Bull case for the Travel Industry and the long-term opportunities

Chia Jeng Yang
Nov 19, 2020 · 8 min read

We are still trapped at home, but the pent-up demand behind domestic holidays/staycations, the establishment of travel bubbles and travel corridors reflect a long-term future where we return to the world of travel. COVID-19 vaccine optimism is also starting to flow in at a startling pace.

The travel industry has been crippled, but we see signs that it is beginning to start to roar back under safe and altered travel guidelines.

As VCs, we take long-term views and make long-term conviction bets, and are excited about the future of this trillion dollar market, looking into the different business models and trends that have underpinned the travel industry long before COVID.

Travel R.I.P. — Long Live Travel.

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2020 has heavily impacted the booming travel industry. COVID-19’s worldwide spread and subsequent global travel bans have brought international tourism to a halt. Before 2020, travel was growing rapidly: the industry’s contribution to the global economy has been rising consistently for more than a decade, with its growth rate outpacing global GDP growth from 2010 to 2019.

Even in the midst of the pandemic, there are signs that the fundamental demands for travel is here to stay:

VCs seem to agree. Although some of these are bridge rounds which belie long-term optimism, many of these are fresh external rounds.

Selection of fundraising rounds:

  1. June 2020: New York software startup Sevenrooms raised US$50m in a Series B round. It is doubling down on reservations and online ordering, in line with increased social distancing and booking as F&B spots begin to open.

Domestic travel is recovering better than international travel, online booking and technologies that allow for a socially distanced world are thriving, and companies that embed COVID-19 safety protocol are areas that are showing signs of dramatic recovery/growth.

Considering this is also an environment where the talent is more readily available — supplier relationships are easier to negotiate, and institutions are more willing to try new things. Just like Airbnb’s beginnings in 2008 post-Great Financial Crisis, it wouldn’t be a big surprise if 10 years into the future, the seeds for the next big travel company is sowed during this time.

The 3 Relevant Trends

There are three macro-trends that we think are creating investor urgency. Firsty, the shift from selling tickets online, to selling access to unique crafted experiences. Secondly, the lack of digitisation in the tours & activities space as a subset of travel. Thirdly, tech incumbents and traditional hospitality companies who realise they can only continue to grow via M&A.

Trend 1: Moving offline to online, and from commodities to experiences

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With the industry moving online rapidly, there has been a growing focus on experiences. Startups have been at the heart of the industry’s evolution over the years, disrupting traditional travel, characterised by in-person travel agencies, by bringing the entire sector online. Looking back, another shift is imminent: startups which began with transitioning commodities like flights, hotels, and car bookings to online models, are now moving towards experiential products like tours, following the general macro-trend that younger affluent travelers want experiences rather than visiting the same postcard monument that everyone has visited.

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Affluent travellers are increasingly prioritising experiences and activities over relaxation or luxurious indoor accommodation. This preference is also clear from their actions: 54% of affluent travellers have participated in an adventure travel experience and around 75% have participated in organised activities and tours. As a result, the travel activities bookings segment currently makes up 10% of the overall global travel market, has a high CAGR, and reached US$171b in 2019.

Trend 2: As tours & experiences remain undigitised, startups and VCs are entering the space

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There exists massive growth potential for online activities in the travel sector. Despite tours and experiences being the third largest travel segment behind hotels and airlines and its increasing growth, its online penetration lags far behind that of other segments:

  1. Bookings and inventory: 20% of in-destination inventory is bought online, compared to the overall travel ecosystem with 44% of purchases being online. Approximately 25% of tours and activities bookings are done online, whereas about 70% of leisure hotel bookings are online.

Given the size of this opportunity, VC attention to this sector is strong. Since 2017, US$1.2b has been pumped into startups providing online activities on trips, and now incumbent startups have also been exploring the space:

  1. Booking.com expands Experiences service, now in 60 cities worldwide

Trend 3: M&A by incumbents and traditional players is increasing

As startups and funding enter the travel experiences space, M&A activity and exits have also been increasing, as incumbents and traditional players step in. As incumbents (earlier startups in the travel industry) grow and mature, they are using M&A to grow quickly and maintain their market leadership.

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Traditional travel players have also joined the M&A game to remain relevant, given shifting trends. Global hotel companies like Mariott and Hyatt, for example, are integrating activities into their own platforms to encourage customers to book directly with them.

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Breaking down the range of possible business models to invest in, we see white spaces in B2C Multi-Day.

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We think the B2C single-day activities space is crowded and investments are clearly focused around later-stage players. Two main players, unicorns Klook and Get Your Guide, dominate the space.

However, we believe that there are still significant early-stage investment opportunities in the B2B and multi-day B2C space.

B2C multi-day market: This $300b market is still largely untapped and is still in the early stages, with VC interest picking up only in recent years as startups begin digitising the space. Notable players include Tourradar, Tourlane, and Evaneos. Within this space, there is demand for customisation as most current offerings limit online booking activities to standardised tours which are difficult to sell.

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B2B space: There is significant opportunity as incumbents have been acquiring and are likely going to continue acquiring B2B technology providers to become full-service digital providers. For example, we have seen quick exits like Bokun and Fareharbor after small early-stage rounds. With a fragmented landscape with hundreds of players, including Checkfront, Resdy, and Bookingkit, there is likely to be consolidation and thus exit opportunities as the sector scales.

Besides exit opportunities, it is clear that the space is still in its early stages and therefore has significant room for growth. Out of the $1.8b that has been raised in the activities sector since 2017, only 5% has gone to B2B tech players. We expect to see the sector taking an increasing portion of fundraising share in the coming years, though with a temporary pause from COVID.

Spotting Winning Businesses

While looking at potential opportunities through the above framework, we also keep an eye out to tactical trends that successful business models are more likely to prioritise.

These tactics include:

  1. Customisation: So far, standardised tours have dominated the online activities booking space. While hotels, airlines, and associated products can be commoditised, activities have to cater to a variety of price points and personal preferences. Hence, we expect to see increased customisation in this space taking over standardised packages.

Okay but seriously, COVID-19?

We are waiting to see great companies emerge, but as long-term investors, we tend to only track, rather than think from quarterly performance reports. Investing at the early-stage of this space in travel when it is easiest to accumulate supply is only advantageous to prepare for the eventual uplift in travel.

COVID-19 is not going away. I personally take a pessimistic view that COVID is probably akin to the common flu — it will be with humanity for a long time as we have to get accustomed to life with masks and regular check-ins with doctors for multiple types of COVID vaccines over time.

However, one thing is already clear — humanity will not remain locked up. We will and are already adapting to COVID as we have already realised there is no such thing as a post-COVID world, and our fundamental yearning for travel, new experiences, and new places remain undiminished.

As investor momentum has already been picking up as the calendar turns to 2021 with vaccines, travel bubbles and massive travel IPOs coming up, we are excited about the early-stage venture scene in travel.

Are you a travel founder or a VC who has been thinking in this space? I’d love to exchange notes at jengyang.chia{@}creditsaison-ap.com

Chia Jeng Yang, Principal at Saison Capital, dives into consumer and fintech investment trends across the U.S. and Asia, builds projects in the venture capital and public policy space, works closely with early-stage (Pre-A) founders and can be contacted at jengyang.chia@gmail.com. Previous work here: http://chiajy.com

Saison Capital

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