Serial entrepreneur Hong Qinghua founded online travel agency Lvmama in Shanghai in 2008. It caters principally to independent travelers, a category that was neglected earlier. In a very short while, Lvmama has acquired around 10 million registered users and expects revenues of 2 billion yuan (US$320 million) in 2012. It’s a tough market where a price war has broken out. This is not good for the industry, says Hong. But it does eliminate the weaker players. He expects Lvmama to survive because it offers a differentiated product.

Lvmama is a late entrant. But it is growing apace. The company went national in 2010 and operates five branch offices in Beijing, Chengdu, Guangzhou, Huangshan and Sanya. It began setting up offline stores in 2011. Hong, in his late thirties, sees a bright future for both his company and the industry. “I think what’s absent in China’s travel market is not demand, but supply,” he says in this interview with China Knowledge at Wharton.

Below is an edited version of the interview.

China Knowledge at Wharton: Lvmama has had investors with strong industry background from the beginning. It has also grown very fast and without any hiccups. How and why did Lvmama have such a smooth passage?

Hong Qinghua: There are several reasons. First, we adopted a differentiated strategy. Our position from day one was to be the best service provider for China’s DIY – do it yourself — travelers. [The DIY traveler – part of the jargon of China’s travel trade — refers to those who travel independently and not in organized groups]. When we started, most of the agencies in the market were one-stop travel service providers like Ctrip or travel information search engines like Qunar. There were no scalable online service providers for DIY travelers. 

We saw the opportunity. But where could we start from? We decided that the destinations would be the starting point. At that time, tickets for independent travelers were expensive and there were no discounts. Independent travelers not only buy tickets, they also need to dine and lodge. They buy other tourism products. [Discounts come through aggregation.] Over time we have integrated travel spots and independent travelers.

Second, we researched the trends in the market. In 2008, the major trends in the travel market were an increase in the number of leisure and independent travelers and the growing demand for more personalized services. A report released last year by the National Tourism Bureau has shown we were right; in 2011, group travelers accounted for 6.3% while independent travelers were at 93.7% of total travel. Things were definitely very different back in 2008. So we caught the tide and the trend. That’s the reason for the strong growth of Lvmama in the past few years. 

Besides, Lvmama is my third entrepreneurial project. The first two were in the same domain; they were about services for travel destinations including planning, design, consulting, marketing and operations management. We know about travel and have accumulated a lot of related resources. Lvmama is just one part of our Joyu International Tourism Operation Group. The other subsidiaries include KChance Tourism Planning & Consulting Institute, which has been undertaking planning and design for travel destinations from 2004; Joyu Tourism Development Company, involved in destination operations management; and Joyu Tourism Marketing Service Company, which handles marketing and promotion for destinations. Our group’s business model is B2B2C as we work for travel destinations on the one hand, and for travelers on the other. We have several B2B service providers behind Lvmama to support its business. In nearly a decade of building up these companies, we have a great talent team that is crucial for a startup. 

China Knowledge at Wharton: What problems did you face in setting up Lvmama? 

Hong: We had the same problems all startups face. For example, in the beginning, it was not easy to sign contracts with travel destinations. We knew a CEO of a major travel destination in the Yangzi Delta Region very well. We had worked together before. When we called him in 2008, he said “this is a new business model and we need to research it”. It took one year for a second phone call. Then he said: “if I give you this price, the offline travel agencies will be unhappy.” In 2010, the third year, after Lvmama had already cooperated with some other travel spots around his, his attitude changed. “This is an interesting model,” he said. “We should go ahead.” So it took three years for him to change his mind.

In general, entrepreneurs need to be positive and optimistic. This is very important as there will be a 1,000 reasons to make you fall, and only one reason to keep going. You must have a strong heart as you will hear negative news every day. The finance manager says that the cash flow can keep the company going for only two more months. The HR manager says he can’t hire the people you want as the company is not known well enough and the package is not attractive. Someone else says the regulators want to meet you. There are barriers — external and internal – everywhere. So the entrepreneur has to ensure he has positivity, persistence and confidence. 

China Knowledge at Wharton: The Internet has many startups. Few survive. What advice would you give entrepreneurs today? 

Hong: First, the project has to be different. There is no opportunity for platforms [a portal offering everything]. In a market where there are already major players, don’t compete head on. Look for the next blue sea, and find a differentiated strategy to outflank the giant. 

Second, you have to build a team. Different industries have different talent needs. At online travel agencies, good product managers and professional marketing people are crucial for success. 

China Knowledge at Wharton: How did Lvmama build its executive team? 

Hong: KChance, Joyu and Lvmama have different teams. In 2008, I invited Li Dan, the CEO of KChance, to take charge of Lvmama. He started to build the talent teamfor Lvmama. Our chief technology officer is from eBay. Our chief marketing officer is from Allyes [an online adsservices provider in China]. We also looked for people in the traditional travel agencies. 

Every company has its own growth route and team-building path. You can also have great products first and then look for good people from the market. Every company has its gene. 

China Knowledge at Wharton: What’s the gene for Lvmama? 

Hong: Understand the market, shape a differentiated strategy and change when needed. This is our gene. We have experience of the traditional travel industry. We know what destinations want. We know what travelers want. We build our products on a differentiated demand. We change when the demand changes. 

China Knowledge at Wharton: What are the major milestones in Lvmama’s growth and how do you build your core competitiveness? 

Hong: I feel that the growth of Lvmama has been like a tree. Its business model matured gradually through organic growth. At the beginning we were only selling tickets fromtravel spots. We are still one of the biggest online distributors in China. Then our customers said they wanted to stay in resort hotels near the travel spots. [At that time, online travel agencies like Ctrip were selling mainly business hotels]. So we started to sell resort hotels. After that our customers wanted entertainment. So we started to sell tickets for [commercial entertainment programs] like Impression West Lake or Impression Lijiang. Then some travelers said they would like to join groups but they were not interested in standard meals or shopping. So we started offering semi-DIY travel products. In this way, along with the change in our customers, we have become a comprehensive service provider for independent travelers. In the future we may add other services such as tour guides. 

China Knowledge at Wharton: There is a big price war going on in the online travel market. What are you doing? 

Hong: We are not competing head on. A price war is not positive for the industry’s long-term growth. Customers will not benefit from it either as service quality will be sacrificed. 

To avoid getting caught in a price war, you have to adopt a differentiated strategy and offer differentiated products and services. A price war can only take place in standard products like air tickets, hotels and tours. We sell differentiated products. 

When a market is growing, too many players jump in. A price war is an inevitable development to eliminate the weak. 

China Knowledge at Wharton: What is your vision for Lvmama? 

Hong: I think it will become a composite online travel community with the core being service to independent travelers. We are a supermarket for independent travelers. The Joyu Group aims to be among the most-respected tourism groups in the world. 

China Knowledge at Wharton: In three years, your employee numbers have moved from zero to 900. How do you manage such a rapidly-growing startup with still uncertain profit prospects? 

Hong: Any company with more than 500 people has to manage with its corporate culture. Every system is only a restrain, or a standard. The company culture is more important. Our culture is one army, one family, one school. Our corporate value is integrity, passion, innovation and multi-win. We have also set up a Joyu Group talent institution to offer training to our people. 

China Knowledge at Wharton: What is your role in Lvmama right now? 

Hong: I was involved in daily operations at the beginning. But as founder and chairman, you have different roles when the company grows. When it had 100 people, I was the forward and led the team to the goal. When it had 300 people, I was the centre to distribute the ball. When it had 500 people, I was the rear guard to keep goal and upgrade the company to respond to market changes. Right now I do only four things in Lvmama — first, define development strategy; second, read user complaints; third, integrate resources, based on the philosophy that the Joyu group is a complementary and mutually-nursed value chain; fourth, choose talent and build the internal culture and vision. 

China Knowledge at Wharton: What is the future for China’s travel industry? 

Hong: The future is in leisure travel and sightseeing. The mega trend is that the market and products will get more niche. The online travel market will upgrade itself as technology improves. Another mega trend is that mobiles will have an increased role and many new opportunities will come up. The smart phone has a lot of potential for future entrepreneurs.

What’s absent in China’s travel industry is not demand, but supply. Comfortable resort hotels surrounding travel destinations, or good quality souvenir products, or specialized cuisine restaurants inside travel spots are limited in number, which offers a lot of opportunities here.