The travel and transportation industry is going through the biggest crisis in its history.
The FTSE 350 Travel and Leisure index, indicative of trust in the industry’s future performance, has fallen by more than 50% and the coronavirus impact on business is extremely challenging due to comprehensive travel bans, quarantines and consumer caution.
The crisis is by magnitudes more severe than any previous external force that has been inflicted on the sector.
Impact of September 11, 2001
Impact of 2003 SARS crisis
Impact of 2008 financial crisis
Impact of current crisis
The situation puts almost all travel companies in dire straits. Stock prices have halved, assets are massively down-valued.
Even more so than corporate entities with deep pockets, many startups are in for a rough journey. Private companies with lower brand equity are seeing even stronger negative effects due to the current crisis than the public giants:
- Cash crunch: bookings and revenues are down 50% to 95% and companies are seeing their runway shrink much faster than anticipated. Notably, many high-growth-yet-negative-EBITDA later stage companies face significant cash flow issues as their runway melts away quickly. Those companies have generated positive contribution margins (revenue-cost of goods-marketing) in the past, which has contributed to refinancing overhead costs. Now these revenues are gone and OPEX is harder to reduce than for early stage companies.
- Early stage startups see different challenges: the financial impact on their runway is not that severe, yet they cannot keep working on the product, market fit strategies or A/B testing their marketing campaigns.
- Systemic risk for many startups, notably B2B: they are in jeopardy due to losing SaaS revenues and the potential bankruptcy threats of suppliers and distributors they are dependent on.
- Impact on raising new funds: early stage travel & transportation startups are, so it seems, temporarily blocked from relevant fresh capital.
In short, coronavirus has caught most startups completely off guard. Those that haven’t raised a round in the last few months face existential threats. Many startups are thus now in dire need for additional cash, during the worst of times.
In the following analysis, we shall give an overview of the current investor sentiment and impact on startup funding in the short and medium term, as well as discuss likely outcomes for the industry.
The first thing to understand is investors have also been hit hard by the outbreak of the coronavirus. For them, the past few weeks have mainly been about bringing stabilization to their existing investments.
Some VCs also see themselves confronted with unsuccessful capital draw-downs as their limited partners (LPs) have slipped into financial troubles. This is not the best time to ask investors for money.
At the same time, once the first shock has digested, there is still a lot of money "in bank."
Many venture capital companies have just closed their latest funds. They have dry powder at hand, which they have been mandated by their LPs to invest. Not doing any deals for a longer period of time would take away their legitimization for earning a management fee, which is the basis for financing their day-to-day operations.
Hence, investors will need to reengage in the investment game at a not-too-distant point in the future, especially as the current crises will give rise to new market opportunities.
Now, the timing of that rebound of investing of course depends on the further development of the coronavirus crisis and may differ by geography.
However, most VCs and private equity operators that we talk to around the globe would agree that within the next 12 weeks, funding efforts - at least, engagement with new opportunities - will need to resume.
VC funding is not dead
Some investors are continuing to back companies, even at this point, and such levels will go up as soon as there is at least a level of certainty around the development of the crisis. Note: This is very different from saying investment will resume only post-Coronavirus.
We have just ourselves embarked on launching a micro VC-as-a-Service fund for the travel and transportation industry.
Compared to the U.S., where 10x the money is spent on corporate venture funding, Europe has lacked a corporate startup funding culture. We are convinced that those corporates coming well out of the coronavirus crisis - aware of the need to innovate and excel in a more dynamic marketplace - will seek accelerated access to and investment into cutting-edge startups.
What startups will be seen as the ideal investees in the current climate:
1. Those with the longest runway
A lengthy runway serves as an insurance policy to investors that the company will survive coronavirus.
Operational budget cuts are hence advisable across the board, even to those companies with a current runway of 12+ months. The rule of thumb here is: until coronavirus calms down, brands better have another 9-12 months of runway ahead of them. How to best achieve this of course varies from company to company.
The chart below gives an indication as to how a company may ponder their strategic options.
2. Startups that make most of the moment will be advantaged
The travel landscape will be very different post-coronavirus. And any company, the older it is, has internal deficiencies that don’t get resolved in times of day-to-day operations.
Companies should use the crisis to regroup, (re)focus and take a minimum of two months to prepare for the post-crisis period.
Things to look at whilst customers are absent are: internal processes; technical debt of previous months and years; data quality; and optimization of marketing performance.
The goal, notably for later-stage companies, needs to be to come out of the crisis leaner and more efficient, effective, focused and professional than before.
3. New investors will look for reassurance
Existing investors need to show commitment, perhaps more so than ever, to signal that they are willing to help their venture through tough times. This is the best indicator of trust for new potential investors.
4. Investors will place an even stronger focus on the fundamentals of a business
It has always been more difficult to raise money in downturn periods, simply because investors become more risk-averse, hold their cash together etc.
But during the past decade, we have seen the rise of multi-billion dollar-valued but highly unprofitable companies.
Already, pre-coronavirus, the investment climate had changed. The current climate will be a boost to this, with the sustainable growth becoming more important. A focus on keeping costs in check will be a likely medium or even long-term effect of the current crisis.
5. Technology will be king
The crisis will hit companies without a unique value proposition the hardest. Compared with other industrustries, travel still lacks strong data, machine learning and, in general, automatization on many levels.
Investors will look more closely than ever at the defensibility of business models and underlying technology.
6. Leisure-focused brands will have a slight advantage
The leisure market is already more local, atomized and, overall, less technology-led than the corporate travel market. The sector will also bounce back more strongly.
Conversations with our portfolio companies and other travel startups, as well as with our co-investors and other venture capital and private equity companies, lead us to predict that, by 2022 at the latest, leisure travel will have bounced back to 2019 levels.
This is likely to happen in phases. Startups will be affected in terms of their ability to raise funds and grow their business, according to what area of the industry they work in:
- Leisure travel in destinations that can be reached by ground transport will see an earlier comeback.
Individual trips will grow faster than flights+hotel packages.
- Package travel will only see an uptick in a third wave. There may be a catch-up effect on package trips to the Mediterranean in Europe this summer, should coronavirus fade quickly in the region.
- Corporate travel could be changed for good and decrease in total market size post-coronavirus, as companies adopt new practices that reduce the necessity for corporate travel. This may also affect startups working in the field.
7. A shift in risk assessment from VCs
Early stage companies (small to absolute EBITDA loss) will be seen relatively less risky than later stage companies.
Nisa Amoils of Forbes says: "Early stage pre-revenue tech startups become, in relative terms, less risky. At the early stage, risk doesn’t change much in absolute terms but changes dramatically in relative terms. If you at normal times evaluate a pre-seed startup risk to be, say, 100x higher than that of a later-stage company, at the time of crisis this could become only 20x.”
While the future may look less bright than three months ago, being an early stage brand during the current climate is beneficial in many way: early stage companies have little to no market exposure and little to no supplier risk.
Also, a valuation is commonly not based on hard KPIs like revenue or EBITDA. And, finally, there is a certain likelihood that, post-crisis, quite a few old players will fail and the incumbents will be gone. The market will then open up for younger brand perhaps more quickly than without the turbulent market conditions.
Conversely, while the crisis will hopefully only be in play for a matter of months, it is probably safe to say that latter stage companies will not be able to raise solely on pre-coronavirus KPIs, but must build up traction once again to prove to investors that they are still able to operate post-coronavirus. The longer the crisis lasts, the more likely this will become.
Although the crises may have long-lasting effects and there will be changes to travel behavior and patterns, we do not believe that the travel industry as a whole will be in jeopardy.
Numbers from the past two decades are telling. When 9/11 sent shockwaves around the world, the World Tourism Organization still recorded 588 million travellers on a global scale. Nine years later - after the peak of the financial crisis - 818 million people were still traveling (2010).
Fast forward again and you can count 1.3 billion travellers in 2019. It is impossible at this point to predict the precise end of the coronavirus crisis. However, it is fair to assume that nine years from now, more than 1.5 billion travellers will be taking leisure and business trips around the world. Constituting a tenth of the global economy, travel will remain an attractive field of investment.
Commonly, it takes seven-plus years to grow a successful startup. By the end of the decade, currently nascent, disruptive technologies and companies facilitating travel booking, processing and traveling will have seen accelerated adoptance, scale and will remain attractive to investors.
About the authors...
Jan-Frederik Valentin, Anton Werner, Alexander Trieb and Cassian Silins are partners and Simon Schiller is a junior analyst at Ennea Capital Partners