How to build a company using the psychology of incentives

Imagine you are the CEO of a large Company and you have employees that need to travel everywhere. You want to make sure they get the lowest prices but you don’t want to micromanage them.

So, how do you use psychology to incentivize them to find the best price? That’s what today’s guest has figured out.

Dan Ruch is the founder of Rocketrip, which gives businesses travelers an estimate of what trips should cost and incentivizes them to get the best price.

Dan Ruch

Dan Ruch

Rocketrip

Dan Ruch is the founder of Rocketrip, which gives businesses travelers an estimate of what trips should cost and incentivizes them to get the best price.

roll-angle

Full Interview Transcript

Andrew: Hey, everyone. My name is Andrew Warner. I’m the founder of Mixergy.com and we’re smiling because before each interview, I put my hand up to the camera so it picks up on my dark complexation. Dan did that too.

Hey, check this out. Imagine you are the CEO or the CFO of a large company and you’ve got employees who need to travel everywhere. One needs to go to New York, the other to Austin, etc. and you want to make sure that they get the lowest prices, but you’re not in the micromanaging business, right? So, how do you use psychology to incentivize them to find the best price for their trip without distracting them from the business they’re going to go do there?

Well, that’s what today’s guest has figured out. He’s come up with a way to incentivize employees to find the best rate for their trips and it helps him, helps his company and helps the employees who are doing it. His name is Dan Ruch. He is the founder of Rocketrip. It gives business travelers a precise estimate of what trips should cost and as I said, and as you’ll see in a bit, incentivizes them to get the lowest rates.

This interview is sponsored by two companies. The first will host your website. It’s called HostGator. And the second will help you hire your next great developer. It’s called Toptal, top as in top of your head, tal as in talent. I’ll tell you more about both of those later. First, Dan, welcome.

Dan: Thank you. Good to be here.

Andrew: What kind of revenue are you guys doing right now?

Dan: We’re a privately held company. We don’t disclose that.

Andrew: You told our producer—and I’m not going to give it away because it was a private conversation between you and the producer, but you did tell our producer something about revenue. Can you give us any sense of it?

Dan: What I can tell you is we’re a software business. It’s called SaaS. So every year, our revenue compounds. It’s recurring revenue. It’s a great business model. We are in our second year into this business model. We’ve been tripling revenue year on year. So, that’s what I can tell you about revenue.

Andrew: Can you say if it’s over $1 million, over $5 million, over $10 million, any of that?

Dan: It’s over $1 million and tripling year over year.

Andrew: Okay. All right. I mentioned the creative way that you incentivize employees. Can you give us a quick description of how that works?

Dan: Sure. Most of what we do at Rocketrip is based on the foundation of principles of behavioral economics, this concept of how can we motivate people to do things they wouldn’t otherwise do. There are a lot of folks in the space that do really good work academically on this, Dan Ariely and Daniel Kahneman are two of the forefront, most prominent academics in the space that talk about the difference between intrinsic versus extrinsic motivation and what makes human beings tick.

The best analogy I can give you is the loyalty economy in the hospitality and airline industry. If you’re loyal to a certain airline, if you’re a Delta guy, a United girl, specialty travel for business, maybe a Marriott guy, a Hilton person, we all do crazy things for points. We will all spend more or fly less conveniently or stay farther away for something of aspirational value, what we might get. We might get the upgrade. We might get the free Wi-Fi, the late checkout, the free breakfast. We want to belong to something. We want that status. That is a very, very powerful motivator and actually makes predictably rational human beings act in fairly irrational ways.

SO, the original concept of Rocketrip was why can’t we harness some of that power in a corporate environment? Why can’t we create fiercely loyal employees to the companies they work for. If you think about what an HR team has to motivate, the arrows in their quiver that they have to motivate employees, salary, vacation base, bonus, title and maybe profit sharing or equity in the company—what about the little behaviors?

What about community service or corporate citizenship or being healthier or spending less? Introducing micro-incentives to motivate employees to do something above and beyond what they’re paid to do or expected to do to do something extraordinary, that’s’ basically the founding principle of Rocketrip.

Andrew: Okay. So, you’ve gone broader than the product in your description. As I understand it with the product, if my boss, if I had a boss here at Mixergy, but if my boss said, “Hey, Andrew, go use Rocketrip to book your next flight to New York,” I could then go use the sites that I like right now like Airbnb and I think even Expedia, find the best rate possible and if I get a rate that’s lower than the software expects, I get to keep part of the savings in the company and the company keeps part of the savings. Am I understanding that right?

Dan: That’s right. So, today we’re focused on business travel specifically. We partner with the largest organizations in the world including organizations like Twitter and GE and Edmunds.com, many other. But we integrate with their travel management systems.

They’ll use a software management platform like Concur, a travel management platform like a Carlson Wagonlit or an American Express Business Travel, we partner with these providers to allow employees to use the exact same systems that they are used to using today that their companies have contracted for them to use or procured for them to use to book travel.

We provide them with a budget to beat. That budget to beat is a prediction of what that trip would have cost had there been no motivation to save for every dollar the employee spends below our budget because maybe they’ll take a connecting flight, maybe they’ll fly coach instead of business, maybe they’ll stay with a friend—half the savings goes to the company, half the savings goes to the employee.

Andrew: That’s exciting because you can’t, as a company, say, “Hey, I’m sending you to New York. Go stay with a friend.”

Dan: That’s right.

Andrew: It’s kind of awkward to say. It’s inappropriate to do as a business. But if they happen to do it because there was a financial incentive to do it, great. You both get to save. All right. That’s the idea behind it. You have a lot of experience in online companies and tech in general. You worked at TACODA. Am I pronouncing that? I never know how to pronounce the name. It’s all uppercase too.

Dan: TACODA, yeah.

Andrew: TACODA. Thank you.

Dan: A long time ago.

Andrew: TACODA used to do behavioral advertising, right? They would help target ads before Facebook did based on what we did online. What was your experience working there before they sold?

Dan: So, that was my first experience working at a venture-backed startup, which is almost diametrically opposed to working in a large organization in every single way. So, very little structure, very high pressure, a lot of fun, but startups aren’t for everyone. For me, I fell in love with the concept of TACODA. It was the first business model I’d ever encountered where everybody in the value chain won.

So, without going into the depth and detail about how online advertising works, TACODA was what you would call today an online advertising network. What we did was we bought inventory from publishers like The New York Times, the Wall Street Journal. We bought that inventory very cheaply because it was unsold inventories, inventory they couldn’t sell themselves.

We were selling it to advertisers like Procter & Gamble and Unilever and General Motors at a Premium because what we were able to do is collect data from other sites in our network and target to relevant users in non-relevant locations, which means that if you went to Yankees.com and then you went to the sports section on The New York Times, when you were on Cars.com, I could serve you an ad for Nike because I knew you were a sports enthusiast based on your prior browsing behavior.

You were seeing an ad that was relevant to you. You were seeing a sports ad instead of an ad for tampons. Nike was getting a discount on the inventory they were purchasing to target you and Cars.com was getting a premium on the advertising space that we were buying because we were able to get a premium from Nike much higher than they would have otherwise spent on network advertising.

Andrew: You were one of the early employees there.

Dan: Yeah.

Andrew: Is inappropriate to ask if family relationships—your dad was an investor in the company, am I right?

Dan: My dad’s fund was an investor in the company.

Andrew: Is it inappropriate to ask if the relationship there helped you get the job?

Dan: No, you can ask anything you want.

Andrew: Was it? Did it help?

Dan: Yeah, it helped. It helped me get an interview. It didn’t help me get the job.

Andrew: Then when you were in there—I’m sensing your vibe was changed because of that. Was that a little too early in our relationship for me to come up with that?

Dan: I love spontaneity.

Andrew: I looked up your dad, he’s super-impressive, started a fund back when you were born, right?

Dan: That’s right.

Andrew: You were exposed to his background.

Dan: You’ve done your homework.

Andrew: You know what? I had to look him up because you don’t mention your father’s name in articles written about you. So, I had to figure out what fund was started around the time that Dan was born. Here’s another one that I don’t know how to pronounce. Is it Rho Capital Partners?

Dan: Rho Ventures, yeah.

Andrew: Rho Ventures. Okay.

Dan: So, actually, the long story short is the guy who introduced me to that company was my dad’s partner, who is a gentleman by the name of Habib Kairouz, who is one of the smartest, most thoughtful venture investors I’ve ever met. When I was introduced to the company, I fell in love with the company. I like to think the company fell in love with me on my own merits and not my father’s. I proved myself there and we as a company did well and I as an employee did well and I eventually went up to work at the parent company, AOL, and we launched Platform A and I was running biz dev there.

The world has come full circle as I’ve started my company. I asked Habib Kairouz to come on to my board as an independent board member and he accepted. So, he actually sits on my board now.

Andrew: I see. What was it like to have your dad as a dad, someone with VC experience? I’ll tell you why. When I was a kid, my dad was an entrepreneur and I thought, “That’s the greatest. He’s an entrepreneur.” Then I became a teenager and I had all these questions about business and I realized the limits of his knowledge about business, that when I wanted to start a company—my dad used to manufacture women’s clothing. He got me a job working in the basement of one of the clothing companies in Midtown.

Then when I said I want to be an entrepreneur, he said, “You know what? I notice there are people who sell perfume outside.” My dad doesn’t listen, so I can say this out loud, but this bothered me forever. He said, “I notice there are people who sell perfume outside of the stores that I sell clothing to. Those people are independent entrepreneurs. I can help you get a stand outside of somebody’s clothing store.” I said, “This is not working.” So, I went and I got an internship.

I always felt like someone like you, who had a dad with experience in VC and entrepreneurship, that you would be able to soak up a lot of knowledge. What do you think of that? Were you able to? Share some of what you learned if you were.

Dan: Hell yeah. Both my parents were entrepreneurs. So, my dad started a venture fund the year I was born. My mom has been an architect, self-employed for the majority of her career and has done an incredible job and has had an incredible career. I’ve learned almost everything I know about business from both of them and very little from the last 15 years I’ve been doing it learning from experience. But absolutely is it an advantage and specifically in the venture space when your job is to analyze companies and help companies grow and understand what goes right and what goes wrong and why, a ton of knowledge that I got from him in terms of—

Andrew: Is there one thing you remember that you can—you’re right. One of the things I notice about VCs, even my friends here when we’re sitting and having beer—I happen to live in San Francisco, so I have a lot of VC friends—the way they analyze companies is so much different from the way that we do. We have very surface-level analytics. They think about it in a different way. Is there something that stands out for you about the way you saw these people think through businesses?

Dan: So, my dad is not a good example because his background is really in a different market sector than SaaS. There is a new model of software companies that are evaluated based on a set of metrics. It’s very new. Modern-day SaaS and the best SaaS investors—Bessemer and Canaan are on our board and I’d say are two of the best investors in the business—look at software companies and evaluate them based on unit economics that are very new, very unique and didn’t exist five or ten or 15 years ago as different sales techniques have evolved, there’s different ways to run businesses.

I think for my dad specifically what they got was a workhorse ethic and a real focus on learning as much as possible in the earlier years of my career. It’s not about how much money you make. It’s not about going to the job that is going to give you the best near-term outcome. It’s about going to the job that is going to give you the best foundation for the future of your career and that’s really what I learned from him.

Andrew: So what did you learn then working for a company that was then acquired by AOL? What did you learn before? What did you learn after that informs the way you think about business now?

Dan: What I learned is a couple things. Number one, you’re never too early in your career to start something. I’ve always had that chip on my shoulder, those that start companies know they want to start a company. They always have wanted to start a company and they always want to be the guy at the top.

I’ve always wanted to be my boss, not just my boss. I’ve always wanted to be the guy running the company and I just knew I had to do it. That was in me from the very beginning. So, I learned that at TACODA. When I looked at my boss and I looked at my boss’s boss and I looked at my boss’s boss’s boss and I said, “I don’t want to be any of you guys. I want to be that guy.” From there, it was just a matter of time to get there.

That’s not for everyone. I remember a very distinct conversation with my direct manager when we sold the company. I said to him, “Let’s go do something. What are we going to do now? We’re not going to work at AOL forever.” We both spent a couple months there and realized the writing was on the wall. This wasn’t going to be forever.

We came from a place where we sold TACODA, I think it was close to $300 million in cash and everybody got accelerated. It was an incredible outcome that the founders of the company negotiated. And credit where credit’s due, actually—one of the other guy’s that sits on Rocketrip’s board today was one of the cofounders of TACODA as well.

So, what I learned then is two fundamental things. Number one, not everybody is designed for nor wants to be at the top. I remember that conversation. I said to my boss, “Let’s do something together. Let’s go and start a company.” He said, “No chance. I don’t need that kind of stress or responsibility in my life.”

Andrew: Interesting.

Dan: And I did not understand for the life of me what he was talking about, but I’ve got to tell you, I understand exactly what he means now.

Andrew: There was a period in my life where I thought they were all wrong or missing an opportunity or blind to it and then I realized no, there’s a lot of logic to it.

Dan: Yeah.

Andrew: Not everyone wants it and it makes sense not to.

Dan: It’s hard. Work-life balance is hard. The stress of it’s hard. There are many days where I leave the office thinking, “Why do I need this?” Then the next day something incredible happens and you remember exactly why you’re doing it. So, that was the first thing I learned. The second thing I learned is that my network or your network is your most important asset if you invest in it the right way. Everything that’s gone right for the company today is a product of the hard work of that the team at Rocketrip is doing.

Andrew: By the way, your mic is snow hitting the collar. There you go.

Dan: Sorry about that. Today is a product of the hard work that the team puts in at Rocketrip, but the early days, I started Rocketrip with the guy that I met at TACODA, Gil Beyda, when I first started Rocketrip, he gave me a home at his venture fund to incubate Rocketrip. We birthed Rocketrip out of a venture fund and that was provided for me based on a guy that I had met two or three jobs ago.

We raised our first round with Canaan Partners. I met that guy, he sat on the board of Tremor Video, my last company. My first hires came through my network. The best hires, I think, come from my network. I think too many people, especially millennials and whatever they call the new ones these days, don’t invest heavily enough in a network, in your personal network, but it can pay off in spades if you do it right.

Andrew: I was trying, Dan, to figure out what you do to invest in your network because you are surrounded by people who you’ve known for a long time. Here’s one thing that I found out, which is huge but it’s still one thing. You respond to email obsessively. Apparently, you cannot allow the inbox to sit with like 20 or 50.

Dan: Who have you been talking to? Who’s teaching you this stuff?

Andrew: I do research. I look you up. There’s not that much about you, but there’s stuff on you online.

Dan: Fair enough.

Andrew: What I’m wondering is what—which is amazing. I will actually go 50 emails in my inbox and it eats away at me, but I can’t dig myself out. What else do you do that allows you to stay in touch with these people? Are you like a dinner party person where you organize dinners? Are you a trip person? What do you do?

Dan: I’m a pay it forward person. So, number one, I use this system. My system is LinkedIn. I engage obsessively. If we’re not already connected on LinkedIn, we will be soon. Everybody I meet, I connect with. LinkedIn is an automatic way to keep your network updated. Everybody that you meet when they go somewhere else, they update their profile and everybody stays connected.

Today, the value of LinkedIn has gotten diluted because everybody’s connecting with everyone. I get ten random people wanting to connect with me. I don’t even know who they are. And that’s not a great thing because it dilutes the power of the network. But that said, when you do invest in the network, it’s very, very powerful, number one.

Number two, I like helping people. I genuinely like helping other entrepreneurs get their businesses off the ground. I love connecting people with other people, number one, because it’s fun for me to do, number two, because it makes me look good. I like introducing smart entrepreneurs to my board members because my board members are looking for new investments and my buddies, who are entrepreneurs, are looking for capital. If I respect them, there’s nothing more fun for me than to help other people out.

The karma comes around. It has a funny way of working that way. So, today, fast forward to where anytime my sales team needs an introduction to a CEO or a CFO, chances are we can get one either through my network or the board’s network and generally speaking, it works and it’s a very powerful thing.

Andrew: All right. Let me take a moment to talk about my sponsor and then I want to come back and ask about this experience, this conversation that you had with a Googler that set you on the path that launched Rocketrip.

Dan: Sure.

Andrew: So, the sponsor I want to talk about is a company called Toptal. I had dinner with a guy named Drew Gorham, who said to me, “I use Toptal.” I said, “How do you use Toptal?” He said, “I’m a software consultant. I need to say yes to a lot of projects that come my way, but sometimes I say yes to projects that I don’t have people on my team to fulfill and I need people quickly who can join my team and help fulfill what I said yes to because I want to jump on good business.”

I said, “How does Toptal help you?” He says, “When a client asks for something that my team can’t do, I say yes if it’s close to what we do. I say yes, we can do it. Then I go to Toptal knowing that Toptal will not just have the developers we need or designers we need, but also Toptal’s extreme vetting will make sure those developers are like 10x’ers, not just good developers, but people who are the best.” So, that’s why he can say yes confidently and know that his clients are going to be taken care of. When he does bring people in from Toptal, often they are like full-time employees the way that they treat his customers.

So, if you’re out there and you’re running agency and you need more developers than you can handle on a regular basis or frankly if you’re a client of an agency and you want someone in house, you should talk to Toptal. I say talk because I’m going to give you a URL, but you should know the first thing they’re going to want to do with you is get on a call, understand what you’re doing, long-term, short-term project, what kind of developers you need, how many you need, etc. Then they’ll match you with the right people or, as I’ve heard from some listeners, in some cases they’ll say, “We’re actually not a good fit for you,” and I admire their honesty there.

So, the URL where you’re going to get 80 hours of Toptal developer credit when you pay for your first 80 hours in addition to a no risk trial prior of up to two weeks, that URL is Toptal.com/Mixergy, top as in top of your head, tal as in talent, Toptal.com/Mixergy. Dan, you guys are growing fast. You should keep track of Toptal. They’re phenomenal. Andreessen Horowitz invested in them because, well, Andreessen Horowitz needs to do that.

All right. The Googler conversation, what happened there?

Dan: So, I left my last my job without another job. I took the plunge. I had four business ideas I wanted to start and eventually, we will. But we—and I say we, remember, this is me and this guy Gil Beyda who’s at Genacast Ventures, which is the subsidiary seed fund of Comcast ventures—we’re sitting there trying to figure out what business to build next. We’d run out of ideas. There were three or four that I wanted to build. It turns out that for whatever reason, the timing in the market wasn’t right. They weren’t defensible enough or whatever it was. We decided not to do them. I’m excited about social psychology. My background is in psychology. I majored in psychology.

Andrew: I had no idea.

Dan: I worked at TACODA, this behavioral network. I’m pretty excited about behavioral psychology. I’ve read Dan Ariely’s stuff and Danny Kahneman’s stuff and Malcolm Gladwell’s stuff. I find it fun. So, I was trading these ideas in this concept of this loyalty program in the consumer space that we talked about. It just so happened I was having drinks at the time with a buddy of mine who used to work at Google.

I was telling him about this concept, that there’s got to be a way to motivate employees to do different things, to be healthier or be better corporate citizens or speak on panels or whatever it is and give them points. How can we use the loyalty economy? Starwood Points for companies was the idea. How can we create the same power of the Starwood Loyalty Program for their hotel chains have created but do it for companies and have companies issue points to employees?

He said, “Well, actually, it’s funny. That sounds pretty similar to what Google has built internally to manage our travel business. The way it works is the company predicts what your trip should cost and if you beat the price, they give you points. You can use those points to spend more money on other trips you take.

The light bulb went off. That just makes so much sense. Not only does it make sense, but it’s the perfect place to start. If you think about what business travel is, it’s the only area of discretionary spending in a company where employees act like consumers because it’s an emotional product, it’s a personal product. They’re leaving their families and friends and loved ones and going on the road. The company has to give them—it’s not like a laptop where you say, “Here’s your computer. Like it or not. Here’s what you’re using.”

It’s you have to travel from your home, to the airport and stay somewhere else, sleep in some other bed. The company can’t force you—they can give you guidelines and polices, but they can’t force that choice. So, just like you said, you can’t force an employee to do anything below policy, but you can motivate it. That’s what Google figured out back in 2008 and that’s where we basically got the original idea of what became Rocketrip.

Andrew: Can you productize an internal Google product? They didn’t have a patent on it or any restrictions on it or anything?

Dan: So, that was a risk. To your question can you, yes, we did. We built it very differently than Google built it, number one. Number two, the guy who built it at Google sits on our advisory board. His name is Mike Tangney. He’s based in Dublin. He’s helped us build our product in a different way than Google built it, but done so that it works not just for a place like Google but for every commercial organization in the world.

Andrew: So, Google was doing points. Are you guys doing points or are you giving back a share of the savings?

Dan: Both. So, we issue points. Points from a behavioral standpoint are far better than cash because non-cash incentives tend to work more powerfully. It’s counterintuitive because you’d think cash works better, but giving an employee points where they have to come and retrieve something of value out of the platform so that we don’t just give you cash and your paycheck goes to groceries.

We give you cash you can redeem through our platform or you can feed a family at Christmas that can’t afford to eat. You can take your family on vacation. You can remodel your home. You can do so many things with points. If I gave you cash on your paycheck, you’d forget about it.

The big difference between our program and Google’s program is that at Google, you can only use your points to upgrade on future business travel or go over budget on future business travel. With Rocketrip, we wanted to create a more powerful mechanism to drive behavior. So, what we’ve done is implemented the program so the benefits are personal. They don’t have to do with future business travel.

Andrew: I see. That makes more sense. I’d be much more incentivized by that. But just to be clear, you’re giving them both cash and points to the employee?

Dan: No. We’re giving them points that have cash value.

Andrew: I see. Okay. Then the company gets to save money and that’s cash to the company. Is that right?

Dan: That’s right.

Andrew: Do they pay you also? Is there a price for using Rocketrip?

Dan: There is.

Andrew: I see. Okay. So, they pay for that and then they get savings and they get to see how paying you compares to how much money they’re saving because they’re paying you.

Dan: Yeah. A typical company that we work with on average conservatively speaking will reduce their spend by about 20% each year. So, say your company spends $100 million a year on travel, we’ll reduce that by about $20 million. Your commitment is to give half of that back to your employees. So, you’re giving $10 million back to your employees. You keep $10 million in savings and we would charge you about $2 million to run that program. So you’re investing $2 million into Rocketrip to return $10 million in net savings.

Andrew: Is that a typical expense?

Dan: Is $100 million a year—

Andrew: You have companies who are paying seven figures to have you manage their expenses?

Dan: Sure.

Andrew: Really?

Dan: Sure. Besides payroll and rent—and usually T&E sits above rent—is the second largest producer of cost on a P&L. It’s a huge paint point.

Andrew: More so than insurance?

Dan: Companies globally spend—way more than insurance—companies globally spend $1.25 trillion every year on flights, hotels, cars and trains and it’s being spent by people who don’t care how much they spend. It’s totally discretionary. It’s other people’s money.

Andrew: I see. Wow. That’s huge.

Dan: Huge.

Andrew: So, first of all, when I say over $1 million, do you internally laugh at that? Do you say, “Of course, look at the size business, Andrew doesn’t have a good sense of how much our clients even spend?”

Dan: Some companies spend $2 million, $3 million a year on travel and some companies spend hundreds of millions and some companies spend billions. The biggest companies in the world spend over $1 billion every year on flights, hotels, cars and trains. So, if we can reduce that by several hundred million dollars, would they not invest a couple million dollars to drive that behavior? Of course they would.

Andrew: That makes sense.

Dan: Total sense.

Andrew: One thing that you did that I found that people here in Silicon Valley do especially well is you didn’t talk about the product as it is today. You didn’t even talk about the product that it’s going to be in the future. You talked about the bigger vision—points is a bigger vision. Then I had to come back and say, “Concretely, here’s the product as it is today.” I get why some people would do it. I’m wondering why you do it. Why are you thinking beyond travel if travel is so large already, if the product is working? Why think beyond travel to other usage and points and incentives?

Dan: Because we’re not a travel product.

Andrew: Why not be a travel product? What are you seeing that’s not. . .?

Dan: Because there’s companies that do it better than we do. Concur is a better travel business than we are. AmEx or Egencia or Carlson—these businesses are in the business of procuring and fulfilling travel for companies. I don’t want to be good at travel. That’s a commodity and it’s a good business to be in, but it’s not our business. Our business is the behavioral economics and incentivized behavioral change.

So, what I think is really sexy is understanding what makes people tick and how we can make them tick a little bit differently. If we can get it right in travel, then the world is our oyster in terms of where we go next.

Andrew: For example?

Dan: We can go to procurement and healthcare.

Andrew: Healthcare?

Dan: Yeah.

Andrew: You could incentivize employees to make better healthcare decisions about insurance but maybe even on how many times they see a doctor?

Dan: Or stop smoking or go to the gym or go for a hike or go for a swim or whatever it is or stop eating so much, to watch their weight. We can incentivize employees to stand on one foot if we want them to. It’s just a question of the value exchange. How much does the employee think they’re giving up in exchange for the reward that we are willing or the company is willing to offer them. With travel, it’s easy because ROI-driven. You know how much the trip is going to cost. Financially, you know what your reward is. It’s harder to put a price tag on the value of going to the gym an extra day or two a week.

Andrew: I see. That makes sense. So, you’re envisioning a Fitbit-like connection or something like that and then giving people points?

Dan: Yeah. Sure.

Andrew: The office building I’m in is the same office building that houses a lot of Fitbit’s offices. I see that they do competitions on a regular basis. Obviously, they’re using their products and I see them sometimes in the elevator competing with each other. I get the value of it. I realize that in their ideal mind, this is the way every company should work. People will feel bonded by competing with each other to be healthier and I also see that I’ve never had a friend do any of that. No one outside of Fitbit, as far as I know, does that.

Dan: So, this is something we spend a lot of time looking at is the difference between intrinsic motivation and extrinsic motivation. What you’re touching on is a really important point. It’s why leaderboards, it’s why gamification doesn’t work to change behavior when the choice between choice A and choice B is significant, when it’s negligible choice—there’s this famous study in Sweden where there’s an escalator and the stairs.

The government wanted employees to be healthier and take the stairs instead of taking the escalator and how do they do that? They created this sort of keyboard, this piano on the stairs. They painted the stairs, they put paper on it. It looks like a keyboard. Every time you step on a stair, it played music. That was enough, just that subtle change, that subtle benefit to an employee or traveler, where if I step on the stair, it will play a sound for me was enough to get people to stop using the escalator and take the stairs.

Why? Because human beings are lazy. We are biologically. We optimize for self-interest and maximum input/output of how much energy we expend. So, we’re lazy and if there’s an escalator, we’ll take the escalator. But we want to be healthier. We want to be healthy individuals because that helps drive longevity. We’d be willing to take the stairs for a very subtle nudge, for a very marginal increase in personal benefit.

But if I’m asking an employee to exercise more, that’s real physical exertion. I’m asking a person to fly coach instead of business when they’re allowed to fly business class. I can give them a leaderboard or I can’t expect that just a competition between peers is going to move the needle. I have to be willing to give them something more powerful to offset the cost of what they are giving up.

The stairs to the escalator is not that big a leap as far as behavioral change is concerned. Exercising two more times a week or driving a Fitbit competition or flying coach instead of business class—the reason that not too many people participate in these competitions is because the value exchange is too great, right? The increase in the time value of money, how much they value their own time. I could engage in this competition or I could go watch TV. They prefer to go watch TV.

Andrew: Right. Then at some point, you’re not at the top of the leaderboard, so who cares, right?

Dan: What’s in it for me? What’s the point?

Andrew: So, you’re going to solve that problem by giving them points, by giving them a reward that’s more acceptable.

Dan: We answer the question, what’s the point? You’re allowed to fly business class. Your predicted budget to be for this trip is $4,000. You’re allowed to spend $4,000. You’re even allowed to spend a little bit more as long you’re in policy, but I’ll play a game with you or I’ll ask you a question. Do you want to fly coach for $1,000, save the company $3,000?

I will pay you $1,500 to do it and the remaining $1,500 goes back to the company. Is that something you want to engage in. It doesn’t mean you’re a bad person if you don’t. Not every employee engages, but for those that do, it ends up saving their companies a huge amount of money and returns an awful lot of value that today is frivolously being spent with hotels and airlines and returns it back to employee pockets.

Andrew: I get it. One of my pet peeves with traveling is I hate layovers. I will not take them if I can avoid it, but if there was an incentive, I might think, “Well, I have some time to myself. I’ll sit there and watch videos or do some work.” I’m isolated. So, I’ll probably get more work done and then I can see myself taking a layover even though it’s not my preferred way of traveling.

Dan: Everybody’s different. This is personal. We talked about this. Travel is an emotional construct. I’m not like you. I don’t mind the layover, but I really don’t want to stay in a three-star hotel. So, maybe I’ll take the layover and stay in the four-star hotel and you’ll stay with a friend or an Airbnb but you’re going to fly direct every time. That doesn’t make us better or worse people. That just makes us different.

Andrew: I see. And you’re allowing us to each take the things that we’re willing to take but not eager to take because of the incentive. This is where I can see that you get really super-excited.

Dan: Yeah.

Andrew: All right. So, you told our producer, “Look, I have this idea. I knew where I was going with this, but one thing I did not want to do is bootstrap.” I’m wondering why that was such a strong statement from you.

Dan: Because my background is venture-backed startups. That’s what I know. I know how to scale companies. I don’t know how to build a company through just sheer blood, sweat and tear with no gunpowder for growth to hire people. God bless that do bootstrap and there have been some incredibly large, successful organizations that have been successful doing it. Most companies that bootstrap end up becoming great lifestyle businesses. It’s really hard to scale a business especially in SaaS without outside capital.

We went six months without raising capital because we needed to make sure we had a real product. Once we had a real product, number one outside capital is validation that there’s a real opportunity here. Number two, building a board of experts around us so that we have real advice coming in and we weren’t just sitting in the echo chamber of our own thoughts was really powerful.

Andrew: You talked about the MVP with our producer. What was in that minimum viable product that you took to Y Combinator and raised money? I see a big smile. That tells me there’s something interesting there.

Dan: The MVP was a working website that you put in your itinerary and it connected to Expedia’s free system that would tell you what all the options for travel were and we basically calculated a small percent above the lowest available option that we found and that was your budget to beat. It was really a proof of concept. It wasn’t a real viable product for any business.

Andrew: It didn’t work. It was just there as a demo.

Dan: It certainly wouldn’t work in today’s environment given what we’re doing and giving employees real value back. Back then, we operated on a performance pricing model where we gave the product away for free, so we weren’t charging anything for our product, basically telling clients, “Look, use this and if you save money, pay us 10% of whatever you save.”

So it was good enough to start having a conversation with clients, but we really iterated over the next six months and built a pretty defensible product that we issued a patent on with an algorithm that actually did a fair amount of predictive analytics in terms of what a trip should cost. So it was after YC and after we raised our series A that we started to get real momentum.

Andrew: I’m wondering why Y Combinator invested in you. I remember in the early days, Y Combinator would invest in someone with an idea. But by the time you got to them, they were looking for more than that. What was it about your idea? What was it about your minimum viable product that got them to say, “Yes, we want to be in business with this guy?”

Dan: So, we were the last batch that went through Paul Graham. I really got to know him and really got to like him. What he saw was what I saw, which was a market—in startup land, we talk about TAM, the total addressable market size. I come out of digital advertising and we got excited about a $90 billion total addressable market. That’s a big market. By any definition, that’s a big market with enough room for multiple players to have a bite of the apple.

Corporate travel is one in a quarter-trillion dollars global and it’s all antiquated. It’s highly consolidated by a couple of key conglomerates and very, very little innovation goes on. What we saw was this opportunity that is just so ripe for disruption, number one, and number two, it’s a completely defensible product because Google already proved that it works. If Google proved it in 2008 and continued to use it, by the time we applied to Y Combinator five years later, this was already a proven product.

So what they look at is what’s the risk. Like any venture investor. It’s not about getting excited about the idea. Anyone can get excited about an idea. Once you’re excited about the idea, it’s what’s the risk that this isn’t going to work. The biggest risk that it’s not going to work is that it doesn’t actually work. The people won’t eat the dog food. Google proved that the dogs eat the dog food.

So, we would already de-risk the big part of the value proposition and then the market segment is enormous. There isn’t a CFO on the planet that wants to control cost in a way that doesn’t create friction. So, it’s not why did they invest us. It’s why wouldn’t they have.

Andrew: I see. I get the vision there. Was it a tough interview with them?

Dan: No. It depends. It depends how you look at it. I had a lot of fun with it. You’re fielding questions aggressively for a very, very short period of time, 10-15 minutes.

Andrew: Once you were done—actually, how did Y Combinator shape the product, help shape the way you were thinking about your business.

Dan: For me, we were a little bit farther along. We’d already raised a bit of capital. Most people that go to Y Combinator haven’t raised anything and they’re looking for their first financing when they leave Y Combinator. We had already raised a couple million bucks going into Y Combinator. For me, it was much more powerful to leverage their network.

So, Paul Graham’s network got us our first few key customers, got us connected to Bay Area companies and Bay Area investors. I actually met Jeff Epstein at Bessemer Ventures for the first time at YC’s demo day and they didn’t invest in our A, but they did end up leading our B. So, again, it goes to show the value of the network. And also just the network of friends and individuals that are running companies that I’m still in touch with from my batch, a bunch of guys that are doing great work and in the Valley. So, for me, that was the real value.

But in terms of growing the product, I think actually that’s a criticism I would have of YC. I think they’re really sharpened and strong in terms of the network they can provide and the pay it forward. We talked about that, where YC alumni want to help other YC applicants because of this concept that we all got help back then, so we all want to provide help now.

But in terms of the individual advice they give you, it’s gotten so big now, something like 70 companies and now it’s well over 100. There’s only so much advice to go around and there’s just not enough time. So, I actually don’t recommend YC from the perspective of advice that you can get—their advice is pretty much cookie cutter. They want hyper-linear revenue growth and month over month growth rates of 20% plus. Either you have it or you’re a failure and it’s binary. That’s not the way I think businesses grow, but that’s the way they’ve trained their applicants to think.

Andrew: I’m looking at your investor list. CrunchFund was one of the investors. Why did you take money from CrunchFund, Michael Arrington’s fund?

Dan: Because he’s a known entity in the Valley and he lends credibility. We were closing what is called an accelerated round. So we raised some money. We were raising a little bit more money just because there was so much inbound interest. I thought that having Mike participate in some way would add credibility, definitely couldn’t hurt. So we decided to participate. I’m still very much in touch with his group. I don’t spend an awful lot of time with him, but I’m glad we did it.

Andrew: Are they still around? I can’t tell if they closed or not.

Dan: Well, their investments are still around.

Andrew: But they’re not making any more investments and he’s not involved in it?

Dan: I don’t know.

Andrew: I’m so fascinated by him. He had such sharp analysis. I’d have entrepreneurs on who said that one post of Michael Arrington would help make them back in the early days, but more significantly, his analysis of why their companies were going to succeed or fail was spot on and made them realize things they hadn’t thought about their own companies. They’re in it all the time. He’s cranking out like five to ten posts a day and he still had that. I had such high hopes for CrunchFund. I’m fascinated by them, but I don’t think he’s coming here and talking at all.

All right. Let me talk about my second sponsor and then I want to come back and ask you about that first inbound customer. I’m so amazed and impressed that you remember the first one that came to you without any connection before, the first cold one.

But first, I’ve got to tell people that when it was time for me to host my website, we started a new business, one that helps people create chat bots, I said, “Who do I get to host my site?” I thought, “I want someone that I can actually depend on, someone who does good work, someone who’s been around and not a fly by not operation. I don’t need to save money, but I like when I save money.”

So, I looked around and said let’s check out HostGator. Now, HostGator, the URL that I’m about to give you and usually promote here, is known for inexpensive hosting packages. In fact, if you want to start cheap, they’re really good—cheap, they work, you can have unlimited domains, unlimited email addresses, unmetered disk space, etc. So, really good, for less than $5 a month, you get that.

But we signed up and I said, “Give me the best, the top of the line.” One of the things I don’t talk enough about with HostGator is they scale up with you. They gave us dedicated server that we can count on. We had hundreds of people come to the website at the exact second. The site stayed up. The site works. We get all the features and all the benefits we want. Real professional operation.

So, if you’re getting started, go check them out and I’ll give you a link where you get a really low price, but when you’re ready to grow, grow with them, they have grown with us and I urge you to sign up for HostGator to host your website. One-click WordPress install—think about that. Super simple. Here’s the URL. Go to HostGator.com/Mixergy. Remember that gator, HostGator.com/Mixergy.

All right. Tell me about that first inbound person, came to you cold, wasn’t part of your network.

Dan: I was just thinking we started Rocketrip on HostGator, so there you.

Andrew: You did?

Dan: Yeah.

Andrew: That’s fantastic to hear.

Dan: There you go. Free publicity. That first inbound—someone on my team was speaking on a panel in New York City about women in management, nothing to do with Rocketrip, just about women in management. Because she was on a panel, they talked about, “Here’s my role, here’s what I do and here’s what Rocketrip does,” she had to introduce who she was. Someone in the audience fell in love with the concept. The next day, we had an inbound on our lead request form, which we got one a month on. It was a company in New York. It turned out to be Glenn Beck’s company, called The Blaze or Mercury Radio Arts back then.

We went in to see them. There was a guy, the CFO was sitting at the table with his entourage and it was us and it was our first meeting with somebody that was totally outside of our network because the first 10 to 15 deals, we close friends and family or people that we knew or introductions from our board. This was a company that we had never met before. This was totally cold outreach.

They basically said, “Look, I love what you do. I love the concept. I love everything this represents. From a financial ROI standpoint, it works. From a cultural ROI standpoint, having employees embrace a culture of cost-sensitivity in a way that’s not enforced, it’s encouraged. You enlist them as enthusiastic, cost-sensitive corporate citizens is such a powerful way to drive culture.”

So, they fell in love with the idea. That turned out to be a four-year relationship. So, it was a pretty exciting opportunity for us. It was when we really realized we were on—as I mentioned, we had a different pricing model. The business hadn’t taken off yet, but it was a really exciting opportunity for us to recognize that there was value beyond our network in what we were selling.

Andrew: The other thing that you mentioned in the pre-interview with us is that you think about the first customer you lost. I’ve never heard an entrepreneur talk about that. I know that it hurts, but I never knew anyone who took it as painfully as you did. How did you lose them and what did you feel at that time when that happened?

Dan: You always think about this. You remember your first win. You remember your first loss. I still remember the first employee that quit working here. I probably always will. It’s emotional because it’s tough to disconnect yourself. You spend so much time investing personally in the success of the organization that it’s hard not to take these things personally.

But the first customer that churned—churn is sort of tech talk for a customer that terminated or didn’t renew their subscription—turned us off because the product really wasn’t where it needed to be and they basically agreed to work with us to test the product. It was actually an interesting challenge that we had where as we talked about, Rocketrip is designed to predict expected behavior.

In this particular case, there was an employee that was travelling from a regional airport that had one flight a day that was direct to Chicago from this region in Pennsylvania, I forget where it was. There was one direct flight that was like $3,000 and there were a bunch of connecting flights that were like $200 or $300.

The only reason this employee flies out of a regional airport is because she was taking the connecting flights, but our policy set up was based on nonstop flights, so the budget to we gave her to beat was $3,000 and she ended up obviously saving a lot of money because she took the connecting flight.

I think the client at some level realized that number one, they were too small and saving money on travel wasn’t a material enough problem right now and number two, our product had a long way to go. So, I remember the day that they emailed and said, “Hey, we’re going to wind down here.” Like anything else, you learn not to get too excited about the good things and too distraught about it, too bent out of shape.

Andrew: You said you couldn’t sleep that night, literally?

Dan: Back then I certainly couldn’t. I don’t think I slept for a week.

Andrew: You couldn’t sleep that night?

Dan: Well, it was the first time someone had really challenged the integrity of my product. That sucks.

Andrew: I’m wondering why you take this stuff so seriously, why you care about starting a company on your own, why you care about fighting through all this, why do you care about when someone loses? I sometimes feel like entrepreneurs who succeed really big to your degree have a hole that entrepreneurship is going to fill, a hole in your heart. What is it? You seem like you’re well put together. Why are you battling?

Dan: You have to ask my therapist that. I have no idea.

Andrew: I feel like you’re introspective enough to know.

Dan: I just think it’s a chip on my shoulder, something I’m emotionally connected to.

Andrew: How did that express itself as a kid?

Dan: I was a very stubborn guy. I was the one destroying everything to figure out how stuff worked. I was taking apart everything. I was trying to force fit everything. I had a bunch of hobbies, interested in a ton of different things, but a real sort of lack of attention span. So, I’d get bored really quickly, move on to other things.

Running Rocketrip gives me the opportunity to duck into a bunch of different things in and out really quickly, right? So, one day, I can be working on sales, another day product, another day engineering, another day marketing, another day whatever it is, customer success, customer service, customer support. There’s so many different things to pay attention to here that you never get bored.

Andrew: I noticed that even as we were talking in the beginning, your knee was shaking. You couldn’t sit still for the conversation. I said, “This is a guy who needs to move around.” Do you have a stand-up desk?

Dan: I don’t, but I should.

Andrew: You should. Is my analysis of it right?

Dan: My knee was shaking just because I was excited to talk to you.

Andrew: I’ll take that too. But I do get the sense that you’ve got a lot of energy inside of you. Did you have good grades as a kid?

Dan: I goofed off in high school. I had really good grades in college. I started doing really well in school in college.

Andrew: Okay. That’s the end of my armchair psychiatrist. Let’s talk about then in light of all that, when you wanted to buy the domain Rocketrip—right now you own essentially the domain Rocketrip—when you wanted the one that had the two Ts, what happened?

Dan: So, this is a story. So, when I first started the company, I knew that I wanted the domain. I’ve always been cheap. I’ve got an Eastern European mother. Both my grandparents are Holocaust survivors, so survival instinct and being frugal has been in my blood and I didn’t want to pay anything for this website.

So, I came up with the name Rocketrip in my sleep, literally dreamt it up, woke up one morning. I’m like, “Rocketrip, that will work.” The domain was available with one T, so I bought it, but I knew that two Ts would always be an issue because people would misspell it all the time. And Rocketrip with two Ts was taken. It was parked in this whatever, some domain hosting service, this domain farm.

So, I email the guy and I pretend to be a college student working on a college project. I knew if he or she had any indication that I was starting a company, then he’d want a lot of money. So, if I asked if I could buy the domain if it was available. This guy or girl or whoever it was emailed—it was a guy because I remember his name now—he said that he was pretty sure that NASA was working on some consumer travel opportunities and he was excited about the domain. He’d sell it to me for $10,000. I said, “You’ve got to be kidding me. No, I’m not doing that.”

Then we launched the company. A year later, I reach back out. I go through—I think I went through GoDaddy to broker and buy the domain.

Andrew: I know what you used, you used Wild West Domains.

Dan: Something like that. I think Wild West Domains was the guys who owned it. I don’t know.

Andrew: Okay.

Dan: But I used GoDaddy. They came back and said, “The guy wants $20,000.” I said, “No chance.” A year later, he comes back to me through GoDaddy and says, “The guy who owns this is interested in selling it to you. Would you be interested in buying it for $40,000?” I wrote back and said, “I’ll buy it for $10,000.”

Next thing I knew, it was one of our large enterprise clients—we were getting complaints from our customers saying—until now, you went to a dead site, one of those weird marketing sites where you entered the wrong domains and a bunch of links come up. This guy had redirected Rocketrip.com to a gay porn Tumblr blog. So, every time one of my clients mistyped Rocketrip.com, they were staring at dick pics instead of staring at my website. That presented a real issue for us.

It turns out, you actually legally can’t do that. So, we were able to send him a cease and desist. I ended up getting the website for $10,000, exactly what I had originally offered. So, we eventually got the domain several years later, but I was able to get the price that I wanted.

Andrew: Several years. Yeah, I see. It doesn’t redirect right now, as far as I can tell, but it is owned by you. I’m going to tell you something private after we’re done about that domain.

Dan: Was that you?

Andrew: That you might not have noticed you need to adjust once you bought it. I’ll bring that up in private. I don’t want anyone to take advantage of it. So, you’ve built this thing up. You’re here. It’s working. At what point do you take the next step. At what point do you say we’ve got our model. We understand how human psychology works in business. We’re going to start expanding beyond travel.

Dan: I don’t know. I’ll let you know when I find out. For now, we’re head’s down. We’re focused on building the best product we can build and staying true to getting one thing done really right. This is a really hard business to build. It turns out that predicting what a trip should cost before it happens and getting it right for any employee anywhere in the world is really, really hard, but there’s real opportunity to do it and do it right. That’s what we’re focused on.

Andrew: The prediction part is hard?

Dan: The prediction part is hard. Understanding the value exchange of how much to reward the employee is hard. Getting an ecommerce platform that has good quality merchandise for employees to redeem is hard, but yeah, every part of it is really hard.

Andrew: All right. Anyone who wants to check it out, the website is Rocketrip.com and now feel free to have it with one or two Ts, it doesn’t matter. It will all work. I appreciate you coming in here and I’m also grateful to the two sponsors, HostGator, which actually hosted Rocketrip in the beginning and hosts my bot company. Go check them out at HostGator.com/Mixergy. And if you need to hire a developer or designer, go check out Toptal.com/Mixergy. I always mispronounce it or pronounce in a way that people don’t understand it, so I’ll say top as in top of your head, tal as in talent, Toptal.com/Mixergy.

Thanks, Dan.

Dan: Thank you.


Who should we feature on Mixergy? Let us know who you think would make a great interviewee.

x