Travel investors talk areas of focus, the right fit and U.S. funding

For travel startups with a product in the market and with early funding, perhaps from friends and family, navigating the investment landscape is challenging.

At the Enterprise Ireland Travel Tech Summit last week, funding executives provided insight not only on what they look for but also what startups should be asking from an investor.

While some of the elements might seem obvious, such as the founding team and potential of an idea to go big, others are less so.

Katherine Grass, venture partner at Thayer Ventures, a specialist in travel tech startups, says new businesses need to understand the motivations of the investors.

At Thayer, which is mostly focused on Series A investments, Grass says two things standout: first, is a need to return investment on the fund, which means ideas with a big enough market opportunity to achieve growth.

“There are some amazing things in travel where you can solve a real pain point," she says, "but the market size and market opportunity, that you were to fully address, just isn’t big enough to drive sufficient returns for a financial fund to want to back you.”

The second item is the customer segments in travel and the difficulty and time taken to convert them.

Grass says: “For example, if we were to see an idea selling into a full service airline, we know the time to sell into airlines is a bit long and we would worry about how quickly a company could scale and the profits.

"So, sometimes those companies start to limit themselves because the sales cycle into an airline or a travel management company might be longer that what that startup has realistic expectations for.”

What's hot?

Current areas of focus for Thayer are “anywhere from hospitality solutions to smart cities and transportation.”

Grass says the company sees huge traction and potential for alternative lodging models, such as “let to let” and areas that are trying to professionalize the market.

“There are still huge margins in that and a lot of IT inefficiencies," she adds.

For JetBlue Technology Ventures, which now has 24 investments and plans to announce its first outside the U.S. soon, the focus continues to be on five areas including customer service, operations and maintenance, and distribution, loyalty and revenue management.

Looking at what has changed when it comes to travel startup investment in recent years, Amy Burr, managing director for partnerships and operations, says the check sizes have got bigger.

She says investments used to be in the range of $500,000 to $1 million but are now between $1 million and $3 million.

“Part of it is probably that we’re investing a bit later than we were, we don’t do pre-seed anymore," Burr says.

Grass also acknowledges the bigger rounds for some startups and says “good startups always have a choice” of where they get their money and should really think about the investors, their industry knowledge and ability to help the startup grow.

She adds: “There’s a role for different VCs in each round. When we’re doing a Europe-based investment, we’ll co-invest with a local VC. Now, we’re seeing within certain industries a lot of excitement, like alternative lodging with a lot of investors wanting to pump money in which is leading to bigger rounds, much quicker.”

Grass also points to growth in ground transportation and corporate travel as well as from funds which are not necessarily travel specific investing “extreme amounts of capital.”

Other investors also addressed the value for international startups of raising money in the U.S.

Pedro Santos Vieira, an angel investor who looks after partnerships for 500 Startups, says the venture fund looks for whether the company is entering the U.S. market, as well as the better deal terms and the expertize that a U.S-based board member can bring.

Burr adds that the possibility of introductions as well as the “ability to gain an initial client in the U.S. are also of value to non-U.S. startups.“

Right balance

Some final thoughts were given on the balance between travel startup founder naivete versus knowledge of the industry and its legacy technology and processes.

Burr argues that working with a corporate venture capitalist such as JetBlue helps with that “deep knowledge.”

She adds that it’s also good to have entrepreneurs who have never worked in travel because they look at problems differently.

“You hear a lot of ‘we’ve always done it this way’ and entrepreneurs do give the perspective of ‘why can’t I apply this technology’, or ‘why doesn’t it work this way?’"

However, as Grass concludes, be prepared for a short conversation if the opening pitch is along the lines of an experience putting together an itinerary for backpacking with friends.

* This reporter's attendance at the event was supported by Entreprise Ireland.