One of the most watched panels on stage at Phocuswright this year was the "Investor Insights" lineup during the Travel Innovation Summit, which included John Balen (Canaan Partners), Joel Cutler (General Catalyst), and Brad Gerstner (Altimeter Capital).
After speaking with Canaan Partners' Brendan Dickinson and General Catalyst's Joel Cutler, an informal chat with Brad Gerstner from Altimeter Capital completes our own roundup.
Gerstner has been working around the travel industry since 2000, when he was co-CEO of National Leisure Group, a cruise technology company that was purchased by General Catalyst and Softbank and then sold off to World Travel Holdings in 2006.
Altimeter Capital is Gerstner's venture arm, which was initially capitalized in 2008 and saw growth posted after an early bet on down-at-the-time Priceline.
The fund also included a prescient investment in Kayak and Zillow, both of which have returned significantly, and other travel-specific companies such as HotelTonight, Duetto Research and SilverRail.
After speaking on stage, Gerstner sat down to discuss the current state of travel, especially on the importance of pursuing orthogonal opportunities.
A strategy equally emphasized by Joel Cutler, the idea is to look for complete right angle ideas. So ideas that have a tendency to be on a similar track to something else, but then takes a radical 90 degree turn away from that previous concept to go in complete opposite direction.
This is not necessarily about create brand-new markets from scratch in unproven areas; it's more about seeking right angle opportunities to something that already has a defined path and thus creating the new opportunity.
To add structure to the free-wheeling, in-depth interview, framing questions have been added to structure the conversation, and comments have been edited for brevity and clarity as appropriate. Dive in!
I was surprised that we didn't see more Internet of Things or wearables today at the Travel Innovation Summit. Do you think we as an industry get into this rut where someone from outside the industry comes in and just come up with a "me too" concept?
As Marc Andreessen said the other day, since 2003 there are roughly 10,000 companies that receive venture funding each year and fewer than 15 turn into a company worth at least a billion dollars.
So if we look at it, we live in an era - because of the intersection of globalization and mobilization - where I think the number is going to go up from 15. It may go up to 25 billion dollar companies that get created every year.
But remember this is in every category on a global basis. So part of it is about right-sizing our expectations for what we are going to see. This vertical of travel has created enormous enterprise value over the past 15 years, it's just been consolidated in a very few companies.
And so, as observers, we can say that's boring. But the reality is that the track record for value creation has been enormous.
But yet, does the inventor and entrepreneur in me want to see more stuff - of course. Because that's what titillates us all, when we see new and interesting stuff.
But the reality is, as an investor, when I think about where the value will be created over the next five to ten years...well, we spent the last ten years wiring up 700,000 hotels to the internet.
Next year, by our estimates, there will be 5.5 billion occupied hotel rooms on a global basis: 400 million of those go to Priceline, 200 million go to Expedia, 50 million go to Airbnb - you can go down the list, and that's where most of the value is. You can plot out the ecosystem that way.
The scientist and inventor in me...I am absolutely convinced that we are seeing a steepening in the secular curve around innovation and disruption. I have no fears that the world is more innovative than its ever been, the cycle times on innovation are shorter than they've ever been, and we're going to see more cool shit then we've every seen.
Weareables are exploding, location-based information around travel will enable things we haven't seen before. I'm terribly excited about that.
How do economic cycles impact the disruption curve?
On the other side, we still are subject to economic cycles. I think we are in the top end of a cycle but the secular curve is steep.
What I mean by that is, generally in the last 25% of a cycle you see a lot of stuff that's not that compelling get pitched. Think about when Uber and Airbnb got started, they were at the bottom of the cycle.
If you start at the bottom, you are a passionate entrepreneur. If you start at the top of a cycle, every guy with two black cars thinks he can be the next Uber - you'll see a lot of "me-toos."
Are there many simultaneous cycles in different areas - say in transportation?
We're 6 years into an economic recovery in the United States, and economic recoveries generally last only that long. I don't think we've changed the economic laws of gravity, so who knows what the events are that will cause some slowing, some fear to re-enter the markets.
But when fear re-enters the markets, people stop getting funded and stuff gets shaken out, and prices get reset. When that happens, things start anew. I'm just suggesting that I'm seeing a lot of me-too stuff as well, which means we would be later in the cycle.
Great stuff gets started late in cycles too - it's not to say that there's not good stuff. It just means that it's almost a mathematical certainty that the denominator - which is the number of things getting started - gets way bigger at the end of a cycle.
The numerator - or the winners - stays the same. So on a percentage basis, the win rate goes down late in cycles. Earlier in cycles you have a small denominator so the percentage goes up.
So what do cycles mean for investors?
As an investor, you don't want to put all of your money to work late in cycles. Of course, none of us have a crystal ball. We don't know where we really are in a cycle.
It seems to me that we are no longer in the first or second inning. I don't know if we are in the 6th, 7th or 9th - we're just not in the first or second inning, for sure.
Is travel particularly vulnerable to having more investment coming in late in a cycle? Mostly because investors think "I travel, I can do this" therefore rationalizing risk in the travel industry. Everyone says they want to open a restaurant, or do something familiar to them - yet few are making their own soap trying to be the next P&G. How do you approach investing in travel not only with your own implicit biases as a traveler but when a wave of external money comes into the industry?
If I look at public valuations - such as Expedia trading at 10x EBITDA for a company growing 20% - there is nothing frothy about that. I see a lot more froth and hefty valuations in the private side, which is why it's hard right now for public companies to buy private companies.
Because if you are public and trading at ten times EBITDA and you are private and you expect 100 times EBITA, it's a highly dilutive transaction for the public company to buy the private company. So we don't see a lot of that right now.
We probably see a little excess heat in the private market, but that doesn't mean we're going to stop investing. We see a lot of interesting stuff. But it's definitely excess heat.
Airbnb and Uber are two of the largest companies created in the past 10 years. Define 'orthogonal' and how those two companies fit into that rubrik.
By orthogonal I mean finding an angle of attack to a market that is at a right angle to the consensus approach. This allows you to create new markets and beat entrenched incumbents because you are playing a different game.
If you look at the guys who really created enormous value over the past 6 or 7 years, you've got Airbnb - totally an orthogonal competitor. You've got Uber - totally orthogonal.
In the case of Airbnb - the conventional approach to the market was home listing classifieds. By creating a 2 sided marketplace - and enabling the transaction between buyer and seller - they actually re-defined the market in a way that it has been difficult legacy players to follow.
In the case of Uber, many software companies had been trying for years to make taxi and limo bookings easier by connecting the reservation systems to the internet. Uber attacked the human transportation problem in a totally way. They did not seek to enable the existing infrastructure - but created a totally separate marketplace that radically expanded both supply and demand.
In both instances, you had visionary product leaders who re-imagined two fundamental questions in travel - where to stay and how to get there.
And then you have some players like HotelTonight that came in and used mobile disruption. And then many players outside of the United States, such as in China with Qunar and in India with Cleartrip.
The fact of the matter is that business pivots and you get lucky - it all goes back to the team. What we've all learned is that when you're feeling uncomfortable, that's the one that you should pay attention to. When there's consensus, that's when you have to stay away.
Where do you see particularly undervalued sector in travel, or areas that aren't seeing as much work as you expect?
Generally, I see a lot of startups and a lot of money chasing startups. It's hard to find a place where no one is tackling it or there's no money. You have a lot of both today. Here are some thought starters.
Elon Musk took on seemingly insurmountable problems: electric cars, satellites, rockets. A lot of entrepreneurs can't dream that big.
They don't have the intellectual arrogance to dream that big, and so they take on small problems. And I see a lot small problems being addressed by really smart people. The problem is, if you win, the prize is pretty small.
Because you addressed a small problem.
Take a company like SilverRail, that I'm invested in, trying to build effectively ITA Software for the rail industry.
What most people don't realize is that ITA took 12 years and a lot of hard work. And SilverRail will have a similar gestation period. You have national governments involved that are running rail search, inventory and pricing systems. And so that investment is not for the faint of heart.
You have to believe that someday searching and booking global rail will look similarly to what ITA did for air search. Those are not the sexiest things - everyone pays attention when its getting funded, and then it fades away because it's just work.
The seemingly insurmountable problems are the most interesting. Why doesn't someone fund a supersonic jet flying from New York to LA? We used to have supersonic service from New York to Paris.
Doesn't make any sense - or maybe it does makes economic sense. There's got to be an Elon Musk to make that happen. There's no private or public transportation that gets you there that fast.
But we know that it is theoretically possible. So I'm hearing some murmuring about tackling that - it's going to take an enormous amount of money and the market's small.
But there are probably 100 people that will pay a limitless amount of money for that jet. If Moore's Law is applicable to something like that, we ought to be able to build them cheaper and so forth.
Really hard problems scare people away but ironically most funds today are looking for people tackling really hard problems.
The really easy because the problem is small so victory is small. Or you're deluding yourself and you're making a marginal improvement in a space where you can't capture that much market share.
As we said today, if you are going up against Priceline or Expedia today, you had better have a product that is 10x better or doing something that is different. Because you are never going to be able to outspend them on marketing. Airbnb did something that's different.
HotelTonight did something that's different.
The other side is that I am a believer that software is eating the world. The last ten years has been about wiring hotels to the Internet.
But yet my search experience and my traveling experience is roughly the same, around things like check-in. Why have hotels lagged the airlines?
That whole part of the guest experience is up next - I've given my credit card to the brand.com site, and now what is my experience between that moment and the time I check out?
Getting the room I want, seeing the synthetic view from that room, seamless check-in, doors that unlock, stuff in my room that I require - that will all occur and we're investing in companies to make that occur.
That's a very big market, with 5.5 billion occupied hotel rooms. Every one of those travelers wants a better experience.
So personalization is the next step.
I'm a walking GPS. They know when my car pulls up to the hotel. There's a lot of things, whether using iBeacons or other technologies, that you can start to deliver to me in a very personalized way - that is both accretive to the hotels because they an generate more revenue, the OTAs can generate more revenue, and I'm thrilled because I have a better experience.
Eight years ago, when the airlines really starting tackling this, I remember people telling me that people will never pay for an aisle seat or a window seat, they'll never pay for more legroom, they'll never pay for their food, they'll never pay.
The reality is that I pay for an aisle seat and my food - and I'm happier. Because I know what I am going to get. I didn't like the unpredictability of it. So now they've differentiated the experience, people will pay for the experience they want to get.
Hotels have a much wider ability to differentiate than the airlines, and yet they do none of it today. It's lost opportunity. What do they do at the front desk? Maybe a free upgrade, which is good for the guest but totally random.
The hotel's missing the revenue opportunity, so someone like CheckMate can really help.
All of a sudden, whether I book on an OTA or brand.com, I get a notification that my room is available for check-in. Here's a discounted upgrade, your king bed, we know who you are and we've got your stuff in the room.
These are the experiences that Uber has learned how to deliver. It's not an easy problem to solve, as you have a lot of disparate hotel systems and places to book.
The hotel doesn't know the email address or the phone number of any of the customers that booked on an OTA, so how do they actually communicate with those customers? Those are big problems to solve. Again, that's not trying to beat Booking.com at booking, it's trying to do something different.
How does the OpenTable/Priceline purchase slot into this? Restaurants are travel now. How does personalization/merchandising/up-selling fit into the way you see the travel landscape?
I would bucket that in two different ways. What Darren said in his earnings call about OpenTable is that Priceline has made it very clear that they want to own more of the software stack that enables the hotels to do all of the things they need to do.
But in order to do that, you have to buiukld a software product and then sell software to the hotel. That's a very different business. But OpenTable did that, effectively building a property management system and sold it to restaurants - and that enabled them a very unique customer experience.
For the first time, we could see live reservations at restaurants.
To deliver a better experience to the end user at Booking.com or Expedia, you've got to build better systems for hotels.
Darren said that OpenTable was about 1) learning how to be a better enterprise software company and selling software to hotels, and 2) effectively treating guests as people instead of a number by being able to collect more data on personal preferences, such as what type of restaurants I like to eat at. You can build a customer profile that allows for complete transformation of the hotel experience.
Think about it - if you were just worried about how to get the hotel plugged into a search engine, Big Data is not important. We haven't had the luxury of thinking about these problems.
We've solved the first generation problems, and the technology has evolved to the point where we can start solving the second generation problem. It's not going to happen quickly, but it's an exciting time for the consumer.
We've been talking about it for a decade, and now the catalysts are occurring for this all to thrive.
The airlines talked about this for years, and eventually, one day you showed up to the airport and it was all kiosks and mobile phones.
What happened to all the people? It didn't happen fast - they worked on it for a decade and then the Cambrian moment happened and it all occurred. The same thing is now happening on the hotel side.
We will have this experience enabled by the supercomputer in our pocket where the car shows up automagically to pick me up, I roll into the hotel and automagically walk into my room and it's exactly as I knew it was going to be because I saw it first online. That's the fully automagical experience.
We're going to see way more of that, as the cycle times are dropping. A lot has been percolating under the surface today, and I think you'll see a lot of this accelerate over the next year.
As an investor, I have to earn returns for the people who invest in my fund. But as an entrepreneur and someone who has hung around this, I get excited about building products that actually make people smile and make their lives better. That makes people say - holy shit how did that happen?
On stage, you said that you were "tired of seeing so many entrepreneurs wasting so much time making a tinu turn on a screw at the top of the funnel. What lessons did you learn about the Room 77 experience? Do you think that Room 77 was working on too small of a piece of the funnel? If so, how does a company approach that moment of truth when the opportunity isn't meshing with the company's solution?
The vision behind Room 77 was large - to build hotel only metasearch on a global basis. To be the Booking.com of meta. That is a big idea - worthy of a venture bet.
Remember, at the time, Trivago was still a small German player and Tripadvisor was still doing pop-ups circa 1999. We pioneered room maps and room views (thinking that this data would help us drive alot of direct traffic) and we pioneered instabook - the idea that you could close the transaction on the meta site.
However, vision is one thing and execution is another. It turns out that the team spent too much time on the room maps and views (which were ahead of their time) and we did not build a team geared toward building a big global brand.
By the Fall of 2012, the world had changed a lot. Tripadvisor had gone meta, Expedia had bought Trivago, and Priceline had bought Kayak.
It turns out we moved too slow - and others pivoted into our lane. So the team responded - licensing the core technology to Google, moving the Room 77 brand into a mobile only hotel search brand (which has doubled its revenue since the Google deal), and launching Checkmate which has become the leading SaaS platform for guest interaction and mobile check-in.
Just last week, Expedia, Orbitz, Kayak, Concur, and many others announced that they will be using Checkmate as their mobile check-in platform - no doubt this is another big idea with a lot of momentum.
Will there be any big winners, or will there be a bunch of smaller players that have to integrate and play nice? Who will be the glue?
This is the billion dollar question that I'm trying to answer. There will be a very diverse ecosystem of software companies competing to be the big winner. It's not yet clear how that all ends.
One of them may buy up the other ones and become larger. For example, Micros is a $5 billion company that Oracle just bought. So Oracle has intentions in this world, SAP has intentions in this world.
So will Oracle roll up all these companies, will SAP roll up all these companies, will Priceline roll up all of these companies, or will Expedia do it? Or will some investor like me help to do it among a bunch of different private companies? That's the big question.
Irrespective of how that comes together, there is going to be a lot of action. It's ultimately going to be good for the consumer either way.
How far will seamless travel, automation and personalization go?
The world of search is moving from ten blue links to predicting your needs and answering your questions before you ask them. As Larry has said, Google wants to be your brain and anticipate questions before you ask them.
Again, I have a supercomputer in my pocket. It has my calendar in my pocket and knows when I'm going someplace. Do I really need to go run the query for the New York hotel room?
My calendar knows and I have a hotel search app on my phone - can't there be a smart search wizard that runs in the background and searches my top five hotels for me?
All of the pieces of that puzzle exist. Google bought Room77's technology earlier this year - that's what they were working on, and that's what Google wanted to buy. And Google Now is already anticipating my needs.
Whether its Google, Priceline, or Expedia, it's not necessarily going to be a startup that develops predictive search technology. It's going to be one of the existing players. Room 77 was in the vanguard on that stuff, but the reality is that all these guys are working on it.
If you consider rank order priorities for these CEOs, that's not the first thing you would have worked on. First, you would have hooked up the hotels to the Internet, and then the in-travel and post-book experience comes next.
Figuring out how to drive better conversion and better customer satisfaction - and product differentiation through personalization - are all next.
Once we know that, what do we do with it? It's a Big Data problem. Michael Mortiz [of Sequoia Capital], was asked how he could invest in Skyscanner in 2013, this is all played out!
He said something that I totally agree with: "We're thirteen years into this whole experiment." We're going to look back in 2050 and these will be the stone ages. 2014 will be the fucking stone ages.
I completely agree. As creators and investors, we have to maintain that perspective while also respecting the size of the incumbents. There are certain things you can do and certain things you can't do - yet, there's plenty left to be solved.
What about travel agents? What's the role of the human here?
For 15 years, I've said that the right answer is a computer that can be as smart as the best travel agent in the world. Predictive search is usurping the role of the travel agent and that is the direction that I would bet on.
There could be some of it that is human enabled. I'm not going to bet on that, I'd be more interested in a Siri that can automagically predict the travel. But the party that will do that is the ones with teh data, and that's the big search companies. It's hard for a small company to build that without the data.
From a Room 77 perspective, there's a lot that we continue to work on - including the core meta search technology. In terms of the dream, and why Google licensed the technology and much of the team went to work there, is that the dream is going to happen at a place like Google.
Finally, let's talk space travel. At what point do we start seeing a new gold rush for the space travel ecosystem?
First, I would talk about travel enabled by space. For example, Elon Musk's micro-satellites that are going to fly in formation and cover the planet to provide high-speed internet in remote locations.
That, along with things like supersonic jet travel, will enable us all to explore the globe than we do today.
While it's fascinating to go fly around in space, the reality is that the vast majority of people on this planet do need spend a vast majority of time traveling on this planet - let alone leaving the earth.
Modes of transportation and ubiquitous global communication will enable people to just move around more than before - both where they live and where they travel.
You might even see some de-urbanization because urban centers are becoming so expensive - and now we have technology that doesn't require me to live in urban centers. All that is fascinating when it comes to geographic shifts over the next 25 years.
The big thing is: what will space enable?
NB: Right angle blacktop image courtesy Shutterstock.