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 epicenters.

According to Phocuswright's State of Travel Startups data, about 2,000 active travel and mobility tech startups have been founded globally since 2008, and venture capitalists invested $31 billion in them in 2017, up from $19 billion in 2016. And the allocations in early 2018 - $4 billion in the first six months across 160 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’s 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 Ventures: Many 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 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 - Skyscanner, Kayak, Trivago 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 Expedia, Ctrip, Booking. 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 traveling.

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

Share this quote

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 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 inefficiency.

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 - GetYourGuide being 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 on 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 skeptical if this is working, but we see activity.

Challenges…

Blachford: They [categories] 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 much money floating around. A lot of seed investors - I certainly feel like this - are being very careful right now because once you get a lot of money in a market like this, it gets a little scary.

Two things happen. In terms of investing in specific companies, you get people willing to pay valuations that make it difficult to get a return. That’s just supply and demand. The more worrying thing is … you can invest in a perfectly good company with great founders and a great market, but if your competitors have too much money and they’ll spend it irrationally - hoping Expedia buys them or something - it’s very hard to make a return. That’s what I mean by scary, because you can’t control that at all.

Hemmeter: For startups, the sort of golden formula is the cost to acquire relative to lifetime value. It’s always easy to get tens of thousands of people to set up accounts and engage and find you - there are enough humans out there that by word of mouth alone you can get there, but to get into the millions of users it just takes a massive balance sheet.

Some companies can manage to break through, because they continue to raise lots of money, but for most startups it’s very difficult. The ultimate cost to acquire customers at scale is too high. And it’s hard for investors to jump on that train.

Every time a startup speaks with an investor they should be able to articulate clearly the progress they’ve made in the last 90 days...

Chris Hemmeter - Thayer Ventures

Share this quote

If you say, "I’ll start a travel website that will inspire people to go to places and when they get on location I’ll have content for them to discover what to do," you just scratch your head and say, “That is exactly what Google Travel is up to.”

They have Google Local, they have content, they have all of it.  They are good at it, and they are getting better, and it’s their core mission. So everyone trying to do a segment of that, they are just swimming upstream.

Maybe six, seven years ago, it seemed like everyone was talking about travel inspiration, and one of the first statistics they would display is how people had to go to 15, 20 websites in order to plan a trip. They would make the intellectual leap that therefore it’s inefficient and not working, so I’m going to give them one website that does it all, or one app or one artificial intelligence bot that will spit out their summer vacation.

What turns out to be the case is that, because it’s an infrequent purchase, the psychology of anticipation and discovery is pleasurable. So the idea of consolidating the whole travel discovery experience down to one site, one page, one app - it just fails miserably. The idea that you will talk to your home device and it will spit out a trip for you, I just don’t buy it. 

Saller: One thing we are seeing is a lot of startups that try to enter some niche market, like they want to offer yoga vacations or whatever. Maybe you can build a viable business there, but something like that is not a venture case because it’s too small. That is starting to be a problem in travel because some of the big segments are already occupied in way that it seems difficult to build a new successful company, and then a lot of the segments that are not occupied yet are too small to build something relevant.

I’m usually looking at, how do you acquire customers, and what’s the marketing channel that’s scalable and allows the company to become big? When we did Swoodoo and Kayak, you could get a lot of traffic from SEO, and you could do search engine marketing profitably and maybe TV advertising, and in this way acquire customers.

But all of these marketing channels have become really expensive now. SEO is pretty much gone, because in travel everything is ads on Google, and all the ads have started to be so competitive, and Google is so greedy in what they are charging that in a lot of spaces it’s difficult to do marketing profitability.

Evaluating startups…

Blachford: You are investing so much in the people. You want to see strategy, you want to see a market that makes sense. But from the moment you write a check, you know the plan you saw isn’t going to come true - it just never does - so you have to have faith in the founders.

It helps an awful lot to have spent a lot of time in operating environments. At Expedia and so on, I interviewed a lot of people for different jobs. You are able to see if they are able to do the stuff you hired them to do. So you calibrate against candidates pretty well. I get pretty comfortable in my ability to decide if I think people have what it takes to survive in the trenches.

It’s incredibly stressful to be a founder. You see how they respond under stress, you see how they respond to competition they didn’t expect and you learn for next time. After a while you are like, “Yeah, this is one of the people who can make it happen.” Without that feeling I don’t invest. There’s no way.

Hemmeter: The things I think are important are, first, a really well-defined understanding of the total adjustable market [TAM] that the company is focusing on. Small TAMs are difficult, because there’s very little flexibility if the company’s initial effort is off target to pivot and support the company, where larger addressable markets create more opportunity to do experimentation and discovery.

And then especially in our world, but also in consumer space - companies need to define in very clear terms the pain, the inefficiencies, something that’s clearly not working. And then that leads into the nature of their innovation - their core product - and inevitably that leads to a conversation about competitive dynamics. Long-term competitive dynamics, not just who’s doing it now and why your startup is better.

The chessboard involves anticipating moves four or five years down the line. How might incumbents respond? Are there parallel players in other industries that might move over?

And then the final three steps in my view are team, financials - which almost always boils down to unit economics – and then progress. Every time a startup speaks with an investor, they should be able to articulate clearly the progress they’ve made in the last 90 days, because it’s one of the hardest things to do as an entrepreneur is advance the ball down the field.

If you are constantly telling people the progress you’ve made in the last 90 days, that’s a really important thing because over time you provide evidence that you are capable of getting stuff done. Which believe it or not, I think most people burn out on that alone.

Saller: The biggest question for me in the beginning is, is it something that can be big? Then the second area I’m looking at is how do you do marketing and how do you scale the business? Do you have a way to do Google SEM in a positive ROI way, or do you have other channels to acquire customers? And then the most important thing in the end is the team and whether we believe they can build something.

In travel in particular, it helps if it is people who have been in travel before, who have ideally built a successful startup before. If you look at the founders of HomeToGo for example - it’s not one of our investments - but one of them was with me at Kayak and the other one was building a vacation rental business in Germany so they knew from the beginning what they were doing. Travel is rather specific and complex, so it helps if someone has been there before and knows what they are doing.

Google has been going after the sector pretty heavily, so what we are looking for also is businesses that are not so suitable for Google. HomeToGo is a great company, but in the end it’s vacation rental metasearch - it’s relatively likely Google will do that. That may not kill them, but it will impact them quite heavily if Google went into that sector.

Mistakes…

Blachford: The classic thing is expanding too quickly. The most important thing is to have a product and to feel it has validation with the customers you want. Product-market fit. Companies that spend money and start growing before they are sure of that, it always go sideways.

The other thing is in travel specifically, a lot of companies start in the consumer market without properly understanding how difficult it is to get the marketing right. Then they try to move into B2B without taking seriously the sales side of it.

So you get people that do good products, but they don’t put enough time in the go-to market. Over and over again they’ll say, “We’ll spend money on Google to get customers.” And you say wait a second, Booking.com is doing that too so how are you going to be able to spend more money than them? And if you get a blank look back, it’s a good indicator.

Hemmeter: The truth of the matter is, it’s hard to build a business to profitability, period. We see thousands of deals to make 10 investments, and then we’re wrong 40% of the time. So it’s not typically because someone’s made a mistake, I think one of the great factors of success is timing. And timing is a function in some ways of luck.

There have been some studies that have shown what differentiates successful entrepreneurs from entrepreneurs that don’t break through are the number of failures they’ve overcome. So it really is a function of taking at bats. Very, very few people have just nailed it on their first attempt.

Sometimes people brush over really understanding the details of their addressable market and the human dynamics. How big is it? Is it growing? What’s really going on in that marketplace? They’ll get really excited about what they can do with a new app and software, but they haven’t really figured out if somebody cares. They assume everybody will because their stuff, of course, is always the coolest. But human beings - it’s hard for them to change.

Saller: Going after segments that are too small. We still see companies that think, we’ll build a travel inspiration site and then after we build the audience we can start selling hotels and flights to people coming to our site. I don’t think there is a shortage of travel inspiration sites, so it’s not by building another site in that sector you will attract a big audience easily. And secondly, it’s actually pretty difficult to cross-sell or sell an actual product to people who are looking for inspiration. The only company doing well in the content space and selling is TripAdvisor.

So this idea that okay, I’ll build a great product and then people will come automatically, that is over. There are hundreds of thousands of websites, and it’s not that people just find you because you have a great product. You have to have a marketing strategy and a way to scale the business in place.

Travel is also very challenging from a technology standpoint. It’s much more complex than building an e-commerce site, so underestimating the technical challenges and not having a strong chief technology officer and strong development capabilities is another mistake we see.