It was Thursday, a few hours before the long Fourth of July weekend would begin, when FareHarbor co-founder Lawrence Hester stepped out of a meeting and his cell phone rang. "I think Zerve is going out of business," reported a co-worker on the other end of the line.
That seemed impossible. FareHarbor had a lot of competitors in the race to dominate reservation-booking software for the tourism industry, but Zerve was one of its biggest. The rival was just a year and a half removed from securing $20 million in venture capital funding. If Zerve was going under, that would mean hundreds of customers, from mom-and-pop kayak rental shops to New York City-based sightseeing tours, were up for grabs--and FareHarbor wouldn't be the only startup vying for them.
Hester cut his San Francisco business trip short and caught the next flight back to Denver--one that turned out not to have functioning Wi-Fi. "It was the longest flight of my life," Hester says.
While he was in the air, the scramble was already on. News of Zerve's implosion had spread quickly through the booking industry. FareHarbor's 35-person sales team was frantically calling and firing off emails to Zerve clients, trying to reach them before competitors could do the same. For the past three years, FareHarbor had been logging in a spreadsheet the small-business customers across the country that each of its competitors--namely well-funded rivals Zozi and Peek--served. Now that legwork was paying off.
What started as a long day on June 30 turned into the craziest week of FareHarbor's existence. When employees weren't sleeping on air mattresses in the office, they were chugging Red Bulls and giving 2 a.m. product demos for prospective customers several time zones away. The competition got ugly: FareHarbor and Zozi aired their sides of the story in blog and Twitter posts containing thinly veiled barbs.
At the end of it all, FareHarbor, a four-year-old family-run startup, successfully scooped up most of the pieces of its failed rival, a 13-year-old company that had more than 500 customers. The startup wound up with nearly two-thirds of Zerve's clients--and about 90 percent of its total sales. Here's how it all went down.
The Aloha State.
Lawrence and Zach Hester grew up in chilly Wayzata, Minnesota. Lawrence, five years older than Zachy, as he refers to his younger brother, graduated from Brown in 2006. Zach ventured a bit further and enrolled at the University of Hawaii.
They came up with the idea for FareHarbor after Lawrence visited Zach in Hawaii. The elder brother wanted to reserve surfboards, boats, and kayaks online the way you could book a hotel room. But this was 2011, and he found that most tourism businesses either didn't take online reservations at all or relied on wonky systems they'd created themselves. After some research, the brothers realized that existing software systems catered to much larger operations and were too expensive and complicated for these mostly mom-and-pop businesses. "What they really needed," Lawrence says, "was a simple software that could help them with online sales."
The pair pooled just over $100,000 of their own money and investments from friends and family. They hired three developers, including one of Lawrence's old buddies from middle school. While the coders went to work, Zach landed the company's first client through a friend, a sailing tour company on Oahu's north shore. "Then I called everybody and said, 'I guess we have our first customer,'" Zach says. 'We need a product.'"
Days later, FareHarbor, based in Honolulu at the time, went live with one client on board. The software was designed to integrate into a tour operator's or rental company's website, allowing customers to make reservations without leaving the page. It was free to sign up, but FareHarbor took a 6 percent fee from each transaction--thus giving clients the chance to try it with no downside.
In the first year, Lawrence and Zach slowly built up a modest roster of 25 Hawaii-based clients, including a parasailing company, a scuba and snorkeling business, and a horseback-riding company. They made it their policy to meet with all prospective clients in person, even if it meant hopping on a plane at the last minute.
The company could grow only as quickly as its tiny team could work--it was still the three developers building the software and the brothers handling sales, customer support, on-boarding, and a handful of other functions, unbeknownst to their clients. In one instance, a new golf client asked the founders for the logos to be shifted on their personalized invoices. "Sure," Lawrence and Zach told them. "We'll get on the phone and call the developers." The brothers opened Excel, shifted the logo, and sent the invoices back.
By June 2014, 18 months after launching, FareHarbor had 86 clients--85 of which were located in Hawaii. It was time to launch a full-scale effort on the mainland. To help lead the effort, the brothers tapped Lawrence's college buddy Max Valverde. Valverde was a mechanical engineering grad selling credit card machines on commission and inventing products on the side. (His reverse shower cap Morninghead made it to Shark Tank but the Sharks hated it.)
He looked at the software the Hesters had built, and what they were competing against. He was impressed--FareHarbor had created "a non-sexy product with real world functionality," minus VC funding to boot, he noted. Valverde came on board as the startup's chief operating officer and opened the company's sales office in Needham, Massachusetts.
Over the next two years, the startup grew from 86 clients to over 2,500 and from a handful of employees to more than 100. It opened an operations office in Denver and a software development office in San Francisco. In an industry with several well-established, VC-funded competitors--Peek ($16 million), Zozi ($44 million), and Zerve, among others--bootstrapped FareHarbor had become a formidable competitor.
At 1:25 p.m. on Thursday, June 30--on the cusp of what was typically her busiest weekend of the year--Kat Nazar received a foreboding email. With her husband, Joe, Nazar runs San Francisco Whale Tours, a company that pulls in about $1 million in revenue annually, and two other boating ventures. A Zerve employee told her that she appreciated Nazar's business, but she wanted to apologize.
Something was about to happen. But it wasn't clear exactly what.
"It was really scary," says Nazar. She called Zerve frantically, trying to find out if she was about to be left high and dry before the Fourth of July weekend, which usually nets her about $70,000 each year. She couldn't reach any of her usual contacts or a supervisor who could explain what was happening.
A few hours later, a mass email went out to Zerve's 500 clients. "Currently," it read, "we believe we will need to discontinue our services next week ... We deeply apologize for this and we have been working tirelessly to avoid this situation, but unfortunately this is now our reality."
"Right away," Nazar says, "the vultures started coming." Before she could even warn her staff, the phones at all three of her boating businesses started ringing off the hook. Other booking software companies including Peek, Zozi, and FareHarbor were calling to pitch themselves as the system that would save the day as Zerve crumbled.
In Massachusetts, FareHarbor's Valverde was at a doctor's appointment with his 10-month-old son when his team called him and told him the news. The staff was already getting phone calls from panicked Zerve clients, some of them crying. The team, made up of mostly early 20-somethings, was trying its best to calm "Zerve orphans"--while also trying to tactfully lure in their business.
With the next day scheduled to be a company-wide day off and a four-day weekend upcoming, management asked anyone who could stick around to do so. FareHarbor staff started canceling weekend plans. Lawrence's father took off from Minneapolis and Zach from Honolulu to join Lawrence and his two other siblings--all company employees--in Denver.
As the team continued to work its way down the list of Zerve customers to target, they discovered some had already switched to competitors. Two rivals, Zozi and Reservation Genie, were offering to waive monthly fees for all former Zerve customers.
Valverde decided against using any sort of deal sweeteners. Instead, he told his team to target Zerve's largest, most lucrative clients first and to pitch them on FareHarbor's customer service and software. The company set up a page on its website for Zerve customers with a FAQ section and a continually updated account of the latest developments--and let clients know they had staff available to answer questions around the clock.
By the end of Thursday, FareHarbor was closing in on 100 new customers. By FareHarbor's count, Zerve had begun the day--"Z-Day," as it's now called--with 549 clients. That left hundreds of businesses to pin down. And now, rumors were circulating that Zerve was going to shut down by Friday night. It quickly became clear that FareHarbor needed more time if it was going to make a solid go at cornering most of Zerve's business.
Let's make a deal.
Around 1 a.m. on Friday morning, Lawrence and Valverde came up with an idea to make more headway and literally buy FareHarbor more time. Later that morning, the team contacted Scott Newman, Zerve's founder and executive chairman, whom Valverde had met previously at a conference, and gave him a proposal: FareHarbor would give Zerve some cash to keep the lights on--but the failing startup had to keep them on for another week.
FareHarbor wasn't the only one that showed up looking to make a deal. San Francisco-based Zozi had tried over the last nine months to acquire Zerve, but couldn't come to terms on a deal. Now, Zozi founder and CEO T.J. Sassani was getting radio silence when he reached out to Zerve's execs.
What's not entirely clear is why Zerve withheld information about its solvency from its clients until the final hour. Zerve CEO Michael Buhr did not return Inc.'s multiple requests for comment, nor did Zerve investor and board member New Atlantic Ventures VC Thanasis Delistathis. Founder Scott Newman indicated through a representative that he didn't wish to speak to Inc. for this story.
In the end, Zerve accepted FareHarbor's offer of cash. The startup wired over $100,000--enough to keep Zerve afloat for seven more days. In its farewell email to clients, the company recommended FareHarbor as a new software provider.
On July 4, a frustrated Sassani resorted to posting an open letter on LinkedIn, in which he offered to keep Zerve's operations afloat for another 60 to 90 days. In it, he addressed Zerve's clients directly and without naming FareHarbor referred to "pressure and scare tactics" being used against them. "I can't bear to stand idly by," he wrote, "and witness the very fabric of this industry, and the integrity that so many of us have worked years to uphold, be eroded because of the actions of a disingenuous few."
An industry executive referred to a merchant who called the deal an "under-the-table payment."
Rezdy, another activity booking software company, sent an email to Zerve clients on July 2--which was then forwarded to Inc.--calling the situation an "arranged marriage" and claiming that FareHarbor had paid for customers' information without their consent. Rezdy did not return a request for comment.
Lawrence insists that no customers were transferred, and no data was exchanged, without the clients opting in. "It took so much hard work and so many calls to get these people up and running," he says. And he dismisses the idea that there was anything shady or disingenuous about the dealings.
"We had to do all of the same hard work that everybody else had to do. I think what differentiated us," he says, "was that we were the company that was actually fully staffed that Friday and all the way through the Fourth of July weekend."
A week of insanity.
Across FareHarbor's four offices--Honolulu, San Francisco, Denver, and Needham--it was all hands on deck for the next week. Once clients were signed up, the work was only just beginning: The reservations they'd already booked with Zerve had to be transferred to FareHarbor's database by hand so as to not lose any precious information. Each new client also needed a demo by phone, which often lasted more than an hour--and, in some cases where time zones differed, took place at 2 a.m. During all this, the company still had to service its existing client base of more than 2,500 businesses.
At the Denver office, Lawrence and Zach's father served as both a leader and motivator. "He was going to bed later than all of us," Lawrence says. "Then we'd arrive back at the office and he'd already have the coffee and doughnuts ready to go."
In Needham, where the office has a shower, the staff brought in 20 air mattresses. Many workers stayed through the night. They came up with inventive cocktails combining Red Bull and 5-Hour Energy.
No orders to stay at the office were ever given, Lawrence says--only a general request to pitch in. In all, 90 percent of the FareHarbor work force came to the office through the July 4 weekend and continued into the following week.
"There was definitely a FOMO factor," Valverde says. "People wanted to be a part of it. They knew it was something that would be talked about for a long time." There was another acronym in play, Lawrence says, and one that's become the unofficial company motto: "DWIFT," or "Do Whatever It Fucking Takes."
"It was one of those things where we said, 'We have to do this,' " says Mark Loh, a FareHarbor account executive who canceled his trip back to his New Hampshire hometown to work through the weekend in the Needham office. "Nobody was prepared for that exact scenario, but we all just wanted to do what we could, and we wanted to knock it out of the park."
So what exactly caused Zerve to fail so spectacularly--and so suddenly? Valverde has a theory. It was well known throughout the industry, he says, that when Zerve received its recent $20 million round of funding, it then slashed its commission rate from 10 percent to around 3 percent in an apparent attempt to gain a huge market share. Nazar, the whale tour company co-founder, confirmed that her fees dropped. Zerve also was covering its client's credit card fees, which usually run between 2 and 2.5 percent--leaving it with razor-thin margins on many of its transactions.
Zozi investor and board member Elon Boms argues that Zerve's move to cut its commissions was wholly unnecessary. At least two-thirds of the more than 30,000 tourism-related businesses in the U.S., he estimates, still don't have online booking. "This market is one in which most companies are not buying share right now. There's a lot of space to grow," Boms says.
If you're wondering what Zerve's board and investors might have thought about the company taking $100,000 instead of securing an acquisition, so are we. But since no one from Zerve will return our requests for comment, it's one we can't answer. Inc. also reached out to two Zerve backers--DFJ Venture and New Atlantic Ventures--and didn't receive comment.
In the end, FareHarbor snapped up 340 of Zerve's 549 clients, which amounted to nearly 90 percent of all its transaction volume. FareHarbor, which has pulled in $10 million in total revenue through July 2016, expects to approach $30 million by the year's end. Lawrence says it processed $500 million in transactions in the past 12 months and projects that total to surpass $1.5 billion in the next 12 months. In all, the company increased its business volume by 20 percent in the course of a week.
FareHarbor says it now has around 3,000 clients--about as much as its two largest competitors combined. A look at the top line, however, shows that FareHarbor is still the underdog with its work cut out for it. Forbes put Zozi's 2014 revenue at $118 million.
"There are no shortcuts in this industry," Valverde says. "I'll admit I've looked for them. Lawrence and Zach have." He also mentions that FareHarbor has made a deliberate decision not to spend money on things like a decked-out office that screams "startup." "We get a lot of young people coming in thinking, 'It's a startup, this is so much fun! There's gonna be skateboards in the office.' And then they come in and there's nothing on the wall and all Ikea tables."
"That's generous," Lawrence says. "Here in Denver, as conference tables we have two picnic tables that I ordered on Amazon Prime."
He credits FareHarbor's scrappy, DWIFT mentality for the reason why so much of the team was willing to drop everything during the company's week of chaos.
And it hasn't gone unrewarded. Each employee received a monetary bonus that varied based on how much time they spent at the office during Z-Week--up to a month's worth of pay. Lawrence hints that there's more coming.
"I'm sure we'll have a FareHarbor Fourth of July at some point," he says. "We need to make it up to them."
Correction: An earlier version of this story mischaracterized the attribution for the statement about the FareHarbor payment being "under-the-table." An executive was referring to a merchant who used this term to describe the deal. The earlier version misstated Zozi's venture funding; the company says it has raised $44 million to date. Inc. has also updated the description of FareHarbor's and Zozi's blog and Twitter posts to clarify that both companies used such posts to air their sides of the story. Inc.com apologizes for the errors.