Funding

Surveying the travel startup landscape, part 1: The investors’ perspective

The global travel industry is experiencing unprecedented growth. The World Travel and Tourism Council estimates travel contributed more than $8.3 trillion to the global economy in 2017 and predicts that number will grow to $12.5 trillion by 2028.

That upward trajectory is fueling an active startup ecosystem. Around the globe, entrepreneurs are working on disruptive solutions to fix inefficiencies and address pain points, with work spanning from small-scale individual developers in remote corners of the globe to well-funded initiatives in tech epicentres.

According to the Lufthansa Innovation Hub, there are about 2,500 active travel and mobility tech startups around the world, and venture capitalists invested $25.45 billion in them in 2017, a 32% increase over 2016. And the allocations in early 2018 – $6.5 billion in the first two months across 76 deals – put this year on pace to set a new record.

But what’s not evident in those figures are the thousands of struggling startups, the ones being dismissed by investors or shutting down after years of trying to make it.

Travel is a complex arena for entrepreneurs. So much potential. So much risk. So many moving parts.

This month we’re digging into the topic of startups, aiming to understand the challenges and opportunities from the perspective of various players in the field.

We begin with insights from three experienced, and active, venture capitalists – Erik Blachford, Chris Hemmeter and Christian Saller – to find out what’s on their radars, the challenges facing startup entrepreneurs and how they evaluate the pitches that land on their desks.

The current state…

Erik Blachford, venture partner, TCV (Technology Crossover Ventures): You had the big wave of “How cool would it be to book stuff online?” that carried us for a long time – first for air, then hotel and car rental. But now it’s not just that you take all the old stuff and put it online for booking. We’re starting to move into this interesting spot where, because they have tech available, people can travel in a different way.

Uber and Lyft are the easiest examples, as opposed to trying to hail a taxicab. There are all sorts of interesting stuff going on there, and my hunch is that will enable a whole lot more local connections over time. And you’ll find the typical travel experience for leisure anyway will look pretty different in five years from the way it looked 10 years ago for sure.

Chris Hemmeter, managing director, Thayer Ventures: It’s a bit of a tale of two cities. On the one hand, it’s the best it’s ever been. On the other hand, it’s an impossible landscape.

From our perspective, all things B2B – the core value chain of everything related to travel and transportation – is really being reinvented, and in our view, we’re just getting started. On the other hand, on the consumer side of the world, the top of the travel funnel or anything that depends on discovery and search is just an incredibly difficult place to launch a business unless you are a wizard fundraiser and can manage to sustain a capital strategy that can give you enough juice to reach escape velocity.

So for consumer ideas, it’s just a death trap – very hard. But core software and systems, it’s never been better.

Christian Saller, general partner, Holtzbrinck VenturesMany investors like travel, so there’s a lot of money available for travel startups, both for early stage and later stage. Compared to a couple of years ago, the amount of money travel companies are raising is getting much, much bigger than in the past.

There’s a lot of money to deploy – billions and billions – tens of billions. That’s the function of two things. There’s a lot of investor appetite for travel companies fueled by some of the big exits that have been happening in that space – SkyscannerKayakTrivago and so on.

If you are funding an e-commerce company, it’s not clear who the exit channel would be, but in travel, there’s ExpediaCtripBooking. And then, there’s a lot of entrepreneurs that have big visions on the companies they want to build. I know of one – I can’t name it – that would have been able to sell for $500 million to Expedia, and they decided to hold on because they thought they can build bigger if they hold on. That’s something we haven’t seen in the past.

Opportunities…

Blachford: Five or six years ago, if you told me I would go to Berlin and, using an app on my phone, some random Berliner would give me a lift to where I wanted to go, I’d say I don’t know about that. Safety issues, how I’m going to pay for it, all this stuff would have been in my head.

Uber and Lyft solved that. I think the same thing will happen in a whole pile of different categories. People will expect and think it’s perfectly normal to interact with strangers when you are travelling.

When you travel, you kind of like to talk to people that live there. It makes you feel adventurous. I think there are all kinds of startups trying to figure out what are the right ways to meet up. And the fact that people are trying all of this, that’s where interesting businesses come from.

Also, the startup activity in China and India has been interesting for a long time. It’s also really interesting in Europe where the fragmentation in the lodging space is so different than in the United States, so attacking the lodging tech opportunity is very dynamic and interesting.

The most important thing is to have a product and to feel it has validation with the customers you want.
Erik Blachford – TCV

Hemmeter: When we talk about travel and transportation, we are talking about travel, hospitality, tourism, food service, logistics, elements of entertainment. It’s a really, really broad category. And historically, the category has been resistant to the adoption of technology, so there is a lot of inherent inefficiency in the value chain.

It’s also a category growing faster than global GDP and is expected to for some time. There have been a lot of demographic shifts and the evolution of countries – like India and China – that are starting to produce massive amounts of outbound travel as well as domestic travel. So you’ve got this growing space that’s got a lot of latent inefficiencies.

You look at one specific category – the hotel technology stack. The old PMS is completely incapable of functioning in the modern world. So there is an aggressive need for cloud-based, platform-based, open-API structured PMS systems that enable hotel companies to innovate.

We believe the whole hospitality technology stack is in play. We have an investment in a company called Mews Systems in Prague that is specifically focused on the international opportunity, operating in 37 countries, growing very fast, 100% cloud-based PMS. We see lots of interesting opportunities for software and services and tech out there.

Saller: A lot has happened in alternative accommodations. Specifically, vacation rental metasearch is one area we’ve seen a lot of activity. And in tours and activities – GetYourGuidebeing the most successful, but also Tiqets and some others that have been able to build businesses. Multimodal search companies have been around a long time and they never seem to go anywhere, but GoEuro has proven it’s possible to get a lot of investor excitement.

B2B is getting a lot of attention right now. The B2B travel market is 50% of the whole market, and there hasn’t been disruption and innovation in that market on the same level as there has been in consumer travel. For a long time, business travel was dominated by the old companies like Carlson Wagonlit and BCD Travel, not a lot of startup activity – that is changing now.

The latest area where there is a lot of activity is in individual travel, adventure travel – going to South Africa and doing a safari there. And then I’ve seen a couple of startups that have tried to do some things using AI and data points from social media to better target travel and find more individualized offers. I’m a little sceptical if this is working, but we see activity.

Challenges…

Blachford: They get saturated. A good example would be if you go back five or six years, there was a slew of startups saying, “We’re going to do travel guides based on your friends’ photos.” It got sort of crazy, there were like 150 companies doing that. It’s a perfectly good idea, but it saturates out and then after a while you go, “You know, I think that might be Instagram.”

The investment climate is a little overheated, but that’s across startups in general. Valuations are probably higher than they should be. And there’s too

Source
Phocuswire
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