The travel industry is no stranger to disruption. Even so, some feel travel may be undergoing its greatest changes since the rise of the online travel agencies two decades ago, and much of that is coming from a new generation of startups and emerging technologies. In this report, Skift Research analyzes the rapidly evolving market for travel startups and their venture capital backers. Looking back, 2017 was a landmark year for VC activity, anchored by heavyweight travel startups such as Airbnb and Uber, which continue to raise capital while the industry awaits their initial public offerings. Incumbent players are feeling the pressure, and are responding with their own venture investments to buffer themselves. They are also planting the seeds of expansion by placing bets on a new class of travel startups outside of core geographies. Growing, and increasingly wealthy, consumers in Latin America, China, India, and Southeast Asia, among other areas, continue to lure new businesses and investment. At the early stage, innovation is thriving although founders face a funding gap, forcing many to bootstrap at the start. Exciting breakthroughs in artificial intelligence and blockchain threaten to unseat long-time incumbents. However, startups face challenges both in commercializing their tech and in convincing an, at times, skeptical audience. Elsewhere, verticals like tours and activities companies are rapidly consolidating while others are experimenting with business models, like subscriptions, that their sectors haven’t traditionally used. We expect last year’s startup momentum to continue through 2018 as these trends play out, underpinned by our optimistic economic forecast for travel.
What You'll Learn From This Report
- The size of the travel startup financing market
- Emerging changes in early stage investing
- A deep-dive on trends in corporate venture capital investments
- A case study of investments made by JetBlue’s venture capital arm
- An overview of travel startup exits and corporate partnerships
- How startup business models are evolving
- A look at growth in Latin America, China, and beyond
- Hot spots on the horizon for 2018
- A look at heavyweight startup influencers and their year of change
- Trends in verticals, including in-destination, car-sharing, and business travel, amongst others
The travel industry is no stranger to disruption. Even so, some feel travel may be undergoing its greatest changes since the rise of the online travel agencies two decades ago, and much of that is coming from a new generation of startups. In this report, Skift Research analyzes the rapidly evolving market for travel startups and their venture capital backers.
Looking back, 2017 was a landmark year for VC activity, anchored by heavyweight travel startups such as Airbnb and Uber, which continue to raise capital while the industry awaits their initial public offerings. Venture capital investing in travel startups in 2017 attracted $5.3 billion in funding, driven by some 348 deals, according to CB Insights, a firm that tracks trends in venture capital. That figure excludes ride-hailing giant Uber and represents growth of 115 percent from the sector’s 2016 funding total of approximately $2.5 billion.
Innovation is thriving at the early stage, though this segment continued to decline as a share of overall deal-making. Early-stage venture deals fell to 62 percent of rounds in 2017 from prior highs of 70 percent-plus. Early-stage (Seed/Angel/Series A) lost ground to late-stage (Series E+) while mid-stage (Series B/C) capital raises remained flat. This is partially a function of the ascendency of heavyweights, like Airbnb. But it’s also because founders face a funding gap forcing many to bootstrap at the start.
In general, the hunt is for seed-stage companies that are a bit more mature, have a lower perceived risk of failure, and will likely produce an exit faster than a new startup. That being said, startup exits are taking longer. The average exit is taking 10 years. IPOs are taking longer still.
Public corporates have been pressured and, in some cases, bruised by new competitors and are responding with their own venture investments to buffer themselves. Public companies and their venture capital arms seek returns but are often also doubling as outsourced R&D and/or recruitment centers. Corporate partnerships, though not without challenges, can be especially fruitful for travel startups seeking access to incumbent networks and inventory.
The draw of growing, and increasingly wealthy, consumers in Latin America, China, India, and Southeast Asia, among other areas, continues to lure new businesses and investment. Travel startup traction and expansion outside core geographies means that investors have more options to look at with most startups in these regions vying for funding attention. Some 31 percent of travel deals are done in the U.S. This makes for a plurality of deals but means that most opportunities are international. Challenges and distractions for heavyweight travel startups such as Airbnb and Uber suggest that some of these contenders, if they survive, will have time to grow and reach for market share.
We expect last year’s startup momentum to continue through 2018 as these trends play out, underpinned by our optimistic economic forecast for travel. Exciting breakthroughs in artificial intelligence and blockchain threaten to unseat long-time incumbents. However, cutting-edge companies leveraging these emerging technologies face challenges both in commercializing their tech and in convincing an, at times, skeptical audience.
Moving into 2018 — after a strong year for travel startups — investors appear to be shifting their attention toward specific indicators of maturity and provable ideas within specific segments, including tours and activities, airline distribution, blockchain-enabled applications, hotel operations, and performance marketing.
Among travel-tech startups, investor-friendly concepts include platform-based businesses that streamline core enterprise functions. Gladly.com, for instance, has built a customer service platform and interface that consolidates inbound customer inquiries and requests across email, SMS, voice, and social channels such as Twitter and Facebook, and recently partnered with JetBlue. Other potentially attractive models include new and niche approaches to market sectors that are underserved and/or under-explored (ultra-short haul aviation, for example). Startups, including those creating business travel concepts, with a shot at significant percentages of total addressable market are also likely to interest funders in 2018, as they have traditionally.
Vertical by vertical, the common threads among travel technology startups focus on, unsurprisingly, customer reach and consumer-journey insights. On-site experiences dominate the hotel tech startup landscape, while rebooking and price breaks are a key focus in the air travel vertical. Heavyweights and aggregators are staking claims to the tourist experience, in destination. Big-brand automaker interest in the P2P auto-sharing space included BMW and Daimler: Both helped back different startups in 2017. For business travel startups, the drive is to create consumer-grade experiences and help companies save on their travel spend by incentivizing employees to book discounted flights and hotels.
Throughout 2018, a key differentiator between success stories and those startups destined to return to the drawing board or fail lies in products or services that cannot be easily replicated by larger competitors. Startups that offer these advantages will rise, aligning the experience they’ve created — what it is about their company that cannot be copied — with the audience and reach that investors and travel leaders demand.
- 2017 was a landmark year for travel startups with $5.3 billion invested, up 115 percent year-on-year, across 348 deals.
- We expect last year’s startup momentum to continue through 2018 as these trends play out, underpinned by our optimistic economic forecast for travel.
- Early-stage funding remains at the core of travel-tech investment but increasingly founders are self-funding as building young businesses on their own becomes more attractive and often is required.
- Public companies and other corporations, undeterred by cultural challenges, continue to invest heavily in travel startups through venture capital arms, deploying $1.9 billion in 2017.
- Startup exits are taking longer — the average exit takes 10 years; IPOs are longer still.
- Nearly 70 percent of startup deals are outside the U.S. as growing, and increasingly wealthy, consumers in Latin America, China, India, and Southeast Asia, lure investment.
- Startups that can avoid competing head-to-head with Priceline, Expedia and Airbnb for search-engine share — something that’s easier said than done — should be attractive options.
- In-destination tours, activities, and restaurants saw a large upswing in interest that we expect to continue as enough supply has become online bookable, companies have begun to figure out how to generate demand, and commissions are surprisingly high on many of the products.
- Exciting breakthroughs in artificial intelligence and blockchain threaten to unseat long-time incumbents if the big players aren’t fleet-footed enough to adapt. However, these cutting-edge companies face challenges both in commercializing their tech and in convincing an, at times, skeptical audience.
Introduction: Dollars, Deals, and Deal Share in 2017
2017 was a landmark year for venture capital investment in the travel industry. According to CB Insights, a firm that tracks trends in venture capital, travel startup investing in 2017 attracted $5.3 billion in funding, driven by some 348 deals. That figure excludes ride-hailing giant Uber and represents growth of 115 percent from the sector’s 2016 funding total of approximately $2.5 billion. Strength was driven by further fundraising from unicorns, such as Airbnb, rising interest in emerging technologies, like artificial intelligence, an expansion outside of core geographies, and traction in growing verticals, including tours and activities.
For historical perspective, the relatively modest amount of capital raised in 2013–14 was part of a multi-year funding slowdown that started in 2012. Analysts told Skift that the 2012–2014 slump stemmed from caution and an abundance of investment candidates. “Many investors [were] waiting a bit longer to see more traction in companies before they invest,” said Katherine Barr, an investor and founding partner at Wildcat Venture Partners, “given the very large number of companies that … [previously] received seed funding.”
At the time, 2015 was the most bullish year for startup investing we had yet seen. The $5 billion raised that year was bolstered by Airbnb, which closed on a $1.5 billion series E round – only three other venture-backed companies have ever raised a similar or greater number. But even excluding that monster round, the $3.4 billion raised elsewhere still would have set a record until this year.
Still focusing on dollars invested, while 2016 looks to have been a modest shift away from the bullish nature of 2015, investors’ approaches to the market in 2017 were more robust overall. In fact, when analyzing the data, 2016 appears to have been the outlier, with 2017 representing a return to the five-year trend. Some of the key deals from the year:
- Expedia backed a $350 million Series B for Traveloka Indonesia.
- Starwood Capital made a $250 million corporate-minority investment in Yotel.
- Sequoia Capital India and SoftBank Group backed Oyo Rooms to the tune of $250 million.
- Priceline contributed $450 million to a $4 billion capital raise by Chinese e-commerce platform Meituan Dianping (not included in above numbers as it is not pure travel).
- Ctrip led a $300 million round to help Tujia, China’s largest vacation rental platform and an Airbnb rival, expand internationally.
- And then there was Airbnb: the heavyweight startup brought in $448 million as part of its Series F in March.
In contrast to the volatility in dollar figures raised, deal count has continued to trend higher over the last five years growing at an 18 percent compound annual growth rate. This suggests that investor interest in the travel industry is steadily growing, although business models need to prove viability and market fit before being able to raise large dollar figures.
Early-Stage Investing: More Bootstrapping and Fewer, Larger Deals
In 2016–2017, early-stage deal share continued its decline, falling to 62 percent of rounds in 2017 from prior highs of 70 percent-plus. Early-stage (Seed/Angel/Series A) was replaced by late-stage (Series E+) while mid-stage (Series B/C) capital raises remained flat.
Exhibit 3: Share of venture capital deal count split by stage of investment
Source: CB Insights
This scenario tracks with recent CrunchBase numbers: “The total number of investment rounds for U.S. seed-stage startups hit the smallest projected quarterly total in five calendar years in Q3 2017,” wrote Joanna Glasner in October 2017.
Given that nearly half the travel startups in the CB Insights report are seed-level deals, the overall U.S. trend that CrunchBase notes is likely influencing the global numbers that CB Insights has released, though the impact to travel is less severe than in other verticals.
Early-stage and seed-level funding remain at the core of travel-tech investment and any decline in rounds is important to track. Yet, the data are not necessarily sending us a negative warning signal. “There’s a trend that’s been ongoing now for a few years, which is the very early stage in travel is much more efficient than it used to be,” said Erik Blachford, venture partner at TCV and former CEO of Expedia, in a Skift interview. “Getting started 10 years ago often meant that you had to raise several million dollars and often more than $10 million just to get your product to market, just to see if it worked or not.
“Now, we’re seeing a lot of entrepreneurs using lean methodologies and understanding that you can get something out there … for just a few hundred thousand dollars,” Blachford said. “It’s clearly easier to get started, and you’ve got two things happening. One is lots more people are starting and getting a little bit of money to do stuff with, but then you’re also seeing a much bigger percentage of those companies not managing to attract the institutional money that’s Series A.”
Skift recently conducted a survey of 177 startup leaders about the state of travel startups and, in-line with the above, found that 64 percent of respondents’ startups were self-funded.
It is a phenomenon among startups and investors that experts have noted across other industries, as well.
“Even among seed-stage investors, startups seeking initial funding rounds of a few hundred thousand or less often struggle to attract attention,” said Jeff Sohl, director of the Center for Venture Research at the University of New Hampshire, speaking to CrunchBase about the overall investment ecosystem in the third quarter of 2017. “Many funds and individual angels now prefer bigger rounds, commonly $1 million to $3 million, for seed-stage companies that are a bit more mature, have a lower perceived risk of failure, and will likely produce an exit faster than a brand-new startup.”
Part of this shift can be explained by investors putting more money behind venture capital than ever before. Funds have a mandate to put that capital to work and backers don’t want to see their investment sitting in cash, which is not earning a return. The net result is that VCs anxious to get their cash out the door would rather do larger deals, all else being equal. One of this new breed of investors is the corporate venture capital fund.
A Spotlight on Corporate Venture Capital
Corporate venture capital is on the rise. According to CB Insights, as of the first half of 2017, corporate venture capitalists, across all industries, had invested over $100 billion of capital globally over the last five years. This is not surprising as corporate balance sheets are flush with cash at a time when disruptive startups and technologies are threatening many incumbents.
These broad trends are playing out in the travel industry, as well, with travel executives first waking up to venture capitalist possibilities in a big way in 2014. We suspect it is not a coincidence that Airbnb passed the $10 billion valuation mark the same year. Since then, corporate venture capitalists in travel responded aggressively and have remained in high gear ever since. In 2017, travel corporates and their venture capital arms invested $1.9 billion, up 30 percent from 2016, across a record high 88 deals.
Amadeus, Expedia, JetBlue, Hyatt Hotels, Concur, MakeMyTrip, HomeAway, and Accor Hotels are amongst the most active corporate venture capitalists. Chinese firms Ctrip, Tencent, and Alibaba are also some of the largest investors in this space.
Exhibit 5: Corporate venture capital is on the rise for travel startups
Source: CB Insights
Just how large has the corporate response been? Based on data from CB Insights since 2013, corporate venture capital has accounted for 36 percent of all venture capital dollars invested in the travel space, compared with a more modest 27 percent across the broader startup landscape. Travel corporate investment arms tend to do deals that are 50 percent larger on average than their peers in other industries.
Perhaps this finding should be no surprise. Travel has uniquely had a front row seat to the rise of Uber, Didi Chuxing, and Airbnb, the first, second, and fourth largest startups in the world, respectively. Incumbents have been bruised and when Skift surveyed executives at established companies in the industry, a full 35 percent self-identified as being behind the curve in their ability to compete in a digital world.
Throw in the fact that large travel corporates are consolidated with deep pockets, a cumulative $38 billion across the 17 largest hotels, airlines, and OTAs, and in-house VCs become a compelling response to these threats. They often invest with an eye toward developing strategic assets, negating an emerging competitor, or to evaluating an M&A target.
Companies used: EXPE, PCLN, CTRIP, TRIP, TRVG, MAR, H, HLT, AC, WYN, IHG, CHH, DAL, AAL, UAL, LUV, JBLU.
Corporate venture capital is also used to acquire skilled talent or even to help import a culture and brand of innovation. “An important thing that we learned with our startup initiatives is that to really help startups, you need to think like a startup and act like one,” Bart Bellers, senior advisor for corporate strategy at Amadeus IT Group, told Skift in May 2017. “And when you do that, working like a startup has the power to rejuvenate the internal culture of a large organization.”
Further adding to the need for partnership, an overwhelming 50 percent of travel executives polled by Skift agree or strongly agree that they struggle to recruit technical talent. However, Skift’s conversations with startup executives indicates that the allure of travel has a unique edge in recruiting talent in the competitive startup world. This dichotomy adds the talent benefit that CVCs bring to the table. It will be essential for travel leaders to close this technical skills gap and we would not be surprised to see more ‘aqui-hires’ if recruitment can’t be done organically.
In contrast, traditional venture capitalists invest solely to drive a financial return for investors. We don’t mean to imply that corporate investors do not focus on financial returns, which remain an overriding factor, but simply to underline that these funds are often doubling as outsourced R&D and/or recruitment centers.
Though there are many advantages, Corporate VC is not without its challenges. Large corporations are still learning to work well with new, young travel startup partners. Technical integrations at times prove difficult between smaller, nimble project leaders and larger legacy partners. A general quest for more incremental and less disruptive definitions of success is also in play on the corporate side. Some of these approaches stop short of true venture capital and involve forming capital-light incubators or marketing partnerships. But, when corporate venture capital partnerships work, they pave a two-way street.
JetBlue Case Study
A case in point of a startup/corporate partnership putting real money to work is JetBlue Technology Ventures, which formed in February 2016 as the corporate venture capital arm of JetBlue Airways. JetBlue Technology Ventures was the first corporate venture capital subsidiary in Silicon Valley backed by a U.S. airline. It’s headed by Bonny Simi, a 15-year veteran of JetBlue, an active pilot, and former Olympian, who was recently named as being among the 100 most powerful corporate venture capitalists. Simi told Skift that she sees herself as an interpreter whose role is to translate between “start-ups [that] are speaking English and the industry [that] is speaking Latin.”
Simi notes that most “people are always worried about getting flights out on time, or filling today’s rooms. I challenge some of the leaders in the industry to think beyond two years; it’s hard.” Seeking to expand this short-term perspective, JetBlue Technology Ventures’ investments are not limited to aviation. The fund has a broad mandate to invest in early stage startups disrupting all parts of travel and hospitality.
Simi sees major disruptions coming in the long term from blockchain, artificial intelligence, and electric propulsion, and is planting those seeds through investments in companies like Filament, FLYR, and Zunum Aero, respectively.
Other deals have been textbook examples of how a corporate venture arm can create strategic value. JetBlue Technology Ventures invested in Gladly, a customer service software vendor, after JetBlue’s vice president of customer support asked for help improving his systems. The airline is now in the process of switching over its customer service infrastructure to Gladly.
Still more investments reflect an approach to air transportation that addresses pain points at moments between the traditional travel stages. Mozio, an online platform that allows users to search and book airport transfers, aspires to be an online travel agency for the “last mile.” Recharge lets travelers book hotel rooms by the half-hour, ideal for a red-eye morning shower or long layover. Recharge’s hospitality focus also plays well with JetBlue’s minority investment in the development of the TWA Flight Center Hotel. Reducing customer friction can be a powerful strategy. The approach is rare for an airline but exemplified by others like Amazon, which makes seamless shopping experiences (1-click shop, 2-day Prime delivery) an obsession.
A Record Number of Exits in 2017, Although IPOs Remain Rare
The travel industry recorded 20 startup exits as of September 30, 2017, slightly edging out last year’s 19 exits, to hit the fastest pace over the past five years. Even so, JetBlue’s Simi says that “the startup exits are taking a lot longer. The average exit is taking 10 years and IPOs are much longer.”
Is staying private the new exit? Certainly, that is the model pioneered so far by influential giants like Airbnb and Uber. When Skift polled startup leaders, most defined success as achieving profitability or, lacking that, being able to grow fast enough to raise enough capital to remain independent indefinitely.
When it does come to exits, though, the overwhelming preference is for mergers or acquisitions. Many founders are angling for an acquisition that allows them to keep their brand. Interestingly, this was the preferred exit for founders over the more prestigious initial public offering. Here, though, not all deals are created equal. At the bottom of the list are the acqui-hires. The worst-case scenario, not a response in our survey, is an engineered soft landings or downright asset sale.
In sum, the M&A heavy exit landscape further reinforces the trend towards strategic buyers identified in the corporate venture capital section. The behind-the-scene networks maintained by incumbents make partnership an easy path for them as they generally get to know the entire travel startup landscape. This is not lost on startups and from their perspective, most recognize the need for partnership. 64 percent of startups surveyed by Skift intend to partner externally in the future.
Even in the highest-profile initial public offering of a travel company in 2017 one cannot escape the strategic investor. Despegar, the Latin American online travel agency, went public in September of 2017 with Expedia as a 14 percent minority owner.
Patience and Traction: Travel-Startup Models Across 2017
“Finding the right ones to jump on, you have to get smart on the technologies,” said Simi, president of JetBlue Technology Ventures, speaking during Skift’s Global Forum in New York on September 26, 2017. Among travel-tech startups, Simi said that investor-friendly ideas include cross-platform businesses that are essentially a one-stop-shop channels for travelers. Another attractive segment includes new approaches to aviation — specifically ones that focus on ultra-short-haul options for air passengers.
Chris Hemmeter, managing director at Thayer Ventures, said in April 2017 that its third fund — a $150 million allocation intended to focus on travel technology, which launched last year — will pay close attention to long-term plays. Startups that can avoid competing head-to-head with Priceline, Expedia, and Airbnb for search-engine share are attractive options, he said, although that is often easier said than done. And while Thayer won’t ignore consumer travel startups, business-targeted concepts with a shot at significant percentages of total addressable market will burn bright on the fund’s radar.
For many travel startups, focusing on the business customer can offer the largest opportunity. We found that 38 percent of startups deploy pure business-to-business (B2B) models and that a further third offer some business products or services (B2B2C). Startup leaders also say that B2B models generally have an easier time raising capital.
Skift expects B2B models to continue to grow. That is no surprise to Blachford at TCV, who is “bullish on the rewiring of the back end of the [travel] business.” He sees “a lot of that technology is still being replaced from systems that were often installed a long, long time ago. … It works fine [now], but it’s not going to work fine going forward. There’s a huge wave there that’s just not going to slow down.”
Regardless of technological underpinning, many startups are bringing non-traditional business models into the travel space. In a Skift poll of 177 startup leaders, 27 percent expect to see experimentation with subscription-based revenue models. For instance, subscription airline Surf Air offers an “all you can fly” membership for a monthly subscription fee. The California-based company was founded four years ago and has raised at least $83 million.
There is also a growing movement towards personalized pricing models and unbundling services. Given our survey work, this is a trend Skift will be following closely and we expect further business model innovation to come in 2018.
Global Growth: Latin America, China, and Beyond
Looking across the global landscape, 31 percent of travel deals are done in the U.S. This makes for a plurality of deals but means that most opportunities are international.
One part of the growth story that emerged is around travel investing in developing markets outside the U.S. and that begins in Latin America.
In September 2017, Despegar, the Argentina-based travel agency, raised $332 million in its public debut. The company, operating as Decolar in Brazil, went into its IPO at $26 per share and moved some 12.7 million shares to start. It could turn out to be an acquisition target for Expedia in the future, given close ties to the booking giant via Expedia’s prior strategic investment and inventory partnership.
China’s footprint in the alternative accommodations segment expanded in 2017, as Tujia, the country’s chief rival to the U.S.-based Airbnb, sought new territory in the Japanese market. “The Beijing-based startup aims to increase the number of properties available for holiday rental to about 100,000 by 2019 from 10,000,” Tomoko Suzuki, CEO Tujia’s Japanese operation, said in an interview with Bloomberg in October. Airbnb has about 55,000 listings in Japan.
Beyond the U.S., outbound markets with significant growth potential will become a focus for travel investments more generally. “The Chinese outbound travel market is a great part of the Ctrip and Priceline long thesis,” Mark Mahaney, managing director and analyst at RBC Capital Markets Research Division, told Skift in October. “Online travel agencies have a huge opportunity there and the most attractive market right now is China.”
Meanwhile, Klook, based in Hong Kong, raised $60 million to fund its ticket-voucher platform. The startup focuses on local transit and theme park admissions, among other travel activities and services. Goldman Sachs led the round, which came to fruition in October and was likely the largest in its sector at the time. In Europe, a month later, GetYourGuide, a Berlin-based tour and activities booking platform, edged out Klook’s title to largest round when it brought in a $75 million Series D. U.S.-based Battery Ventures led the round.
Even as funding materializes for startups such as GetYourGuide, the pressing question of what Brexit will mean to European startups loomed over the sector throughout 2017. Its pending impact will figure into 2018, as well — whatever that impact turns out to be — although the timeframe for the exit is currently slated for 2019; there will undoubtedly be negotiations and developments that define impacts throughout the months ahead. Already, in the UK, however, the push is on to entice further funding for tech startups, with this move coming in the face of European competition to claim the title of “startup nation.” Europe, it appears, would like to lure more UK startups into its post-Brexit ecosystem.
Heavyweight Influencers: A Year of Change
One role for travel-tech startups is that of the new organization on the map, the fresh disruptor. Another is the kind of role that Airbnb, for example, has built for itself in the years since its 2008 launch — a hoped for “super brand of travel,” as Deanna Ting puts it, writing for Skift.
From its estimated cash pile of $3 billion to its recent expansions into activities’ bookings (and, potentially, flights) the startup is now among the heavyweights of the travel industry. A big question now is when Airbnb might go public. Industry experts aren’t holding their breath, especially in light of regulatory challenges the company faces in cities such as Chicago and New Orleans, and lawsuits over the very nature of Airbnb as a room seller or merely a marketplace. Another issue is who is liable when tenants create unhappy neighbors. Though a judge recently dismissed Aimco’s suit against Airbnb in California, a similar case is still pending in Florida. Even with modest legal success under its belt, it may well be the case that Airbnb hunkers down for some time longer — it can focus on its Trips tours product, expanding its vacation rentals and into the luxury sector, dining reservations, and possibly flights in the interim.
Similarly, Uber spent much of 2017 dealing with its internal operations and public setbacks. As the company works to reinvigorate its org chart and roll back its odometer around public and municipal sentiment, overseas competitors such as Didi Chuxing may well see an opportunity to expand and entrench itself in the hearts of minds of riders in the on-demand transit space — in China and around the world.
Hot Spots on the Horizon in 2018 and Beyond
Skift’s state of startups survey asked which technology was likely to be most disruptive to the travel industry.
Artificial Intelligence and the closely related field of machine learning/predictive analytics topped the list. These technologies continue to advance and are poised to disrupt a wide range of industries. FLYR, an artificial intelligence travel startup raised an $8M Series A in 2017 led by Thiel Capital and backed by JetBlue Technology Ventures. The company predicts airline fares, and uses artificial intelligence and its algorithm to sell customers insurance against future price drops post-booking.
Close behind was blockchain technology, which has been the spotlight this year as the technology underpinning behind virtual currency bitcoin. However, we expect that much of the true innovation will come not from the currency but from the protocol’s ability to decentralize areas such as distribution and contracts and imperil legacy IT systems. Simi at JetBlue agrees, and sees potential from distributed databases and smart contracts around payments, distribution, and loyalty systems. A smart contract is a self-executing, self-enforcing contract embedded in software. In this context, a smart contract could perhaps be used for programming automatic settlements.
Simi also noted interest in airspace ventures — for example, vertical takeoff and landing vehicles. Plus, electric propulsion in the aviation space could also gain traction in the years to come, especially around short-haul travel options, according to Simi.
Virtual and augmented reality also had a strong showing in our survey and are likely to play a large future role in travel. Blachford at TCV observes that no one has yet “figured out how to integrate … higher-order functions [like virtual and augmented reality] into the travel experience.”
Despite the potential of augmented reality and virtual reality technologies, many established players will be slow to adopt them.
What will be key here, as with all new tech, said Simi, is a continued effort to bridge the cultures of new companies and legacy giants. “It’s hard for them to grasp a new economy and new ways,” she said, regarding organizations that have been in the industry for decades rather than startups that have been around for months or just a couple of years.
Despite the potential of augmented reality, virtual reality, blockchain, and voice-based search, for that matter, the success of these technologies and the startups going to market with them is far from a foregone conclusion. We find that many travel executives are hesitant about their potential. For instance, almost half of those we polled were not sure when, if ever, they would incorporate blockchain into their business models. Yet, just seven percent said that they would definitely “never” integrate blockchain into their tech stacks. We believe that most are waiting to see a stronger use case for these new products before committing.
Startup founders in these emerging technology fields should work on bridging the knowledge gap, ensuring that there is real value in their products and services, and then attempting to get C-Suite buy-in at larger corporations.
Chatbots and virtual assistants, on the other hand, are ready for prime-time, in the view of Skift Research, although there is a ton of work that needs to be done to make them efficient and viable. Over half of respondents plan to incorporate chatbots into their digital strategies over the next two years. Many major airlines, hotels, online travel agencies, and metasearch engines have already rolled out customer service chatbots. Early stage startups like Voya and 30SecondsToFly are both working to develop artificial intelligence-powered booking assistants for unmanaged business travel. Expect tough competition here with tech giants like Salesforce.com, Google, and Facebook participating. Our survey work indicates similar adoption curves in localization technologies and predictive analytics.
Lens on Verticals: Startups in 2017
Which verticals are startup founders and co-founders focusing on? A majority said in-destination tours, activities, and restaurants. No wonder, competition in that space was so intense in 2017. That trend is likely to continue over the coming years. Other common areas of focus are vacation rentals, air travel, car-sharing, and business travel.
Hotels and Vacation Rentals
A focus on services that intersect directly with travel consumers’ on-site experience powered a Series A for Keypr in 2017 through a $19 million investment led by Karlani Capital. The Los Angeles startup’s mobile-device-based products allow hotel guests to check in, unlock rooms, and request room service. Its seed round was $1.3 million. There is a lot of competition in this arena.
Similarly, HotelTonight came back into the funding conversation for the first time in three years: Accel Partners led a $37 million Series E for the mobile-booking startup. The move helps mark a kind of comeback story as in recent years that startup laid off employees, and struggled to differentiate itself and compete against larger players. HotelTonight is fighting its way back into the game.
New York-based Alice, a unified-back-end platform provider for hotels, grew its funding total to $39 million in 2017 as it captured an Expedia-led Series B of $26 million. The move comes at a notable time for Expedia: The online travel agency began to promote its revenue and messaging tools for hotels, suggesting that its interest in software services for the hospitality industry is intensifying.
Business traveler booking site Freebird disclosed some $8.5 million in funding, according to CB Insights. The company’s mobile rebooking tool allows airline customers to find new no-fee tickets when their routes get cancelled, delayed, or they miss a connection. Similarly targeting the rebooking space, Fairfly captured some $2.1 million in 2017; its platform tracks airfare price drops and prompts users to rebook with the cheaper options.
Meanwhile, some 19 years into its run, JetBlue still considers itself a startup, according to Simi, president of JetBlue Technology Ventures, in her recent Skift interview. The airline’s venture arm is investing in startups that enhance customer relationships. Gladly, for instance, has built a platform that consolidates passengers’ online posting histories — email, SMS, voice, and social channels such as Twitter and Facebook — and the airline is integrating Gladly to improve customer service. JetBlue invested an estimated $2.5 million in Gladly’s $36 million round in 2017.
Investments in next-generation aircraft could have a moment in 2018. Boom Technology, based in Denver, is looking to bring the supersonic jet back to the runway. Its 2017 Series A totaled $33 million. That should be enough to allow the startup to build its first 50-passenger test aircraft in the near future. JetBlue participated in a funding round of an undisclosed size in April 2017 in Zunum Aero, a company developing a family of commercial hybrid-to-electric aircraft for regional air service. Flying car startups also had a good year in 2017. Lilium (a $90 million round) and Volocopter (a $29.5 million round) are building on vertical take-off and landing capabilities.
Competition in the tours and activities space intensified in 2017, as Airbnb worked through its first full year with Trips, expanding the tours-and-activities offering from 12 to what is expected to be more than 50 cities. In other developments, Peek and Zozi, two of the bigger players in the reservations space, essentially merged. With heavyweights and aggregators staking claims to the tourist-experience ecosystem, scale and customer acquisition remain keys to success in the in-destination travel sector. Startups able to help organizations grow and capture market share with these approaches are positioned to trigger investor interest — and dollars — in 2018.
The in-destination sector enjoyed two mild surprises in 2017: VC money poured primarily into consumer plays, rather than business-to-business distribution startups. That trend went against the conventional wisdom of recent years among many investors that favored business-to-business companies because of perceived lower risks. In another mild surprise, first-tier firms led a couple of significant funding rounds on the consumer side.
In 2017, the in-destination sector saw its largest venture capital-led round ever when tours-and-activities consumer booking platform GetYourGuide secured a $75 million Series D investment. Leading the investment was first-tier U.S. firm Battery Ventures. The Berlin-based GetYourGuide has now raised $175.5 million since its inception in 2009. Its largest startup competitor is Hong Kong-based Klook, which raised $60 million in a Series C round led by Goldman Sachs. Klook has raised $97 million, to date. The startups face competition from TripAdvisor, Expedia, Ctrip and others.
Why the sudden interest in consumer in-destination booking startups? We believe there are three factors: Enough supply has become online bookable, companies have begun to figure out how to generate demand, and commissions are surprisingly high on many of the products. Since 2015, a significant chunk of inventory has come online, with the amount growing in 2017 at a 20 to 25 percent annualized pace, according to the leading companies. Venture capital firms appear to be encouraged by the financial results reported by TripAdvisor, which has the most transactions and inventory of any in-destination player thanks to its TripAdvisor Attractions business and Viator — a brand it bought in 2014 for $200 million.
TripAdvisor had solid 2017 margins in its attractions business. While private startups don’t reveal their margins, looking at TripAdvisor’s numbers can help us back into estimates of the economics of its startup rivals. In our checks, we find that commissions TripAdvisor charges hover consistently at the 20 percent range, comparable to hotel commissions enjoyed by many online travel players. In the third quarter, $44 million of TripAdvisor’s $126 million non-hotel revenue was essentially operating profit, or adjusted earnings before interest, tax, depreciation, and amortization. The company said its attractions business was the largest contributor of that non-hotel revenue — a segment that also includes its restaurant and vacation rental businesses.
We believe that one aspect of TripAdvisor’s attractions business bears comparison to the very early days of Booking.com, in that both the early Booking.com and today’s TripAdvisor/Viator had to sign up lots of suppliers which were not accustomed to online distribution. The in-destination sector is arguably a more fragmented and harder market of suppliers to sign up than hotels. But from a leadership perspective, it is a similar exercise of scaling up.
In the past couple of years, online travel companies like TripAdvisor have become more adept at matching relevant in-destination content to consumers as ancillary, or add-on, sales to other products, such as hotel stays and flights. Another example, in 2017, Google added content from GetYourGuide, Klook, TripAdvisor and other consumer players to its Trips planning app.
The market potential in tours and activities is large. We estimate that only about 20 percent of in-destination inventory is bought online today worldwide, on average, which suggests the massive growth potential of this sector.
Focusing on 2018, the key theme among in-destination consumer booking companies will be a fight to plug the gaps in their regional inventories. Each of the bigger companies has better inventory and larger consumer demand in some regions than in others. For example, GetYourGuide sells a lot of tours to German millennials while Klook sells a lot of attractions to Asian millennials.
Smaller players often have advantages in particular regions. For example, we found that Withlocals had superior breadth and quality of inventory in Malaysia compared with Klook, GetYourGuide, or TripAdvisor/Viator. In 2017, Withlocals, a Netherlands-based startup for in-destination activities, received a $4.1 million Series A investment led by Inkef Capital.
Investors in all of these consumer-facing startups need to keep in mind that potential exits via acquisition by giant players remains the most desirable outcome against the alternative of having to compete against them in acquiring customers online.
So far, the Priceline Group has shown only mild interest in the tours and activities sector through Booking.com pilots. Among dining reservations, though, the Priceline Group acquired OpenTable for $2.6 billion in 2014.
Expedia Inc. has added inventory in the past two years via its Local Expert product, but it still lags TripAdvisor, GetYourGuide, and Klook in inventory. Ctrip, China’s largest online travel agent, has only dabbled in the sales of tours-and-activities thus far.
Besides the Peek and Zozi merger, there was little investor activity on the back-end, distribution side of the sector in 2017. Fragmentation and a lack of technological sophistication among suppliers plus the high upfront cost of technological investment by startups are the key explanations for this lull, as we noted in our State of Tours and Activities Tech 2017 report.
Looking ahead, companies that have established businesses in distributing travel may look to acquire in-destination business-to-business players to add attractions’ content to their repertoire. Exhibit A: Private equity firm Cinven and the Canada Pension Plan Investment Board in 2016 bought hotel-room wholesaler Hotelbeds from TUI. Since then, the owners have invested $2.9 billion to make the group a market leader. The company has recently expanded its distribution of coach tour content in Europe. Adding in-destination content via a B2B tech startup might be one of its next logical moves.
Similarly, the world’s largest global distribution systems for airline tickets and hotel rooms — Amadeus, Sabre, Travelport, and Travelsky — have increasingly made noises about their interest in adding more ancillary content for their travel agency partners to use for upselling consumers. Among those, we believe Amadeus has the most free cash flow to be able to take a gamble on the in-destination sector.
Another notable 2017 play in the in-destination sector was Context Travel, which attracted $5 million in private equity funding, its first external funding since its founding in 2003. The Philadelphia-based company has a goal of scaling with the help of Active Partners, the London-based firm.
“These guys have large budgets and compete well on paid and organic search and digital marketing. They’re also global,” said Context co-founder Paul Bennett. “While we have an advantage regarding quality control — we own the product — and differentiation, we still go head-to-head on customer acquisition.”
Other startups won rounds in 2017 as well. For example, Amsterdam-based Tiqets took $17 million, led by HPE Growth Capital. The company specializes in last-minute mobile ticket booking.
Peer-to-peer car sharing startups continued to push for market share and funding rounds in 2017.
Upfront Ventures, for example, led a $10 million Series A for the Los-Angeles based Skurt, which connects short-term renters with available peer-to-peer inventory via their mobile devices. Users deliver the car they’ve finished driving or riding in to the next renter in the app’s queue. BMW also made a strategic investment in the startup.
Echoing big-brand automaker interest in the peer-to-peer space, Daimler joined backers such as SK Holdings and Liberty Mutual Strategic Ventures, to plow $92 million into car-sharing startup Turo, which focuses on daylong, or longer, rentals.
“It’s not hourly rentals, so it’s really based on travel, and people that are going away for the weekend, or people who are flying into a new city and taking a trip there for a few days, or a week,” said Christin Di Scipio, a Turo spokesman, in a Skift interview.
The deal was further linked to Daimler when Turo acquired Croove, Daimler’s own car-sharing unit. Turo also launched a component of its platform aimed specifically at business travelers.
Getaround, which operates a similar model to Turo, received $45 million in Series C round from a group of investors including Toyota and SAIC Capital. The car-sharing company also has a partnership with Uber through which drivers without their own cars can essentially rent a Getaround vehicle to use for a low hourly fee.
Car-sharing may not have broken into the mainstream with the same velocity as ride-hailing, but investors around the world have begun to pay attention to the promise of the sector, particularly as automobile ownership begins to decline overall.
The business and corporate travel space faced two key points of pressure as 2017 began: A rising demand for consumer-grade interfaces, which has perennially been on wish lists, highlighted by the emergence of business travel apps like Lola that sport a spiffy consumer-friendly design. Second, there are several startups that are geared to help corporations save on travel spend by incentivizing employees to look for and book bargains.
Looking to compete with brands that offer traditional corporate travel management services are startups such as Upside, which aims to provide business travelers with alternative, lower-cost options for routes and accommodations. Jay Walker, Priceline.com’s founder, has raised $50 million for the new company.
The idea is that there is a huge market of business travelers who don’t work at a company with a travel policy, and gift-cards or other rewards can incentivize them to book on the platform.
There have been a variety of investments in recent years in business travel startups employing behavioral science and economics to help companies save money when their employees travel. TripActions, a booking platform that rewards users with perks and gift cards for making decisions that save their company money, raised $14.6 million in early 2017 from Zeev Ventures and Lightspeed Venture Partners.
Meanwhile, startups that represent the kind of interface and price-finding advantages that the sector seeks also include Comtravo, a natural-language and machine-learning booking tool for small- and medium-size businesses. The company won a $9.7 million Series A boost, in 2017, with Project A and Creandum leading the round.
An arms race of sort has also opened up among expense solutions providers like Chrome River, which announced a raise of $35 million in December 2017. Companies like Chrome River and Certify are gearing up to develop products for an international corporate audience, with the goal of taking market share from industry leader Concur.
Throughout 2018, startups in business and other verticals will continue to vie for investor attention. The key differentiator between success stories and those startups destined to fail, according to Eric Breon, CEO of Vacasa, lies in products or services that cannot be easily replicated by larger competitors.
It seems likely that in the business travel space, acquirers will look to snatch up growing startups and incorporate their products into a wider portfolio as travel management companies seek to transform from mere service providers to booking and technology platforms in their own right.
Insights and Strategies
- Measured by either dollars invested or deal count, 2017 was a record year for travel startup funding. Venture capitalists invested $5.3 billion, up 115 percent year-on-year, across 348 deals. We expect last year’s startup momentum to continue through 2018 as these trends play out, underpinned by our optimistic economic forecast for travel.
- Structural challenges remain for travel industry startups. Travel is indeed a promising area for new companies and investment, but founders and investors should go into the category with their eyes wide open. Key challenges like the difficulties of building consumer awareness and the low frequency of travel purchases are not going to go away anytime soon.
- Overall investor trends, across industries, include a search for organizations showing some proven traction rather than just rhetoric. Within the travel space, early stage funding is seeing increased scrutiny. Startup leaders can respond to this scenario by focusing on lean methodologies and unique product and service differentiators that larger travel players will want to include in their stacks.
- Corporate venture capital is showing new interest in travel startups, but cultural and institutional challenges are still creating slowdowns and misalignments between legacy companies and startup teams. Bridge-builders and organizations capable of shifting towards more nimble approaches are the strongest contenders in this space.
- Corporate partnerships, though not without challenges, can be especially fruitful for travel startups seeking access to incumbent networks and inventory.
- Unicorns such as Airbnb — and, to the extent it is a travel player, Uber — are significantly focused on internal and external challenges. There is room for competitors, both among U.S. and non-U.S. companies, to capture funding and market share while the giants deal with regulations and organizational challenges.
- Travel startup traction and expansion in emerging markets means that investors have more options to look at. Nearly 70 percent of startup deals are outside the U.S. as demand from a growing class of increasingly wealthy consumers in Latin America, China, India, and Southeast Asia, lure investment.
- Exciting breakthroughs in artificial intelligence, blockchain, augmented/virtual reality, and voice-based search put increasing pressure on incumbents, although they will likely acquire startups and otherwise adapt in attempting to meet these challenges. Startups leveraging these potentially cutting-edge technologies face challenges both in commercializing their tech and in convincing an, at times, skeptical audience. Startup founders in these emerging technology fields should work on bridging the knowledge gap and getting C-Suite buy-in at larger corporations.
- In-destination tours, activities, and restaurants saw a large upswing in interest that we expect to continue as enough supply has become online bookable, companies have begun to figure out how to generate demand, and commissions are relatively high for many of the products.
Endnotes and Further Reading
- CB Insights, “The State Of Travel Tech: The Startups, Investors, And Trends Shaping The Future Of Travel.” January 4, 2018
- Amadeus + Skift, “Bridging the Funding Gap for Travel Startups” November 30, 2017
- JetBlue Technology Ventures
- Skift, “Venture Investment Trends in Travel 2017.” November 8, 2017
- CrunchBase, “Seed-Stage Activity Fumbles Amidst Increases In Late-Stage October 18, 2017
- The Wall Street Journal, “Airbnb Raises $1.5 Billion in One of Largest Private Placements.” June 26, 2015
- CB Insights, “Timeline: Travel Tech Exits Take Off As Startups & Corporates Go On Acquisition Sprees.” October 17, 2017
- Skift, “Travel Startup Money Is Flowing But the Road to an Exit Is More Distant,” October 4, 2017
- Skift, “JetBlue Switches to Customer Service Tool Built by Startup it Funded.” August 9, 2017
- Skift, “Thayer Ventures’ New Travel Tech Fund Will Be Cautious About Consumer Startups.” April 7, 2017
- Skift, “Travel Tech Startup Accelerators Learn From Early Missteps and Adjust Course.” May 5, 2017
- Bloomberg, “Tiger Global’s Despegar Marks First Argentine IPO of 2017.” September 20, 2017
- Skift, “Airbnb’s Chinese Rival Tujia Is Also Focusing on Business in Japan.” October 6, 2017
- Skift, “Travel Startup Money Is Flowing But the Road to an Exit Is More Distant.” October 4, 2017
- CB Insights, “Travel Tech Is Having An Uneven Year, But Emerging Markets Are A Bright Spot.” October 5, 2017
- Skift, “Tours and Activities Site GetYourGuide Secures a $75 Million Funding Round” November 2, 2017
- Skift, “Sadiq Khan begins drive to keep London as Europe’s startup capital despite Brexit.” November 2, 2017
- Skift, “8 Takeaways on Airbnb’s Road to an IPO.” August 23, 2017
- Bloomberg, “Airbnb May Face the Music Over Partying Tourists.” November 6, 2017
- TechCrunch, “Airbnb beats big property landlord’s lawsuit in California.” January 2, 2018
- Forbes, “How China’s Ride-Hailing King DiDi Is Taking Over The World Before Uber Can.” August 3, 2017
- Skift, “Keypr Unlocks $19 Million for Hotel Keyless Entry: Travel Startup Funding This Week.” June 23, 2017
- Skift, “HotelTonight Raises Another $37 Million in Funding.” June 23, 2017
- Skift, “Expedia Leads $26 Million Alice Investment in Hotel Tech Push.” August 30, 2017
- CB Insights, “Worth A Visit: 10 Early-Stage Travel Tech Startups To Watch.” October 30, 2017
- Skift, “Boom Tech Raises $33 Million for Supersonic Jet: Travel Startup Funding This Week.” March 23, 2017
- Skift, “Tour Operator Context Nets $5 Million in Funding for Its Task of Scaling.” September 19, 2017
- Skift, “Tiqets Secures $17 Million in Funding for Tours and Activities Ticketing.” May 17, 2017
- TechCrunch, “Skurt has raised a $10M Series A to grow its rental car delivery service.” February 21, 2017
- TechCrunch, “Turo raises $92M and acquires Daimler’s Croove car-sharing business.” September 6, 2017
- Skift, “Lola Travel App Will Pivot to Target Business Travelers.” May 17, 2017
- Skift, “Egencia Is Growing Fast but Corporate Travel Rivals Still Dominate Large Accounts.” February 13, 2017
- Skift, “The New Machine-Learning Booking Tool for Road Warriors: Travel Startup Funding This Week.” July 14, 2017
- Business Indsider, “A car-sharing service that partners with Uber just snatched $45 million in funding.” NovemApril 20, 2017
- TechCrunch, “TripActions raises $14.6 million for its corporate travel booking tool.” January 24, 2017