by Real Business - Thursday, 30th August 2007

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We first mentioned Lastminute.com six months ago, when we tipped it as a business to watch in 1999. The idea of selling last-minute offers through the Internet looked like a neat idea.

We were wrong.

It’s a very neat idea. A very, very neat idea. We’re only halfway through 1999, and the young UK company has quadrupled in value to somewhere around £12m, has 135,000 customers and has just raised - with apparent effortless aplomb - another $10m from hungry venture capitalists. Here’s what happens in six months of Internet time.

How’s this for a film script? Bright young man rings recent ex-colleague, bright young woman, proposing business idea. Needs to be topical and trendy - say, an Internet concept. She says no. Scene two: they’re writing the business plan. Scene three: he’s making phone calls. Dials wrong number, gets Tom, an unknown venture capitalist. Scene four, three days later: Tom offers $1m to get things going. Act two: four months later, token setback. Much pulling out of hair. Techies talking nerdese. This may never happen, etc etc. Act three, one year after opening scene: newspapers run huge articles saying this is the hottest business in town. Venture capitalists queue up to invest another $10m. And so on. The finale has yet to be written, but who’s to say that Bill Gates won’t buy the whole thing for $250m?

Well, guess what? This isn’t a movie. Lastminute.com hasn’t reached its finale yet, but the rest is verbatim from real life, including the two glamorous protagonists, Brent Hoberman and Martha Lane Fox.

Lastminute.com is perhaps Britain’s purest Internet success story. Even the Wall Street Journal quotes it as “a textbook example of how to start a new media company in the UK.” While the rest of Britain’s start-ups struggle to score a meeting with investors, these two completed their second round of fundraising in a matter of weeks.

Lesson one: be smart. Be prepared, think ahead, make plans. Lastminute is a pretty good identity for a Web site selling last-minute stuff. A seat on a plane that takes off tomorrow, hotel rooms not yet booked for this weekend, holidays departing next week. If you’re footloose this weekend, log onto Lastminute and frighten yourself with how far you can get on how little. Hoberman thought it was a good name too, when he thought it up, a year before the project got serious. He registered the name instantly. Just in case. Cover that base.

But there’s more to this than smart. Ricky Tahta was one of the first people to see the Lastminute business plan and is philosophical about an investment that got away. “A lot of people talk,” he says. “Brent doesn’t talk. Brent does.”

Doing may include some brilliant talking, however. How else do you put the charm to work? Julie Meyer of New Media Investors, the firm which led the recent venture capital hunt: “Brent’s very persuasive. When Lastminute launched, it meant nothing to anyone. That didn’t stop Hoberman getting links on some really big sites - the Electronic Telegraph, Excite, Virgin - that guaranteed him traffic. I don’t think he paid a cent for them.” Meyer’s colleague, Tom Teichman (the Tom who came up with a $1m offer after one meeting): “Brent also needed a product to offer. At that stage, anything he got was a handout. Airlines don’t make a habit of giving leg-ups to twenty-somethings on the make. Yet he lined up a fleet of quality airlines. He got it by asking 350 times. He doesn’t hear No.”

The most straightforward assessment of Hoberman’s qualities comes from Martha: “Brent’s a brilliant blagger and upgrader.”

Hoberman agrees: “I am a lifelong exponent of the biggest ingredient in Lastminute, which is getting more than you’re paying for. Take flying. Flying is about upgrading, and this is how to do it. Wear a blazer, arrive late, smile. Say you’ve got a business meeting at the other end. Then ask. Ask again. Ask five times. Ask 20 people five times each. If that doesn’t work, find someone else to ask. Ask at the check-in. Ask at the departure lounge. Ask as you board. Ask until the flight takes off. Then ask again. Show them you’re serious - ask before it lands. Smile all the time. I get upgraded seven times out of ten.”

At 30, Hoberman is a geriatric among Netpreneurs. He says he wrote his first personal business plan within two years of leaving Oxford, while working for a management consultancy. It was all about a taxi magazine. Free in the back of every cab. It got past the all-powerful Public Carriage Office, only to trip at New Scotland Yard. The police had a say-so and they said, “No.”

He moved on. At a consultancy called Spectrum, he was employee number ten. The next month, Martha joined as number 11. He wrote lots more business plans, mainly for clients. Pearson wanted to set up a TV channel in India. Someone else wanted to set up an Asian educational channel. Then early Internet projects logged in. Hoberman recruited one himself: Viewcall was the Internet via your TV. You paid a subscription for a set-top box. Viewcall paid Spectrum in options, then went bust. Hoberman wondered, he says, whether a Net business might get further if, instead of seeking revenues from subscriptions, access itself was free and when you found something you wanted, you paid for it directly. But the Net had nothing you wanted to pay for - yet. That’s when he registered Lastminute. Just in case.

He then moved to the Murdoch/BT joint venture, LineOne, an early Internet service provider. It was all happening at LineOne. More ideas than you could shake a stick at. Everyone keen to move forward. No-one knew where forward was. Hoberman’s brief was e-commerce. What would people buy? How could it be sourced? He checked out a tiny outfit in the States, Amazon.com. It looked an interesting model. He came across another stateside pioneer, On Sale, as in discount prices. He tried to get LineOne to trial the Lastminute idea.

Six months later, he joined Quixell, a UK start-up inspired by On Sale. They pooh-poohed Lastminute, too. He wrote a one-page business plan which he put in front of a few friends whose opinions he respected. They weren’t impressed. Nor was his father, a US venture capitalist. He tried it on Martha. Another wash-out.

Doing it was the one thing left to try, especially once he decided he didn’t like his new job. He left, expanded the plan to ten pages and took it round to Loot, the successful free-to-advertise publication. (Hoberman is a networker sans pareil.) Finally, someone liked it. But they would only entertain it as an in-house project. He tried it on Martha again, by then at Carlton working on its new digital television channels. “I knew she wasn’t a big company person. We had worked together really well on some difficult projects at Spectrum. We’re complementary, including Martha being good at minutiae.” Martha eventually succumbed to the offer of a 50 per cent share in the idea Hoberman had nursed for years.

Over Easter 1998, they sat in his flat and fleshed out the ten pages to 40, simultaneously ringing people who might want to sell their wares on Lastminute. This was not mere forward planning. No-one was going to put up a cent until the product was queued up. Sheraton were the first people to say yes, although it then took an age to turn that into a firm commitment. Lufthansa. British Midland. Big names. Time to get the money, then.The two did 20 copies of the plan. About six went to VCs, the rest to angels. It felt more of a business angel proposal because they weren’t looking for a lot of money. The obvious option was to go for Internet investors - “because we knew them and they would understand it.” The Internet world is a close one: Ricky Tahta had been involved in Bookspages - which had just been sold to Amazon - with Simon Murdoch. Hoberman knew them from LineOne. “Actually, Tahta made the first offer, but we came up with a better one.” Hoberman also knew Thomas Hoegh who was just setting up his fund for Internet start-ups, Arts Alliance. “He wanted to somehow work music into Lastminute. We couldn’t see it. But he was still a hot prospect.

“The best people were New Media Investors (a sort of club for business angels),” Hoberman recalls. “I had never heard of them. I phoned them by mistake. By the time I discovered they weren’t the New Media I thought they were, I found myself talking to a guy called Tom Teichman who said he was a venture capitalist. I said I’d send the plan. It wasn’t a priority one prospect. Two days later, they asked us to go round. We answered a few questions. They said they’d do it.

“And they would have done, except they couldn’t underwrite it and guarantee the money, because they don’t have their own fund. But their offer was a stick we could beat the others with. We called Hoegh and said, ‘Are you serious? Because if you’re not...’ That got us a second meeting. Then it all went on pretty fast. New Media were very instinctive. For them, it was always the big picture. Arts Alliance were more analytical. They are a good combination.”

Alongside the private individuals in the orbit of New Media, the first-round investors were Hoegh’s Arts Alliance and two funds brought in by Hoegh, including Innovacom, part of France Telecom - useful in equal proportions for its money and for “dealing with doubters.” Every time anyone wondered whether this was just another fly-by-night Internet outfit, Hoberman replied, “Hey, did you know France Telecom is one of our investors?’” These four put up £600,000 for 40 per cent.

Half the money was poured straight into four software contracts, including the challenging task of plugging into the airlines’ computer systems to enable the real-time sale of flight tickets. Against a top quotation of £2m, Lastminute got its Web site up and working for £300,000 and a lot of heartache. “It was interesting to see the different responses to delay. One firm would say to us, ‘We’re having problems and we’re going to work all night.’ Another would say, ‘We’re having problems and we’re going to be late.’ Strangely, the first one was the big firm; the second was the small firm. Less strangely, the big firm was in the States, the small one in the UK.”

Inevitably, even a launch delay of six weeks proved insufficient to rectify all glitches. For those of you who have not set up an Internet business, it may surprise you to learn that not having the software right on the first day doesn’t imperil the whole operation. But to entrepreneurs and investors alike, wondering whether the site is up and running is “the greatest source of angst.” That’s compounded by the fact that most of these companies go through a stage when the “techies” go all glum on you.

There was a lot more to the business, though, than just the software. There had to be the right range of products available through the software; and the people who were going to buy it had to be directed to the site. Now all that had to work, too, and preferably quickly. “It was a slow start. I think that was because all we had was the sheer basics - flights, rooms, some holidays. It took a tremendous effort to line those up. We knew that ultimately there would be other categories, but sourcing them was the challenge. Christmas was a turning point. In particular, we sold a diamond ring. One ring. £700.” It was proof that Lastminute was a lot more than last-minute flights.

Martha Lane Fox: “Last minute means different things to different people. Yes, a big aspect of it is ‘Buy late and get a bargain.’ But it also means, ‘Oh God, I’d forgotten it’s our anniversary today.’ And how about, ‘The babysitter’s called off?’ And try this one, ‘You want to go to that pop concert tonight? Guess where you’ll still get a ticket!’”

And once the silly money surfaces to buy its way out of an overlooked anniversary, perhaps with the last ticket in town, many other ways of capturing it come to mind, especially to the Lane Fox mind. In March, Lastminute launched Serious Money... “If you have enormous amounts of money and feel like splashing out in style...” This is where you spend £8,929.75 on a 30-minute flight in a Russian MIG, or bid $3m for Marilyn Monroe’s house in Beverley Hills. Hot sellers? Of course not. But they sure bring traffic. And once punters have drooled over the MIG, they can turn to the Serious Donkeys section and splash out £22.50 to Adopt a Donkey in Cornwall. And here come babysitters, pet walkers, keycutters...

All of which requires funding. Say, $10m. Hoberman: “There was always going to be an early second round. We started talking about it just before Christmas. That didn’t seem a clever time to get ourselves valued because we weren’t doing enough business. We felt sure some of these new initiatives would accelerate our recruitment and therefore our value. And in January we saw the beginnings of that. They let us ride it a bit, with a bridge loan.”

The differences between the first and second round of fund-raising were profound, says Lane Fox. “Second time around, we were more into the institutions. It was interesting to see traditional venture capital firms struggle with the issues arising from us. People who know this space don’t mind the fact that we don’t have any experience. The traditional people do.”

It clearly rankled. “They want to have their cake - they want to get hold of some of our shares - and eat it. And they want them on the cheap. It’s ‘but you’re so risky, this is all you’re worth.’ Some just recognise that they weren’t in the game. Rather than coming up with laughable calculations, they just wished us well.”

Ah, the wonder of Internet numbers. In April, as the second equity round was finalised, Lastminute clocked 3.5 million page views and someone bestowed the 135,000th click on its “please put me on your e-mail list.” Hoberman reckons that a December valuation would have been pushed to get beyond £3m. April’s, benchmarked by the new money, was £12m, ignoring a late offer which put it at £15m. Sales? The budget says £6m this year, fortified by openings in Paris and Munich. Profits? The plan says: by 2001.

Will they get that far? Won’t Bill Gates arrive first, bearing an unbelievable amount of money? Well, you certainly can’t count on it. For one thing, Bill’s got his own e-commerce travel site, Expedia. If he’s even heard of Lastminute, you can bet he’s intending to flatten it, not buy it. And what’s going to stop him? Well, in my book, donkeys and MIGs will be two good bets.

At Expedia, you don’t even see the product without signing the visitor’s book. And when you have, the most outlandish thing on offer is a week’s sailing in Turkey. Which may be what we all want. It’s just that we’d prefer to check out the MIG first.

Internet stocks: are they worth the candle?
When investment bankers start talking about “frenzied” activity, you know something is up. So how on earth are investors meant to know what’s going on in the Internet sector? The recent Granville Equity Research paper The New E-conomy had some cool insights to offer about the prospects for UK Internet stocks. One key observation, says managing director Richard Downer, “is that whilst everyone is concentrating on e-commerce (consumer activity), the development of e-business (business-to-business integration) is the more significant trend in the longer term. Here are a few extracts from Granville’s “Investor View”:

Q Is the Internet market sustainable?
A Yes. The Internet is an evolution and a long-term strategy.

Q Have I missed the boat already?
A No. While the US still has over-inflated valuations for further stocks, the Internet industry is growing at breakneck speed, and investors are keen to buy in at this early stage. For example, through 1999, Forrester Research predicts that e-commerce transactions will amount to $109bn, more than double the 1998 total.

Q Will US mania happen here?
A Unlikely. London quoted Internet stocks will surge through 1999 and out-perform “slower” sectors such as chemicals, engineering and financial services. However, we do not expect a UK Internet explosion similar to the US. The reasons are:

• Different market dynamics. In the US one of the most important forces driving Internet stock prices has been the influence of the “day trader” which reportedly accounts for 25 per cent of trades. Day traders are comfortable with the technology sector. In the UK, not only is the influence of the day trader (private individuals trading from PCs on margin accounts) so far a non-issue, but also here investors are more cautious of sky-high ratings, while US traders appear to see an opportunity as vast as cyberspace.

• Different types of companies. In the US there are an estimated 75 listed Internet companies. The US Internet companies are biased towards the business-to-consumer market. In the UK, Internet companies are focused on the more stable business-to-business sector, which mirrors European Internet take-up.

• Lower European Internet penetration rates. Europe lags US technology adoption by around 12 to 18 months. Not only are there fewer Internet users/companies in Europe relative to the US, but they also buy less goods and services. For consumer users, the US percentage of 35 per cent is double that of Europe.

Contacts
Alistair Blair is an award-winning investment and financial journalist. Find Lastminute.com at www.lastminute.com. The above extract is from the recent Granville Equity Research Paper, The New E-conomy. For details, call 0171-488 1212.

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