Are travel companies more willing to work with startups?

The travel startup ecosystem stands to gain from the changing mindset of established companies in the industry.

Investors believe there has been positive change since before the pandemic with travel supply companies such as hotels and airlines now much more receptive to working with startups.

Speaking at Phocuswright's Investor View session during last week’s ITB Berlin, Chris Hemmeter, managing director of Thayer Ventures, describes the “pretty powerful change in the overall sector.” 

“There’s no question that the supply side of travel was caught totally flat-footed and lacking agility when the pandemic hit," Hemmeter notes during the session, which took place before the collapse of Silicon Valley Bank. "If you look at any chart at the drop-off of transactions, it’s staggering what happened to this industry. As a result, a lot of organizations had to furlough staff, had to flatten themselves.

"We saw these global cross functionality teams that were working on things like housekeeping software projects that would be reported in three years just get obliterated, and companies started testing and trialing and working with startups and engaging in ideas. I think that had to happen because this is an industry that has always been resistant to the adoption of technology, late to the game and resistant to experimentation.”

Hemmeter adds that simultaneously many new companies have sprung up, not just during the pandemic but also in 2022.

“So there is this surge in interest in owning our own destiny, entrepreneurship and attacking problems and an industry that is now open to those ideas, and I think that is creating a more dynamic and exciting space for entrepreneurs and investors today.”

Hemmeter feels confident that with enough ideas “percolating” the good ones are more likely to be able to break through in the current environment.

“You have to have a receptive value chain, and I think that’s what we’ve got here. I guess the theory would be if there’s enough lunatics banging at the wall of the asylum eventually some ideas are going to get percolating and we’re going to test, we’re going see traction. They’re going to be financeable, and we’ll be off to the races in the category,” he says.

“It’s just that it’s hard, and it takes time, and it doesn’t just happen in a single cycle. Frankly, it takes a few years. It feels structurally as if this multi-trillion dollar complex global value chain is finally in a place where it might change, which is very exciting for entrepreneurs.”

Agreeing with Hemmeter, Lucile Cornet, a partner in Eight Roads, adds that rising customer expectations are also driving change.

“You get to a point where in other industries things are frictionless - you get great booking experiences, everything flows through, people have your data - then you have travel where nothing communicates,” she says.

“That’s because the back end, to Chris’ point, will never change. That’s why I agree there will be a point where you just can’t work with it. That’s where at some point you will have to rebuild, rethink, use the latest stack and modernize this entire industry if you want to stay competitive.”

However, Jan-Fredrik Valentin of Ennea Capital Partners is less positive on the startup funding landscape, especially for Europe, and sees a need for more early stage funding as well as corporate venturing.

“We did not have a lot of IPOs, we did not have a lot of new money coming into very early stages, especially in Europe. I think also there’s more to be done in terms of collaboration between corporations and B2B startups. It needs some money in there.”

Valentin says that the United States market has 10 times the amount of corporate capital compared with Europe, and that overall there’s “a conspicuous absence of corporate venture capital in Europe.”

The session, moderated by Charuta Fadnis, senior vice president of research and product strategy for Phocuswright, also touches on the move by startups to more efficient growth as well as changes in the capital landscape.

Cornet says that the change isn’t specific to travel and adds that Eight Roads, an investor in OTA Insight as well as Amenitiz, invests in Series A and B rounds “so we’re not just talking about profitability because I think it will be a bit too early, and a lot of what we do is invest in those companies for them to keep investing in their product. But what people care much more about is how many dollars do I need to invest to get that level of revenue. 

“There was probably a time in 2021 when it was all about the top line, and we were all in that bubble and now there’s much more trade-off being discussed around what does it take if I grow a bit faster, how much is it going to cost me?” she says.

Hemmeter agrees that the cost relating to borrowing has changed, and he doesn’t believe it’s a fad.

“A lot of people have realized that these aren’t just sort of funky little fickle cycles of the funding community, and we decide suddenly that we’re not all about growth and we’re about efficiency and we’ve changed our mind. What happened was we lived in a world where central banks were shoving us out on the edge of the risk curve. Capital was so cheap that the people that give us money to deploy were demanding yield, demanding growth and pushing us out there to invest in that way,” he says.

“Fundamentally, in 2022 that’s what has changed and we’ve all been forced to come back on the risk curve. That’s leading to this whole idea of efficient growth and business models that are actually ready to work and be focused on profitability.”

He adds that the situation is positive for the startup ecosystem and that a business without a path to profitability “probably doesn’t belong in the marketplace, and that noise should get out of the way so that the better ideas that can truly monetize and make sense have the space to percolate.”