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| October 02, 2006 | Daily Deal |
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| Next Generation of Online Travel Startups Vying for Venture Dollars |
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| Portfolio Company: Luxury Link |
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By Carolyn Murphy
As Expedia Inc. celebrates its 10th anniversary this fall, the next generation of online travel startups is vying for venture dollars in a market getting increasingly tighter.
Several companies eager for a piece of the nearly $70 billion-dollar online travel pie have taken on venture funding over the past two years. But the online travel businesses commanding attention and capital are doing things differently than their predecessors.
Traditionally, most sites have focused on the transaction component of travel — airfare, hotels and car rentals — says El Dorado Ventures' Charles Beeler. "If you look at that whole funnel, until recently, most of the front end of that wasn't really very well addressed by the online sites."
By contrast, he says, new sites focus on that early research component of trip planning, delivering it down to a transaction. Others emphasize niche or hard-to-aggregate markets, or some of the softer, social aspects of travel.
How many travel startups are challenging entrenched incumbents? Beeler says there's likely at least a 5-1 ratio of new companies looking to take on the leaders. While most won't likely succeed, he says, a couple will.
Along with San Francisco Equity Partners, Menlo Park, Calif.-based El Dorado co-led a $9 million, first round of venture funding for 9-year-old Luxury Link LLC, announced in June. The Los Angeles company runs auctions for high-end vacations and has broadened its focus to other luxury goods. It's a niche market, Beeler says, underserved by online booking engines such as Expedia.com and Travelocity.com LP.
Co-investor Scott Potter of SFEP agrees. The horizontal agents, he says, can't really serve the luxury markets when they're also trying to serve the budget traveler.
Another largely untapped segment is group travel. Centennial, Colo.-based Groople Inc., launched in 2004, enables groups to book bulk travel and manage trips from a centralized location. In August, Groople tapped Boston's FA Technology Ventures and Redwood Shores, Calif.'s ArrowPath Venture Partners, among others, for a $6 million Series A round. The funding came on top of $4 million Groople had previously collected in seed capital.
Groople offers group booking features and templates to design travel for different occasions like destination weddings or class reunions. FATV's Giri Sekhar says it's the only venture-backed company aimed at group booking. The overall U.S. hotel market is $100 billion per year, Sekhar says, of which group travel is 30%.
"Group planning itself is a big challenge," Sekhar says, because generally one person is planning but many have input and all are paying. "There's a lot of technology involved here. You've got to know the plumbing of the reservation systems to really make this work."
And then there's social networking, which was bound to find its way into the mix. Groople promotes networking by allowing users who go bulk to talk about their plans or share photos.
Gusto LLC also promotes the social networking and community aspect of travel. The Springfield, Mo., company took a $4 million, first round of funding in June from DHST LLC, says Jeff Wasson, the company's CEO. Wasson founded TravelNow.com Inc. in 1995, and after taking nearly $5 million in backing from private investors and Boston hedge fund Tudor Ventures, sold the company to Hotels.com, now part of Expedia, for $47.4 million in 2001. "Over the past two years, we've seen an explosion of online travel startups because there's a lot of speculation that people aren't finding what they're looking for," Wasson says.
Meta-search site Kayak.com, which scans sites for deals then delivers customers directly to airline or other provider sites for booking, took an $11.5 million Series C round in May led by London's Accel Partners for marketing and European expansion. Accel's Judy Gibbons is an adviser to the Norwalk, Conn., company. "The incumbents are looking quite first-generation," she says. "They're looking a bit 1.0."
But has the online travel business become overcrowded? "One of the things VCs look at is who is already in the space, how much headway they've made and how competitive is it, really," Gibbons says. She sees opportunity for startups on the innovation and creativity front and specifically those emphasizing the community aspect of travel.
Eventually, the market could see growth taper. In August, comScore Networks Inc. reported that from January through June, travel spending hit $34.7 billion, a 14.7% jump from $30.3 billion for the first half of 2005. It's on the rise, but not expanding as quickly as the whole of e-commerce.
Among VCs, there could be a mentality that the segment is played out, Beeler says, but he thinks the most diluted sector is the booking component.
Beeler points to vacation home rentals as a little-tapped segment. LeisureLink Inc. of Pasadena, Calif., closed a $5 million Series B from Mission Ventures of San Diego and Clearstone Venture Partners of Santa Monica, Calif., in May. The company tries to boost exposure for property owners and agents to draw prospective vacationers.
Similarly, San Francisco-based Viator Inc. addresses destination activity planning and took $4 million in June from Washington-based Carlyle Group's venture arm and Sydney's Technology Venture Partners Pty. Ltd., following a $6 million round from the pair in November.
"We were looking for opportunities where there would still be the potential for venture-type returns," says Allan Thygesen, a Carlyle managing director, adding that it is more difficult once the industry starts consolidating, as online travel has in recent years. Carlyle engineered Viator's acquisition of Las Vegas-based LookTours in May.
As for where travel startups are headed next, many remain optimistic. The first generation of travel sites did customers a great service, Sekhar says, noting there's still much to be done to make booking easier. So Web sites are assembling the planning or search tools to sit on top of reservation systems, he says, but it is all still Web 2.0. "What does Web 3.0 look like"? he asks. |
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