Travel- and transportation-focused venture capital firm Thayer Ventures has raised $80 million to invest in new early stage startups.
The new Thayer Ventures Fund III has already invested in communications platform Beekeeper (September 2019), technology-focused hotel management brand Life House (January 2020) and autonomous shuttle company May Mobility (February 2019).
But the world – and specifically the travel industry – is very different today as the fund is closing and aiming to make six to eight additional investments over the next 18 to 24 months.
Below, Thayer Ventures’ managing director, Chris Hemmeter, discusses how COVID-19 has affected the firm’s investments plans, the opportunities it has created in the travel industry and whether it will change consumer behavior permanently.
Q: This fund has been in development for a few years. Has the coronavirus crisis changed your strategy as far as future investments?
It doesn’t change our strategy, but it affects our tactics. What I mean by that is that it affects the kind of metrics that we consider when we’re making new investments. Clearly, we were lucky that for most of our existing investments, the companies had recently raised money. They have capital to take them into 2021 and were early stage enough that they didn’t have a huge dependence on revenue gains in order to cover their costs over that same time period.
The worst case scenario are those early stage companies that suddenly, because of this shock, found themselves in positions where they had to raise significant fresh capital now. We did not have that occur with any of our portfolio companies. Also, I think it’s another reason why institutional investors can be very good partners for startup CEOs, because we maintain reserves behind our initial investments, so we’re always there to support our companies to make it through difficult times like this, which is not the same with other types of capital sources.
But in this particular period, we are mindful of the fact that a very, very critical underwriting variable has changed and that is time. In 2019, when you would look at sales projections and there was early momentum in a company and they had a substantial pipeline of new opportunity and they were growing, time had a little bit more certainty to it. At least you could make a bet on that variable.
Whereas now it’s just not clear, all other things being equal, what that variable will look like, so that has to be then taken into account in price. Valuations have changed dramatically, and I think it’s principally because of the radical disruption to the variable of time.
So, that’s an important part of our tactics. We also are mindful of the fact that suppliers and major incumbents in the greater travel and transportation space … are going to be looking for innovative ways to manage costs. They are going to be looking for automation techniques and other types of products and services that are going to help them be more productive and more flexible as they recover and as they re-emerge into the new world. I think that is important.
So, being a B2B investor, predominantly although not exclusively, that really plays into our wheelhouse because that is the majority of the kinds of companies that we see.
Q: In the news release announcing the closing of this fund, you say, “With this unprecedented period of global change and dislocation, we believe macro-disruptions, including the current COVID-19 environment, will be catalytic towards the pace of innovation and further underscore our long-term investment thesis.” Explain more about the connection between disruption and accelerated innovation.
In 2018, 2019, travel companies, especially suppliers, were thriving. RevPAR in the hotel space was growing substantially, and everybody was doing very well. In a lot of cases during those times, especially enterprise incumbents tend to be less experimental. Why upset the apple cart when things are going well?
When there’s a shock like this and things change, what used to be a two-year study with a cross-functional team now becomes a decision that leadership needs to make immediately. So there’s just a difference in attitude and appetite for experimentation, because the need is there.
Now that’s offset by the fact that nobody has any money. So those great ideas that can solve long-term problems and help to cut costs and drive productivity but cost millions of dollars upfront are going to struggle. But software concepts that are very light, SaaS concepts that are very light, that don’t have a lot of upfront costs, but really a bit more of an ROI-as-you-go type of a structure can do very well in this type of an environment. And it’s an opportunity for newcomers to, frankly, take on some of the old legacy players, because suddenly there’s an appetite for experimentation and change.
Our investment horizons are five to seven years, so investing in companies now that are solving real problems that have significant contributions to make to the productivity story of travel suppliers and so forth, this is a very good time to do that. We’re not sensitive to the quarter-by-quarter performance; we’re really interested in building companies over the long term. And then we just fundamentally do not believe that travel is dead. That’s for sure.
Q: That leads to my next topic – your optimism. Do you feel confident all sectors of the industry will not just come back but will continue to grow?
The comeback will be a multi-year story. I’m not suggesting that we’re going to blow past 2019 numbers in 2021. All sectors are going to take time to recover. And remember, we also are not necessarily dependent upon the industry’s top-line performance achieving 2019 levels and beyond. This is a multi-trillion-dollar global industry with a history of slow adoption of change and innovation. There’s lots of great work to be done even as companies recover.
But we’ve seen this movie before, in many ways, right? We know that leisure travel is going to come back. Initially it’s going to be domestic, it’s going to be the drive-to type vacations and so forth. We’re already seeing some evidence of that in other parts of the world.
Long-term, we know that large group (travel) is going to come back, just because it’s an entire industry in and of itself. So it’s really more of an existential question of whether that will even exist, and we firmly believe that it will, it just may take some time to come back.
Then frankly, the small- and medium-size business travel, while we may see more video conference meetings that used to be travel for internal groups, the reality is business is highly competitive and face-to-face meetings are always more effective. In most cases, there are a number two, three, four and five competitor who are going to get on an airplane to go press the flesh, and that means everybody’s got to be back in the game. So we fully expect that to come back as well.
I also think that in some ways, right now, we all suffer from … this concept of a recency bias. You see it every day in the paper, there’s an article that says how – fill in your favorite activity – has changed forever. Well, I just don’t believe that that’s true. The truth is that when we have compounds that effectively treat this [virus] and you know, God willing, an effective vaccine, things aren’t going to have changed forever. People are going to return to the way they did. We’re already seeing people do that now, even in the face of no real effective treatment and no vaccine.
I honestly don’t even think that people are going to be obsessing about cleanliness in two years. They’re not going to be wearing masks. I just think this whole idea that the world has changed forever and that human behavior is fundamentally now going to be changed forever – once there are treatments and a vaccine for this – is wrong.
The momentum behind travel fundamentally is there. The dynamics are in play, they haven’t changed. We fully expect this industry to continue to grow. Whether this is a two-year valley, a one-year valley, a three-year valley, that’s that time variable that makes it complicated to underwrite investments, but it’s not changed forever, lost for good, no longer a viable industry. That’s just incorrect.
Q: You are looking to make six to eight additional investments from this fund. Give us a sense of the type of startups that might get you excited right now.
We continue to believe in the alternative lodging category. We’ve been saying for years that this whole category of hotel versus vacation rental versus alternative home-share has just blurred into this big, old, messy, interesting category called “where you sleep when you’re not at home.”
We just continue to think that that whole dynamic is shifting and moving around. We love our position in Sonder. We’re still a huge believer in that business. We like that there’s just a lot happening in that category, that’s something that’s super interesting for us.
In the air space, that’s a really interesting one where I think there’s going to be a shift. There’s definitely going to be more pressure on carriers to figure out how to merchandise differently and how to work together to create global coverage. That could lead to really interesting solutions, everything from virtual interlining solutions to just NDC-driven merchandising solutions. It’s so difficult to find the right things in the air category because airlines are tough, but there will certainly be a lot of drama and change and opportunity in that category.
Then you know, transportation is one that is super interesting. In a lot of ways this coronavirus experience has caused sort of an unintended experiment of what it looks like when cities close. Cities are starting to look at that and say, ‘Do we really want to bring all of these streets back online?’ Maybe we shouldn’t bring this street back online and make people use enhanced bike lanes and so forth. I think in Seattle, and many cities, we’ve seen that they’re really rethinking how they reopen. That’s just the tip of the iceberg. So there’s a lot of interesting stuff going on around city infrastructure and transportation generally.
And we tend to be B2B investors, but that doesn’t mean we absolutely ignore all things consumer. There are still a bunch of interesting things happening in that category. And frankly, where five years ago I would have said that the top of the travel funnel was just a dead zone for any startup, that may not be the case anymore, because the dynamics have changed.
It used to be kind of this big, blunt stick where everybody was just trying to out-compete each other on price for Google search terms, and it’s changed. It’s gotten much more nuanced and there are more tools, even that Google has provided, that enable innovative and thoughtful ways to address consumer travel. We haven’t seen anything yet that particularly gets us going, but we’re interested in what’s happening there.
And of course, all things related to business travel and groups and meetings are super interesting. There is, of course, the time variable, once again. It has changed dramatically. But you know, that was a highly analog space and it’s changing. Tours and activities, same thing, highly analog category that was in the midst of radical digitization and then got just slammed, but it too will be coming back and calling for innovation.
Q: Finally, I’m curious – how has the coronavirus and the limitations it has imposed on travel impacted how you are doing business – identifying and evaluating startups and entrepreneurs?
In 2019, I flew 400,000 miles and spent 210 nights in a hotel room. That ain’t happening in 2020.
We’re a global investor. We have limited partners from across the planet. [While 2019] was a particularly big year, there’s no doubt travel is a big part of our business.
Video conferencing tools like Zoom and Skype and so forth, I think are definitely effective and there always were times when we would take pitches over platforms like that, and that is very effective, but it is difficult. It’s unlikely that we would close any new investment without visiting the company physically, wherever they are. So, we will be back on the road.
The last two months has been meeting people [virtually], talking to them about their business, getting more information, but certainly the pace has slowed down. I expect that that will begin to change over the summer, but the summer always tends to be a little bit of a cold period as well.
It really won’t be until the fall, I suspect, that we would be back at it in earnest. But now is a good time for us to meet entrepreneurs and hear their stories, evaluate their business. We can do a lot of that work from home.
• This article first appeared in Phocuswire.
