Humans love to anchor on the high. We default to comparing our situations to the best of times. Travel tech investment is no different. It’d be convenient to believe that interest rates would stay low, venture capital would remain easy to raise, and venture debt easy to access. If the rapid collapse of Silicon Valley Bank showed us anything, it’s that those of us who run companies need to pay careful attention to the changing economic landscape and make decisions based on both a short- and long-term outlook. While many are quick to yell that we’re headed for an iceberg, I don’t agree. If founders can re-calibrate expectations, understand the capital landscape and adjust their fundraising strategies accordingly, we’ll be successful.
That’s what I want, for all travel tech startups and founders to excel. Our entire industry benefits. As a founder who has led a travel tech company through several rounds of funding and raised more than a quarter billion dollars in capital, we've seen a lot of funding environments. We've had hundreds (if not thousands) of conversations with investors, founders, brokers, dealers and business agents of every kind during times when travel tech was the hottest new industry down to pandemic times when no one wanted to touch travel tech with a 10-foot pole because the entire world was locked down. The collective experiences lend credibility to what I’ll share next.
The money is moving - but it’s still there
The macroeconomic landscape is macro for a reason: It affects everything. But it doesn’t control everything, and you have to keep that in mind. On a macro level, travel tech stocks have declined. At the time of this writing, they’re down 14% on a price-weighted basis compared to Software as a Service (SaaS) stocks, which are down 38%, according to insights from S&P Global Market Intelligence . Valuations are crooked and down across the public markets. Private companies are always the last ones to be impacted, but eventually they’ll come down too. The public markets dictate it. According to Carta’s State of Private Markets: Q4 2022 , 2022 deal count declined 29% year over year, and deal value fell more than 50%. Kevin Dowd and Peter Walker, co-authors of the report, noted in their previous Q3 report that, “Nevertheless, startup funding activity remains high relative to most of the past decade, signaling that it might have been 2021 — and not 2022 — that was the outlier."
This leaves us in a funding environment where the spread between an investor’s bid and a company’s ask is enormous.
There's never been more cash
Here’s what gets buried in all the media chatter: There’s always buyer willingness. And there's always seller willingness. Right now it’s a buyers’ market, but right now there’s also 1.8 trillion of private equity and venture capital dollars sitting on the sidelines, according to Pitchbook’s Q3 2022 Global Private Market Fundraising Report , and the clock is ticking. Investors sitting on cash will enjoy a wealth of options during a downturn. But they can’t ignore cash drag, and they can’t miss the opportunity to invest while the market is in their favor. Money still needs to get deployed. Funds still need to earn their management fees. Seller and buyer willingness have to meet up on the same page in the near future, regardless of today’s ask/bid spread. Founders can expect more flexibility with how deals get done. Flexible capital is becoming investors’ two favorite words.
The best companies can raise, and they always will. The middle of the pack, however, are going to face deals that come with all sorts of triggers, like a milestone event trigger that affects the dilution of a founder’s stock if you miss it. For example, investors could require an annual recurring revenue milestone in 12 months that if the company does not meet triggers a re-rate of the deal and an issuance of additional shares to the investor at a punishing valuation.
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Where this money is sitting deeply impacts your path to liquidity. There is $424 billion on strategic balance sheets versus $1.8 trillion in growth equity. So private equity, with their massive pool of capital on the sidelines, becomes the most likely buyer for your startup, not the strategic one. Corporate strategic buyers simply don’t have as much money lying around and are facing depressed stock prices of their own. This creates a situation where there’s an insane amount of cash out there, but not a lot of liquidity paths.
That means you have to reframe. You can’t assume you’re selling to a strategic buyer anymore. You’re probably selling to another private equity firm, and your fundamentals need to be very, very different as a business for private equity to buy you. Finding a path to liquidity means you’ve got to (a) look at the landscape differently, and (b) adjust how you’re thinking through your exit.
Deal structure, deal structure
As I’ve mentioned, the biggest change to the travel tech investment landscape is how deals are getting structured. When a founder believes they’re valued at A, and a venture capitalist believes it’s B, both sides are getting clever in how they structure their agreements. When investors talk about “flexible capital,” what they mean is finding solutions to the misalignment in valuations between founders and investors. They’re removing an upfront valuation and using hybrid models where structured vehicles and equity enter the picture. The issue here is that it comes with strict return mechanisms, plus a whole lot of other fancy terms that you as a founder need to understand. The current growth equity funding environment reminds me of the post-Global Financial Crisis era in 2008 when cheap capital and clean deals were replaced with expensive capital and highly structured deals. While private market deals are done in the darkness, PitchBook does provide some insights into the recent uptick in structured equity that includes cumulative dividends (i.e. fixed returns for investors). The last two years were abnormal, and what we’re seeing is an overcorrection followed by a return to normal.
Creative stuff that’s common now include: convertible securities, Paid in Capital (“PIC”), Liquidity Preference (“LP”), dividends, ratchets, caps, and a whole lot more. If you’re not familiar with some or any of this, go ask your attorney what they mean and how they affect your waterfall (how money gets processed out of a company at the time of liquidity). When valuations are off from the peaks of '21, the industry will pivot to what enables capital to be put to work. Right now that’s flexible capital.
Unicorns were never real
If unicorns exist, they don’t exist in business. Investors know this. You can’t sell a magic vision to a smart growth equity or private equity firm. Investors are looking for companies with solid unit economics, so be brutally honest with yourself. You might need to pivot. It’s not about your backstory; it’s about your committed practice to underlying business performance, plus very, very good efficiency key performance indicators. Performance is something that my own company is very focused on. We’re no longer growing at any cost and instead focusing on intelligent and efficient growth.
Companies should have been graded on their health all along. Check your key performance indicators and see if they need work. Or at least chase a more rationalized creature. Today they’re talking about the startup centaur : half human, half beast, $100 million in annual recurring revenue with an emphasis on quality metrics. Personally, I love the less mythic concept of a donkey – stubbornly predictable, sturdy, delivers and has a high life-expectancy. Regardless of which animal you aspire to, work toward quality metrics, which the people with the money right now are looking for.
The travel tech investing landscape is different than it was two years ago, but change isn’t inherently bad. If founders and their executive teams in our industry understand the new capital landscape and how to navigate it, they’ll continue to thrive no matter what the headlines say.