THE VA­CA­TION PRE­DIC­TOR

While many bank on AI pay­ing off in the fu­ture, one of the world’s hottest apps, Hop­per, has raised $84 mil­lion by mon­e­tiz­ing it right now.

Forbes - - CONTENTS - BY KATH­LEEN CHAYKOWSKI

While many bank on AI pay­ing off in the fu­ture, one of the world’s hottest apps, Hop­per, has raised $84 mil­lion by mon­e­tiz­ing it right now.

One of the most cut­ting-edge travel apps in the world makes its home in a de­cid­edly old-fash­ioned set­ting: an ac­tive zinc fac­tory in Mon­treal’s for­mer gar­ment dis­trict. Walking through a maze of sput­ter­ing ma­chines and chem­i­cal vats, Fred Lalonde, founder and CEO of Hop­per, the world’s fastest­grow­ing flight-book­ing app, ex­plains why he has rented the space since 2009. “As bad as this place looks, it was prob­a­bly the smartest place to start a data cen­ter,” he says. The build­ing is pow­ered by a hy­dro­dam, part of a Cana­dian sys­tem that de­liv­ers a sup­ply of cheap elec­tric­ity and a per­fect match for an en­ergy-hun­gry startup mak­ing a big-data bet: that AI-driven rec­om­men­da­tions can make travel more af­ford­able and per­son­al­ized than what peo­ple can craft for them­selves.

Un­like most other travel sites, which gen­er­ally want you to book right away, Hop­per is pred­i­cated on pa­tience. “Think of an e-com­merce site that tells you 70% of the time, ‘Don’t buy,’ ” says So­phie For­est, a part­ner at Brightspark Ven­tures, the startup’s first in­vestor. “Hop­per is that anom­aly.” Aimed pri­mar­ily at the leisure-travel mar­ket, the app uses a so­phis­ti­cated al­go­rithm to pre­dict the best deals and times to fly and buy—alert­ing users at the op­ti­mal mo­ment, well be­fore prices go up or down by spe­cific amounts.

Since its launch in 2015, Hop­per has be­come the most for­mi­da­ble new­comer in an $800 bil­lion flight mar­ket dom­i­nated by Ex­pe­dia, Lalonde’s for­mer em­ployer, and Book­ing Hold­ings (pre­vi­ously called Price­line), and now boasts more than 20 mil­lion users.

In Jan­uary, Hop­per was the fourth-most-down­loaded travel app in the U.S., after Uber, Lyft and Airbnb. The 120-per­son com­pany, led by Lalonde, 44, and co­founder and CTO Joost Ouw­erk­erk, 46, gen­er­ated about $15 mil­lion in rev­enue last year by sell­ing flights, al­most en­tirely through push no­ti­fi­ca­tions.

Cus­tomers buy more than $1.5 mil­lion in flights per day across more than 300 air­lines, and give Hop­per a $5-per-ticket fee (air­lines pay a 1% to 4% com­mis­sion). Hop­per says cus­tomers save an av­er­age of $50 per ticket and claims its air­fare fore­casts are 95% ac­cu­rate up to a year in ad­vance. Mean­while, Kayak pre­dicts flight prices only seven days out, and many com­peti­tors, such as Google, in­di­cate whether prices will go up but not whether a bet­ter deal is com­ing.

Ex­per­i­ments were part of Lalonde’s child­hood in Que­bec City, where his fa­ther, a bi­ol­o­gist, reg­u­larly brought home new com­put­ers, which Lalonde used to learn to pro­gram. In­stead of at­tend­ing college, he moved to Los An­ge­les in 1993 to start an on­line air­fare-tick­et­ing com­pany called Travel On­line be­fore the launch of Ex­pe­dia. Un­able to raise fund­ing, he moved at age 23 to Mon­treal to be with his girl­friend (now wife), nov­el­ist Do­minique Fortier. Soon after, he built New­trade Tech­nolo­gies, which re­placed faxes be­tween ho­tel reser­va­tion sys­tems and book­ing sites with soft­ware; it was ac­quired by Ex­pe­dia in 2002.

As an Ex­pe­dia ex­ec­u­tive over­see­ing ho­tel prod­ucts and deals, Lalonde was struck that there weren’t bet­ter ways for peo­ple to dis­cover places, not just prices. In 2006 he left to build a des­ti­na­tion site, tak­ing Ouw­erk­erk, Ex­pe­dia’s prod­uct man­ager, with him. The jour­ney was a long one: For the first few years, they lacked the cap­i­tal to build pow­er­ful servers but be­gan mak­ing deals to col­lect flight-price records and travel data. In 2011, Se­ries A fund­ing en­abled them to build a long-term data cen­ter. By 2013 they had enough data to start build­ing al­go­rithms. Hop­per.com launched the next year.

Traf­fic soon flooded the web­site, but peo­ple were in­ter­ested only in one small sec­tion: flight

fore­cast­ing. Lalonde re­al­ized users didn’t want to pick a des­ti­na­tion un­til they knew flight costs and de­cided to shut down the web­site to work ex­clu­sively on air­fare pre­dic­tion. His other key di­rec­tive: Hop­per would ex­ist only on mo­bile. In 2015, Hop­per re­leased its app.

Hop­per has raised $83.6 mil­lion in ven­ture fund­ing from firms such as Ac­com­plice and Omers Ven­tures (the com­pany was val­ued in late 2016 at about $300 mil­lion), and it’s poised to be­come much larger. Pur­chases driven by AI—for ex­am­ple, sug­ges­tions to travel on dif­fer­ent dates or to dif­fer­ent lo­ca­tions—now drive 25% of sales, up from 5% in Novem­ber. The AI knows, for ex­am­ple, that Hop­per users watch­ing a flight from New York to Hawaii are more likely to end up pur­chas­ing a flight to the Caribbean. Over time, Lalonde ex­pects AI to gen­er­ate 75% of pur­chases.

“If I’m watch­ing a trip for a fam­ily of four in Salt Lake City in Fe­bru­ary, Hop­per knows, ‘Oh, I want to ski,’ ” says Jeff Fag­nan, a part­ner at Ac­com­plice. “What hap­pens if I shift you to Den­ver in­stead for $100 less? They’re chang­ing the whole sup­ply-and-de­mand curve of the in­dus­try.”

Most users are spon­ta­neous Mil­len­ni­als, like Morgan Avery, 24, a re­tail co­or­di­na­tor in New York City. Avery started us­ing Hop­per after she snagged a $164 round-trip ticket from New York to L.A. She got an alert at din­ner and pur­chased on the spot. “Hop­per al­most guar­an­tees I get the cheap­est op­tion,” she says. “It’s the worst thing to book a flight and see the next week that it’s dropped $200.”

In late 2017, Hop­per ex­tended its fore­cast­ing and book­ing tool to ho­tels, likely an even larger busi­ness op­por­tu­nity. The app now of­fers over 200 ho­tels, typ­i­cally sold at a 10% to 15% dis­count in five ma­jor U.S. cities, and aims to make ho­tels avail­able in 15 more cities in the next six months.

Hop­per’s flight deals, “Se­cret Fares,” de­buted in Jan­uary and en­able air­lines to fill lower-cost seats faster, al­low­ing more time to sell last­minute and busi­ness-class tick­ets, the main rev­enue driver for air­lines. The tool sells seats at roughly a 10% to 20% dis­count.

To­day Hop­per is fo­cused on in­ter­na­tional growth (users can buy flights in more than 160 coun­tries) and adding ho­tels. Lalonde ex­pects head count to dou­ble to more than 200 peo­ple by the end of 2018, mainly in data sci­ence, en­gi­neer­ing and cus­tomer ser­vice. In a world that’s be­com­ing more iso­la­tion­ist, Lalonde thinks Hop­per can make travel cheaper and more con­ve­nient.

“Our AI is get­ting peo­ple to start shop­ping ear­lier and buy things they didn’t know they wanted,” he says. “We’re no longer just a bet­ter mouse­trap.”

Flight plan­ners: Co­founders Lalonde and Ouw­erk­erk en­vi­sion Hop­per as an al­ways-on “leisure com­pan­ion,” au­tomat­ing how peo­ple find new ac­tiv­i­ties lo­cally and on va­ca­tions.

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