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Lakestar has invested in European travel startups more than any other venture firm, based on total money. Does it know something that others don't?

Despite pandemic challenges, the travel sector is positioned to pop with investor love. Lakestar, a Berlin-based venture capital fund, wants to get a piece of the next big travel startup as the sector’s winners and losers emerge from the pandemic.

Remarkably, Lakestar is even backing consumer-facing startups at a time when many investors have soured on companies that compete with the global giants, favoring business-to-business startups instead.

Lakestar buys stakes in startups in all types of industries worldwide. But travel is a specialty. It has invested more euros in travel startups based in Europe than any other venture investor. Its well-timed investment in Airbnb generated fat paper returns when that startup went public in December.

Feeling emboldened from recent windfalls, Lakestar upped the ante this year. It launched a special purpose acquisition company, or SPAC, with the intention to take a startup public. (For context, see Skift’s explainer on SPACs.) In recent weeks, Lakestar SPAC I signed a letter of intent to take public HomeToGo, a vacation rental price comparison search and software sales company that Lakestar’s venture division had invested in.

Venture investing remains a separate activity for Lakestar. Its venture bets in travel besides Airbnb include HomeToGo (price-comparison search for vacation rentals),
Limehome (which manages short-term rentals with hotel-like service), Omio (metasearch for point-to-point travel including ground transportation), GetYourGuide (a travel agency for tours and activities), and Impala (a startup specializing in hotel data connectivity and next-gen distribution).

The Problem With Consumer-Facing Startups

Entrepreneurs developing travel technology startups face not just an industry dominated by giant companies on the consumer-facing side: the proverbial Googles, global online travel agencies, and suppliers such as cruise lines with wide sway over distribution.

The difficulty consumer-facing startups face is having to compete with large companies by buying advertising on search engines or other channels. The cost to acquire new customers keeps rising as they try to grow. If they gain early traction, giant platforms can mimic their best features and undermine their success.

So many investors, such as Thayer Ventures, JetBlue Technology Ventures, and Amadeus Ventures, have broadly shied away from consumer-facing startups, with rare exceptions, such as Thayer’s investment in Sonder, a lodging brand.

Lakestar has been bolder. Many of its venture bets have been in consumer-facing startups. Why?

Christoph Schuh, a partner at Lakestar’s venture business, offered three reasons. Lakestar tends to invest in more mature startups in the Series B or C rounds, which is after the companies have shown a strong track record. The firm wants to bet on emerging leaders of a category.

Lakestar also takes the view that customer acquisition costs have come down in the past five years because many startups have become much better at retaining customers once they get them, reducing churn. Schuh said Lakestar had seen startups across sectors (inside and outside of travel) significantly boost average “customer lifetime value,” — which is roughly the total revenue a company ever makes on a customer minus the cost of marketing to get and keep the person.

Lakestar also targets startups that are focused on categories underserved or unserved by the major online players. Schuh believes HomeToGo’s vacation rental search and GetYourGuide’s tours-and-activities agency are better and more comprehensive than Google’s or Kayak’s or Tripadvisor’s comparable offerings, though skeptics will debate that point. Schuh believes Omio is better at end-to-end travel booking that includes trains and buses than any other player, though skeptics will question the profitability of serving the “last-mile” parts of travel.

Schuh also (and unsurprisingly) argues that Limehome, which manages short-term rentals with hotel-like service, could succeed in Europe in a similar way to how Sonder has gained traction in North America. (Sonder is set to go public later this year.)

Schuh pointed to a few other factors besides gains in marketing efficiency as improving the survival odds of consumer-facing startups.

He said consumer behavior is changing, for instance. Consumers appear to be more willing to seek out individual brands for particular needs, such as mattresses or shoes. The rise of Airbnb as a brand represents the application of this trend in travel, he said. People accepted Airbnb because it offered a category they couldn’t easily find with existing travel brands.

To explain the shift in consumer behavior, Schuh began with an observation from outside of travel. There’s been a recent gold rush in “quick commerce” startups: Companies such as Amazon, DoorDash, Uber, and others have focused on delivering food and other products near instantly. An Irish startup, Manna, is even working on drone-based deliveries to consumers.

So many customers are expecting faster speeds and greater customization from online ordering. That expectation will spill over to travel, too, Schuh argued. Yet today’s travel booking services are too cumbersome and slow to use, and they offer products that are too generic and standardized — broadly speaking.

Christoph Schuh partner Lakestar

Christoph Schuh, partner at Lakestar. Source: Lakestar.

“Consumers want instant gratification, and they’re going to have less tolerance for searching a dozen sites or apps to plan a trip,” Schuh said. “If they have special needs, like, say, traveling with a pet, they are underserved by today’s online travel brands.”

Schuh used the example of remote working as an emerging problem. He said there’s a market failure in making it easy for employees to book remote working spaces that fit their precise needs.

“If you have a specific idea of what kind of working space you’ll need for many hours, with an expectation of Wi-Fi speed and a comfortable desk and a window with a view, you might have to spend hours looking online to find what you want using the global brand travel sites,” Schuh said. “If a sub-vertical player emerges that makes it quick to find that kind of room, consumers will find the brand and use it. You can forget about the brand marketing spend of the giant players, more or less.”

Most Daring Bet

Lakestar’s most imaginative prediction about the future is represented by its investment in Impala. Most of its other investments have represented fresh applications of proven models, such as how GetYourGuide is applying the online travel agency model to the product of tours and activities. But Impala represents a category of startups that are premised on a prediction that technology will change consumer and supplier behavior.

To explain Lakestar’s vision of the future, Schuh talked about the spread of application programming interfaces (APIs) and the broader architecture of a more modern internet and how it opens up new ways of selling to consumers.

Impala is one of a wave of startups betting that new data-sharing techniques could make it more common for companies outside of travel — think of banks, e-commerce sites like Amazon, and ride-hailing apps like Uber — selling hotel stays, flights, or other travel.

“Startups like Impala that are building on the API infrastructure have a massive potential,” Schuh said. “They’re adding travel selling as a new layer on top of non-travel businesses that already have customer bases or audiences. I like this kind of horizontal business model, unlike the typical travel startup, which is a vertical play.”

Skeptics will question why well-capitalized giants such as Expedia Group or can’t come in and swallow whatever category is invented by new startups.

“Many investors have overestimated the power of network effects in travel,” Schuh said. “There’s this notion that or Airbnb can come into the selling of tours-and-activities, for example, and quickly succeed. But so far, they’ve had many more headwinds than they expected. And that’s just one of many examples. Tripadvisor is now trying again to sell hotels, etcetera and so forth.”

“It has turned out to be harder for the global brands to expand their umbrella of offerings, so to speak, than many people had assumed,” Schuh said. “That’s good news for startups and good news for consumers.”

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Tags: europe, lakestar, startups, travel venture capital, venture capital

Photo credit: A chalet that's a vacation rental bookable via travel search site HomeToGo, a portfolio company of Lakestar. The Berlin-based venture capital fund has a distinctive investment strategy to get a piece of the next big travel startups. HomeToGo

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