that they don’t control, and it really is a reflection of the shared values of both companies. We both refer to our customers as members, and that shared value is what brought our relationship together, which is very unique in the world of both luxury travel and for American Express to have such a unique partnership. There’s nothing else like it. And so that was a very significant deal.
“Finally, our launch of ‘Inspirato for Business’ was another giant achievement for a company like us in figuring out that there are ways to more efficiently use inventory in a way that’s not going to negatively affect retail customers. It’s going to bring in a lot of revenue so that we make more opportunities available for our retail customers that they will love.”
Q2: What were the major growth accelerators for your company in the early years of high growth?
Handler: “Our growth aspiration has always been to grow at a sensible rate where we can continue to provide our members with the experience that they deserve. Now that we’re post-institutional capital, we are growing at a faster rate and our success in the market has been greater – which has in turn fuelled additional growth – and we have the capital to sustain that growth; but, we’re adamant to not grow recklessly.
“Our innovative leasing strategy allowed us to launch in the way that we did – we launched with approximately 40 homes. If we were in a ‘build and own’ strategy, such a launch simply wouldn’t have been possible. When we previously launched Exclusive Resorts, the company launched with four properties total. If somebody were to come into the market now, they’d have to have 100 properties to be even credible, so we’re in a unique marketplace of one that has buoyed our growth. At over 4,000 members today, that makes us the largest, most successful destination club ever, and we were able to achieve in two and a half years much greater membership growth than our old company had in ten years.
“Our growth has shown that price matters. Just because you can afford to spend US$ 300,000 on a club doesn’t mean you want to, and end up doing so. Similarly, in our old club, you’d pay US$ 300,000 to become a member and then you’d get 75% of it back when and if you left. Yet, what happened in the marketplace was there were more people who wanted to leave than wanted to join, so we weren’t able to give everybody their money back. Today, because Inspirato’s initiation price is relatively small – anywhere between US$ 7,500 and US$ 17,500 to join – even though you don’t get any of it back if you don’t like the club, you just don’t pay your dues the next year and you’re done. The initial hurdle is relatively small and insignificant, and there’s no wait for money to be returned.
“What’s more, member referrals have fuelled our growth. Let’s assume that you are in the economic class that could join Exclusive Resorts and you’ve had a great experience. You really love it and you have a friend who is similarly situated to you and you think they might love it, but if they hate it, they’re out US$ 300,000 and they’re going to have to wait years to get their money back. They’re likely going to be mad at you. In our model, if they spend US$ 7,500 and hate it, they’ll be mad at you, but after you buy the wine for dinner a couple of times, they’re going to get over it because it’s like a bad stock trade. And so the great help we’ve had from our members as word-of-mouth salesmen – knowing that their friends won’t take it out on them if they dislike the experience – has been instrumental in our growth.”
Q3: What role did key aspects of the entrepreneurial ecosystem surrounding your company play in the growth of your company?
Handler: “Denver has a growing start-up culture and environment. And we’re in hospitality, which is very big in Colorado, so we were definitely able to pull people in from Colorado who had significant hospitality background. What’s more, people like to go to Colorado and people like to live in Colorado, so it helps that we’re there. Further, we draw on the resources of the community around us because we have a lot of entrepreneurs in Denver, and entrepreneurs have been the first people to see the value in what we’re doing. They’ve been our early advocates and members. And then through their companies and their contacts, they’re able to help us in a lot of ways, whether it’s through software they can provide for us, services they can provide, or the like.
“When we were in stealth mode, building out our Web system and our back-end control system, we were one of the largest start-up software developers in the Denver area, and nobody knew what we were up to. But we were able to easily tap into the Denver ecosystem as we had already built Exclusive Resorts from there. Exclusive Resorts quickly became a big employer in Denver that was a brand-new, fun company and an overall bright, shiny object. And so when we started with Inspirato, there were a few hundred alums out of Exclusive Resorts who’d been in the ER system before, had since gone off to other companies, and were interested and excited again to interact with us.
“Lastly, it’s very fortunate I came from eBay and was one of the early employees there, as it allowed us to build a powerful network with strong ties to Silicon Valley. Once word got out that my brother and I were doing something at Inspirato, we were very fortunate to get a lot of inbound calls.
“While we could have launched Inspirato from – name your city – it overall just would have been harder to find the right people with the right skill sets that we could seize upon.”
Q4: What key aspects of the entrepreneurial ecosystem surrounding your company that were absent (or existed only in a weak form) created the greatest challenges for growing your company? Please describe and discuss how you met/were impacted by these gaps in the ecosystem and their resultant challenges.
Handler: “I don’t know that there were any that were completely absent. I can’t think of any that were devoid.”
Q5: Large companies can play an important role in the scaling up of early-stage companies with high growth aspirations. These roles can include being customers, suppliers, marketing partners, joint venture partners, and so on.
(a) Describe the key areas where interaction with larger companies helped promote your growth path.
Handler: “Our partnership with American Express serves as a great example of how we’ve leveraged the resources of larger companies to our advantage.
“We also have a lot of locations in our portfolio where we work with key partners that are hotels. We don’t have ‘signature residences’ – whereby we have exclusive access to a property – in these locations, but we rely on our hotel partnerships to provide additional inventory. So we have a very strong relationship with Fairmont as well as the Trump Organization, for example, and being able to launch with help from them has been really valuable. Even at an early stage as a company, through relationships that I built up over a dozen years, we were able to arrange very good corporate partners, such as an early banking relationship with Citibank.”
(b) Describe the challenges and potential problems that larger companies may have played in limiting the growth path of your company.
Handler: “All larger companies move at slower speeds than start-ups, so there’s an inverse proportion between size and speed, and you learn to plan for that. But we truly haven’t had any major conflict with larger companies out there.”
Q6: Your current revenue growth to date had been predominantly focused on your own domestic market. What are the major reasons for this major revenue focus to date on domestic markets?
Handler: “I guess it’s simple – we pick the lowest-hanging fruit first. So the domestic market is where we are; it’s our home base, the biggest market and the biggest opportunity. Our properties are primarily where North Americans like to travel, so the value we provide is clearly geared to the North American market. Our strategy has been to start there and then, as that market gets saturated, to look for the next lowest-hanging fruit and to pick along the way. It just requires more resources because other markets aren’t quite as dense or culturally may not be as familiar with the destination club mechanism.
“Our membership is overwhelmingly from the US and probably 95% from the NAFTA world – the US, Mexico and Canada – though we have members from over 20 countries and clearly have a global property network. So we do have members in other countries, we just haven’t started to market to them directly, but we will be slowly rolling that out country-by-country and region-by-region. We’ve been very successful in Mexico because we have pursued a particularly nuanced Mexican strategy of how to build for that market – for sales we’ve hired people who not only speak Spanish but also who live in Mexico and are intimately familiar with the culture. So as we move from country to country, we need to build up that infrastructure. So we’ll be successful in the markets that we choose to go into as we invest the resources required to know that market.”
Q7: What would you view as the greatest challenges in growing a sizable revenue presence in markets beyond your own domestic country or region? In deciding when and where to seek growth in international markets, what characteristics of a country’s ecosystem would be most important in attracting you to invest significant resources in that non-domestic country or region?
Handler: “The biggest challenge for us will be understanding both the regulatory restrictions a particular country may have on the sale of travel – which is a highly-regulated industry in most parts of the world – and making sure that we have people on the ground who understand the culture of those markets. If we’re willing to put in the resources to do that, then I think we can succeed.
“As for thinking about where we are going to expand our property footprint throughout the world, our property team is constantly in communication with our membership base. We’re always polling them and asking them where they want to go, and we use that information with our own knowledge of the market to figure out where we want to go and expand – so that’s an ongoing iterative process that will never end.
“Investing to acquire members in the country involves a coordinated review as to when we have the resources in place so as to understand the cultural and regulatory nuances of the geography. So for example, Brazil is a huge market. After all, it’s the B in BRIC for a reason. Everyone wants Brazil. What’s the single most important thing you need to do to be successful in Brazil? You have to speak Portuguese. So it doesn’t matter how big an opportunity Brazil is until we’ve got a critical mass of trusted people who speak Portuguese and who can go into that country and manage member expectations there.
“In Mexico we had a guy on our senior staff who was fluent in Spanish, had lived in Mexico, liked the culture, wanted to be there and wanted to run it, and he went down and built the organization. We’ll do something similar in every market we enter. It’s just making sure that the individuals we bring on really are a perfect fit with our own organization and the opportunity in those markets. And that’s to ensure that the product we design in those markets is very consistent with the experience that we’ve already created and that has worked to date. Our decision is more about the people we can attract, the size of the market opportunity and the fit of our own product there, and less about the country’s overall ecosystem beyond its macroeconomic characteristics.”
Q8: Building a company that aims to have sustainable high growth inevitably will have both high moments and dark (low) moments. Briefly describe one high moment and one dark (low) moment in your entrepreneurial journey.
Handler: “Any potential competitor is always a big deal. At eBay, Yahoo!! announced they were going into auctions and all of a sudden we thought, ‘It’s the end of the world – how are we going to survive?’ But at the end of the day, they turned out to be blips on the radar and flashes in the pan, and the threat ultimately went away. At our old company, Exclusive Resorts, we had our fair share of that as a number of copycats sprung up. Even Exclusive Resorts launched a pseudo copycat brand – Portico – to try and compete with Inspirato. While Inspirato is much more competitive towards Exclusive Resorts than Portico, Exclusive Resorts felt they had to launch something. So, they created a travel club that is little more than a volume-booking agent available to members for a small annual fee. Portico is more deal-oriented and takes little or no inventory risk. But we didn’t really know what it was when they first launched, and at the time we thought it was going to be a challenge. However, we stuck with our strategy and the competition didn’t materialize in a significant way. Luckily, there’s very little overlap in the luxury hospitality industry between Inspirato and other companies. There’s very little available from the Ritz Carltons and Four Seasons of the world. Our biggest competitive threat is luxury villa rental and second home ownership.
“We’ve wanted some leases, which at the time seemed like the most important place in the world to be, which we weren’t able to close. But then we ultimately found other places that turned out to be just as good, hardly half a mile away from where we were originally looking, and everything ended up just fine.
“We did have a number of partners who told us that they couldn’t continue a partnership with us because now they identified us as an American Express company and they had a deal with VISA or MasterCard. So we got caught up in those politics, even though it doesn’t seem like it should have affected us. And that were disappointing because we liked working with those partners, but it’s bigger than us or our partners, and we recognize that it’s just about these behemoth companies fighting it out above us.
“We certainly have had our share of ups and downs but, overall, we’ve been very fortunate.
“The best moments we get as a company come every day when we get e-mails from our members who have been on a trip and have had a fabulous experience. There’s no better moment than that. I get e-mails, letters and cards every day from husbands and wives telling me that it was the most fabulous trip they’d ever had and that they never would have vacationed in such a way without our help, thanking us for creating a system where they could have such an experience.
“The lows are again driven by our members – which fortunately doesn’t happen often – but occasionally a member will have a negative experience. They will have taken their vacation time, which is very precious, and invested it in us so that they could have a great experience with their family and, for whatever reason, it didn’t work out – whether because of a failure of one of our staff, or randomly, in a way that was out of our control, such as because of the weather or there were no fish when they ventured out to go fishing. Whatever the issue was, when our members aren’t happy, that is a failure. We have to learn from that and work to make sure it doesn’t happen again.”