Long sales cycles, difficulty moving to implementation and a patchwork of legacy systems are causing turbulence for start-ups in the travel tech space.
Finding the right venture capital partner can help, delegates at The Future of Travel, an international travel technology summit in Cork heard recently.
The event, organized by Enterprise Ireland, brought global leaders in the travel sector together with Irish travel tech innovators. Ireland is a leading travel tech hub with over 100 companies operating in the space, including global leaders such as Ryanair, CarTrawler, Datalex, and OpenJaw.
Partnering with a VC can speed growth
Partnering with a US venture capital firm can speed a company’s growth in that market, according to Katherine Grass, managing director of Thayer Ventures, a San Francisco-based VC that specializes in travel technology investment.
“For a European-based company looking for investors, you want someone who brings expertise to the table. We have the travel expertise that can really help a company when they are expanding their business into the US, so that’s the fit we are usually looking for when we’re making investments outside of US,” she said.
Thayer’s primary focus is Series A funding. Right now, it sees opportunity in a subset of the hospitality sector, including “what we call ‘alternative lodging models’, trying to professionalize the whole Airbnb concept,” she said.
“We see a lot of ‘like-franchise’ models in Asia that are taking all these long-tail, non-branded hotels and trying to brand them. There is a lot going on around hospitality and lodging, there are still huge margins in it and a lot of IT inefficiencies, so tons (of opportunity) there,” she said.
The same can be said for smart cities. “Not connected stop lights or fridges but how a city uses its curb space better, the taxing of the streets,” she said. The rise of delivery services, from Amazon to Uber, creates a need for solutions that help cities operate more effectively, and possibly charge for such activities.
“They are two of the areas we are really excited about,” said Grass.
Understand the investor
Those looking for VC funding must understand the motivations of the investor, she told Irish travel technology companies present.
For Thayer, a primary one is the need to return investment to the fund. “We are looking for start-ups and ideas that have a big enough market opportunity and that have growth potential.”
Even a solution that addresses a very real pain point in travel is not enough, she cautioned, if it won’t generate enough return.
The travel industry often requires more runway than a start-up expects. “The time it takes to sell into airlines, for example, is long, so we worry about how quickly a company can scale – and about profits,” she said.
While VC funds want to see clear focus, start-ups that come into the sector with a solution for travel that could also, eventually, have currency in other verticals can make a compelling case, she suggested.
This chimes well with the success of Irish travel tech company Boxever pointed out Dublin-based Edel Coen of London VC fund Draper Esprit, who moderated the panel. A creator of a big data and personalization platform for airlines such as Ryanair, Boxever is now poised to roll out in other sectors now too, including insurance.
Don’t, however, come to a travel tech VC with a pitch that suggests you “want to attack five different sectors at once,” warned Katherine Grass.
Don’t forget to monetize the idea either. “The typical stereotype of the naive entrepreneur in travel is one who comes in with ‘I was backpacking with my friends and couldn’t share our itinerary so I have this route planning solution’. If that is your opening pitch, it might be a short conversation,” she said.
Industry knowledge most valued by VCs
Industry knowledge is held at a premium by travel VCs, agreed Amy Burr, managing director partnerships and operations at JetBlue Technology Ventures.
The Silicon Valley-based corporate venture capital arm of JetBlue Airways invests in early-stage travel technology companies, including seed, Series A and Series B rounds. While it generally invests in US companies, it is now looking to branch out into new regions, particularly in Europe, said Burr.
To secure investment from JetBlue Tech Ventures, a start-up must fall under one of five ‘themes’.
These are customer experience; hospitality and service; operations and maintenance; loyalty and distribution of revenue; and evolving regional travel. All are broad enough that “anything that actually touches travel, we can look at,” said Burr, whose role is to help bring value to portfolio companies.
Though it can’t guarantee a deal, the team acts as a conduit to JetBlue Airways and JetBlue Travel Products, as well as to the international partnership programs it runs, where it can make connections with other travel providers around the world.
It currently has 24 portfolio companies. Although these have an inside track into the travel sector, including assistance with proof of concept, they ultimately face the same challenge that faces all start-ups in this space, “actually converting it into implementation,” she said.
Working with legacy systems
Industry knowledge helps in what is a highly nuanced sector. “It’s really complicated to hook into the legacy systems and processes and change the way people do business in travel. If you don’t have that background in travel, you maybe want to look for someone who can help you in this vertical,” said Burr.
There is, of course, value in bringing the fresh perspective of the outsider to any industry, she said, “But the balance is that you’ve got to be able to find a way to work with the legacy systems.”
500 Startups, the California-based early stage venture fund, was also in Cork to meet with Ireland’s burgeoning travel tech sector. 500 is an active early-stage investor, with a family of 19 funds around the world investing at all stages but most typically Series C.
“We are sector agnostic but we invest in so many things that have applications that are horizontal to lots of different verticals, so there are some things we are investing in that will or already have impacted on the travel industry,” said Pedro Santos Vieira, head of partnerships at 500 Startups Europe and a business angel investor.
As an angel, he is particularly interested in voice technologies, blockchain, and IoT, all areas that the travel tech space will ultimately take advantage of, he said. For Irish travel tech companies looking for VC investment, the most important consideration is the expertise of the board member it brings with it.
A key driver for VC investors is the founding team, he said. “In deep tech, it’s very customary to see teams that are super strong scientifically and technologically, but if they don’t have the commercial ability – that’s a potential red flag for us. So we do try to find a team with complementary skills.”
The size of the market opportunity is vital but interestingly, the founder-market fit is more important than product-market fit for very early stage investors, he said. This is because 500’s experience with its accelerator program shows clearly how a strong team will be able to pivot as the market requires. If they are the right team for that market, “the chances of us investing are much higher,” he said.