(Bloomberg) -- It’s not every day an older and better-funded tech startup gets swallowed by a younger competitor. That’s what happened this month when online travel company Peek cut a deal to take on the technology, customers and some employees of rival Zozi.
The story of how the two companies became one has all the hallmarks of a Silicon Valley drama: executive-board conflicts, allegations of inflated financial metrics, and lawsuits involving the heirs to a multibillion-dollar hotel empire.
Zozi, founded in 2008, ran a website where travelers could book activities ranging from hiking trips in the Andes to craft beer tastings in Santa Barbara. It also sold software to tour operators to help them manage bookings. It raised around $60 million in cash and debt financing. Peek, which runs a very similar business, has raised $16.9 million since serial entrepreneur Ruzwana Bashir founded it in 2012. Now, Peek is the only one still in the tour business. The terms of Peek's deal to acquire Zozi's assets in April weren't disclosed, but two people familiar with the matter say the price was a fraction of the $125 million valuation the company had touted in the past. A pair of dueling lawsuits helps explain why the number is so much lower than the company's valuation.
Zozi's founder, T.J. Sassani, started the company after quitting his consulting job to travel the world. He was also chief executive officer. His LinkedIn profile describes him as an avid traveler, and he completed two Ironman triathlons and a solo cycling trip from Portugal to Italy. On March 29, he filed a lawsuit against KLP Enterprises, the Pritzker family's investment office and the company's largest shareholder. Sassani alleged that the firm went behind his back to arrange a sale after years of bullying him into working harder despite his regular requests to take time off to deal with a serious chronic stomach disease.
KLP sued Sassani on April 21, alleging he was often absent from work, improperly used a $5.7 million loan the family office had given him and had exaggerated Zozi’s success to investors. They want him to repay the loan. This week, a San Francisco state court judge issued a tentative ruling in favor of Sassani, and ordered arguments to continue on May 3.
Sassani and representatives for KLP declined to comment. Bashir said Peek isn't involved in the lawsuits.
While most of Zozi's assets now belong to Peek, Zozi will continue to exist to manage its liabilities. Elon Boms, a representative from KLP Enterprises, is acting as Zozi's CEO. The company's brand and website will be phased out and its customers transitioned to Peek, according to Bashir. Many of Zozi's employees were dismissed before the company was sold and some of the remaining ones have begun working at Peek.
One former Zozi employee, whose job was recently eliminated, said that under Sassani, the company was working on too many disparate projects at the same time and that senior managers had conflicting goals for the startup's future. Town hall meetings were held throughout the end of 2016 but employees didn't get a clear sense of the company's status until many of them were dismissed this year, said the person, who declined to be named because the matter was confidential.
According to another Zozi employee, Sassani attempted to raise $20 million late last year from investors in Europe and the Middle East. But Sassani failed to bring in fresh capital and the startup was nearly out of money, the person said. The employee is not authorized to speak on the matter because of the litigation and declined to be named. By early January, some of Zozi's existing investors, which included KLP, extended Zozi a $15 million lifeline in hopes the company would sell to a larger travel startup, but it didn't, the employee said. By the end of January, according to Sassani and KLP's suits, Sassani was fired by the board.
Sassani's lawsuit describes a struggle between him and Boms, who was then KLP's representative on Zozi's board. In 2011, Sassani was diagnosed with a chronic disease, the lawsuit says. In 2014, it got worse and he asked the board, which included Boms, for time off, but was repeatedly refused, he alleges. KLP's suit presents another version of events. The firm alleges Sassani misled the board and other investors about Zozi's revenue growth and told them he was about to sign deals with big tour operators that never materialized.
According to KLP's lawsuit, Sassani was terminated because he couldn't raise the funding necessary to keep the company going. Sassani's suit says he was sick and denied medical leave and terminated when he was unable to come to the office. By the end of January, Sassani was out.
The tour and activity market is worth nearly $150 billion worldwide, but more than 80 percent of bookings are still done over the phone and in person, said travel research firm Phocuswright. Zozi and Peek weren’t the first to try and build a marketplace for booking tours online, and in the last few years, larger competitors have emerged. In 2014, TripAdvisor Inc. bought Viator, a longtime tour company, for $200 million. And last year Airbnb Inc. decided to enter the industry with its Trips feature.
Phocuswright counts 176 tours and activities startups that have started since 2010. The market is deeply fragmented, made up of thousands of mom-and-pop small businesses. Activities cost a lot less than the other segments of travel -- hotels and flights -- so there’s less money to be made per sale.
“There’s no growth hacking in this business,” said Lawrence Hester, CEO of FareHarbor, another tours and activities startup based in Denver. Tour operators need to be signed up manually, one by one, he said. "You often have to spend 4 to 5 hours with your customer before signing them.''
In such a tough market, consolidation is likely to keep happening, Michael Coletta, Phocuswright’s head of research and innovation, said in a report. “The extreme fragmentation of small suppliers and varied breadth of inventory make the work highly daunting and painstakingly slow –and a slow pace of evolution is a notorious startup killer,” he said.
Bringing in Zozi's customers and technology will help Peek tackle that work, Bashir said. Thousands of customers will move over to Peek's software and eventually its consumer-facing website will take on the activities listed on Zozi.com.
--With Kartikay Mehrotra