At this year’s PhoCusWright Conference in Los Angeles, the investment firm Canaan Partners is out in force, meeting and greeting.
One of its VCs is Brendan Dickinson, who earlier this year became a principal at Canaan Partners. He covers several of its portfolio companies in the US.
Tnooz spoke with Dickinson to get a sense of Canaan’s — and his own — approach to travel startups. He shared what he thinks is one of the most important equations a startup needs to focus on.
He also talked about the dangers of founders raising too much money, whether a startup should build to IPO or built to be acquired, and why — despite frothy valuations — there’s no travel startup bubble.
Which travel-specific companies do you work with?
I’ve worked with Rocketrip and with OneFineStay. In its early days, I worked a lot with OneFineStay, but now that it has grown, I don’t work as closely with it.
My colleague Warren Lee is also on the boards of OneFineStay and Rocketrip.
Other Canaan VCs closely involved in travel are John Balen, who is a board member at Stayful, Switchfly, and SilverRail, and Deepak Kamra [CK], who handles RelayRides.
How has your background informed your investing work?
I worked as a quant at Lehman Brothers and Barclay’s Capital (now Barclay's Investment Bank). I did a lot of fintech investing in companies like Lending Club and Orchard Platform.
My quant training has come in very handy in being able to efficiently add value to the conversation around understanding customer lifetime value, which is something many new founders struggle to get a fine-tuned sense of.
Any consumer facing company that has conversion funnel has to worry about the customer acquisition lifetime value equation. You have to acquire customers efficiently and you have to generate an effective return from the customer.
In early days companies are often spending a lot of money to ramp up, and those equations can be really tight.
But to really understand how a company is behaving and to come to some projection of what will happen, you have to look at its customers on a cohort basis.
My training as a quant enables me to better communicate with founders about how to think about customer lifetime value in a thorough way, because that topic is critical to their businesses.
Anything else from your background give you an edge?
I have a masters in computer science from Brown. So I can talk with entrepreneurs at a more technical level than some other VCs at other firms might about the platforms the companies are trying to build.
That said, I’m obviously not a full-stack developer. And some of the founders that me and my colleagues have worked with are very accomplished technologists in their own right. We wouldn’t want to second-guess them.
Where does travel rank in terms of computer science savvy, compared with other tech verticals?
Each startup differs in its technology needs, vis-a-vis what and how it’s selling.
Take Rocketrip as an example. They are building a very complicated algorithm to provide realtime budgets back to companies’ travel managers and ultimately tp the business travelers individually at those companies.
The goal is to give real-time feedback on what are appropriate prices for certain city-pairs for flights. Rocketrip is deep in machine learning to model that out.
What's your view of Rocketrip?
We’re so excited about it, we led the seed round, and we came in and led the Series A.
It’s gotten incredibly positive reception from its market. We’re abreast of its competitor set and the market, and we're very comfortable with where Rocketrip is right now.
Are some travel startups raising more money than they should?
There’s two schools of thought about this. You could take more money than you need, while cash is cheap, like it is now, to survive in the lean times as they come to pass.
But the other thesis is that founders who get very focused on maximizing terms for valuation can sometimes — fair or not fair — have a hard time raising a follow-on round if the trajectory hasn’t been perfectly on plan.
It can be uncomfortable for folks to come in on something that’s already priced incredibly high.
Can focusing on maximizing valuation also hurt a company’s prospects of being acquired by one of the legacy travel giants?
There’s certainly a risk there. Some companies have tiered thresholds for what prices they’ll be comfortable paying.
A startup needs to meet various criteria of strategic-ness to warrant various acquisition prices.
The last round investor will want a multiple on whatever price they paid was, and you could certainly run into a case where you’re making your acquisition price more expensive in the acquirer’s eyes.
There are hundreds of travel entrepreneurs attending PhoCusWright. What naïveté do you see in them?
One thing that’s important and that can get lost in the excitement is that, at the end of the day, you have to build a sustainable business model.
I wouldn’t say it’s a widespread issue, but there can be a loss of focus on the key question, which is: can the startup acquire customers who generate more value than the costs of acquiring and servicing those customers.
A lot of any conference talk — and no more so at this one than at others — can be about growth, growth. And growth is incredibly important. But there also has to be an eye on the long-term sustainable business model.
Should an entrepreneur build to get acquired, or build to IPO?
You should build something you’re passionate about that has a strong business model. Focusing on building something for a particular exit is certainly one way to go about the problem but it doesn’t necessarily lead to the best result.
The places where we’ve had the most success is when we’ve partnered with entrepreneurs who are really passionate about the problem they’re trying to solve. That’s what we look for from day one.
Is travel tech behind in innovation relative to other tech verticals?
In a word, yes. There hasn’t been a ton of innovation in how we book travel since the late 90s. That’s really where we at Canaan see a host of opportunities.
A lot of our investments are based on the thesis that there’s an opportunity to fundamentally alter an industry that hasn’t been innovating the way it should.
Some examples are with SilverRail building out a GDS and tech shop for the rail industry or OneFineStay leveraging the new cultural acceptance of peer-to-peer accommodation.
Same for RelayRides. It’s reshaping a travel vertical that hasn’t seen a ton of innovation but where consumers are eager for help.
What’s a happy threshold for exits?
As VCs, we’re targeting outsize returns, so any 10x and beyond exit is what we’d be happy with.
But we’re cognizant of partnering with our entrepreneurs. We would never find ourselves in a situation where we were not aligned closely what they want and what they’re trying to achieve.
With lots of sizable funding rounds recently, is there a bubble in travel technology startups?
I don’t think so. Yes, there have been several high-profile fundings done recently.
I think for the first time in a while we’re seeing fundamentally new approaches being brought to bear on the market. That validates the large funding rounds.
Companies that are doing well are very much in a seller’s market when it comes to selling their equity.
Those that are in the middle on the performance curve are benefiting from the bullish investing cycle right now. It may be easier for these middle performers today than it will be in the coming years if there’s a market slowdown.
What excites you in travel right now?
There’s a huge opportunity in mobile. The change curve that e-commerce had for travel starting 15 years ago is now happening, in a way, for mobile.
Does mobile just cannibalize existing customers?
Cannibalize is a strong term. I think it changes customer behavior, and it gives a rare opportunity for new startups to get a leg up on legacy companies in wooing consumers.
Mobile is enabling consumers to book travel easily and spontaneously consider alternatives and upsells in the moment and at their fingertips. Some of our companies are just on the cusp of where mobile is trending, such as what Stayful is doing in a phenomenal way for quality hotels.
How does Canaan differ in its investing style from other VC firms?
There are several ways. For one, probably more aggressively than our peers, in terms of dollars, we reserve more capital for follow on investments beyond the initial rounds. We’re supportive as companies are growing.
What VCs do besides investing and making introductions?
At Canaan, we want to be partners with CEOs. We’re looking to be more useful than just reviewing metrics at occasional board meetings.
We’re often helping identify the right people to hire and helping with the interview process itself. We are available to talk through any strategic planning and partnerships, even if it’s Saturday at 9pm. Plus we help manage a successful exit.
Depending on the company, a principal like myself may spend significant amounts of time helping a company think through how to formulate an algorithm or how to structure their data set to efficiently get to an answer.
We can have a structured conversation with an entrepreneur, based on our past insights with other companies, to help determine what’s reasonable and what’s unreasonable in what they’re hoping to achieve via technology.