Travel investment analysis shows shifts in financing and opportunities for innovation

The investment climate for travel technology hasn’t exactly been mild lately.

According to Phocuswright’s The State of Travel Funding 2023 report, there has been a cooling off in recent years. Data shows that travel funding totaled $4.6 billion in 2023, down from $12 billion in 2022. And 2024 is also off to a weak start, with just 1 at the end of May, according to Phocuswright’s Travel Startups Interactive Database Raised $.7 billion.

But according to investment experts, that dip does not necessarily have to be negative.

“I think the overall market will probably remain subdued, but I don’t think that’s a bad thing,” said Gaurav Tuli, partner at F-Prime Capital. “These are really healthy levels for the sector.”

Anna Schneider, senior research and intelligence analyst at Lufthansa Innovation Hub, is author of the recently released 2024 TNMT Sector Attraction Report, which looks at the travel and mobility sector’s priorities and investment strategies between 2018 and 2023. She said there are a few reasons why the financing delay has occurred.

“In the context of venture capital financing, I think there are really three big factors influencing this,” Schneider said, pointing to macroeconomic uncertainty, geopolitical tensions and inflationary pressures.

“These are huge constraints for venture capital and for fundraising, as I see it,” Schneider said.

But she acknowledged that challenges and pain points that persist across the industry will drive continued innovation.

“I think it’s always helpful to also have an optimistic view of the prospects for the future,” she continued. “There are areas where innovation is needed.”

Tuli believes the market is recovering after a “deep” correction in the years following the COVID-19 pandemic. “We have only just returned to the levels we were at before the market surge.”

He added: “We’re seeing great companies actually getting funded now, and we’re starting to process a lot of the noise and fallout of the last two years.”

Schneider and Tuli discussed investment trends during a conversation in the PhocusWire Studio at Phocuswright Europe last week, days before the TNMT report was published.

During their conversation, the pair discussed what has happened with financing in recent years and where they think investment trends are heading.

Investment trends: AI, core feature improvement, personalization

There is still a lot of room for innovation in the travel industry, whether it is addressing persistent pain points or moving with the times.

“Does this reduction in venture capital funding mean that innovation within our industry has come to a standstill?” Schneider asked in the report. “Not necessarily. As venture capital funds become more cautious, the industry’s ongoing challenges require continued innovation.”

While venture capital funds become more cautious, the industry’s ongoing challenges require continued innovation.

Anna Schneider – Lufthansa Innovation Hub

And in terms of business investment, travel and mobility projects have remained remarkably stable, Schneider wrote.

In the TNMT report, Schneider looked at how investors operated over the past five years, focusing on 60 companies in the ground transportation, aviation, online travel and hospitality sectors, covering more than 1,200 investment deals.

In the report, Schneider identified artificial intelligence and machine learning as common denominators across all investment strategies across all sectors.

AI investments are not new – despite the recent hype around generative AI – and have been consistent for six years, accounting for between 60 and 70% of investments by travel and mobility companies annually over that period.

“Such sustained levels of investment indicate that our industry recognizes the transformative potential of AI not just as a tool for incremental improvements, but as a fundamental driver of future growth and innovation,” she wrote.

And that trend isn’t likely to end anytime soon.

“Our industry is clearly not only riding a wave of AI hype, but also investing deeply in leveraging AI to reshape the landscape of how people get from point A to point B,” Schneider wrote.

Schneider also pointed to expansion and operational efficiency as top areas for investment across all sectors.

But there are also trends that are unique to specific categories of travel and mobility.

The report states that hospitality-focused investments can lead to market expansion – as has traditionally been the case – but the sector is now increasingly looking to invest to increase operational efficiency. Similarly, the TNMT report shows that online travel agencies have also focused on expansion – and this was the only segment to see an increase in investment between 2022 and 2023, driven by investment targets in Asia. Ground transport also focused on expansion, despite being very sensitive to economic changes.

Meanwhile, aviation’s focus was a little clearer – and focused on operational efficiency, with efforts focused on maintenance, repair and overhaul, as well as ground operations, revenue management, crew training and more. Aviation was also more focused on sustainability-oriented investments than other sectors.

Operational efficiency could dominate as we look ahead.

“Operational efficiency, I think, is really one of those points that is going to become increasingly important,” she said in conversation with Tuli.

Automation will also be a priority area, she says. “More automation also means knowing you can reduce your costs in the medium to long term,” Schneider said, pointing in particular to airlines and how they could use automation to improve core functions.

Tuli supported her stance and weighed in, noting how much has changed in travel.

“So much has changed in the way consumers want to interact with travel providers,” says Tuli. “And yet the infrastructure has not been able to change.”

According to Tuli, there are good reasons for this. But that doesn’t mean the travel industry has to remain stagnant – and addressing that kind of blemish is what he’s looking forward to as an investor.

“For some of the big companies that we know and love that have been around for decades, it’s hard for them to necessarily keep up with the innovation that’s happening on the surface. And so the statement that we’re most excited about is: How do we… bring that modern experience that consumers want, even if you’re not a consumer-facing travel startup?”

As for how Tuli sees the industry’s long-standing focus on AI, what excites him most is its ability – specifically through generative AI – to drive personalization.

“I think personalization experience should permeate many consumer-facing apps over the next five to 10 years,” he says.

All things considered, Tuli says he’s feeling “bullish.” Watch Schneider and Tuli’s full studio interview.