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Welcome to our Spotlight Series Newsletter. As February opens, we take a closer look at O
ptions Away - one of Thayer's newer investments and a company uniquely poised for exponential growth in 2016!
We hope you'll enjoy this issue and look forward to your comments and continued interest!
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In This Issue: Spotlight on Options Away
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Options Away is a data and technology company that leverages concepts from the financial options' markets and creatively applies them to the travel industry. The company's TripLock product gives customers the ability to lock-in an airfare for days or even weeks without committing to buy - providing fare increase protection and the flexibility to take advantage of fare price drops prior to ticket purchase. The company distributes its solution on a revenue share basis through travel distribution channels such as OTAs as well as its consumer site,
www.optionsaway.com.
Founders Rob and Heidi Brown, both financial markets veterans, recognized an unnaturally large and systemic "bid-ask" spread in US airline pricing. Perpetual volatility (coupled with increasingly high cancelation and change fees) created a pain point widely felt by travel consumers and the founders set out to develop a solution. The Browns argued that consumers might pay for added flexibility with their airline ticket purchases in the form of an option. Rather than a look-book-or-abandon path, they envisioned a look-book-or-lock path that enabled travelers to hold a price for a stipulated period of time. Heidi Brown, a former options trader, also suspected that an algorithm could be developed that optimized option pricing based on fare trends and abandonment rates. She concluded that in order to price options efficiently, you need an enormous amount of data - typically unavailable in most industries (but readily available in the airline industry where there are as many trip searches on airline and OTA sites as there are trades on the global finance exchange.)
The result is a Thayer Ventures portfolio company that is entering a period of exponential growth. With active distribution deals in place with leading OTAs, Metas, GDSs and airlines, the Browns have a proverbial tiger by the tail.
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Airline Travel Market
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Thayer Ventures was introduced to Options Away when the company began working with Hipmunk and was in early talks with Expedia regarding a distribution partnership. The goal of the partnership was to increase Expedia consumer satisfaction by offering new features and services and to drive revenue through the sales of TripLock options. The downside risk, however, was also significant as any negative change to Expedia's look-to-book performance would shut the project down immediately. In other words, the test had to prove that customers whom might have otherwise booked didn't "Lock" instead.
The
data to date has been very positive. Not only is the TripLock product's conversion rate better than expected, but there is also no evidence that bookers are being lost to the lock option. In fact, recent results suggest a positive impact on the look-to-book rate may exist when a "Hold" button is presented alongside a "Buy" button. It seems that the presentation of an option compels some people to simply book when they might otherwise have kept shopping, as if the subliminal signal of the option increases the perceived value of the current price.
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Economics
Options Away has created a complex algorithm to price millions of options in real-time every hour. The company correlates a range of real time and historical data points to forecast whether a fare is likely to rise, fall or stay the same. If the price falls, the customer abandons the option and purchases their flight at the lower price generating a 100% margin for Options Away. This is also true when the price remains the same. In the event of a price increase, however, the option holder expects Options Away to honor the locked-in price and, as a result, Options Away takes a loss equal to the new higher price less the old lower price less the price of the option. The company has designed and implemented proprietary automated monitoring and hedging tools in order to mitigate "out of the money" (OOM) situations, and customers are frequently delighted when they are offered alternate flights with better departure times or fewer stops.
The real kicker in the math, however, comes from abandonment of these OOM options. Unlike a true financial option where holders always cash in their winnings; the same is not true in travel. Just because a traveler locks in a fare to Las Vegas and the fare subsequently rises - he or she may choose not to travel after all. The traveler, in effect, is abandoning a profitable position because they have changed their mind about the trip. This latter case also produces 100% margin for Options Away. It turns out that people will pay a fee to essentially hold a price while they rally their friends to road-trip to Vegas. If the group doesn't rally, so be it.
The abandonment rate is one of many consumer behavior data points that the company has collected through nearly three years of TripLock transactions. In fact, Options Away is now able to predict the behavior of a consumer throughout the duration of their TripLock. This real-world data provides a significant market advantage over potential entrants, large or small, into the space, and positions the company to become the centralized marketplace for travel options as the market matures.
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Product Extensions
Rob and Heidi realized early on that selling TripLock options is just one part of the company's vast economic opportunity. Option holders are, in essence, travel planners. They have purchased an option to travel but have yet to book the specifics of their trip. The period between the purchase of the option and its expiration presents a powerful opportunity to market other travel products including hotel, car and insurance. The engagement rate with these travel planners is turning out to be quite impressive and has opened up a new and exciting revenue channel for the company. The company believes that its pre-trip marketing opportunity is differentiated from the myriad other providers (option holders have "skin in the game" in the form of the option price) and thus, are more likely to engage content from the company.
Finally, Options Away is amassing high quality data regarding consumer intent and the like. Imagine a customer who repeatedly purchases TripLocks on flights to Las Vegas but never takes the trip. Options Away recognizes this traveler as a Las Vegas fan and can use that knowledge to target promotions concerning trips to Las Vegas. In time, the aggregate value of this intent data could prove extremely valuable and Options Away has committed to investing in the infrastructure that will allow them to harvest that value.
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Performance
Options Away is on the cusp of hyper-drive. The Expedia rollout alone could generate upward of $10 million in revenue over the next year. Add to that a developing partnership with American Airlines, and the existing relationships with: Hipmunk, Kayak, Sabre, and CheapAir (among others) and the future is very bright.
Thayer Ventures invested in Options Away in April of 2015 and the company is forecasting a Series B raise (at a significant markup to the Series A) in the next three to six months. The company plans to use the additional capital to drive growth internationally and invest in its data and merchandising initiatives. To Rob and Heidi Brown the future is bright indeed and from their perspective, the best option on the table is to stay the course and steady as she goes.
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Correspondence: 25852 McBean Parkway, Suite 508, Valencia CA 91355
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