Tom Magnuson isn’t your typical startup guy.
When he started his company in 2002, he wasn’t a kid coming straight out of college looking to raise money for a tech idea. Nor was he an ultra-rich investor, painstakingly searching for the next Internet behemoth.
He was just a middle-aged man with a big idea, and a plan.
“We had two Macs and this business idea that we could start a hotel chain for independents,” Magnuson says. Back then, all he had for an office was his son’s bedroom.
He was in his mid-40s when he founded Magnuson Hotels with his wife Melissa. Now, it’s the largest of such independent groups in the US, and the top hotel company on the Inc. 5000 list.
Magnuson’s entrepreneurial roots run deep. He started working for his dad and grandfather’s family business when he was eight. It was a tiny motel in Idaho, out in the middle of nowhere.
“I was ingrained with the hardscrabble life of an entrepreneur with my dad,” he says. “You’ve got to do whatever it takes to keep your business going, and just work with whatever you’ve got.”
Still, it would take much more than a zealous entrepreneurial spirit to bring Magnuson Hotels to where it is today.
We sat down with Magnuson to talk to him about how his hotel chain became so successful, and the struggles he went through along the way. Here’s what he had to say (edited for length and clarity):
When you initially started how much funding did you have?
Oh man. None. Out of pocket, we never had any investor funding. I think the first two years we had a 50,000 line of credit in the bank and, as all entrepreneurs do, you end up securing things with your house and your cars and all those kind of things. But it forced us to build. It forced us to be very lean and economical and that’s to this day.
Believe me, we tried everywhere for funding. We tried SBA and we thought, God we got a really great business idea, there’s going to be a lot of people that’ll help us out. You specialize in entrepreneurial circles and you know that there are all these small business administrations. There are all these pools around for startup companies, and there are all these pools around for next gen companies. Oh man, we went to them all and just kept coming up dry. I guess it was a good thing.
Was the initial plan to become the fifth-largest hotel chain in the world or did that just happen?
You know what the initial plan was? I wanted to have a home-based business where—my son was five and a half, and I’d been travelling for the last year and a half, and my wife and I started at home and we said—I wanted to be able to drop him off at school, pick him up afterwards and ski at least 35 days of the year. We’re still there. I’m in London, I dropped him off to school this morning, I’m picking him up in an hour and we still get to ski a lot.
So that was my goal, and what happened was we started the company with twelve friends and family and we had these ideas. Hey, we’re going to have all the power of a major chain, but you can keep your name as the Seashore Inn, or the Stardust Hotel in Wallace, Idaho, one of my dad’s old properties. Keep your name.
What were the growing pains that happened as you got bigger?
There were serious growing pains. Keeping the payroll going, banks are never friendly enough, and we worked with technology vendors that were from hell. We all do. We all work with vendors that try to put the squeeze on you and they’re not as nice as you are. And you know banks are tough, banks are tougher all the time.
We always struggle with seasonality in our business because obviously more people travel in summer, but we always had to keep the same growing number of employees. So then we always had a tough time making it through winter. We’ve always been very hopefully focused on trying to maintain a really honest and positive culture so that we didn’t have a culture drift and it’s been working out so far.
What were some competitive difficulties that you ran into at Magnuson? How’d you deal with all the giants as a small, but rapidly growing startup?
Well, I kind of think that it wasn’t hard at all because I think that most corporations and most people focus on themselves and not what’s around them. I think many companies are figuring out how are we going to grow, what’s our plan and what are we doing? And I think many companies are very internally focused, they’re too internally focused and so you probably miss a lot of things that are happening.
What was your advantage over the big chains?
I think some of our advantages were that we were privately held, which gave us certainly a lot of flexibility and it gave us the ability to adapt quickly. We still have the same business model that we’ve had ever since we started eight years ago with Magnuson Hotels. We just made it better, cheaper and added more choices for people if they want them. A lot of other companies might have more money, but with a lot of money comes a lot of baggage.
When you got a lot of VCs, it slows down your decision-making capabilities. If we wanted to wake up on Monday morning and say hey, let’s go in this direction—I remember the Monday morning that we got up and said we should really have all of our hotels no smoking. So like an hour later we were all no smoking. I mean it’s nice to be able to do things like that. Flexibility or freedom is the best thing. It’s better than having a lot of money. We’ve always certainly never had those types of advantages, but it sure allowed us a lot of flexibility.
How did Magnuson get to where it is today?
We just kept going with this mission of: we’re just going to keep finding out really fair, transparent, good karma ways to simply drive revenue for hotel owners without resorting to normal corporate strategies which are long term contracts, lots of funny little fees and lots of terms and conditions. Just really straight up. If we make you money, we get paid. If not, you can fire us.
And that transparency really rang true with a lot of people, so we kept going in that direction. In the last year and a half, we kept investing, investing, investing back into the company and to technology. We built our own central reservation system over the last couple of years that’s all XML-based. So now, all these big changes and a lot of these OTAs are now operating on technology that’s 15 or 20 years old, and we have all this new stuff.
We had a wonderful vantage point to say, “We have a blank sheet of paper, we don’t have any bureaucratic barnacles.” If we could just see where’s the world going, what do people need and find the shortest path between buyer and seller and do it clean. That’s what we did, and our system – we invested a lot – it’s done really, really well. All of our hotels have done well throughout the last two and a half years.
How old were you when you founded Magnuson with your wife, and what does that mean to you?
I’m 55, so I guess my mid-40s, which I always drew some inspiration from. Because you know Sam Walton and Henry Ford are two guys who didn’t start early. Henry Ford didn’t get his car out of the garage until he was 46, and Sam Walton was the same way with Wal-Mart. They both spent decades grinding it out the hard way and then they got on to something during their late 40s. I love it. This is history, so you always look for something that gives you some inspiration when things get tough. Those are two things that did.
What’s Global Hotel Exchange, and how will that impact Magnuson?
Well, I think that it’s going to be something that is going to be much larger. And I might be wrong, but the business model of Global Hotel Exchange is going to be available for every hotel on earth regardless of affiliation with a chain or franchise, or if they’re owned by a corporation or whatever. It’s strictly a selling mechanism, a sales channel for every hotel that is hopefully going to become a valuable part of their distribution, because we will have no fees for hotel owners. Our goal is to offer lower rates than any of the OTAs.
Magnuson Hotels will continue to grow really well. It’s a service-based company. Global Hotel Exchange will be more of a pure Internet company, which because of the business structure has a lot more potential for scalability. In a service company, there are a lot of work components that come into successfully on-boarding new clients and making sure that they’re done well. But with a pure Internet company, it’s more about seeing people do self-enrollment and get right on so it doesn’t require as much personal intervention.
So what’s your new goal with both Magnuson and Global Hotel Exchange?
The goal now is that we’re really going to look at Magnuson as a global company that provides low cost growing platforms for just about any kind of hotel. So we started off being, hey, we’ll help these independent guys in the US. Then, we started helping brands a few years later, and then we came over here in the UK and said let’s try to help these UK hotels. Then, we came up with this new platform Global Hotel Exchange which can help any kind of hotel.
I guess how it’s all coming together when we look at it. It’s really becoming a global entity that serves the need of selling excess capacity or revenue generation for hotels just about everywhere. And it might be a different kind of program for different kinds of hotels.