Chris Hemmeter

The Superstructure of a Fundable Travel Startup

The six gotta-haves in order to attract venture capital investors.

Episode Summary

There are six gotta-have, basic points of the structure of a fundable startup, things that a venture capitalist look at when valuing companies.

  1. A totally addressable market (TAM). A true understanding, not just an overall scope and scale, of a large enough market.
  2. The inside of an idea: it needs to address a pain or inefficiency in the market and a clear, quantifiable, difficult to repeat solution to that pain point.
  3. The idea of competition and competitive response. In-depth questions like: Who has to lose if we win? Or once we reach traction? What are some of the other competitive forces that could be putting a damper on our competitive growth? Human inertia is actually one of the biggest competitive dynamics in a startup business.
  4. Progress. The art of entrepreneurship is kicking the can down the road, it’s advancing the ball on the play field. Good entrepreneurs make progress. They’re not always right, they’re not always lucky, but they make progress.
  5. Team. You can show intelligence about team by showing what your orchard wants to look like and what some of the next critical hires are.
  6. Financial plan. The fundamental unit economics: how big can we get? How fast can we grow? To really understand this is an important part of establishing confidence.

There is a gap on the service provided to consumers in the travel market, and it consists of two macro areas. One of them is alternative lodging, where there’s still a great deal of innovation from a brand perspective, from a booking perspective, from services that are going to wrap around what some people think will become 20-30% of the global stay inventory in the next 5-7 years. The other area that is very interesting and difficult to solve is group business and meetings in the hotel industry. It represents a massive percentage of the industry’s revenue and there hasn’t been much innovation in the way that they search, discover, transact, plan, and execute. Nothing about group has changed much.

Artificial intelligence will continue to have a huge impact in the travel industry. When you think about the incredible complexity of the value chain in travel and how fluid it is, and how large it is, and what a huge component human labor is, and how expensive labor is, you gotta believe that AI in all of its forms will find purchase, now whether that’s horizontal companies that are doing innovative things that then sell products to tour and travel players, or whether it’s pure play travel companies that develop applications that can enable them to become companies, not just products, who knows, but intuitively it feels like there couldn’t be a better match between AI and the complexity and scale of global travel.

The things that lead to failure in the business of venture capital, where it’s really tricky to tease apart the difference between great ideas, great products, great execution, and great companies, more than anything are: misunderstanding the TAM. We have all seen companies that wind up being a mile wide and an inch deep, where they come to the table in the early traction and you think ‘oh my god, these guys are gonna be great!’, but then they just can’t get below the low hanging fruit costumer, so they die. Another one is dysfunctional management teams. It’s hard to start a company, it’s tough, so people sometimes just fall apart and it doesn’t work. The third one is discovering too late that what you’ve actually invested in it’s a product instead of a business, and then it sort of hits some terminal velocity and can’t figure out how to go further.

Historically, the travel industry has been resistant to the adoption of technology and change. With 7 to 10 trillion dollars of global economic activity, it’s one of the largest industrial landscapes on the planet, and it’s catching up. You add to that this incredibly interesting change in demographics, expectation of the new traveler, the expectation of the new hospitality worker, the way that we’re thinking and living globally, there are so many ways that the notion of travel, business, recreation and engagement is just fundamentally changing, that to me it’s just like standing in front of a desert field after a warm rain in the spring, and the wild flowers are just popping up everywhere. One of the greatest constants for human experience is creation and innovation. Start ups, start up energy, risk taking, disruption, it’s all part of that process. Don’t ever buy into the idea that innovation is dead and over, or that there’s no opportunity for change. Innovation is happening everywhere.

Human inertia is actually one of the biggest competitive dynamics in a startup business.

Questions and Answers

What does it take? What does a company have to look like, what are the things that a venture capitalist look at when valuing companies?

A: There are six gotta-have, basic points of the structure of a fundable startup:

1) The idea of a totally addressable market (TAM). A true understanding, not just an overall scope and scale, of a large enough market. If it is too small there is not enough room left to put more money into the company and enable it to pivot and approach another part of the market.

2) The inside of an idea: it needs to address a pain or inefficiency in the market and a clear, quantifiable, difficult to repeat solution to that pain point.

3) The idea of competition and competitive response. We need to go further than the obvious question of “Who is doing exactly what I want to do in the market that I am addressing?” Questions like: Who has to lose if we win? Or once we reach traction? What are some of the other competitive forces that could be putting a damper on our competitive growth? For example competitors’ reactions, regulatory issues (Airbnb), human inertia is actually one of the biggest competitive dynamics in a startup business.

To present these three components in a very deep way that exposes the understanding of the business and landscape they’re working in, is the biggest opportunity for an entrepreneur.

4) Progress. The art of entrepreneurship is kicking the can down the road, it’s advancing the ball on the play field. Good entrepreneurs make progress. They’re not always right, they’re not always lucky, but they make progress. Even a brand new idea that’s looking for seed stage money can talk about progress. Whenever an entrepreneur is presenting their business, they should talk about the things they have done in the last 90 days, and the progress they intend to make in the next 90 days.

It’s also a great way to hook the audience, so that if they say “no”, you can ask them: ‘can I keep you updated on my progress?’. There are really great companies that they just weren’t right, they were too early, but they were clear about their progress, and they send those updates outlining their progress every quarter, and some of those companies have been set up and have been funded.

5) The idea of team. I think that all of us understand the importance of team, and that can be a function of domain expertise, experience having been an entrepreneur before, having some successful exits, sometimes team can be a function of having the inside of who you need to find, what are the buckets that you need to recruit for or hire into. You can show intelligence about team by showing what your orchard wants to look like, what some of the next critical hires are, because investors love to help entrepreneurs find good people. Team is definitely a critical component.

6) Financial plan. The fundamental unit economics: how big can we get? How fast can we grow? The cost to acquire a customer, its lifetime value, the payback period against the cost to acquire, etc. To really understand this is an important part of establishing confidence.

 

What is the gap on the service provided to consumers in the travel market?

A: There are two macro areas: alternative lodging is one of them. There’s still a great deal of innovation from a brand perspective, from a booking perspective, from services that are going to wrap around what some people think will become 20-30% of the global stay inventory in the next 5-7 years. The other area that is very interesting and difficult to solve is group business and meetings in the hotel industry. It’s a massive percentage of this industry’s revenue and there hasn’t been much innovation, the way that they search, discover, transact, plan, execute, everything about group hasn’t changed much.

 

How is AI going to impact the travel industry?

A:  It has to have a huge impact, when you think about the incredible complexity of the value chain in travel and how fluid it is, and how large it is, and what a huge component human labor is, and how expensive labor is, you gotta believe that AI in all of its forms will find purchase, now whether that’s horizontal companies that are doing innovative things that then sell products to tour and travel players, or whether it’s pure play travel companies that develop applications that can enable them to become companies, not just products, I don’t really know. And I have to be honest, I don’t understand it enough yet, but intuitively it feels like there couldn’t be a better match between AI and the complexity and scale of global travel. How it plays out, how that turns into real companies is something that I haven’t gotten my mind around yet, and I’m looking forward to investigating that further.

 

What are the things that lead to failure in venture capital?

A:  In the business of venture capital it’s really tricky to tease apart the difference between great ideas, great products, great execution, and great companies. Interestingly enough, the three things that lead to failure in venture capital more than anything are: misunderstanding the TAM, and we have all seen companies that wind up being a mile wide and an inch deep, where they come to the table in the early traction and you think ‘oh my god, these guys are gonna be great!’, but then they just can’t get below the low hanging fruit costumer, so they die. You clearly lose companies to dysfunctional management teams, which is the second. It’s hard to start a company, it’s tough, so people sometimes just fall apart and it doesn’t work. And the third one is discovering too late that what you’ve actually invested in it’s a product instead of a business, and then it sort of hits some terminal velocity and can’t figure out how to go further.

 

Will there be a time when innovative ideas will cease in the travel industry?

A: Historically, the travel industry has been resistant to the adoption of technology and change. With 7 to 10 trillion dollars of global economic activity, it’s one of the largest industrial landscapes on the planet, and it’s catching up. You add to that this incredibly interesting change in demographics, expectation of the new traveler, the expectation of the new hospitality worker, the way that we’re thinking and living globally, there are so many ways that the notion of travel, business, recreation and engagement is just fundamentally changing, that to me it’s just like standing in front of a desert field after a warm rain in the spring, and the wild flowers are just popping up everywhere. One of the greatest constants for human experience is creation and innovation. Start ups, start up energy, risk taking, disruption, it’s all part of that process. Don’t ever buy into the idea that innovation is dead and over, or that there’s no opportunity for change. Innovation is happening everywhere.

 

 

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