The Rise of Travel Startups

The travel/hospitality industry has long been underestimated by investors mainly due to the reluctance of many leading players to adopt technology approaches similar to other sectors in order to improve margins or customer service. Indeed the travel/hospitality sector is considerably lagging behind other sectors where technology adoption and innovation is key to long-term success.

However, this is about to change. Actually, it seems it is already changing – in a good way, of course. According to a research by CBInsights travel startups have experienced 106% in exit growth on a yoy basis during the last 2 years – ranking 4th among other sectors such as Health & Wellness, Data Storage & Security etc.

Actually, this shouldn’t strike you as surprising if you consider the acquisition strategies and investment activities of some of the majors in the industry. In fact, leading online travel agencies (OTAs) were on an acquisition spree in the last 18 months and are planning to be even more aggressive in order to gain a bigger market share of the $1.3B global travel market. Priceline announcing a $1.3B note mainly for acquisition purposes, Expedia spending hundreds of millions on acquiring startups as well as buying Orbitz for $1.6B, Tripadvisor also spending good amount of cash on startups such as Rove, LaFourchette, TinyPost, Jetsetter, Cruisewise, and GateGuru. This clearly shows the liquidity of the market as well as the willingness of leading players to acquire well-performing technology startups in order to increase set of features and improve USP for end user.

In addition, there are certain clusters in travel that will additionally contribute for the positive trend that are worth noting. These include the dynamic pricing solutions that aim to improve margins not only for airlines, but also for restaurants and airbnb lettings. In fact, airbnb has created a cluster of airbnb solutions that aim to improve the guest experience, outsource some processes for the host, and improve profitability. These are expected to prosper as the airbnb industry grows. In addition, to provide a personalized experience to every individual traveller in a world full of too much information and noise, certain curated exploration platforms have emerged. For the same purpose but adding some more local ingenuity, crowdsourced information sites have gained significant popularity recently.

However, there are certain problems for travel/hospitality startups that they have faced and are likely to continue facing unless founders change a certain number of aspects in they way they do things.

First, travel startups do not focus on monetisation. If you look at most travel startups there, you will notice one obvious commonality among them – they don’t charge anything for their service. And if they do not require a monetary incentive for their services, it just means that their services aren’t valuable to customers/users. Mentioning this, it is worth noting that most startups are so much focusing on the end user that they fail to acknowledge the fact that this user comes to communicate with many local business while travelling – an interaction that is worth acting/monetising upon.

This actually leads me to the second aspect – travel startups do not partner with or target business customers, which are actually the customers who are willing to pay if you bring significant value to them. Make a tourist pay for valuable, relevant content that is most certainly available somewhere else and you will fail. Make a local business pay for a tourist you brought to him based on content you provide, and you will succeed. It is that simple.

Third mistake of travel startups is concerned with growth strategy. Travel startups expand internationally either too quickly or way too slowly. This is a common problem among startups in this sector due to a typical challenge they all face – CLV to CAC is a lot lower than in other industries. This is due to the fact that once acquiring a tourist as a user, this tourist will likely use that service once/twice a year simply because he/she doesn’t travel that often. Thus, startups try to expand to other relevant locations in a rush to increase CLV per user, while sacrificing quality of service and loosing interest among users. On the other hand, some startups focus so much on improving a certain aspect of their business per location that they forget about unit economics and burn out the acquired funding till becoming insolvent.

In overall, I am very optimistic about travel startups thriving in the disruption of the travel/hospitality sector as long as they mitigate the aforementioned problems they face. Actually, I expect higher ROI for investors in travel tech startups  and quicker exit road for startups.

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