Venture capital returns to the travel industry

Tuesday, 06 Aug, 2009 0

The first half of this year saw at least 10 investments in travel companies after an initial slowdown last year.

The investments ranged from companies providing online reviews, recommendations and bookings to rental management software.

Venture capitalists are being attracted by the billions spent on travel each year with Forrester Research predicting online travel alone will grow from $115.6 billion to $157.8 billion by 2013.

Jim Armstrong, a venture investor at Clearstone Venture Partners, notes his firm tries “to stay around the money on the web”.

“We’re excited about categories with a lot of money around them and there’s a lot of money in travel,” he said.

Investors and entrepreneurs are excited about travel and believe it is once again ripe for innovation.

The 1990s saw the pioneers launch travel online, this ended in the early 2000s with a wave of acquisitions and mergers.

The industry is beginning its next wave, partly created by social networking and mobile presenting new opportunities.

While large travel companies such as Expedia and Lastminute.com have been massively successful offering a one-stop shop for booking travel, there is criticism from some sectors that they now lack innovation.

The new crop of start-ups are looking to take their models to the next level by adding video tours, price tracking and exploiting niche travel products.

One of the aspects online travel entrepreneurs are seeking to improve on is the information available to consumers with user-generated guides.

Complementing these initiatives is a range of quality, rich media which offers customers improved insight and an immersive experience for travel bookers.

Henry Hardeveldt, a travel analyst with Forrester Research, also pointed to niche travel businesses, saying that sites don’t have to provide the round-the-world trip of a lifetime; some people just want a better road trip.

Investors see one of the most attractive aspects of travel companies as the potential for multiple revenue streams.

For example, a travel review website can generate revenue from advertising as well as referrals for the destinations it features. There are also opportunities to license out their technology as a white label to other sites.

Hardeveldt said it is not just consumer acquisition and booking, many investors see more opportunity in the technology infrastructure. There is opportunity for innovation – and to make money – between the actual booking agent and service provider.

“What you see are these small, cost-efficient companies – well-managed businesses looking to fill the gaps,” Hardeveldt said. “It’s a very rich pool they can participate in.”

But, as Hardeveldt cautioned, not all travel starts ups will thrive.

Many offer services that don’t differentiate themselves form the competition.

“I think there are a lot of these players where there’s too much overlap,” he said.

Still new innovation is there in an expanding market. Entrepreneurs are saying travel is an industry that hasn’t changed enough and investors agree.

Both seek lucrative consolidation and exits when market conditions improve.

“When market conditions allow, a lot of companies will be attractive candidates for mergers or public offerings at very attractive multiples or valuations,” Hardeveldt said.

“It’s not unlike seeing the caterpillar morph into the butterfly. We’re in the caterpillar stage.

“Sometime between 2010 and 2012 I would expect to see the next wave of consolidation.”

With online travel-related spending expected to boom in the next few years, VCs are eyeing the latest start ups in the travel space as well as established players with high-growth potential.

*Investors and entrepreneurs meet at The Get Funded Show@World Travel Market, taking place on November 11-12 in London. Twenty four of the most innovative high-growth travel companies will be pitching to travel gurus and investors. To join them, or to find more information, go to www.getfundedshow.com.

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Phil Davies

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