Wall Street is hungry for Net travel start-ups, contrary to their recent market performance, analysts say.
“There appears to be tons of private money out there, [but] they're looking for tested business models and not finding them,” said Jonathan Yarmis, chief strategy and research officer at eMarketWorld, and former Gartner Group analyst.
Since valuations have decreased, many institutional investors are willing to put money into the industry for “consolidation and technology purposes,” according to Alex Picou, executive director of travel and hospitality at CIBC World Markets.
In addition to Internet retailers, technology companies with new processes are obtaining funding, reports Jake Fuller, lodging and travel analyst at Donaldson, Lufkin & Jenrette.
Net companies that fill a niche, such as iExplore, which services high-end adventure travel, unlike Expedia and Travelocity, also are attractive to investors.
However, many Net travel start-ups are not receiving funding because they have irrational business plans, or are relying on brand awareness, not a winning, long-term strategy, Fuller said. “A lot of companies assume very quick ramp-up in terms of revenue, but there is a lot of competition,” he said.
Bob LaFleur, associate director at Bear Stearns, believes the current public market rejection of many Internet start-ups is simply a return to normal investment procedure. “[Before], you started your businesses … you got investors and, if you got big enough sums, you went public. That all got compressed into about an 18-month time period in the Internet world,” he said. This quick Net model is probably not sustainable, he said.
To get in the running for funding, start-ups should be very profitable, or close to it, LaFleur added. Successful start-ups also should release realistic expectations, analysts say.
One major opportunity for online travel growth is adventure and lifestyle travel sites or services, some analysts say. There is currently a void of sites that book hiking/adventure trips to India, for example.
And the demographic of the adventure traveler is ideal for marketers, according to Picou. “That type of travel tends to be higher end. From an advertising, database-sharing, and lifetime value of the customer point of view, that demographic is very attractive,” he said.
However, LaFleur warned about the “serious” risks to travel sites that get involved in that type of business. “In addition to [possible] failure to execute, people are entrusting their lives,” he said. The sites also must be manned with agents who have first-hand knowledge of the area the clients are visiting.
Wall Street analysts also weighed in on the value of sites' customer loyalty programs.
“Loyalty programs have driven customers to the Marriott.coms, the Hyatt.coms, and we think that's going to continue,” said David Small, analyst at Goldman Sachs. Of the 3 percent of travelers who book lodging online, 82 percent book rooms at the hotel company's Web site, he added.
However, sites such as Travelocity and Expedia are successful because they cater to the customer who is not brand-loyal, according to Picou. “There is a segment of the leisure traveler who is just focused on price and convenience, and is not concerned about loyalty,” he said.