Travel startups: What's the ten-year investment, growth and failure picture?

The number of new travel startups being founded is slowing in the last few years, coinciding with a significant increase in the amount of investment flowing into maturing businesses.

The slowdown in founding activity is contrasted with the explosion of new travel startups that occurred seven to nine years ago during the rise of mobile, social media and the sharing economy. From that explosion, winners are emerging and funding is concentrating into those winners.

This is one of the key findings from Phocuswright's updated State Of Startups report, due for release shortly.

PhocusWire's sister brand has spent the last ten years tracking some 1,900 travel startups, a period that has seen $84 billion coming the way of travel startups through either funding rounds or acquisitions.

According to the research, investments and deals hit $36 billion during the two-year period 2015 to 2016 - a figure that has already been surpassed in the 1.5 years to the end of the second quarter of 2018.

But this 3.5-year time frame has seen a steady decline in the number of travel startups being founded from around 300 in 2015 to 2016 to 150 in the following 18 months.

In contrast, almost 900 new business were created between during 2012 to 2014.

Market switch

The massive skew towards acquisitions and funding rather than founding has meant that 87% ($73 billion) of the total amount being invested in the market has come since 2015.

In fact, according to the research, since 2015 just six companies - Uber, Lyft, Airbnb, Ola, Grab and Didi - have raised $57 billion between them.

And ride-share giants Uber from the United States and Didi in China have accounted for over half of that figure.

Phocuswright's manager for research and innovation, Mike Coletta, says if the volume of individual deals over $100 million is removed from the total there is $14 billion left.

Until 2011, the majority of that slice of the overall funding had gone to companies based in North America, with European businesses a close second.

Since 2012, however, Asia Pacific-based travel startups started to surge onto the scene and have accounted for the most money ever since.

European businesses since 2016 have attracted more money than their counterparts in North America, Coletta says.

Business types

Phocuswright's research shows that excluding the so-called outliers (the six brands noted above), lodging-focused brands have account for the most amount of new businesses entering the market, just short of 20%.

The sector has a sizable portion of the share of funding, but ground transportation travel startups (ride-hailing, car, bus and rail) have still captured the most funding.

The much-talked-about tours and activities wing of the industry still lags behind air-focused services for the number of new businesses and is in third place after air and packaging startups in terms of the amount raised since 2008.

Travel startups that provide some kind of booking-related service have secured the vast majority of funding and account for over 40% of the new companies on the scene, Coletta says, although these are primarily consumer-facing businesses.

Overall, 75% of the $14 billion in investments or acquisitions in non-outliers since 2008 has gone to B2C companies. Just a quarter of the number of new travel startups were B2B, according to the report.

The ugly truth

Coletta says although officially some 25% of travel startups have closed (12% have been acquired), this figure is likely to be higher as they are able to operate as "zombie companies," in which they remain live but have no operating status.

Less than 1% of the 1,900 companies that Phocuswright tracks have filed to go on the public financial markets.

Interestingly, both B2C and B2B travel startups have an acquired rate of 12%, but the failure rate for consumer-facing businesses is over twice that of business service-related companies (27% vs. 13%).

Perhaps unsurprising to the market and keen watchers of startup activity over the last decade is the failure rate of social networking and user-generated content-focused businesses, which have a failure level just under 60%, followed by deals sites, rich media/video services, and inspiration-, content- and itinerary-related businesses which fail at around 40%.

These brands are essentially at the top of the consumer funnel, Coletta says, meaning they are further from the transaction and therefore find it harder to survive.

Air-related new companies have the lowest failure rate at 20%.