Riding the Wave: The Next Generation of Travel Companies Is Here
Of all the sectors impacted by COVID, the travel industry has certainly suffered more than most. For much of last year, airports were like ghost towns, hotel rooms sat vacant, and cruise ships idled in their ports. Not surprisingly, VC investment in this category also plummeted. After reaching back-to-back highs in 2018 and 2019, last year it dropped by 55 percent. In fact, just 382 new travel industry venture deals closed in 2020 — the lowest level in nearly a decade*.
Although many investors have turned away from an industry that’s clearly been in crisis, Inovia isn’t one of them. We’ve been investing in the travel industry for years, and partnering with companies like Routehappy, Localmind, MileWise, and Luxury Retreats, has taught us a lot. Not only do we know the industry well, we also see that it’s ripe for further disruption. That’s why, even during the darkest days of the pandemic, our commitment to the sector has never wavered and, in many cases, we even decided to double down. In fact, since COVID began, we’ve invested $100 million into a handful of companies we believe are positioned to thrive in this rapidly rebounding multi-trillion-dollar industry.
The Not So Golden Age of Travel
The 1950s and 1960s are often referred to as the golden age of air travel, famous for glamorous airline hostesses and gourmet meals. But for years, travel was an exceedingly expensive activity that was out of reach for most.
Over time, that slowly changed. By the late 1990s and early 2000s, the rise of the internet and global distribution systems paved the way for the first wave of online travel agents (OTAs). Soon, companies like Expedia and Booking.com were bringing information, flexibility, and greater autonomy to consumers who no longer had to rely on traditional travel agents. This was a game-changer and one that slowly drove a nail into the coffin of most traditional brick and mortar travel agencies. Thomas Cook, for example, which had once generated £9.6 billion in annual revenue, went bankrupt in dramatic fashion in 2019, leaving 600,000 travelers stranded around the world in the process.
Eventually Expedia and Booking.com grew to multi-billion-dollar businesses, with a combined valuation of $124 billion according to CAP IQ data*. These marketplaces became so big that they grew to control the majority of the supply, effectively setting pricing for everyone. They also simply served up every possible option, often overwhelming customers in the process.
When Airbnb arrived on the scene in 2008, it ushered in a second wave of internet-based travel services that not only leveraged the sharing economy, but were also more focused on meeting consumers’ needs and delivering personalized experiences based on their individual preferences. Although Airbnb has never been the acquiring type, part of their growth story includes the acquisition of two Inovia portfolio companies, Localmind in 2012 and Luxury Retreats in 2017. Doing so further helped Airbnb successfully offer customers unique, customized homestay experiences with the same ease and affordability as existing travel services. It was in large part because of this that the company was able to achieve a $75 billion valuation when it IPO’d last year. And while other companies like VRBO and Stayz have since copied this model, a third wave of online travel services has arrived that’s once again changing the rules of the game and disrupting incumbent providers in the process.
Welcome to OTA 3.0
As we look ahead to where the travel industry is going, a third wave of innovation has arrived, propelled by an increased use of data to help drive one-on-one engagement and more personalized experiences. We are also seeing the rise of alternative accommodations to meet the needs of millennial and leisure travelers in a post-pandemic world. Here are the three trends that we believe will have the biggest impact on travel going forward:
1. Prioritizing peace of mind using data
In today’s uncertain world, travelers want to deal with brands they can trust. At the height of the pandemic, that trust was often in short supply. That’s because people never knew for sure what was at stake if they suddenly needed to change their plans in the face of new lockdowns or other restrictions. Plus, the rules that airlines and other providers had in place were constantly changing. As a result, people didn’t know if they would lose their money or, if they got a refund, how long it would take to actually get their money back. Customers who booked their travel using traditional OTAs often struggled to find answers to these and other common questions.
Going forward, we see an opportunity for travel companies to differentiate themselves on trust. The best are finding innovative ways to leverage industry, individual, and contextual data to develop new value-add products that give customers peace of mind. One company that exemplifies this trend is Hopper, which predicts how flights and hotel prices fluctuate over time, letting customers know exactly when to book to get the best price. Hopper also offers a new type of financial product that allows travelers who miss a connection to immediately get booked on the next available flight to their destination — regardless of what airline it’s on. The price of this financial product is determined using predictive analytics based on the likelihood of particular trips needing to be refunded.
Hopper’s approach to selling financial products has paid off. Over the last 12 months, the company raised a total of US$235 million (including $170 million in the first quarter of 2021), having increased revenue 100 percent between 2019 and 2020 and 50 percent during the pandemic. It’s in large part because of this success that the company partnered with Capital One during the pandemic to create the new Capital One Travel, an innovative customer booking experience for Capital One cardholders.
2. Leveraging customer data to create personalized customer experiences
Today’s travelers are no longer satisfied with the one-size-fits-all experience that’s long been the status quo in the travel industry. They don’t want to be overwhelmed by a never-ending array of options to sort through and decide which is going to best meet their individual needs and preferences.
Going forward, the best travel companies will leverage AI to make sense of the vast amounts of customer data they have, to drive personalization, anticipate needs, and create best-in-class customer experiences. That means understanding customers’ preferences based on past interactions and filtering future offerings accordingly.
Importantly, future interactions will become more direct, happening not on a company’s website or via email, but using captive channels like SMS, WhatsApp, or Messenger. And rather than relying on pressure sales tactics, they’ll focus on delivering a better experience. This marks an important shift. Instead of trying to make a margin on a single transaction as incumbents have historically done, travel companies in this third wave will increasingly be going after customer loyalty.
Snapcommerce, which recently raised a US$85 million funding round, is a great example of a company that’s bringing a high degree of AI-powered personalization into its mobile-based SnapTravel platform.
In addition to helping users book travel in more than 100,000 cities across over 150 countries, the company has used its AI to help save consumers more than 100,000 hours of shopping time while racking up over $75 million in direct savings. The platform does this by capturing users’ preferences and tailoring the experiences it delivers based on them. The more it learns over time, the more finely tuned those recommendations become to give travellers a truly personalized experience that keeps them coming back time and again.
3. The rise of alternative accommodations
The global pandemic completely sidelined business travel, which has historically been the cash cow of the airline industry, accounting for as much as 75 percent of revenues. And while we expect it will take anywhere from three to five years to fully recover, leisure travel is already rapidly rebounding with 57 percent of leisure travelers planning their return in 2021.
Leading the charge are millennials who are eager to reconnect with friends and family in a post-pandemic world. They’re often eager revenge travelers who are ready to go anywhere, anytime for a change of scenery. This increasingly means taking advantage of remote work options to spend a few weeks or months working from an entirely different location. And since we believe that remote and hybrid working models will likely be a permanent fixture for many companies going forward, this trend shows no signs of abating.
What this means is that there’s a growing need for alternative travel accommodations. Companies like Sonder are specifically targeting travelers who are looking for authentic experiences rather than generic hotels or inconsistent privately-owned accommodations. Sonder is reshaping the hospitality industry by buying up new construction that would typically be earmarked for sale as condos and instead leasing them out as boutique accommodations. And the company certainly has a bright future, having recently announced a merger agreement with a blank cheque company, bringing its valuation to US$2.9 billion.
Pack Your Bags for an Exciting Road Ahead
As we gradually come out of the pandemic, pent up demand for travel is going to be massive. And while that creates opportunities for all kinds of travel-related businesses, those best positioned to ride the third wave will be the ones that create better, more engaging, and more personalized customer experiences for the next generation of travelers.
At Inovia, we’ve been backing winners in the travel industry for nearly a decade and we know what it takes to be best positioned to thrive in a post-COVID world. If you’re interested in talking to us about what we see happening in this space, please don’t hesitate to get in touch.
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* Venture Investment Trends in Travel 2020,” Skift Research, 2020. Cap IQ as of May 24, 2021
