There is no shortage of investment flowing into travel startups. Consider the Phocuswright study, “The State of Travel Startups 2017,” which tracked 1,497 digital upstarts around the globe and collectively attracted nearly $62 billion in funding. Those capital resources are nearly double the $32.6 billion that was funneled into the 1,252 startups tracked during the previous year.
The evidence is clear: travel, and the technology that powers it, is an industry thirsty for new ideas and products.
But it does discriminate; just 20 companies—primarily in the ride-sharing and alternative-lodging sectors—account for 82 percent of 2017 investment dollars. That list includes household names—Uber, Lyft, Airbnb, to name three.
“As funding increases, it tends to be concentrated toward a handful of companies that get stronger and because of this concentration of capital, winners tend to emerge,” said Phocuswright research analyst Chetan Kapoor, a co-author of the study. In other words, funding has surged dramatically as investors pour capital into established market leaders rather than newly emerging players.
According to Kapoor, more than 45 percent of total funding goes to startups in North America and the Asia-Pacific region, led respectively by the U.S. and China. He explained that these markets outrank others in the world because they have more access to funding and investors, as well as innovators that are more ahead of the curve than anywhere else globally. The study predicts that the next wave of disruption in the travel industry most likely will be a result of artificial intelligence, which already is driving new search and booking-entry points, as well as pricing algorithms, and thus has the potential to further alter travelers’ interactions with products and brands.
In the meantime, upwards of 40 percent of startups focused on travel inspiration and itinerary building—the furthest removed from the bottom of the funnel—fail. However, Kapoor noted that although most startups are focused on the lodging segment, an increasing number are setting their sights on the transactions category as well as ground transportation; essentially, those segments with a strong mobile presence. He also added that he’s noticed a handful of meeting category startups coming in over the last three years, “but from a volume perspective they’re a very small part of the startups that Phocuswright monitors because the majority are focused on more popular industry segments.”
One meeting startup that has demonstrated marked success is Travel Tech Con, the independent conference on emerging technology in travel that debuted in 2016 at Yelp’s San Francisco headquarters. The 2017 edition saw pitch competition submissions more than double from 25 to 64. Conference founder Marina Janeiko also agreed that travel-industry startups, both existing and new, are shining a spotlight on chatbots and the AI space.
“[Internet of Things] products for travelers are definitely on the rise: smart luggage, airport services connected via beacons, technology procedures to facilitate airport traffic flow and immigration check-points,” she said.
The industry is still awaiting substantial projects happening at the intersection of travel and blockchain technology, Janeiko said, though alluding to Winding Tree, a blockchain-based, decentralized open-source travel-distribution platform that aims to make travel less expensive for the end user and still more profitable for suppliers.
Janeiko added that the most recent Travel Tech Con also attracted several startups, such as Stay Delightful, Guestbot and Smart Hotel, working around the concept of virtual and automated concierges/butlers for the hospitality industry despite the fact that the hotel business “is hard to crack because not many companies actually understand the dynamics of innovation,” she said. The problem, she continued, is that hotel companies are still trying to innovate within their own closed research-and-development environments rather than leveraging the agility of startups. “We’re hoping to create more collaboration opportunities where startups can lead the way to innovations,” Janeiko said.
Venture Capital Views
Joel Cutler, managing director at venture capital firm General Catalyst Partners, offered somewhat similar insights when he told the audience at the 2017 Phocuswright conference that “people we should invest in are people who see the future and do things differently rather than incrementally invest in what’s already there.”
Cutler is putting his money on risk takers and historically that appetite has paid off—he’s invested in Airbnb, Freebird and Sabre.
Thayer Ventures, a VC firm dedicated wholly to travel technology, takes a comparable approach to selecting investment prospects. Managing Director Chris Hemmeter called mediocrity “a fate worse than death in the world of startups.”
What, then, defines a startup with the potential for longevity? To win a seat at the table, Hemmeter said a startup first must articulate a pain point in the industry and devise a solution that is elegant, differentiated and defendable. Once a startup receives funding, that dollar amount is all too often the quantitative value that the industry equates to the outlook of the startup’s future. That can be an erroneous assumption given that the lion’s share of investment goes to established disruptors and investment has been known to fuel bubbles like 2000’s dot-com crash.
To be successful in the game, every entrepreneur must understand when to block and when to tackle—and so must every investor. To that end, Hemmeter highlighted several characteristics that he considers when evaluating a startup for Thayer Venture’s portfolio:
- Addressable market: It’s not uncommon for startups to overestimate the size and scope of the true addressable market. Hemmeter said his group will dissect the actual market opportunity. If the startup grossly misjudged the market, Thayer Ventures doesn’t do the deal. “Addressable market size dictates outcomes,” he said.
- Unit economics: If this fundamental metric is without demonstrable quality, the company won’t achieve profitability regardless of growth or funding.
- Competitive dynamics: Hemmeter described this as “forecasting the chessboard.” One facet that determines how well a company will do in five to seven years’ time, when acquisition often is possible, is looking at what competitors are doing and how that will make it difficult for a startup to gain traction, as well as how the incumbents will react once the startup achieves some measure of scale. “If margins are compressed and growth is slowing, then the valuation on the exit could be weak,” he said.
- Segment competition: Startups may struggle if they’re in an industry segment crowded with other entrepreneurial companies. “We’ve seen companies with high-quality products and superior value propositions that operate in a space where hundreds of startups are making various claims and that leads to a dynamic where buyers are being told hundreds of stories, making it difficult for them to sort the wheat from the chaff,” Hemmeter said. The result is a depressed perception of the company’s value, which causes buyers to negotiate more aggressively on the price.
- The team: Great ideas are born of great leaders. The team is critically important because a good team executing against a bad idea will have the capability to adjust and pivot if necessary, balancing focus with flexibility while also keeping costs well managed, according to Hemmeter.
- Even after all of the boxes are checked, Hemmeter said the only certainty is that the current business plan, financial model and forecast won’t be achieved.
Equally uncertain is where travel startups are headed. Abrar Ahmad, founder and managing partner of Travel Capitalist Ventures, expects to see more innovators come out of India because there’s less competition and a greater need to service a large domestic travel market, including support for multiple local languages in addition to a mobile-first focus. Like Janeiko, Ahmad also anticipates an increase in the number of startups leveraging AI technologies. “Now is the time to leverage transaction histories to fuel third-party intelligence and learning tools in order to provide greater value to the traveler in a way that’s more affordable and accessible to travel startups and travel companies,” he said. “Tools like IBM Watson, Azure Machine Learning and Google Prediction are some examples travel startups can start to think about.”
Ones to Watch
Industrious startups building their own AI-foundational technologies continue to come to market, including Tel Aviv-based Splitty Travel. One example of Israel’s burgeoning startup scene, this hotel booking site was built on an algorithm that uses hotel data across 40 markets to understand how reservations historically have been managed over two years in order to “split and match” consumer booking requests to deliver the best deal possible. That is, a traveler looking for a five-night consecutive hotel stay in New York may find a better deal on Splitty where the search results can include two nights at one rate found on a global distribution system and three nights at another rate found on an online travel agency, with the two combined rates amounting to less than a single five-night booking through any one channel. At worst, the traveler receives two separate confirmation numbers.
“Now we’re working with hotels for more direct connections and integrations instead of them paying additional fees to other mediators,” said Eran Schust, Splitty’s CEO and founder. “The rates would be exclusive to Splitty and they would provide us with more inventory and better search sources.”
Already, the company’s achievements haven’t gone unnoticed; Splitty joined the accelerator program Techstars in Atlanta in January 2017, counts AOL among its investors and among its advisory board members is Marriott International’s former CIO Carl Wilson and former Travelocity CEO Carl Sparks.
Today, most of the site’s traffic comes from the U.S. and Western Europe. Splitty also has a presence on Trivago because, as Schust put it, “it’s metasearch and that’s our most natural place to be because we are cheaper.”
While Splitty found a solution in dynamic pricing to deliver better hotel values to consumers, Stay22’s technology levels the playing field between hotels and vacation rentals during certain compression periods by making available hotel inventory visible to consumers side-by-side with alternative accommodation inventory. When CEO Hamed Al-Khabaz attended the South by Southwest festival in Austin, Texas, a few years ago, he realized that the two-week event has nearly 80,000 attendees and only about 50 hotel partners, which always sell out. Thus was the inspiration for Montreal-based Stay22, a free accommodations widget for event websites, allowing event-goers to view a price-coded map of all accommodations in the vicinity of the event location directly on the event site. Once they click on a price, they are redirected to the channel—be it Airbnb, a hotel site direct, an OTA, etc.—offering that booking.
As with Splitty, the distribution channel pays Stay22 for bookings made through the widget. “We don’t negotiate room rates or room blocks because it’s not what attendees want at the end of the day,” Al-Khabaz said. “They want the confidence that they found the best rate; they’re likely to have multiple tabs open as they search for those rates and more often than not, they’re going to find a better deal than the partner hotel’s discount.” The company is a cohort member of Travelport Labs Accelerator and Montreal accelerator FounderFuel.
Tagible also completed the Travelport program and, in fact, didn’t write a line of code for its content aggregator until halfway through the program and after meeting with a variety of members in Travelport’s partner network in order to refine the idea. Today, Tagible amasses content including photos, 360-degree images, reviews and video from across the internet that hotels, destinations, tour operators and activity companies can include on their own websites with the goal of driving engagement and increasing conversion by reducing bounce rates and the number of additional tabs opened as consumers search for more information. The startup integrates the content so that it appears native to the client’s site, also making key words interactive.
“Anything you can find on a Google map, we have content for,” said CEO Judah Musick, who added that Tagible’s built-in analytics can also test page performance for changes in the percentage of users engaging with content, time spent on each page, and changes in sharing patterns and click-through rates. Additionally, the content is all culled from different repositories such as Google’s content API, which Tagible has a commercial license to use, as well as Flickr, which has a Creative Commons license and even the public domain. “Our systems will not pull any content that doesn’t have public licensing,” Musick said.
While Tagible leverages content that’s already in the public domain, Suiteness has closed in on hotel inventory that often doesn’t have published rates. This membership-driven booking site offers access to luxury suites around the world that are typically not available for online booking anywhere else. CEO Robbie Bhathal said the company partners directly with hotels and often taps into their central reservations systems. But first they must contact hotels directly to find out if they have inventory that isn’t listed on the hotel website.
Oakland, Calif.-based Suiteness’ business comes predominantly from the U.S. and internationally, from Australia, Germany, Mexico and the U.K.; much of the business is generated through referrals and appeals to groups of four or more. “We’re not a bargain site and hotels have the ability to gain margin—and this is really good margin,” Bhathal said. Launched in 2014, the company’s primary backers are Bullpen Capital and Global Founders Capital.
Preview Platforms: Accelerators and Incubators
Unlike the venture-capital world, which largely provides funding with comparatively little or no additional support, accelerator and incubator programs are more proactive in both shaping and shepherding startups into viable businesses. They can often assist with practical matters, such as sourcing legal and accounting services, so the startups aren’t investing significant quantities of time or funding into these necessities. More importantly, they offer industry expertise on a company’s specific product—from inception to marketing and everything in between.
Nevertheless, there are some differences between how each of these programs operates as well as how they select the startups that are invited into each cohort. That decision can be a reflection of the accelerator program’s own beginnings.
Travelport Labs is part of travel commerce platform Travelport; it was formed in 2006, but is a legacy business in the travel industry because it came about as a result of a series of acquisitions beginning with Cendant Corporation’s 2001 purchase of Galileo International, the subsequent resale of Galileo along with Orbitz to the Blackstone Group in 2006 and then Travelport’s own 2006 acquisition of Worldspan. Today, Delta and Etihad Airlines along with EasyJet rank among Travelport’s clients. It’s a natural extension of that business that Travelport Labs is laser focused on travel tech startups.
“What’s good for travel is good for Travelport and startups will only be successful if they create value for someone in the industry and make the industry better,” said Nathan Bobbin, the program’s senior director of product innovation. He also attested that Travelport Labs is unique because success is not measured on the financial value of its startup stable. Rather, Travelport Labs uses traction as a key performance indicator for its startups, primarily as it concerns the product’s usage during the 16-week duration of the program. If they don’t achieve it, that forces a pivot, which the founders can accomplish inexpensively early on. “At this stage, profitability isn’t that big a deal, but the startups need to have a hypothesis for how to acquire customers at a profitable rate,” he said.
Matt and Nicole Zito, the founders of Travel Startups Incubator, have a completely different viewpoint. After the two successfully co-founded, built and sold two startups of their own, they started advising other startups. After working with more than two dozen of these fledgling businesses between 2012 and 2014, they launched their virtual and global incubator when they realized no one was investing in early-stage startups. Now they have a strategic alliance with Amadeus and invest about $25,000 in each company, also taking single-digit equity stake in exchange for their services. But they don’t limit the incubation period to three or four months because they believe a company takes three years to build. They, do, however, shy away from young companies that create business models and products based on competitors that are already entrenched in the market because, in Matt Zito’s words, “it’s really difficult to unseat a large competitor.”
In its portfolio is Proxce, which connects people’s digital identities with their locations, devices and the Internet of Things. For hotels, that means an alert when a customer about to check in is a few miles from the hotel or when an on-site guest is at the pool so housekeeping can clean their room. Also, a member of Travel Startups Incubator is asset- and guest-management company TracNCare, which serves as a central portal for hotel operations by managing assets and housekeeping, such as rollaway beds and cleaning carts, in order to streamline guest requests and maintenance.
Sunnyvale, Calif.’s, Plug and Play accelerator program launched in 2016 untethered to the travel industry. The company’s CEO, Saeed Amidi, had been a commercial real estate owner in the Silicon Valley who took equity in lieu of rent from PayPal when it was still an early-stage startup. The gamble paid off and following other successful opportunities, Amidi bought his current headquarters and established Plug and Play, which has since expanded to multiple locations across Latin America, Europe and Asia.
With “unicorns” including Dropbox and Lending Club, the group supports startups from a spectrum of industries and works with partners such as venture capitalists and C-suite executives who participate in a biannual selection process of startups to be included in the Plug and Play program. “We use this feedback in our own investment metrics on the back end,” said Dillan Keene, corporate partnerships manager. “Our strategy is to make smart, small bets and make a lot so you can catch those unicorns.” Among the company’s travel industry partners are Carlson Wagonlit, AccorHotels Group and JetBlue.
But working with industry players has also come with its own set of challenges for Plug and Play. Keene said that airlines have proven much more receptive to exploring new startup technologies that could benefit their businesses than the hospitality industry, where the push-back has been significant enough for the accelerator program to seek out startup founders with a hospitality background.
“Senior managers have a hard time listening to industry outsiders, which I think is cultural,” Keene said. He also acknowledged that while Marriott International’s 10-week TestBed accelerator program is in its second year, other hotel companies are risk averse to implementing new technology, although their “white whale,” as Keene called it, is a new property-management or revenue-management system that would improve upon current systems. But the industry refuses to invest in and build the technology, according to Keene: “They’re scared to adopt a new technology when another new one may come and it will cost them to switch and train everyone.”
Keene looks for hospitality startups that focus on incremental technology or more specifically, applications that can affect direct bookings and loyalty experiences. Still, Keene said it’s a tough space for innovation, describing the direct bookings arena as “fairly well captured but with room for improvement in the existing space.” He said there is room for improvement in terms of loyalty apps, particularly via further personalization, which can drive higher yields. Keene also suggested that the hospitality industry is ripe for disruption because, despite how crowded the segment is, it’s still behind on technological developments and tech knowledge. “I understand the follow-the-money mentality and in the hotel space tech has never been a money-maker in the past; it’s always been real estate,” he said.
Game Changers: Lessons Learned from Successful Startups
Behind Keene’s take on technology and hospitality is a syllogism that detracts from the many merits of scale. Lauded by Wall Street for its many economic efficiencies, scale also constrains revenue-driving technology development for many hotel brands. In addition to real estate professionals dominating the hotel sector, the franchise and management model fueling brand growth is a detriment to improving technology because the various stakeholders involved—brand, owners and management companies—have varying objectives, both long- and short-term, that aren’t necessarily aligned.
“Smaller companies can be more nimble, take more risks and try new technology because even if they fail, they fail quickly and move on,” said Marco Benvenuti, co-founder and chief marketing officer at Duetto. The company, founded in 2012, delivers software-as-a-service applications to approximately 2,000 hotels globally for forecasting demand, setting prices and managing distribution. Since forming the business, Benvenuti said Duetto’s greatest challenge has been integrating the software with property-management and central reservations systems, which can vary by brand, by hotel and by geographic location. As Keene pointed out, the industrywide apprehension to upgrade and improve these systems leaves Benvenuti and his clients with a single solution for successful integration: patience. There’s no one size fits all answer and so Benvenuti said the process “requires a willingness among partners to integrate.”
Unfettered by the industry’s aversion to new technology, startups that have gone the distance in other travel segments are now setting their sights on hospitality. Mobile app Hopper, which notifies consumers when their airfare selections are at their lowest predicted prices, announced Hopper Hotels in October.
Hopper uses the same predictive pricing analytics to serve up the best hotel deals to consumers, just as it does with airfare. However, the app also offers its consumers “immersive hotel stories,” providing unique content in the form of 360-degree videography of each hotel—and Hopper owns the content.
Frederic Lalonde, founder and CEO, believes the new iteration of the app will bring value to hotels because Hopper is also rich in customer data. Since Hopper rolled out in 2015, the app has been involved in the planning of about $5 billion in airfare. Lalonde explained that because Hopper is linked to the airlines’ distribution systems, it has real-time data on destination arrivals. “We live way ahead in the funnel and we’re also a replacement for Google Search,” he said, adding “we can tell a hotel in New York City when 8,000 people are going to land, just from our app’s data.”
Also equipped with customer search and purchase histories, Hopper, similar to OTAs, can predict sound guest prospects for hotels in a given location, even if they aren’t currently planning travel to that destination. “We have deeper relationships with customers and that’s how we bring value to suppliers,” Lalonde said. Hopper has also had 17 million installs on the iTunes App store during the past two years, taking it from the No. 1 air app to the No. 1 travel app.
Hopper Hotels isn’t the only travel app on the market that’s casting doubt on the effectiveness of hotels’ direct-bookings campaigns. In late 2016, Mezi pivoted from a virtual shopping assistant to a chatbot-driven virtual travel assistant, with white-label capabilities, that allows users to find and book flights and hotels and make restaurant reservations. Mezi doesn’t actually market its B2C app, but 100,000 users have already downloaded it. Johnny Thorsen, VP global travel strategy and partnerships, said Mezi prioritizes its customizable, white-label product. American Express has already signed on and deployed the app under the label Ask AmEx. Other clients white-labeling Mezi are corporate travel-management shops Adelman Travel and Casto Travel.
The technology is capable of automating more than 60 percent of conversations initiated by travelers, with the ability for human agents to monitor conversations and participate as necessary. “Travel-management companies are running out of staff trained on the GDS, so this allows them to hire communication professionals rather than GDS experts,” Thorsen said. Mezi also has been fielding requests from airlines and hotel brands that want to create a mobile platform for their loyalty programs or to showcase their portfolio of hotel brands. Mezi users create a profile, indicating hotel brand preferences or style preferences (brand, boutique, contemporary) that influence future hotel searches along with other data elements such as past bookings at city center hotels and hotels’ proximity to local activities that also match up with the users’ preferences—and Mezi can provide that content.
Lyft Business also wants to get in on hotel bookings. The ride-sharing app is considering the possibility of partnering with hotels on packages that include Lyft credits for a seamless trip. Amit Patel, director of partnerships at Lyft Business, suggested that one way in which the package credits could be deployed is via airport transfers. When making their hotel booking, guests would also share their flight details. When their plane lands, they automatically receive an alert indicating how many minutes until their Lyft vehicle arrives, a vehicle description and the exact location within the airport where it will arrive. “When the guest arrives to the hotel and checks in, the front-desk manager would let them know how much Lyft credit they have remaining and that it can be booked via the hotel concierge,” Patel said.
But the hotel industry would be remiss to look exclusively at startups with partnership potential. The number of newcomer companies specializing in alternative accommodations continues to rise, again calling into question the hotel industry’s efforts to stymie this sector of lodging.
Market research group Technavio reported last February that global vacation rental market size is expected to reach nearly $194 billion by 2021 and startups from Vacasa to Bnbsitter to Le Collectionist want a piece of that pie. So does HometoGo. The independent vacation rental metasearch engine was founded in 2014, already has raised in excess of $24 million in funding and compares more than 11 million offers in more than 200 countries from 250-plus providers.
HometoGo is confident that this accommodations segment is here to stay and continues to invest in its product; the company is soon to launch a search function that will allow users to compare prices over various time periods. “Travelers may not have specific dates in mind, but are considering a season like summer when their kids are off from school,” said Dominik Schwarz, VP of communications and marketing. “Our new tool will compare prices, options and availability among specific weeks because vacation rental pricing is so seasonal, eliminating the need for customers to perform multiple searches.”
The tool—even for those who dismiss the vacation-rental category—is a sign of the times. Sure, the multimillion-dollar investment in HometoGo and other travel startups may signal a vote of confidence among investors, but the real risk of disruption is in how these neophyte companies are using those funds to innovate and how successful they are in implementing those practices among consumers.