Travel is one of the world’s largest industries, ripe for innovation and disruption. That’s exactly what the latest wave of travel startups is bringing to the table. That wave rose to new heights in 2018, when startups raised $7.5 billion of venture capital, across 647 deals, the highest level of travel venture funding ever.
We find that the scope of travel venture capital has expanded as well and no longer does just one company, like Airbnb, dominate the conversation. Startups are making their presence known across nearly every travel subsector: hospitality, alternative accommodations, tours and activities, air transportation, and business travel.
In this report, we examine venture investment trends in travel to understand where startups are innovating and growing. Travel startups of the last few years have already disrupted some of the largest sectors in our industry and we expect this momentum to continue.
What You'll Learn From This Report
- An overview of travel startup financing market
- Regional trends in travel venture capital
- Highlights of which subsectors are attracting the most investor attention
- Deep dives into startup trends in accommodations, tours and activities, air transportation, and business travel
- Amiad Soto, CEO and founder of Guesty
- Amy Burr, managing director, strategic partnerships at JetBlue Technology Ventures
- Chris Hemmeter, managing director at Thayer Ventures
- Erik Blachford, venture Partner at Technology Crossover Ventures (TCV)
- Raj Singh, managing director at JetBlue Technology Ventures
- Vanessa de Souza Lage, CMO of Rentals United and Founder of VRTech Events
Want to know the future of travel? One way to get a glimpse forward is to look at what startups in travel are building today. Travel is one of the world’s largest industries, ripe for innovation and disruption. That’s exactly what the latest wave of travel startups are bringing to the table.
That wave rose to new heights in 2018, when startups raised $7.5 billion of venture capital, across 647 deals, the highest level of travel venture funding ever.
These numbers are according to Skift Research analysis of Crunchbase data. After screening and manually cleaning the data to isolate startups primarily focused on travel, excluding secondary travel startups such as ride hailing apps, our universe consists of 3,269 unique companies and 5,410 private funding rounds dating back to 1997.
The surge in travel deals is partially explained by more cash than ever before flowing into venture capital as an asset class. But overall private capital trends were up 40%, while travel rose 53%. The difference, we believe, is explained by a broadening of interest in the travel space.
The scope of travel venture capital has expanded as well and no longer does just one company, like Airbnb, dominate the conversation. Startups are making their presence known across nearly every travel subsector: hospitality, alternative accommodations, tours and activities, air transportation, and business travel.
In traditional hospitality, new international budget brands are aggressively expanding with a tech-forward model. Meanwhile legacy brands are shifting to cloud tech stacks after years of underinvestment. These new systems don’t just modernize existing functionality, but introduce new systems powered by data.
In alternative accommodations the battle is in full swing to see who can build the industry’s leading property management technology platform. Meanwhile, tours and activities retains its mantle as one of the hottest funding areas of travel for the second year running as startups and incumbents alike are in an arms race to bring as much in-destination inventory online as possible.
Some travel startups are rethinking the mode by which we get from place to place: Could planes one day be electric or return to supersonic flight? Back on the ground, advances in machine learning and artificial intelligence are improving airline business processes and operations.
Lastly, long underappreciated businesses, such as those that build B2B (business-to-business) software or that cater to business travelers also had a moment in the spotlight this year and we expect that trend to continue.
Venture Capital Market Overview
Venture capital for travel startups reached new heights in 2018. Skift Research estimates, based on underlying data from Crunchbase, that travel startups raised $7.5 billion last year across 647 deals. That surpasses the prior high-water mark for VC funding set in 2016, when Airbnb raised a massive $1.5 billion series E round.
To study trends in the venture capital fundraising market, we used the Crunchbase database of startup businesses and fundraising rounds. We started by screening for businesses categorized as belonging to the travel and tourism sector. In order to isolate businesses with a primary focus on travel, we then added a custom built filter to exclude certain subcategories. For instance, we excluded ride hailing software applications such as Uber and Lyft, which have a secondary travel and tourism categorization. We recognize that travel is a large revenue driver for these startups, but their primary focus is on local transportation. We felt it was important to exclude these secondary-travel startups as these companies would crowd out the finer trends within travel that we are most interested in.
Next we further screened to only look at travel startups that had received at least one private investment round. The vast majority of the financial sponsors in these deals are traditional venture capitalists, but the lines between private equity, hedge funds, and corporate development arms are increasingly blurring. Though all of these investors are included in our data, we refer to our final screen as venture capital backed startups for the sake of ease.
After screening, and a final manual cleaning of the data, our universe of analysis consists of 3,269 unique companies. These businesses accounted for 5,410 private funding rounds dating back to 1997 and are cumulatively worth $35.5 billion.
It’s true that some of the success is explained by the success of the overall venture capital market which saw funding rise 40% last year. Yet travel outperformed, with funds raised growing 53%. This means that travel’s share of the global venture market inched up from 1.8% in 2017 to 2.0% in 2018. This remains low, compared to other large categories like health care which attracted 15% of funding in the market, or fintech with 9%. Funding for global travel as a category is in line with the 2% market share that restaurants attracted in 2018. It was also similar to the ridesharing segment, which took in 3% of global funding this year, though in past years ridesharing apps attracted as much as 7%+ of global funding.
“If I look in the Bay Area,” says Raj Singh, managing director at JetBlue Technology Ventures, “there are plenty of VC firms that have a travel deal in their past, but it’s usually a [single] travel deal. But now,” Singh explains, “venture capital seems to be much more interested in travel than it has been for a while.”
He believes that Airbnb’s success played a role in convincing investors that travel has strong returns to offer. But to his point, this year, there was no one tentpole company driving this travel venture capital surge, as Airbnb did in 2016. As a result, today’s growth in the travel startup ecosystem has been broader and spanning across a wide range of sectors.
Deal Size and Stages; Exits
2018 was another year of increased prominence for the travel startup ecosystem. A greater proportion of funding rounds than ever before — 20% — were closed on mid- or late-stage companies. Deal size too has ballooned. At the mid-to-late stage, the average round was $46 million versus $15 million in 2013; early-stage businesses as well have seen deal sizes grow to an average of $3.4 million, up from $1 million in 2013.
Some reasons for this evolution are macro in nature as there is both more money being put to work in venture capital as an asset class than ever before and more venture capitalists are paying attention to travel. That naturally bids up the price of deals.
Looking at company age, the median age of a travel startup that raised capital in 2018 2.9 years old, up by more than a year from the average of 1.6 years from 2011–2016. Part of the reason for this is that travel startup founders tend to be older when they first raise capital. To measure that, we looked at the the median age of a travel startup when it was able to raise its very first round of venture capital. That figure was 1.7 years in 2018, up from an average of one year in 2011–2016. This could indicate that it is becoming harder to raise capital for early ventures. Once a startup takes external capital, the median time between raises has been steady at around 1.1 years.
Jay Ritter at the University of Florida finds that companies are staying private for longer as well. His research has found that the median age of a tech company at its initial public offering (IPO) is 10 years today, up from six years in the 1980s. Ritter also found that when these companies do come public, fewer are profitable than in years past. We believe this speaks to the sea of cash flowing into venture capital today. As there is more private cash available, there would appear to be less demand on these large, unicorn startups to go public.
As the travel startup ecosystem grows, the number of exits has nearly doubled since the start of the decade. That said, we believe that the rate of exits has remained relatively stable. So the tick up in exits speaks more to the greater number of startups in the market today than in years past.
Mergers and acquisitions are the most common source of liquidity and there were at least 46 such events in 2018, up from 18 in 2011. And while it is true that large travel corporates remain one of the most abundant sources of cash, it is still not easy to get an exit by any means. Erik Blachford, venture Partner at Technology Crossover Ventures (TCV) cautions founders to think through what the actual needs of a large business actually are and how they fit with the startup’s product. Skift’s own CFO is fond of saying that companies are bought, not sold; meaning that the founders need to focus on running their business first and foremost. Or as Blachford would put it, a business plan to sell to Expedia is not a plan.
Public offerings remain rare as very few businesses, in any industry, ever scale to this stage. Ample funding in both equity and debt markets has helped some companies stay private that, in past years, would have already come public. Ultimately though, this new generation of private investors does not have an infinite time horizon. Accordingly, many startups, now well into middle-age, seem poised to IPO this year. Uber and Lyft have both engaged investment banks and filed offering documents with the SEC. Airbnb also has long been mulling over the possibility of an IPO which may well come this year, though no firm timing has been set.
The United States remains the single-most important country for travel venture capital, accounting for $2.3 billion of funding in 2018, 31% of the global total. However, taken collectively, the most important region for travel startups has shifted eastward and now firmly sits in Asia.
Asia-Pacific is the fastest growing region for travel venture capital, according to our analysis of Crunchbase data. Funding in this region increased at a 31% compound annual growth rate (CAGR) from 2011 through 2018. The U.S. & Canada were the second-fastest growing regions, posting a 22% and 20% CAGR, respectively, over the same time frame.
South & Latin America and the Mid-East & Africa attract little venture capital today, but that does not mean there is not opportunity in these regions. Both regions have important champions already and will, in the long term, have a bigger role to play in the travel industry as their demographic dividends pay out.
Within Asia, China and India are the most important countries. In fact, over the past five years, they accounted for 27% and 9%, respectively, of all venture capital raised globally.
China is the second biggest country attracting venture investment in travel businesses, fueled by a newly minted, and massive, middle class. According to the UN World Travel Organization and the World Bank, the average Chinese traveler now spend $1,932 on an international trip, well above the worldwide average of $930 and just below the U.S.’s $2,045. It’s not just per capita trends; China is sending so many citizens abroad that it is now the largest spender of international tourism expenditures, with $261 billion in 2016.
The rest of Asia continues to grow as well, led by India and other rising countries in Southeast Asia. These countries are still lower down in the tourism adoption curve than China and so stand to benefit from both a rising population traveling abroad and an increase in per capita expenditure trends.
Sector Trends and Highlights
While the old guards of travel contemplate their IPOs, a new generation of travel businesses joined the unicorn club in 2018 — those startups with a private valuation of over $1 billion. These companies are illustrative of the breadth of new travel businesses being funded
Most notable among these new brands is OYO Rooms, arguably the most important travel startup of 2018. It recently raised a $1.2 billion Series E led by Softbank’s Vision Fund. That raise consisted of a $1B Series E in September 2018, as well as E-1 and E-2 rounds for $100M each that closed in December 2018 and February 2019, respectively. That is the second largest venture capital raise in the travel space ever.
Hong Kong’s Klook also raised a $200 million Series D that vaulted it into unicorn status among an uptick of interest in the tours and activities sector.
Important, and often unappreciated businesses, such as those that build B2B (business-to-business) software or that cater to business travelers also had a moment in the spotlight in 2018. TripActions, a corporate travel booking tool, closed two rounds last year, a series B and C, that collectively raised $205 million. That second round, in November 2018, vaulted the company to a valuation of more than $1 billion.
While each of these companies is unique among their peers for their stratospheric valuations, there are many more startups within their broader segments that have raised millions of dollars in 2018 as well. These unicorns and others are spread across many more segments of travel than might have previously been the case and, in our view, speak to growing interest in travel from the venture capital community.
We further categorized travel startups into subsegments, based on their business descriptions and other identifying information. While this gives us a good sense of trends, unfortunately, the subsegments are not mutually exclusive as some startups may fall into multiple categories or have multiple business lines. Therefore the dollar investment figures we present later on in this report do not sum to total venture capital deal market size.
We discuss each subsegment and further subsegments in more detail in the next section.
Startup Travel Market Opportunities
Looking ahead for 2019 and onwards, in alternative accommodations, Airbnb is busy consolidating its gains in distribution, but further downstream, the battle is in full swing to see who can build the industry’s leading property management technology platform. Also notable is the explosive, if still unprofitable, growth of tech-enabled budget accommodation brands in Asia. Meanwhile, after years of underinvestment, legacy hotel chains are looking to break free of their cumbersome tech stacks. That means a shift to cloud technology and the introduction of new data- and mobile-first systems.
Tours and accommodations could retain its mantle as one of the hottest funding areas of travel for the third year running as startups and incumbents alike are in an arms race to bring as much in-destination inventory online as possible.
Will transportation tech finally bring us flying cars as promised by The Jetsons? Maybe not, but plenty of capital is going towards the development of electric-powered, drone-like air taxis that investors hope can reinvent short-haul travel. Some investors too are looking to the past as a blueprint for the future, backing startups that claim they can do what the Concorde could not: make supersonic flight a commercially viable reality. Back on the ground, advances in machine learning and artificial intelligence are improving business processes within airlines and other businesses.
The accommodations sector remains the largest and most important sector for travel startups. According to our analysis of the numbers, accommodation startups raised $4.4 billion in 2018 across 244 rounds.
Alternative accommodations has been at the center of the travel startup universe for nearly a decade now. This was not always the case. Vacation rentals as a product have existed for decades, but this formerly sleepy, and mostly offline, corner of the hospitality market has taken center stage thanks to the rise of Airbnb.
Many consumers came out from the global financial crisis more frugal, and often preferring experiences to material goods. Airbnb emerged at the right time and with the right product to tap into that zeitgeist.
Since then though, alternative accommodations has exploded, and our research shows that more consumers than ever before are staying in vacation rentals. The latest data point, among many others, comes from Skift Research’s 2018 survey of 1,304 high-income U.S. travelers, who have a combined household incomes of more than $100,000. We found that half had stayed in a vacation rental at least one time, up from 36% in 2017. Only 10% of this coveted demographic said that they would “definitely not” consider a vacation rental, down from 18% in 2017. Speaking to a similar rise of popularity in Europe, Eurostat data shows that 40% of room nights on the continent come from alternative accommodations.
Moving Beyond Airbnb
Airbnb has long loomed large over this space. Its success, having now raised a cumulative $3.3 billion of capital, has inspired a new generation of startups to enter the vacation rental market. The startup-focused website AngelList has tracked 400 new vacation rental startups since 2011 and we suspect that number is an underestimation.
But now that it’s profitable by some measures and preparing to go public, Airbnb raised no new private capital in 2018. Airbnb today competes with multinational public companies like Expedia Group and Booking Holdings and regional giants like Tujia.com. Booking.com today has as many vacation rental listings as Airbnb does and Expedia-owned HomeAway (which includes VRBO), though behind for now, is quickly closing that gap.
The distribution landscape for alternative accommodations looks increasingly settled. There may be room for startups in some niche customer segments, or in specific geographies, but it will be difficult, if not impossible, to disrupt Airbnb and its peers.
The battle over alternative accommodations will instead move downstream, in our view, into the domains of property management and ownership. This next generation of startups will build on top of the scaffolding put in place by Airbnb. They will build business models — and in some cases fully new platforms — that complement, rather than compete with, the major vacation rental distribution platforms.
Vacation Rental Tech Stack
One major area of focus for new vacation rental startups is in modernizing the property management tech stack. We expect to see a professionalization of the vacation rental market and its technology in the coming years. This will lead to a convergence between hotel and vacation rental technology. Vacation rental tech, with its blank slate to build from, may even leapfrog hotel tech that is bogged down in legacy implementations and long-dated contracts.
There are still many new entrants into this space and lots of wood to chop. Our prior report that decoded the vacation rental technology landscape found a healthy ecosystem of startups attacking problems in channel management, revenue management, property management, housekeeping and maintenance, connected homes, and big data.
But increasingly the space is beginning to consolidate.
Vanessa de Souza Lage, the chief marketing officer of Rentals United, a channel management software, notes that venture capital rollups are becoming more common. Though outright mergers still happen, Vanessa notes that oftentimes, “there’s a collaboration aspect to [these rollups]. [T]he companies remain their own and there’s a funding aspect to it that is shared [with] an umbrella funder between those companies.” “It’s the first time I hear of this happening in our side of the travel technology landscape,” she said.
We believe that this trend towards consolidation and integration will only accelerate and that will mean more venture capital dollars flowing into the space.
Guesty, for instance, is a startup building an end-to-end property management platform that integrates many of the tech stack features we listed above. It raised a $19.75 million Series B in April of 2018. Many startups prefer to take a more specialized, niche approach because, as Amiad Soto the CEO and founder of Guesty, told Skift, “It’s really difficult to be a jack of all trades. Part of the reason we raised so much capital is to make sure that we have the resources it takes to build an end-to-end platform.”
These new B2B vacation rental tech platforms are convenient for property managers by obviating the need to jump between tabs or oversee technical integrations.
A subtler driver of consolidation is the demands coming from the distribution channels one layer up. Competition between Airbnb, Booking.com, and HomeAway is only getting more intense by the day, and in order to win the end customer, these sites are constantly launching new features. But these initiatives require more property-level data and, says Soto, “because of that they keep releasing more and more APIs that you must build integrations with.”
As the development environments become more complex, businesses with small or outsourced engineering teams lose the ability to keep up. “You no longer are good with just integrating with availability or pricing,” says Soto, “[now] you have to give the reservation information, the guest information, the messaging layer, and a lot more.”
De Souza Lage, also pointed to increasingly complex integrations as a major challenge for vacation rental startups. She noted that so many companies have issues integrating with Airbnb that the company recently announced a preferred software partner program “to recognize the companies that provide fully integrated connectivity.”
One final force driving professionalization in the software space arises from changes in the needs of property management companies and alternative accommodation owners. They are increasingly becoming what Soto calls “enterprise” property managers.
Vacation Rental Property Management and Ownership
We are seeing a large number of startups developing large-scale, professional, branded vacation rental property management businesses. Historically, it had been hard to generate economies of scale in vacation rentals, because the distributed nature of both inventory and customers meant that costs grew at the same rate as, or faster than, new revenues.
Platforms in vacation rentals, both on the distribution and operational fronts, are changing that math and creating opportunities that did not previously exist. In many ways, these entrepreneurs feel like the spiritual successors to the Hiltons and Marriotts of the 1950s and 1960s. None have yet to succeed at the same scale, but the concept is still in the early innings of development and attracting lots of investment.
The market is highly fragmented — Wyndham estimates that there are 1.4 million vacation rental properties in the U.S. out of which Vacasa, the largest vacation rental property manager in the U.S., operates just over 12,000. To get to where it is now, Vacasa has made at least 30 acquisitions since 2014.
There will be many more mergers to come and investors are, so far, happy to fund this race for market leadership. Vacasa closed a $64 million Series B last year, while rival Evolve Vacation Rental, which has over 10,000 properties, raised an $80 million Series D. Wyndham’s European Vacation Rental business — believed to be the largest in the world with 110,000 units in 600 destinations — was sold off to a private equity firm for $1.3B in February 2018.
And that’s just in classical vacation home markets — think Ft. Lauderdale, FL or Aspen, CO. There is a whole other wave of startups looking to develop short-term rental management and ownership business in urban markets. Many real estate owners are experimenting with mixing short- and long-term rental units within apartment buildings to boost property incomes and offset development costs.
One startup leading in this space is Stay Alfred, which rents out entire floors in multi-family residences direct from developers and convert them into short-term apartment rentals. Stay Alfred now manages 2,000 apartments in 28 cities and just raised a $47 million Series B to further expand.
The company Sonder similarly manages 2,200 units in 18 cities which are branded and designed to reflect the local culture. It raised a $85 million Series C last August. Lyric too has taken a design-forward approach to urban short-term rentals. It has over 400 units and closed a $15.5 million Series A last year.
Some properties are even being built or converted to use solely for travel rentals. Perhaps the leading example of this is Niido, which has partnered with Airbnb and developers to buy entire apartment complexes.
Even this flurry of activity has barely scratched the surface of what’s possible. The market remains one of the most fragmented anywhere. There is a long runway for growth in the management of vacation rental properties and it’s going to take a lot of capital to take off.
International Budget Accommodations
Emerging middle classes across the globe are gaining a taste for tourism due to rising incomes, all the same as their developed market peers before them. Nowhere is that truer today than in Asia which has seen international tourism expenditures explode to $495 billion in 2016 (the latest year for which we have data), a CAGR of 12% over the last five years. And that eye-popping figure is just for international travel. Most trips in these markets take place domestically. And what these travelers want, as Conrad Hilton or J. Willard Marriott understood of American travelers years ago, is an affordable and reliable place to stay across a broad network of properties.
Enter a new generation of emerging market budget accommodation chains.
Most notably, in September 2018, the Indian hotel company OYO raised a $1.2 billion Series E to turbocharge its expansion plans.
MakeMyTrip, a leading Indian online travel agency, estimates that the Indian market for budget and alternative accommodations is a $4 billion opportunity and that the one-step-better, mid-tier hotel market is also worth a further $4 billion in bookings. The obstacle for consumers looking to book these rooms is that the quality of local hotels can, and does, vary greatly, especially in smaller cities. The lack of a standardized accommodation product and the resulting uncertainty is the biggest challenge that OYO is looking to solve.
OYO is a 100% leased and franchised hotel chain. It primarily recruits existing, but underperforming, budget hotel properties which it then renovates to its brand standards with the aid of an in-house design team. For the most part, owners bear these capital costs themselves, though OYO can chip in at times. Since 2016, all properties are mandated to have an OYO general manager, responsible for 2–7 properties, to ensure standards. In some ways, this is a plain-vanilla, asset-light hotel franchise business model. But OYO differentiates itself (and justifies its red-hot valuation) by also implementing a unique and innovative hotel 2.0 tech platform.
All of OYO’s hotel software is mobile first and this includes apps specifically designed to process franchise applications as well as to manage hotel renovations. The most crucial part of OYO’s tech platform is its property management system, at use in more than 8,700 properties, which enables check-in and check-out, hotel service and operations, procurement management, lead management, and search engine management.
That OYO’s entire brand footprint operates on the same interconnected and modern tech platform pays a dividend in the form of operational efficiency and lower customer acquisition costs. It feeds OYO integrated data about its customer behavior which allows for more powerful marketing messages and to drive revenue management strategies. It also makes it easier for OYO to enable customers to book on their phones.
The mobile-first approach is a competitive advantage in India, where mobile is the device of choice to access the internet. That’s because India effectively leapfrogged desktop browsers and IAMAI and Kantar IMRB estimate that, as of June 2018, India has 478 million mobile internet users; a 96% penetration rate out of a base of 500 million total internet users.
From the owner/operator’s perspective, though, there are renovation costs. They are able to boost occupancy, however, by plugging into OYO’s brand network and get a fresh, full-stack tech system. Converted OYO properties can even at times cut daily room rates and still see property revenue per available room (RevPAR) increase because of the sharp rise in occupancy. By recruiting independent owners, much as a soft brand does, OYO has been able to expand much faster in the fragmented Indian hospitality market than would be possible if it was developing new greenfield properties.
The growth rates are impressive. OYO has gone from 6 million room nights across 4,663 keys in 2016 to 75 million room nights across 458,296 keys at the end of 2018. Gross bookings throughout OYOs network were $1.8 billion in 2018, though it should be noted that OYO’s recognized revenue is much lower as it just collects a franchise fee.
Two-thirds of OYO’s gross bookings are in India, but it is rapidly expanding. China is a major expansion market, as is Southeast Asia, where the firm recently committed $200 million of new investment. OYO has also taken funding from, and plans to partner with Didi Chuxing and Grab to aid in its expansion plans. All three of these businesses count Softbank as a major investor and play into that venture giant’s plans to drive investment returns by getting its portfolio companies to cooperate. Other countries in OYO’s crosshairs include western markets like the UK and the U.S.
Despite its top-line success, OYO remains deeply unprofitable with a net profit margin of -20.3% in its core Indian market. Its expansion markets are undoubtedly even less profitable.
OYO will also face stiff competition from peers running a similar business model. In Southeast Asia, OYO will go toe-to-toe with Singapore’s RedDoorz, another prominent startup in this space. RedDoorz raised an $11 million pre-series B in March of this year to expand, bringing its total capital raised to $18.4 million, and the company says it already has 500 properties and “more than 700,000 stayed room nights” in Indonesia, Singapore, and the Philippines. Also in the space is ZEN Rooms which raised $15 million with backing from a top Korean hotel booking app, Yanolja, and is targeting expansion in Southeast Asia as well.
We expect the competition within this business model will only intensify.
Hotel 2.0 Tech
One advantage the above wave of budget accommodations has is that these companies are building their tech stacks from scratch. Legacy hotel chains, on the other hand, have a heavy pile of tech debt. Branded U.S. hotel properties, in some cases, are using systems based on agreements made 30 years ago. To make matters worse they can have up to 20 different vendors, many of which are not integrated with one another. As a result, data fragmentation remains one of the biggest challenges in the industry. We discuss the the state of the hotel tech stack in depth in a separate report, but suffice to say that there is significant room for startup disruption in the space.
The most significant raise of the last 12 months in hospitality operations tech was revenue management software provider Duetto, which raised an $80 million Series D led by Warburg Pincus in February of last year. Sophisticated revenue management and merchandising systems have long been a staple of the airline industry. And like airlines, hotel inventory is perishable — every unsold rooms at the end of the night is a foregone revenue opportunity.
Built as a modern software as a service (SaaS) tool, with strong data analytic capabilities, Duetto claims to have more than 2,500 hotel and casino clients. The space is crowded and competitors include IDeaS and the Rainmaker Group.
It’s not just new functionality coming online. “We believe the entire hospitality tech stack is now in play,” says Chris Hemmeter, managing director at Thayer Ventures, “including the property management system (PMS). Gone are the days of closed-box systems that hamper experimentation and integration.” To that end, Mews built a cloud-based property management system. Rather than the walled gardens of past generations, Mews has placed an emphasis on open, API-based integration. The company recently raised a $7.1 million Series A (Thayer participated) and claims to have over 700 properties on its system. Hotelogix, based in India, also competes with a SaaS property management offering and raised $5 million last March. Hemmeter adds that as a knock-on effect, “demand for PMS as a platform is driving an increased pace of experimentation and adoption of vertical specific software across all categories.”
Guest-facing technology is also being rethought and modernized. Consider SnapTravel, a messaging platform that raised a $21 million Series A this past December. SnapTravel allows for hotels to take bookings over SMS and Facebook Messenger, a savvy play as more of our everyday communication shifts to text-based mobile applications.
Two other guest-facing companies, Intelity combined with Keypr, combined last summer; the new organization offers technology for electronic door locks and in-room mobile apps, among other offerings.
Travel Tripper too, is another travel tech startup with consumer facing product lines. It offers hotel marketing, web design services, and a booking engine with built-in comparison shopping. It recently merged with long-time hotel tech darling Pegasus in a deal orchestrated by private equity firm Accel-KKR. Both businesses offered central reservation systems; the combined entity will service about 5,500 hotels and 16 million bookings a year.
These two mergers signal another trend within this space. Even as new entrants attack this market, we note still that there are a lot of powerful providers with deep pockets such as Oracle and Sabre. That makes it a tough-fought battle for market share in this space as those legacy players modernize their systems. Scale is an advantage and we are already seeing a number of hotel tech consolidation deals.
Other major deals include 2018 Amadeus acquisition of TravelClick, a hotel business intelligence firm, in a $1.5 billion deal. Shiji, a giant in China’s hospitality tech market has also been on a buying spree recently, super charged by a $486 million investment from Alibaba. At a smaller scale, Toronto-based Jonas has built itself up out of many smaller roll ups and offers software across a variety of hotel software verticals.
After years of hotel tech underinvestment, we think that General Partner Jos White of Notion.vc Capital, which led the round for Mews, said it well when he stated, “the hotel industry is at a tipping point in terms of the way it uses technology to better manage their operations and transform the guest experience.” Skift Research agrees.
Tours and Activities
Tours and activities is one of the fastest growing categories for venture capital investment in all of travel. Companies in this category raised $935 million last year and $850 million in 2017, up from when the category struggled to raise even more than $200 million in any given year from 2011–2013.
The growing interest in the space is a function of both the shift towards experiential travel and a push to list inventory online.
On the shift towards experiences, take as an example, Skift Research’s Experiential Traveler Survey, which showed that 65% of respondents, when forced to prioritize travel planning motivations, would rather come back from a trip having experienced something new over feeling rested and recharged. Our Affluent Traveler Survey (affluent travelers account for just about half of U.S. travel-related spending) found that 67%of such travelers would rather spend their money on activities than on a nicer hotel, up eight percentage points from 2017.
But despite all the consumer demand, most business is done offline and very few tours and activities are currently bookable over the web. That is rapidly changing, a shift that Erik Blachford, venture Partner at Technology Crossover Ventures (TCV), attributes to the rise of mobile phones. “We’re still getting used to the idea that when you land in a different country or city, using your phone, you can access all kinds of resources,” Blachford told Skift. Our in-destination mobile usage survey bears this out, finding that just 35% of U.S. travelers use their mobile phones to book a tour or activity, leaving room for increased penetration.
Blachford says that, “increasingly, there are these sort of experiences that are available to people, often served up by other locals, who either are [sometimes] just trying to make some money, but often it’s because they want to meet travelers too, and so you’ve got this connectivity that didn’t exist before.”
The dollars seem to be in place as well. The companies that so far have been able to get a critical mass of supply bookable online, and that have figured out how to shift consumer demand into the online channel, have also found that they commissions they earn are surprisingly high on many of these products.
TripAdvisor, Expedia Group, and Booking Holdings are eyeing online in-destination bookings as a driver for their next leg of growth, hoping to recreate the initial success they saw when flight and hotel reservations moved online. In a wave of acquisitions last year TripAdvisor purchased Bokun, Hotelbeds sold its destination management unit to TUI, and Booking Holdings — in the largest deal in the space to date — acquired FareHarbor for $250 million.
The hits have been coming fast on the venture capital side as well. Klook, Asia’s leading tour booking site, raised a $200 million Series D in August 2018 that vaulted it into unicorn status. Sequoia China, Matrix Partners, Goldman Sachs, and TCV all participated in the round, the largest ever in the space, taking the title from GetYourGuide’s 2017 $75 million Series D. KKday, a rival based in Taiwan, also had a notable $10.5 million Series B last year in which LINE and Alibaba both participated as strategic investors and have agree to collaborate together. Peek also raised a $23 million Series B. It still operates a customer-facing booking platform focused on the U.S. but has largely shifted to focus on selling B2B operational and connectivity software to tours and activities providers. It will use the capital to expand to Europe and China.
While so far much of the focus has been on building platforms that sell one-off, single-day activities, there is a growing wave of interest in developing online business for multi-day activities. In this space, booking values can be multiples higher and therefore, margins are typically better. Evaneos, headquartered in France, is one of the more mature companies in this subsector and connects travelers with more than 1,200 local travel agents. It says that its tours are more customized and higher-end than rivals, though that may not necessarily be a good thing as its competitors look to build out large scale. TourRadar, backed by TCV, is also the one of the leaders in this space, offering multi-day tours to over 200 countries. It closed a $50 million Series C last summer. Close behind is Tourlane, founded in 2016 backed by Sequoia, and offering tours to over 30 countries, which raised $24 million in December of last year.
This market is still relatively immature and well into its expansionary growth phase. Consolidation is not yet in the picture. “Every other part of travel has gone online,” says Blachford, “it’s pretty clear that this one will too”
Online tours and activities will not be an easy nut to crack. Tour inventory is highly fragmented and non-conforming. We expect it will take time and capital investment before tours and activities becomes more than a small part of the overall online travel agency market.
Thus far we have discussed startups that solve for where travelers stay and what they do once they get there. Here we turn to startups focusing on how travelers make it to their end destinations.
We limit ourselves to transportation that is primarily used and designed for tourism. That means we exclude the ridehailing apps, such as Uber and Lyft, and the scooter startups, such as Bird and Lime. We recognize that these startups are used frequently by both business and leisure travelers, and a number of investors that we spoke to have a thesis around door-to-door mobility enabled by last-mile motorized transportation. But to include this broader category of mobility would balloon the value of capital raised and crowd out finer-tuned trends within travel.
Given our narrower definition, we are primarily left with startups in the airport, airline, and aerospace fields. Even so, we see robust trends and our definition of the category broke $1 billion in funding in 2018. Two trends that emerge include businesses trying to build the next generation of airplanes as well as those modernizing aviation operations.
Next Generation Aircraft
In our view there are three important new technologies for aircraft being developed in the lab today: electrification, automation, and supersonic flight.
Raj Singh, managing director at JetBlue Technology Ventures, the U.S. airline’s corporate venture capital arm, draws a distinction between short-haul and long-haul air transportation. Of the two, he says that he expects short-haul will see the greatest changes in the immediate future. Singh predicts a new class of air taxis that run on electric power and can take off and land like helicopters. These aircraft are often referred to by the acronym E/VTOL, for electric vertical take-off and landing.
Battery range and weight remain the two limiting constraints, but each is slowly being addressed. We doubt that electric planes will be flying routes like SFO to JFK (~2,500 miles) or JFK to LHR (~3,500 miles) any time soon, but the prominence of these routes belies the reality of most commercial flights.
In fact, a full 50% of domestic passenger flights are under 700 miles in distance and 20% are under 350 miles. These common operating distances appear to be well within reach of the next generation of E/VTOL aircraft. For context, though not a perfect comparison, a Tesla Model S has a battery range of 335 miles.
Electric aircraft would bring massive changes to short-haul aviation, changing not just the routes and number of passengers that can be flown, but upending airline cost structures.
Perhaps the most obvious change would be in jet fuel costs. In 2017, the last available year of full data, direct operating expenses for the U.S. airline industry were $87 billion. 34% of this cost came from fuel prices. While electricity is certainly not free, it presents an opportunity to reduce some of these costs. Electricity prices also tend to be less volatile than oil markets, making it easier for management teams to predict expenses. Electric planes could also have the benefit of lowering the industry’s carbon footprint.
A second order savings from electric vehicles is on maintenance expense. Consider a UBS report that examined electric motors by tearing down the electric Chevrolet Bolt and comparing it to the internal combustion engine (ICE) powered Volkswagen Golf. UBS found that the electric motor had 24 moving parts compared to 149 in the traditional engine. Fewer moving pieces should improve engine maintenance and depreciation costs which collectively represented 8% of overall U.S. airline direct operating expenses, or $7 billion, in 2017.
There are a number of these flying E/VTOL designs under development and in the early stages of prototyping, including both at Airbus and Boeing. Uber is also working on an E/VTOL. But these are at large corporations. Startups tacking this project include Joby Aviation, which raised a $100 million series B in early 2018, on top of an earlier $30 million raise. Joby has a working prototype capable of short flights.
“[Short-haul air taxis] will significantly change the choices that people can make when they travel,” says Singh, “I think that one is absolutely going to be disruptive for the aviation industry [in five to 10] years.”
Looking further out, autonomy will likely have a role to play in this transformation. Commercial aircraft today already are highly automated, but advances in artificial intelligence may be able to push this progress even further.
“The concept of vehicles that can move themselves around is particularly interesting for us,” Singh explains. That’s because there is a global shortage of pilots. Airbus estimates that over the next 20 years, more than half a million new pilots will need to be trained. And pilots are expensive, accounting for 18% of direct costs on a typical flight. So, Singh continues, “we’re going to have to face the future where we may not be able to staff two pilots on every plane.” A number of new startups are pursuing this tech, including SkyRyse, with its $25 million Series A last year.
As the vision of electric air taxis takes shape in the short-haul market, there is also a slew of startups tackling the long-haul market. Their idea is not new, but instead a reinvention of technology last used commercially two decades ago: Supersonic travel.
Boom Supersonic just recently closed a $100 million Series B, bringing its total capital raised to $141 million. Through a spokesman, the company said it would use the proceeds from this round to advance the development of Overture, its proposed Mach 2.2 commercial airline. Boom has early partnerships with the Virgin Group and Japan Airlines and aims to have its airliner enter service in the mid-2020s, though the first step is to finish building its test prototype.
There are other companies excited about the opportunities in this space and investing in their own supersonic aircraft designs such as Aerion, backed by strategic investor and partner Boeing, which hopes to have its business jet in service by 2025. Rather than go after the business market, Boom intends to create an all business-class airline, similar to the Concorde. But unlike that ultimately unsuccessful venture, Boom believes that “advancements like carbon composites and computer-aided aerodynamic design” will let its aircraft offer business tickets that are comparable to today’s subsonic fares.
Boom also points out that the increased speed — it hopes to cut air travel times in half — can create new demand in and of itself. “In the first 10 years of the Jet Age, travel across the Atlantic and to Hawaii increased sixfold as flight times shrank dramatically,” a company spokesman points out.
A number of challenges exist, foremost among them a ban on supersonic flight over U.S. soil. That ban may soon be a thing of the past, however. Provisions to allow faster-than-sound flight in the U.S. are included in pending legislation to reauthorize the Federal Aviation Administration (FAA) which seems to have bipartisan support. That’s just the first step, of course. The question of whether Boom, Aerion, and others will actually be able to deliver on their promises of affordable fares remains to be seen.
The other side of the air transportation equation has less to do with the actual equipment and more to do with how the business operates.
Amy Burr, managing director, strategic partnerships at JetBlue Technology Ventures, sees potential in how the growing use of artificial intelligence and machine learning intersects with airline businesses. “One [use case] is around operations,” she says, “where they’re combining [AI] with these sensors and they’re just analyzing how we operate better and differently, maybe faster than a person can figure it out.” Singh gives the example of “predictive maintenance… where you’re changing parts out or doing service in a way that allows you to get ahead of the game. … you can pretty much look everywhere.” He continues, “can I apply [AI] to the way that I run the business? Can I better schedule? Can I better pair my crews?”
The other use case is on the customer-facing tech stack, such as revenue management, reservation systems, and customer relationship management software. There is fertile ground here for startup-led disruption, because in general, many airline systems are outdated; either built in-house or bought from legacy software providers. “I think our opportunity in the industry is to really start to see if we can change that dynamic,” Burr says, “they very much are old tech stacks that could be disrupted by some interesting new technology.”
Burr gives the example of revenue management, which JetBlue Technology Ventures has invested in through FLYR. FLYR uses machine learning algorithms to set fare prices while also incorporating user data from outside the airline’s internal datasets. Burr says that, “the newer generation revenue management systems might bring in different data than we’ve ever looked at. It could be web data, search data, it could be competitive data … and all of that gets into the system as well as the historical booking data.”
Similar software in this space includes Plusgrade, which raised $150 million in November 2018, and taps in travel suppliers’ sales and revenue management systems to auction off unsold premium inventory. The company got its start selling aircraft tickets, but has expanded into cruise lines in recent years. Hopper too, raised $100 million this year in a Series D, which it will use to expand its buy-now-or-wait airfare and hotel rate prediction software.
Venture capital in business travel has increased every year since 2014. In other industries, that might be signaling the advent of some brand new technological breakthrough. Not so much in this case. Rather, it’s the realization that business travel tech has woefully lagged its leisure-facing peers. Startups and venture capitalists are finally moving to fill that gap.
The most prominent of all these new businesses is TripActions, a corporate travel booking tool. It closed not one, but two rounds last year, a series B and C, that collectively raised $205 million. The second round, in November 2018, backed by A-list fund, Andreessen Horowitz, launched the company into unicorn status.
Most corporate travel tools are so difficult to use, that, according to Horowitz, half of business traveler ignore their companies’ travel management solutions. This makes it difficult to track and manage employee expenses and potentially creates risks, exposing the company to duty-of-care liabilities in the case of an emergency.
TripActions seeks to solve many of these problems by 1) offering a clean, modern SaaS interface and 2) by leveraging new machine learning technology to save travelers and corporates money. This second half of the equation is perhaps the most interesting; the software generates a target “price to beat” for every travel search based on real-time market data. If the traveler books below, the “price to beat,” they are paid a share of the savings. This incentivizes the business traveler to come in below budget and aligns their incentives with the corporate bottom line.
TravelPerk out of Barcelona, a company building a modern corporate travel management software with integrated search, booking, and invoicing, raised $44 million as well in 2018. Both TripActions and TravelPerk claim to have seen 700% revenue growth over 2017. Chrome River, which makes expense reporting software, also raised a $35 million series D in 2018.
In summary, when looking forward into 2019, we see startups and venture capitalists bringing new technology to long-overlooked segments like business travel and the hotel tech stack. Alternative accommodations remains highly competitive, but the fight is shifting to the operational side of the business. The race for share in online bookable tours is on and the way we get around when we travel is being rethought.
Yet, a large market opportunities does not guarantee success in and of itself. Execution is is where the rubber meets the road. One of the biggest mistakes that early-stage startups make, according to Hemmeter, is “too much focus on the features of their idea and not enough focus on factors, risks and the complexity of driving revenue from day one through to cash flow positive. Building a company to cash flow positive is one of the hardest things to accomplish and every entrepreneur who sets off down that path is a true athlete.”
Burr adds that another challenge is that, “the people who are really smart and building these programs don’t necessarily have the deep experience in the airline industry or the hotel space with these tech stacks or with the regulations and the nuances of those industries.” Here, industry partnerships or travel-focused venture capitalists can be a big edge to nascent travel company founders.
Travel corporates, in particular, are increasing their venture capital activities in the hope that the benefits flow both ways and that they can kickstart innovation at the parent company by meeting with startups.
The Lufthansa Innovation Hub is an example of this, developed as an in-house division of the airline company focusing on building strategic relationships with travel and tech startups. The innovation hub tracks airline investments in startups, among other industry data, and has found that an increasing number of airlines are making strategic venture capital investments. JetBlue, through its JetBlue Technology Ventures, is currently a leader in this tactic, with the largest number of startups funded as of as of 2018.
Airlines are not alone in this pursuit of startup-led innovation. In hospitality, Accor has aggressively pursued a “digital strategy transformation” powered by a investments in and acquisitions of many travel tech startups. On the distribution side, Amadeus IT Group has also actively recruited startup expertise through its Amadeus Ventures investment arm.
The growing enthusiasm for corporate venture capital, added to interest from all classes of financial sponsors (e.g. private equity, pension funds) further grows the pool of money available to invest in travel startups. Combined with significant market opportunity, we expect that the travel startup ecosystem will continue to expand this year.