Why Qunar will travel with Baidu

June 24, 2011, 6:06 PM UTC

Chinese search giant Baidu (BIDU) is making a major push into the travel market, today agreeing to acquire a majority stake in privately-held Qunar for $306 million. So I spent some time on the phone this morning with venture capitalist Richard Lim, a Qunar board member and managing director of GSR Ventures. What follows is an edited transcript:

Fortune: What is your firm’s history with Qunar?

Lim: We were the first investor, leading the Series A round in 2006. Then we helped put together the Series B round a year or two later, and worked with them on the Series C round that closed in December 2009.

Ok, please explain the deal details.

Baidu will invest $306 million for a majority share in the company, but Qunar gets to remain independent. In addition to the investment, there will be a strategic commercial agreement to use Qunar services on a number of Baidu offferings.

For a historical standpoint, Qunar has provided travel search results to Baidu for several years. We were working with Google (BIDU) as well.

Over the years, there’s obviously been interest in a potential acquisition, but we said no because we believed Qunar would be much better as an independent company with a lot of upside. One thing led to another, however, and we eventually concluded that perhaps a more strategic and financial relationship with Baidu would actually enhance the company’s ability to succeed.

Richard Lim

How will this deal affect Qunar’s current relationship with Google?

I do not know. It was never explicitly discussed during the Baidu negotiations, as far as I know.

Let’s go back to the decision to do a deal at all. Why not just stay financially independent of both your major search partners?

Remember, there were no selling shareholders. The company got lots of cash, more than in most IPOs. Management stays in place, and I’m still on the board.

At a macro level, travel is an extremely interesting space. Online companies like Expedia (EXPE), Priceline (PCLN) and even CTrip (CTRP) are primarily offline agency models that went online without fundamentally changing how they approach the business. I think Qunar has the opportunity to dramatically affect the dynamic of how online travel is researched and consumed in China, and partnering with Baidu in this way makes it more likely. It enhances our chances of becoming more successful faster.

How does Qunar differ from those companies you mentioned?

The existing offline business model for travel agency was basically to broker the sale or airline tickets or hotel reservations on behalf of the principals. In exchange, the travel agent would receive, on average, approximately 15% of the top-line.

The online travel agencies consolidated and reached scale in a way that the dispersed offline businesses couldn’t, but it was still basically the same process. This of course led to certain airline and hotel operators realizing it would be faster and cheaper to offer their best deals via their own websites, because they could avoid the broker fee. But, for consumers, this made it difficult to find the best deals.

Qunar lets users look at all the deals on all of those individual sites, and makes money on display advertising and cost-per-click, instead of on commission. It’s kind of like what Kayak is doing in the U.S., but on a much larger scale. For example, Qunar currently is responsible for around 30% of all airline tickets booked in China.

You mentioned that Qunar had acquisition offers. Was one of them from Google?

Google has not bought anything in China.

But did it try to buy Qunar?

If Google tried, it never got far enough that I was made aware of it.