“Ripe to be replaced.”
That’s how Par Capital Management portfolio manager John
Buchanan describes the legacy technology that powers so much of the travel
industry and why he sees ample opportunity for entrepreneurs in the industry.
And it’s an opinion echoed by two other investors that joined
Buchanan on a panel at the Boston Travel Tech Innovation Day November 20 hosted
by Plug and Play, Sabre and Flight Centre Travel Group.
In the discussion centered around venture capital investment
trends in travel, F-Prime Capital partner Gaurav Tuli also made note of the powerful
position some of travel’s “incumbents” play in the industry – “dominating customer
relationships, dominating infrastructure – and doing it very profitably.”
But those dynamics also put them in a vulnerable position
for disruption, Tuli said.
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“The innovation well often tends to run dry for large
companies … and you see startups bringing some really exciting things to the
market. That’s happening in travel at a rate that I’ve never seen before
relative to other [industries],” he said.
The path to success as a startup in travel, however, can be particularly
challenging because of the powerful position of the legacy players and inherent
challenges in accessing data and connectivity across the industry. And that can
deter the flow of funding as well.
“It’s very hard for them [startups] to get involved with the
legacy guys, so the VC dollars don’t flow into it ... so from an innovation
perspective it just kind of limits the industry as well,” Buchanan said.
Tuli took a more optimistic stance on the impact of the
incumbents.
“That does put a tremendous of pressure for big disruptive
ideas to become successful coming from a startup, but that’s why we invest,” he
said.
“There are some really good entrepreneurs [in travel], there
are incumbents that are established, but the level of innovation that customers
expect is much higher than they themselves can deliver. And it’s not an area
that has received tons of venture investment, at least not on the B2B side.”
Down rounds
After record-setting travel startup funding in 2021, when
companies tracked in Phocuswright’s latest State
of Travel Funding report raised $16.1 billion, funding is down dramatically
this year. To date, funding to startups tracked by Phocuswright is at $3.7
billion – on track to be the lowest level of investment dollars raised since
2014.
The innovation well often tends to run dry for large companies … and you see startups bringing some really exciting things to the market. That’s happening in travel at a rate that I’ve never seen before relative to other [industries].
Gaurav Tuli - F-Prime Capital
According to Phocuswright manager of research and innovation
Mike Coletta, one reason for the drop is “the glut of sky-high valuations that
resulted from the period of low interest rates and easy money … are now
falling. As valuations drop in the tougher fundraising environment, securing
follow-on funding is much harder since no company wants to raise more money at
a lower valuation than they previously secured.”
That scenario is known as a “down round.” During the panel
discussion, JetBlue Ventures managing director of operations and partnerships
Stephen Snyder said while the concept has a negative connotation, it is not always
a bad thing.
“From an investor perspective, yes it’s a difficult signal
about the state of the company, but it creates more opportunities as well,” he
said.
“That check I was going to write for a million dollars is
now worth a much larger slice of the pie. … I think a lot of folks are
sidestepping the down rounds ... and we don’t have a problem with that.”
Buchanan said he had done a down round himself as a startup
founder and that not only does he not see anything wrong with it, but it can
also be a positive signal about the founders and their willingness to pivot.
And Tuli encouraged founders to be realistic. “I think it’s
better to rip the Band-Aid off, do the down round, get the reset. You figure
out which of your executive team really wants to stay as part of the company longer
term. ... It builds resilience in a company, and it’s just better to do it
sooner rather than later,” he said.
Looking ahead
Panelists also noted the tighter funding environment has put
pressure on travel startups to generate revenue and have product-market fit –
both efficacious outcomes.
“I think the days of multi-billion dollar valuations for pre-product,
pre-revenue companies are over – I hope. But I’m sure there will be another
hype cycle that gets us excited about that in the future,” Snyder said.
I think the days of multi-billion dollar valuations for pre-product, pre-revenue companies are over – I hope.
Stephen Snyder - JetBlue Ventures
“Over the last few years we sat out a bunch of rounds for
ones that we thought had gotten over-valued, and we feel really justified in
that now.”
And noted Buchanan, startups as well as entrenched travel
companies have all adapted to this more cautious financial climate.
“It has forced a lot of inefficient public companies to really
focus on their cost base. So now you see Expedia, you see Tripadvisor, you see Booking
– all those guys have done a really good job at realigning their cost base,” he
said.
“And no longer are we talking about burn [to our startups] …
companies are actually now cash flow positive. It’s almost like you have to
force them to spend cash, because they’ve been so conservative over the last year
or so.”
And while funding is down sharply this year, the money is
still there – just on the “sidelines,” said Tuli.
“People are itching to put it to work but it will take some time.
My expectation is we’ve seen some resilience in the seed stage market. … And we’ve
seen some recovery in the public capital markets. So over time that converges, and I think next year and the year after it should be a little bit healthier
and hopefully return back to what is normal, which is like 2017, 2018.”
And Tuli expressed excitement about the positive impact of
startups on the travel industry and encouraged all suppliers – large consumer-facing brands as well as the B2B technology providers – to engage with these early
stage companies.
“I wish all the large players in travel would be willing to
try things out with startups,” he said.
“At minimum you learn something new, but in the best case
scenario it can be transformative to your business.”