General Catalyst’s Joel Cutler on the State of Startup Innovation in Travel

Last month we came out with our report, “Venture Investment Trends in the Travel Industry: Lessons & Strategies for Travel Startups,” which looks at what type of travel startups attract venture capital funding, where the smart money is going, and the common mistakes that startups make as they seek funding and strive to build their new businesses.

Below is an extract. Get the full report here to get ahead of this trend.

Joel Cutler is co-founder and managing director of General Catalyst Partners, and has been among the most active and successful VCs in travel over his career. Cutler’s investment selections in travel have included Kayak, ITA Software, Airbnb, Couchsurfing, Room77, Sabre, Trover and Viajanet, among many others.

Skift spoke with Cutler about the state of innovation in travel, and other investment and startup trends. An edited portion of the interview follows:

Skift: Someone told me the other day they think there is a lot of frustration among venture capital people in travel because there are so many copycat sites and apps, and there aren’t too many startups that are really doing something different. Do you agree?

Joel Cutler: If you look at Airbnb and Uber, these are two of the most successful venture-funded companies and they are both in the travel space. In the last five years, two of the 10 best companies around today are both in the travel space. That’s pretty good.

I think the travel industry has out-performed in the last five years. If the travel industry is inclusive enough to take Uber into partial account and Airbnb, then the travel industry has out-indexed. There you’ve got the world’s largest industry, travel, next to healthcare, the second-largest industry, and it should be really flexing its muscle and scale.

Skift: What works in travel?

Cutler: Either the idea has to be really orthogonal like Uber and Airbnb, or the idea has to be in a geographic region that is new and big. Or the idea, if it is similar to something that’s been done in the past, it has to be 10 times better. It’s possible that the business model is 10 times better, but the technology really should be 10 times better. And if it has a material technological advantage then that would be the beginning of making it 10 times better.

Skift: Do you have a working number in mind about the percentage of travel startups that fail or flame out?

Cutler: It’s got to be really high. The bigger issue is how many of them become worth more than $500 million. That’s the more alarming question. There are lots that become worth more than $40, $50, $70 million. Big-time venture capital isn’t built on $40, $50, $70 million exits. It is built on Airbnb. It is built on $500 million or billion-dollar exits. TravelClick just got sold for $930 million. Those are the kind of exits that make venture capital pay off.

Skift: Within the travel industry are there enough companies around that have the deep pockets required for these outsized exits?

Cutler: There aren’t that many organizations that can buy things that are worth $500 million or $1 billion or more. I think by definition when you say an idea has to be worth over $500 million or over $1 billion to make sense to big-time venture capital, we need big, big ideas. The company either has to become an independent public company or it has to be big enough for a very large-cap buyer to pay a lot of money for it otherwise you can’t hit those valuations. It is either going to be a great enough and durable enough idea that it can become an independent public company or it has to be important enough that a large acquisition can be made by a significant organization.

Skift: Where are the biggest opportunities for startups and investors? Are they in consumer brands or in B2B plays?

Cutler: Consumer-facing businesses, if they can thread the needle, create a brand and therefore acquire customers at reasonable prices, and those are valuable customers, they have a tendency to get very, very large. And, they have a tendency to be more valuable on the face of it than brands that are servicing the internal workings of the business, the software infrastructure of the industry.

There are clearly exceptions to that. ITA Software and TravelClick are brilliant examples of the opposite, but they were very special. ITA was very special and had unique technology that was, in fact, 10 times better than anything else out there.

Consumer-facing is so hard to do, but if you get it right at scale then it is so valuable versus the internal, infrastructure software business model of the industry. It really needs to be very special and very, very big to produce the kind of value you need to have a great venture capital outcome.

Even now the plumbing issues around hotel infrastructure and travel infrastructure, they don’t tend to get ultimately valued at enormous rates.

Venture capital, to be successful, needs somewhat exuberant pricing. The back of the house kind of stuff tends to not get that kind of juice. It’s building a brand on the consumer side that tends to get the highest exit valuation.

Skift: What about developing markets? What are the parameters for a good investment there?

Cutler: If it’s like Airbnb, that’s one thing. If it is like something that someone has done before in a geography that someone’s done before, is it 10 times better? Is there a business model shift or a technology shift that creates the opportunity to be 10 times better than what was done before?

If it’s geographic, is it big enough and distinguished enough, and will that geography be valuable enough for an acquirer or can you build an independent company?

International and developing markets are a wild card. For example, you see two good fundings in Germany with GoEuro and GetYourGuide. There again, you’d better believe you have the makings of an independent public company or you are willing to sell it to a large-cap company.

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