Last fall 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.
David Ambrose is managing director of Steadfast Venture Capital, an early stage investment firm based in New York City that focuses on travel and local.
Ambrose previously led Travelzoo’s global mobile and social business. In 2008, Ambrose founded Scoop St., a local commerce company that was acquired by BuyWithMe in 2011.
Skift spoke with Ambrose about the investment and startup scene, including the attractiveness of B2B investments; theme-based offerings, including adventure travel; in-destination services, and startups’ mistakes.
An edited portion of the interview follows:
Skift: How do you view the current climate for travel startups and investment, and how is it changing?
David Ambrose: I think what is very clear in travel investing in 2014 is there has been a lot of interest in the public markets because of the value they’ve created for their shareholders. Companies and entrepreneurs at the early stage are attracted to the model when considering the history and performance of the public travel markets.
The other thing that we are seeing is there is lots of capital flowing to emerging markets, specifically Asia, including India, and to Latin America, too. I think there are investors who look at it from a geographic standpoint because they have built or funded companies in those regions, especially as the travel category there isn’t as mature in North America or Europe.
When evaluating travel companies, it’s helpful to think about it in the form of an hourglass. As you start moving down the hourglass, you basically have online travel agencies. And you have the large public companies that have tremendous pricing power, and they have leverage to do so. If you are a startup building in that top of the hourglass, can you compete spending hundreds of thousands of dollars per day even acquiring eyeballs versus the OTAs? The answer is no. So you saw this proliferation of inspiration and planning products, because they were cheap to build.
We think there are basically two opportunities at the top of the funnel for consumer travel. There is a small sliver at the top of the funnel where people who have the same thesis-driven way of traveling together, people who have the same mission as to where they want to go, people who have the same interests. We think there is a tremendous opportunity around community. Adventure travel is a good example. There is a very active, high-spending consumer base, folks that travel with athletic gear such as skis, bicycles and paddleboards. It is really hard to find information about hotels, properties and venues. So, we think there is an opportunity for someone to build a successful business around the network or the platform that focuses on these types of travelers.
Skift: There is so much talk about consumer startups such as Airbnb and Uber, but is there lots of value in the back end, too?
Ambrose: The back end of the hourglass is interesting because it is much harder to replicate given there is a lot of intellectual property that needs to go into it. Duetto and SilverRail are great examples. Duetto is a business that helps bring hotel revenue management to the cloud or SilverRail for seamless railway booking infrastructure. That took a lot of assets, and time, to build that. You have to have patience as an investor in this category.
Skift: What would you say is the state of innovation today among travel startups? I’ve heard some people say it’s a frustrating time among travel investors because there’s so much copycat stuff going on. Other than Uber and Airbnb, where is the true innovation?
Ambrose: It’s very noisy on the front end, or the consumer experience, of the hourglass. There’s no doubt about it. There’s lots of companies trying to grab the attention of what feels like an infinite consumer base, and having them do local stays and on-demand ride-sharing, i.e. an “On-demand company for X category.” You can spend day and night looking at these products.
For a saturated market, usually in those segments there are one or two winners. Maybe it’s a winner take all or a winner take most. If an entrepreneur can make one or two steps of the journey really magical, then that’s really exciting. Lately, the innovations have come on the back end of the hourglass because more of the focus is in this area at the moment; largely because it is really expensive to build one of these front-end companies now, and much harder to replicate.
Skift: What should startups look for in investors besides dollars?
Ambrose: If I were an entrepreneur I wouldn’t want an investor who was duplicating my role. If I’m really good at sales, why should I get an investor with a great sales background? The best investors that I’ve found are those who have complete confidence in the market, but they know there is risk and they want to work with the entrepreneur on a certain cadence to ask pointed questions. They think about certain people in the investor’s network who can work with the entrepreneur to work through these questions. If the entrepreneur is really great at sales and is not really great at product have someone from the investor’s network who is great at this skill sit with the entrepreneur and have a working session.
It’s up to the entrepreneur to ask the investor, in exchange for currency, how often and how involved does the investor want to be, especially at the seed stage. Some investors can be really active. Sometimes investors can spend every week with an entrepreneur because it is that early in the business. And, I’ve seen great investors do that.