As we reach 2016, Tnooz is unveiling its customary series of reflections on the year behind us and what the travel, tourism, and hospitality industry might expect looking ahead.
And, as always, we’ve asked friends and family of Tnooz to help us out.
Here is part 10 of our 12-section bonanza – startup funding and crazy valuations.
Clearly, 2015 was a huge year for M&A and financing in the travel sector. Cash-rich acquirers moved to consolidate growth categories, and the tight IPO market drove record late-stage private growth rounds. There was talk of unicorns.
Early indications, however, are that 2016 may be less rosy.
The early-stage venture capital market at large will pull back in 2016. Well-funded breakout companies will continue to attract late stage financing as private equity firms continue to move into traditional mid- and late-stage VC deals; but it will be tough sledding for seed funded startups.
The bar to Series A has moved substantially higher in the past six months, and with a glut of angel-backed travel plays, VCs can afford to be choosy.
What does this mean for good teams with product-market fit who have yet to hit escape velocity?
The sense I get is that there are two paths.
One approach I recommend for startups that have some traction and a unique product, but no magic growth hack emergent, is to stay lean, focus on one or two sub-markets or enterprise deals as proof points, raise angel money as needed in 12-month tranches, and grind until one of your bets pays off.
In this scenario, the prudent CEO will be working the phones with Wall Street analysts, reading the filings of likely acquirers, and honing their positioning to fit gaps in existing solutions to put a floor on their deals as potential plug-ins should they not break out.
The alternative, as always, is to shoot the moon on a truly transformative idea.
In this case, though, a CEO should think like an investor – find out (spend money) as quickly as possible if your idea has market-shifting power, and kill it and move on if not.
If you have a “tweener” deal, see option one, or dump it.
Running a travel startup is challenging enough without what I believe is an inexplicable and, more often than not, inapplicable fixation on being a unicorn.
It seems as if every venture-capital-seeking travel startup believes it will be a unicorn based on its “conservative” estimates for growth.
As a skeptical investor, I would rather that you, as a startup founder, let your proprietary business model, traction, revenue and “look-what-we-achieved-in-no-time-with-limited-resources” execution overwhelmingly make the case for you.
Your travel startup may very well be a unicorn in a future year. But for an early-stage startup, you need to focus on the one ahead.
There are too many travel startups, business models, customer types, and markets around the world to give universal one-size-fits-all advice.
But here is my advice, after vetting a lot of travel startups recently.
Start by successfully identifying a large enough travel niche and a corresponding customer segment for your offering, or keep exploring until you do.
I would encourage you to look at other underserved (yet lucrative) travel products like cruises or tours. Or address a specific traveler segment, like business travelers or millennials — perhaps for a particular region.
Ask yourself whether your travel startup is a feature or a business and what do you have to justify the latter?
I can’t give you a formula for choosing a large enough travel niche. But you neither want it to be too broad (“all consumers” is too broad, by the way). Nor should it be too focused or too small in size. Ask entrepreneurs with prior exits, seasoned executives (especially those from the travel industry), angel investors or mentors for advice.
I’ve seen countless startups race through the early stage and spend a year or two (sometimes with multi-million dollar funding) on a niche and traveler segment that I (to be blunt) knew was wrong to begin with. A cogent one- or two-paragraph email, or a 10-minute conversation, could have spared a misguided effort.
So get advice. Also: In most cases, you don’t need (nor should you need) outside capital at this stage.
Secondly, having identified the right niche and customer segment, you should build a working SaaS site or app solving two or three pain points.
Ask yourself how you’ll reach your target audience and why that audience should try your product or service.
Are you a feature or a business? Even worse, are you a few feature looking for a business model?
Naturally, you’ll have other markets you could expand into, but for the time choosing the right initial market is critical.
Avoid being a copycat, geographic knockoff or a petty variation of an existing startup – at best those are lifestyle companies and it’s rare they will get venture funding.
I suggest you provide a minimum 10X or greater total overall value across two or three qualified (researched and vetted) customer pain points versus the legacy market offerings.
At this stage you don’t have all the features your clients want but startups that secure venture funding can demonstrate considerably higher than normal metrics (conversion rates, usage, loyalty, stickiness, average spend…) even at this stage.
A horrible conversion rate means you haven’t found something customers want and every entrepreneur has been there. Be prepared to research, speak with customers, try entirely new features, test, fix, and iterate (or dare I say, even pivot) until you get traction.
You may need to raise friends and family money, or get help from an incubator, bootstrap entirely, raise a small seed round ($50k or $100k) or a combination thereof. Ideally you’ll find traction before you need outside capital so you can raise money to build out the remaining features (and less so to spend substantively proving your business model).
This isn’t where you’re spending money on high-profile, high-traffic marketing campaigns unless the idea of highlighting why people should NOT be your customer appeals to you. Identify, deploy, fix, optimize, and then scale.
An important reminder comes to mind: Every startup founder knows the nuances of why their travel inspiration guide is different that what’s offered by “the other guys” — no surprise there — but don’t expect your customers to know.
Your B2C prospective customers are being bombarded with advertising, e-mails, and promotions day in, day out — not to mention that they already have travel vendor relationships that imply minimum feature requirements and ‘switching costs’ that you or the traveler may not even be aware of.
If you’re B2B-facing, the totality of the offering versus switching to you needs to be considered, including enterprise sales cycles, service level agreements, compliance, customization needs, and how you integrate with a client’s existing sales/marketing/payment systems.
Ultimately you want product-market fit within a big enough lucrative travel niche for a big enough market and once you do, that’s when you raise big money.
For example, be able to say something like:
“We spent SG$10000 on acquiring Singapore (viable initial market) based 25- to 40-year-old working professionals (a lucrative customer segment) who buy cruise travel (an underserved product with good margins) and generated SG$30000 (revenue!) with only 3 out of 10 of the overall features we felt we needed.”
Clearly there’s traction in that example or, to put it simply, people want and are paying for what you offer.
Use a given city or region as an accurate proxy for a larger one. That specificity will let you spend X and consistently earn a multiple of X in return (or, more precisely, justify a path towards a return in the near future). At this stage, raising capital to spend 1000X is a natural next step.
Lastly, some things to avoid.
Don’t expect to connect to a few APIs (you know, the same ones every other travel startup may be using), throw in some social media, guess what customers want, build in ‘sharing’ features, and expect to build a viable business from it.
Do the work and don’t be lazy. Bear in mind that investors don’t have to invest in any deal and chances are you have competitors who are seeking funding who you may not know about (I remind our team that we’re in the secret-keeping business).
You’re “competing” against the other deals the VC firm is considering that week and it’s important to get the right Partner at the VC firm to champion your deal.
Unfortunately for better or worse, early-stage travel startups rarely get skyrocketing valuations unless you’re in an ultra-hot VC market where all startups are getting crazy valuations.
Thankfully there are strong exit possibilities for travel startups who aren’t unicorns and ultimately you want to be in a position where somebody with deep pockets resorts to buying you (because you have long-term contracts, are the market leader, fundamentally have a better approach, market share, etc..) than risk competing against you.
Again, the world is too complicated to offer a formula for startup success.
But I do hope I’ve pointed you in the right direction and ultimateily it’s your hard work, execution, team, timing and luck that matter the most in our collective desire to make a positive impact on travel.
To this day, in my fifth year as an investor, I am pleasantly surprised by what travel founders accomplish. So I know it can be done, and I wish you the best in your pursuit.