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Travel Tech Start-ups: a gold field or a desert?

Last week I attended Travel Tech Israel 2016 conference in Tel Aviv: a unique event that brought together travel start-ups, large industry players and venture investors.  Here I want to share with you the insights from investors’ panel – if you run a travel start-up or have a “next big idea”, this summary is for you.

B2C model – The Loyalty Problem

The good news is that tourism is a huge industry worldwide. It generates 10% of global GDP and create 1 of every 11 jobs worldwide.

The bad news is that tourism is not an easy place for start-ups. Large players like hotel chains, airlines, online travel agencies (OTAs) like Priceline.com, Expedia, Booking.com, etc., are squeezing the value from the supply chain. The investors’ consensus is that “nothing can beat the existing ecosystem unless something revolutionary happens”. Overall, B2C segment is viewed by investors as a “death zone”.

The main problem in selling travel-related services directly to individuals is low customer loyalty – the customer switches from you to your competitor in a blink of an eye, if the latter offers a better price or extra features. This results in very high customer acquisition costs. In fact, every single sale should cover the costs for customer acquisition.  Look for business models allowing large one-off transactions (e.g., premium or group packages) to cover customer acquisition costs. Example: WeTrip, a platform for group booking of activity packages for football matches, skiing and biking tours.

B2B model – Know Your Client

For B2B start-ups, you need to understand who is your customer and which industry players may potentially buy you out. In most cases, your target audience is either OTAs or final service providers (hotels and airlines). OTAs are technologically advanced and have a great appetite for new products and features. Many of them run in-house accelerators and incubators for relevant start-ups. However, there are only few huge players on this market and if you do not get to one of them, you are in trouble.

On the other hand, you may focus your efforts on helping hotels and airlines to protect them against margin-stealing OTAs. There are more potential clients at this market, but they are less advanced and sometimes still use 20th-century IT-systems, so they may be difficult to deal with.

Optimization gaps are closing

When you pitch to a VC investor, never use the word “optimization” as your main selling point. There is not much space left for optimization at the market. At the same time, there is a potential for various features to be sold to industry players. An average exit price for a “feature” start-up is USD 20-30 million, which is a nice amount for a founder or angel investor, but below the radar for most venture capitalists.

Getting customers up to speed is not your business

We all know that many tourists are still way behind with the technologies they are using for planning and booking their trips – they still go to travel agent’s office for air tickets and hotel bookings, they use paper guidebooks and maps. It may be tempting to focus your business on closing this gap and ripe the profit. The advice from investors – don’t go there. Closing gaps is a function of mature businesses. Start-ups should always be on the edge of technology and bring new ideas and business models to life.

Devil is in regulatory details

When you build an international start-up, check regulations relevant for your business – hotel reservation rules, private data usage, customer protection laws, etc. Recent example of influence of local regulation on the travel industry is the New York ban on Airbnb short-term listings.

Seed round is easy, VC round is hell

It is relatively easy to raise a seed round of financing for a tourism-related start-up. Everybody travels, so every individual investor has a feeling he can understand the industry and is more willing to provide financing comparing to industries like cyber or biotech.

This “familiarity” is also a trap for unwary – the industry has a lot of secrets and hidden patterns, so experienced investors always make sure that a start-up they are putting money in, has at least one senior member with vast industry experience. Tip for founders: if you do not have a tourism expert in-house, at least hire experts as consultants.

At the same time, few projects are large enough to be interesting for VC investors. VC investors strongly prefer products over features, while strategic investors have appetite for features that may be quickly implemented and deliver fast results.

If you are in Silicon Valley, you need to get the attention of “Travel Tech Mafia” – a group of nearly 50 angel investors, specialized in travel start-up. If no one of them backs your idea at an early stage, no serious VC investor in the Valley would consider investing in you.

Look wider

Travel industry would inevitably absorb the general trends: virtual reality, big data, artificial intellect, chat as a main interface for customer communication, augmented reality and other buzzwords. Look for possible application of these technologies in travel ecosystem.

While the “core” travel market is overheated, there are many less crowded areas directly or indirectly related to tourism: operational management for hotels, fintech for international payments, cyber protection for websites, etc. There is also a trend for connecting event management and travel, food and travel, sports and travel, etc. For example, in the last years a whole new niche evolved in the U.S. – youth sports travel (mainly to competitions and event across the country).

What’s next big thing?

According to the experts the big breakthrough opportunities in the industry are the following:

Ultrapersonalization: a lot of start-ups are trying to overtake the field of full-cycle trip planning, one-stop-shop booking services, virtual concierges, algorithms replacing the travel agents, etc., but this challenge is not fully hacked yet. Getting the personalization 80% right is relatively easy – it is the remaining 20% “last mile” personalization which is the difficult part. The solution probably lies in the area of artificial intellect and algorithms, possibly enhanced by a human touch. Whoever gets it right first, would be a huge success.

Business travel: this is an highly underdeveloped area with large revenue potential.

Experiences: existing travel industry is focused on hotels and transportation, while people actually travel for experiences. There is a lot of space for large and small enterprises in local experience planning and delivery – from food tasting tours to commingling tourists and locals.

Hotel industry innovation: while the field of hotel booking and revenue management is busy, the operational efficiency and cost optimization side of the hospitality industry is less explored.

Overall, building a successful travel start-up is challenging, but there is definitely a place for new niches, business models and technologies.

Source: Israel Travel Tech 2016, 26 October 2016, panel “Digging up the gold: Demystifying Travel Tech Investments”, insights from Yossi Moldawsky (Plus Ventures), Eran Barkat (BRM Group), Ariel Yosefi (Herzog, Fox and Neeman) and Gigi Levy-Weiss (NFX).

Photo: La Défense, Paris by Elena Nemets, Travelability Blog.


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