Travel startups: Disruption from within?

| Report

Startups play an essential role in spearheading innovation that benefits consumers, businesses, and industries. But travel startups have been underfunded when compared to startups in other sectors. Looking back over the past 15 years, the travel and tourism industry received around 1 percent of funding for startups across all industries.1 This relatively low level of investment stands out in contrast to the industry’s size: Travel and tourism contributed to over 10 percent of global GDP in 2019.2 These factors suggest that it’s a tough industry in which to raise money.

Despite these funding challenges, and unprecedented industry uncertainties, over $27 billion worth of investments were poured into travel companies from 2020 to 2022. In fact, in 2021, investment set a new record of just under $11 billion—indicating that investor appetite has not only returned to pre-COVID-19 levels, but even surpassed it.

Given this context, a new report Travel startups: Disruption from within–or not? presents an overview of the travel startup environment, and how the funding landscape has evolved across geographies, and across the different types of travel startups. Analysis is based on information obtained from the Phocuswright startup database and draws on insights from industry executives (see sidebar, “About this research”).

The report examines the kinds of investors that are funding these startups—and the types of businesses they choose for investment. It also puts forward possible future scenarios that would have implications for travel companies and stakeholders in the startup space. This article presents some of the key findings.

Fewer travel startups are attracting funding, but when they do, they secure a substantial amount

Even though funding may be hard to come by, compared to other sectors, investors are interested in travel and tourism. Investment in travel startups has returned to pre-pandemic levels and has even surpassed record-breaking years in the past, such as 2015 and 2019. These peaks were achieved through significant acquisitions that may have consolidated the market. For instance the online travel agency Expedia acquired HomeAway for $3.9 billion in 2015.3

Furthermore, funding per round has increased over the past decade from an average of around $4 million in 2010 to $20 million in 2022, with the steepest increase seen during the pandemic (Exhibit 1). This indicates that fewer travel startups could be attracting funding, but when they do, they secure a substantial amount. In essence, the relatively small amount of funding that exists is shifting toward fewer startups.

Funding per round has increased, especially during the pandemic.

Funding has shifted toward more mature startups

Across industries, later-stage funding (i.e., Series B, C, D) has made up the majority of startup investment (Exhibit 2). Between 2020 and 2022, more acquisitions (e.g., and On Location Experiences) and public financing rounds (e.g., Sonder and Vacasa) took place than in previous years. This could be symptomatic of a trend: Investors may want to back category leaders that have reached scale (See sidebar, “Q&A with Johannes Reck, CEO of GetYourGuide”).

Most funding is concentrated on growth rounds, with an increasing trend towards public and acquisition rounds.

Hospitality startups remain the leading category for investment

Most recent funding has been channeled to hospitality startups, making up 49 percent of investment between 2015 and 2019, and 41 percent between 2020 and 2022. This is likely due to the rising popularity of short-term rentals. Startups providing services for short-term rentals, such as Airbnb or AvantStay, accounted for 55 percent of hospitality startup funding in 2021.

Business travel startups doubled their share of investment during the pandemic, and within this category, startups in the corporate segment, such as the expense-management software provider Divvy, secured 98 percent of funding between 2020 and 2022. The MICE segment received the remaining 2 percent, likely due to the decrease in events during the pandemic.

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In the same period, booking and transport startups lost some share of funding as investor priorities may have shifted during the crisis. In the booking category, online travel agency businesses secured 90 percent of funding.

Overall, the pre-trip category remains the least funded, having attracted 1 percent of total funding in the past seven years. Within this category, startups in insurance attracted 84 percent of funding in 2021 (Exhibit 3).

Funding has mostly been focused on hospitality due to the emergence of short-term rentals.

Travel companies account for a relatively small percentage of travel startup funding

Since 2015, five categories of investors have funded travel startups:

  • Angel and private investors: These investors oversaw 138 rounds of capital raising totaling $3.6 billion between 2015 and 2021.
  • Banks and the public sector: These institutions oversaw 125 funding rounds, totaling $6.4 billion. Much of this funding took place in 2021, likely due to pandemic-related bailouts and large rounds of debt funding.
  • Venture capital (VC) and VC-orientated private equity (PE) firms: This group raised 2,090 rounds of funding, totaling $72 billion.
  • Travel companies: These are frequently in-house incubators or joint ventures that provide potential businesses with direct support. Travel companies raised $7.8 billion in investment through 389 rounds.
  • Non-travel companies: Despite not being in the tourism sector, these companies raised more money ($12.5 billion) in 264 rounds than their travel-industry counterparts.

Overall, VCs have been the leading investor category, and spent nine times more than travel companies in 2021. Since 2015, travel companies accounted for a relatively small percentage of startup funding, and this has decreased in recent years, dropping from 18 percent in 2020 to 5 percent in 2021.

Between 2015 and 2019, VCs and PEs invested at least twice as much per funding round compared to travel companies. Average funding size was roughly $37 million for VCs and PEs, compared to $17 million for travel companies. This leveled out between 2020 and 2022 where both groups invested approximately $30 million on average per funding round.

In 2021, banks greatly increased their investment share and matched VC investments, likely driven by increases in debt funding (Exhibit 4).

Travel companies accounted for up to 18% of funding; banks increased their share to 46% in 2021.

The travel industry could benefit from supporting startups

To date, travel companies have played a very small role in investing in the industry. As startups generally spearhead innovation, travel companies could take up opportunities to support startups—and reap the benefits. Furthermore, by not supporting, or finding ways to engage other players in the industry, travel companies may be missing an opportunity to shape the next generation of travel businesses. And as the investment landscape becomes tougher, travel companies are well placed to ensure that the innovation pipeline continues to flourish, even if VCs and larger players withdraw.

Travel companies could become more involved in investing in the industry and bring their expertise to bear on innovation and the sorts of capabilities and technologies that may be needed. And they stand to gain from leveraging startup capabilities in-house. Research into collaboration between corporates and startups in other industries shows that both parties stand to benefit. Startups can benefit from corporate funding, resources, and customer access, while corporates may need the innovation that startups offer to stay ahead of competitors and disruption, and also to access new technology.4

Three possible future scenarios could materialize in light of the trends in travel startup funding.

  • Incumbent-driven consolidation: In this scenario, sustained emphasis on short-term profitability due to inflation and increasing cost of capital would make it difficult for travel startups to attract funding and gain ground in the industry. Funding rounds would be smaller due to early exits, closures, bankruptcies, or consolidation by established and scaled technology-driven firms. Established players would focus more on developing products and services that can be scaled globally and less on optimizing backend processes where rapid scale-up is potentially more challenging, such as manual check-in processes in hotels. This situation would lead to less innovation across the industry. In the long run, reduced innovation due to less startup diversity may require more in-house innovation for optimizing backend processes and technology.
  • Emergence of multiple niche startups: Early-stage startups would see sustained and potentially increased funding, while funding for startups in the later stages would plummet. This could lead to an exit wave across later-stage startups due to bankruptcies. At the same time, a wave of new, more diversified, startups could emerge that aim to tackle a variety of niche problems in the industry, such as core technology elements. The result could be an even broader but more fragmented ecosystem of new industry players, leading to higher levels of innovation throughout the industry. Travel companies could acquire distressed startups, at lower valuations, which would boost in-house innovation and allow incumbents to provide new offerings.
  • Travel startups golden 20s: In this scenario, travel startups across all growth stages and categories would see continuous increases in funding and growth. There would also be an increase in larger investments aimed at developing technology and core industry processes such as AI-enabled fulfillment, and disruption management. Innovation could flourish across the industry. In this fast-growing landscape, competition for funding would intensify and investors’ expectations around performance could increase. At the same time, collaboration would become more complex due to the diversified landscape of partners and suppliers. Established businesses would need to build in-house innovation capabilities organically or acquire them. Differentiation would become more difficult and several leading incumbents may be replaced by new challengers in the market.

However the future pans out, support for startups can boost innovation and strengthen the travel and tourism value chain, for all participants.

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