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The Upcoming Shakeout In Travel Tech

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Editor’s note: Warren Lee is a general partner at Canaan Partners where he invests in travel, enterprise software, and marketplace startups.

The last few years have been a dizzying and heady time for travel startups, filled with mammoth funding rounds, high-profile acquisitions, and dramatic examples of young startups soaring past incumbents.

Last year, Uber eclipsed Hertz and Avis after it raised money at an $18 billion valuation. The rapidly growing company then went on to raise another $1.6 billion at a $41 billion valuation as it continued to draw business away from taxi companies and traditional car rental agencies. Sharing economy standard-bearer Airbnb closed a $475 million funding round at a reported $10 billion valuation last year and is now reportedly raising another huge round of funding at a $20 billion or more valuation.

For comparison, Starwood and Hyatt publicly trade at $13.5 billion and $9 billion respectively. Priceline acquired meta-search provider, Kayak, for $1.8 billion in 2013, and in 2014, SAP picked up Concur, a business travel and expense management software provider, for $8.3 billion.

Travel tech is at a pivotal point in its growth and development.

In many ways, the future for the travel tech industry looks bright and sunny. The travel and tourism sector generates $7.5 trillion a year worldwide, accounts for 1 in 11 jobs globally, and makes up 9.5 percent of the global GDP. It’s a massive industry and is only getting bigger. A study by Oxford Economics forecasts that the travel industry will grow 5.4 percent annually over the next 10 years, which is 2 percent higher than how quickly the global GDP is forecasted to grow.

Yet despite this explosive growth, there are a few clouds are on the horizon as the sector gets heavily saturated. The travel industry has grown increasingly fragmented, crowded, and fiercely competitive, which ultimately will lead to a shakeout among both incumbents and smaller companies. As a small handful of travel startups thrive, incumbents will be forced to respond by making meaningful moves to protect and expand their business. This will make it more difficult, but not impossible, for new startups to gain ground and succeed.

Uber, Airbnb and a small number of other travel startups will eventually go public. One major component of their success is due to their innovative marketplace approach, which expands the market on the supply side and which in turn creates new demand for that service. Furthermore, they do so in a scalable and cost-effective fashion that makes it difficult for incumbents to compete.

For example, Airbnb expands the accommodation and hospitality market by enabling people to open up their homes to guests. This sharing economy model provides travelers with a greater variety of lodging options that can be significantly more affordable than staying at a typical hotel. The costs are also lower for Airbnb, which does not own or expend resources managing the properties.

Other sharing economy companies like RelayRides, Lyft and others are doing the same for local transportation. These marketplaces are saving travelers money while also providing authentic “local” experiences on a global scale. Not only are different types of travelers using these services, including business travelers, but the marketplace model is moving beyond transportation and lodging to include a range of other travel-related services, such as rail, cruises, boats and buses. As the leading travel startups continue to grow, they will make acquisitions to further fuel their rapid growth and fill out strategic gaps.

In response to the expansion of travel upstarts, incumbents will be forced to make meaningful moves to protect their businesses. Consumer travel behavior is changing and travel dollars are increasingly moving online and to mobile. Over the next two years, Oppenheimer estimates that global online bookings will accelerate at twice the pace of overall market growth — great news for companies like Stayful and Rocketrip.

Today’s traveler also has increasingly high expectations when it comes to their travel experiences, including immediate and accurate pricing and availability information, mobile booking, user ratings and reviews, past travel history and preferences, real-time alerts, hassle-free check-ins, online concierge services, and more.

In order to keep up with the rapid pace of innovation and deliver the types of experiences travelers want, incumbents must act fast. The fastest way to do this is through acquisitions. Hertz and Avis may need to acquire “cheaper” startups in order to effectively compete with Uber. And as Airbnb steals away personal and corporate travel business, the large hotel groups (Marriott, Starwood, Hilton, Hyatt, IHG, etc.) will need to play defense by making acquisitions of their own.

For example, Barclays predicts that Airbnb will surpass the major hotel groups in terms of actual guest bookings in a few years — a scary prospect for these publicly traded companies.

This hyper-competitive environment means that incumbents are also going to look for ways to expand their business. The travel industry is highly fragmented with hundreds of niche travel apps that cover one specific thing, whether that is in-destination activities, dining or reviews.

In an effort to capture a greater share of traveler wallets, incumbents are striving to become the go-to digital portal for all things related to travel. They are looking for opportunities to move into adjacent segments that allow them to leverage their existing customer base.

We’ve already seen this happen with Priceline’s purchase of OpenTable, which marked its entrance into restaurants. Another example is TripAdvisor’s acquisition of Viator in order to break into the local events and activities space. Incumbents are also consolidating the spaces they are already in and will continue to do so. Even once powerful incumbents are not immune, and risk getting taken over by bigger players. Priceline’s acquisition of Kayak and Expedia’s acquisition of both Travelocity and Orbitz are examples of this.

In addition to these large acquisitions, we’ve also seen a robust market for small buys. TripAdvisor has done 20 deals since 2006 and they are all tiny. However, there are simply too many travel startups — 750 and counting — competing in this sector and too few acquirers, which creates big challenges for new travel startups.

With large, well-funded, powerful companies battling it out in the big leagues, it’s becoming prohibitively costly and difficult for small startups to succeed. They don’t have the same resources as these cash-rich companies, and fundraising will become more challenging, except for those businesses that are truly unique or strategic to a potential acquirer. This means we’ll likely see a number of new startups struggle to differentiate from the rest of the crowd, forcing many to either shut down or continue to build a mediocre business.

Despite challenges that may lie ahead, there has never been a more exciting time to be investing in travel. Marketplaces, mobile devices, a growing global base of travelers, and millennials are all working together to enlarge and transform the industry. Seismic changes are happening and both incumbents and startups will feel the impact.

While this changing travel landscape will be increasingly tricky to navigate, it will also prove to be an exciting and potentially lucrative time to be a travel startup or a travel investor.

*Canaan Partners is an investor in RelayRides, Stayful and RocketTrip. 
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