Technology startup accelerator Startmate this week announced the eight teams to have earned a coveted spot in its 2013 program. Each of these companies will receive a $50,000 investment, as well as intensive mentoring and coaching from a who’s who line-up of Australian tech veterans. The program has a track record of launching fast-growing Aussie startups such as BugHerd, Flightfox, Grabble, Happy Inspector, Ninja Blocks and ScriptRock. It’s why FLT is so excited to be partnering with the program to track the progress of this cohort — more about that here.

It seemed a perfect time to catch up with Flightfox, one of the companies from the 2012 program. FlightFox allows travellers to post travel plans, and have experts help find the cheapest and most effective way to get from points A to B. Following Startmate, the company went on to raise funding and then took part in the illustrious Y Combinator accelerator in Silicon Valley. As co-founder Lauren McLeod explains, it’s been quite a year.

McLeod and her co-founder Todd Sullivan decided to take a path startups are often advised to avoid; the two-sided marketplace. While Australian companies like Freelancer and 99designs have made it, and become enduring tech companies, many more have not. The challenge? A two-sided marketplace can be twice as complex — two distinct customer groups you need to satisfy, market to and engage with. If one side doesn’t work, the other side won’t hang around.

“The key to a marketplace is knowing if you know how to turn on the tap,” says McLeod, speaking to FLT from her home-office in Mountain View, CA. “You have to be growing both sides — if you know how to get one side, then you can figure out how to get the other.”

For FlightFox, the challenge was always going to be finding the experts who could help people organise their trip. If demand for flights went through the roof, then FlightFox could advertise directly or reach out through forums to frequent flyers, who know the best flights and travel tips.

Lauren McLeod — Co-founder of Flightfox

“We realised quite early on in Startmate that if we had a huge demand for flights, we could target the right experts online with Google Adwords and the forums. We’ve experimented with so many things — press, referrals, word of mouth.”

There’s a great story which highlights how FlightFox is different from other providers offering similar services, such as Expedia, Kayak, and Hipmunk. As McLeod described to the Sydney Morning Herald, one of the most interesting requests came from someone looking to move overseas with three cats.

“You can’t put in the option ‘I’m travelling with three cats’ in Expedia,” she laughs.

The company has so far signed up 6,000 travellers who have paid between $30-40 to find flights, and 2,000 experts to help them do so. While the company raised an $800,000 seed round earlier this year, it is still focussed on improving its platform, optimising the user experience and trying to reduce the cost of customer acquisition before thinking about scaling. It’s hard to say when this might be. “We’ll look to raise Series A when we know we’ve got that switch,” says McLeod.

She’ll know the switch is primed to flick when FlightFox can spend less on acquiring a customer than the value of that customer over their relationship with FlightFox (the “Lifetime Value” or LTV) . She doesn’t say exactly how much customer acquisition costs now, although FlightFox hasn’t reached that critical juncture just yet.

A self-described data fiend, McLeod has been working hard to improve conversions. Improving FlightFox’s emails to customers has helped. Thanks to another Startmate grad, GetVero, FlightFox was able to double its email conversions by sending better emails, and sending them at the right point in the ‘funnel’, when users were dropping off.

McLeod found that many people were registering but when it came to pay, there was a drop off in conversions. She knew they needed to address this friction — or hesitation — by providing more information. There’s a great explanation of how they did so on the GetVero blog (well worth a read).

Generating publicity has been one of the cheapest ways to attract users so far. A big boost came after a write-up in the New York Times. While the posts on Hacker News drove plenty of traffic, the conversion wasn’t very good, probably because it’s a hacker audience more interested in what’s happening in startup land, rather than potential customers.

McLeod and Sullivan went from Startmate into Y Combinator, although the two accelerators have offered different things, at different stages in the company’s lifecycle. Startmate was great to help launch a new idea, build a business model and get a functional site going, whereas Y Combinator really helped improve and refine the model.

Y Combinator, unlike Startmate, doesn’t have a physical workspace. Each of the 75 companies which pitched at the demo day, had worked in their own offices, or ‘hacker houses’ — there a number of these Silicon Valley share-houses for programmers — and met each week at a dinner. It’s inevitably less hands-on since you’re part of a much bigger cohort.

How hard is it to setup in Silicon Valley?

McLeod says rental prices in Mountain View are similar to what you’d expect to pay in the middle of Sydney. The FlightFox duo are spending $3,500 a month for a two-bedroom apartment in Mountain View. Living expenses are similar to what they were in Australia.

Because FlightFox incorporated in the U.S., the cofounders were able to make use of the E3 Visa program, giving them the ability to work for the company which sponsored them: their own. Incorporating in the U.S. also helped resolve the issues of working with Australian payment gateways. There are some bizarre rules applying to marketplaces in Australia, which means the usual payment providers are reluctant to support platforms like FlightFox.

Originally, FlightFox was using PayPal, but the platform set off the company’s fraud alerts three times, bringing the marketplace to a grinding halt, and that’s very bad for business — if Paypal suspends your account, you can be waiting up to 180 days to receive payment of funds. It’s not a pretty situation if you’re holding money for customers and can’t afford to pay them. FlightFox now uses U.S. service Stripe, and hasn’t had a problem since making the change.