What’s the right funding level for your travel startup?
Once you have decided to dedicate the next 5 to 10 years of your life building up a transformative travel startup, the funding question becomes a critical early decision.
Do you bootstrap or do you take funding? If you take funding, how much should you take? Should you take funding on the European scale or look for US level seed funding (or for comparative options elsewhere in the world)?
Not only can you spend your equity once (e.g. on early hires), but you can really only decide about raising strategy once also.
For those going the funded route, the choice is a tough one.
The travel industry is fairly distinctive in that, in every sector, in every product vertical, and in every distribution type, there is at least one OTA with an interest, at least one well funded startup who could pivot or expand at any point and at least one very digitally aware supplier.
If you build something that takes one developer three months, and it’s a great idea, you will be copied before you have got out of the gates. Something that takes you three months will take a competitor two, given that they will have a working model to copy.
Small really isn’t a comfortable place to be if you want to be transformative.
OK: So, having rejected taking a small funding round, you think, well, let’s be a bit more ambitious. Let’s hire three developers for 12-18 months and have a chance at building something where we have a sufficient head start against likely future competitors.
How much do three developers for 18 months cost? You need 1 million USD funding.
The problem with 1 million USD funding is that you now need a 15-20 million USD exit.
Just how many 15-20 million USD problems are there? There are a lot of 5 million USD exit problems that no one is interested in because they can’t be addressed without risk of early copycats as per the small size above, but 15-20 million USD problems, less so.
Wow. Let’s really push the boat out and go big. Hey, 80 million USD funding sounds like a good number!
But an 80 million USD funding equates to a 200-500 million USD or more exit. Do you really think the OTAs or the other funded startups are going to idly sit there while you build up to that value? Of course not, they will attack and attack hard.
Look what happened to HotelTonight.
Expedia – “Nearby Hotels Tonight” button
Booking.com – “Booking Now” app
HotelTonight innovated early on the “hotel for tonight” problem, an on-demand service that, like Uber, caters for the “I am here” customer — not the “where do you want to go” customers that the incumbent OTAs had been focused on
Expedia and Booking.com both took their best swipes. The damage their efforts did to that startup’s hopes is likely to be significant.
OK so what DO you do
So: that was all a bit doom-and-gloom. According to the above, no size really works. Well, did you really think running a transformative travel startup was going to be easy?
Partnering early is a viable strategy. Make it easier for a company to partner with you than to copy you.
Even if you have only spent six months with one developer working on something, this is six months that many less ambitious copycats won’t spend — if you make it easy for them to buy into your tech and solution. Partnering = protection.
I really like how Uber and Airbnb not only have control of their distribution (via web and apps) but they control their own product. Being a product company with a powerful digital strategy seems to be the route to miss the small / medium / large issues outlined above.
Think about sector
I remember working in the hotel sector on transformative digital projects and we would suffer from under-resourcing with 75 staff. Transformative airline projects likewise need 100+ staff. Even then, it’s a struggle to move the sector in a meaningful way.
However, in tours & activities, companies with only 10 employees are able to make an impact. Interesting.
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