Travel, tourism and hospitality has always been a wonderful arena for entrepreneurs and other companies to play in.
Like a kid in a sweet shop, there are endless consumer and industry pain points all apparently crying out for a solution, whether it's the somewhat irrational desire to run an airline or a firm belief in coming up with the "next big thing" in travel technology.
Whatever the case may be, the majority of these new companies are small, or at least have to start out as bit-players.
Of the 200 or so travel startups covered by Tnooz TLabs, only about a third have received any funding at all (of any substance). The remainder are privately funded or bootstrapped.
Circumstantial evidence would suggest that some of these companies are either struggling or have yet to feel the need to seek additional/larger investment. That by itself isn't so much of a surprise - newly formed companies struggle regardless of the industry vertical they operate in.
But perhaps other factors are coming into play, at least in relation to travel startups. The three core challenges for the under-funded travel startup (looking for global market share) are:
1. Customer acquisition requires upfront investment
Even though longer term returns from growing a customer base can be demonstrated the money still needs to be found upfront. Buying Google traffic is costly (and shows no sign of reducing anytime soon).
2. Sometimes you need to get "on the ground" in different countries in order to sell your service to your partners / suppliers
This incurs real expenditure that a non-funded startup can struggle to meet.
3. Larger travel companies are unable/unwilling to work with you
Sometimes they believe (rightly or wrongly) that they can recreate what you have done themselves (especially if not a technically challenging scenario - such as trip planning).
Sometimes larger companies can't work with smaller startups because the smaller startups just can't handle the demand. I have seen big travel websites unable to work with smaller product suppliers because they just don't have sufficient stock to handle a big company's traffic.
So what happens next?
With some smaller startups in pain, with no obvious route to success, funding begins to look attractive.
Then there is the mid-funded set of travel startups - these take funding in the region of $2-15 million. To take that funding you have to consider that you have the potential to build a $100 million business.
The challenge this mid-funded set of startups have is that there aren't really any travel industry sectors left that you could build a $100 million business WITHOUT taking market share from an incumbent travel technology company. They won't let you take that market share without a fight.
So, now the startup is fighting with an incumbent. Suddenly that $2-15 million funding isn't looking so much. In fact its looking positively insufficient.
Hence we are now seeing VC-led funding in the $50-$100 million and above range in some sectors, probably with the mantra of "if you are going to fight an incumbent, fight with sufficient force and power that you stand a chance of actually winning."
The incumbents are big but they are slow. Half of the reason you need the $50-$100 million+ funding is to achieve your initial growth in 24 months. Speed is your ally.
Taking all this to the natural conclusion, is it therefore inevitable that the big plays from travel startups will now be heavily funded (when facing incumbents). The smaller funding plays just don't have the ammunition now to deliver on their opportunities?
Is it now: "Go big or don't bother"?