The travel technology investment climate hasn’t been exactly balmy of late.

According to Phocuswright's report The State of Travel Funding 2023, there has been a cooling in the last couple of years. Data has shown travel funding totaled $4.6 billion in 2023, a drop from $12 billion in 2022. And 2024 is off to a weak start, too: By the end of May only $1.7 billion had been raised, according to Phocuswright's Travel Startups Interactive Database.

But that dip is not necessarily a negative, according to investment experts.

“I think the overall market is more likely to stay 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 industry.”

Anna Schneider, senior research and intelligence analyst at Lufthansa Innovation Hub, is author of the newly released 2024 TNMT Sector Attractiveness Report, which looks at priorities and investment strategies of the travel and mobility sectors between 2018 and 2023. She said there are a few reasons why the funding slowdown has happened.

“In the context of venture capital funding … I think there's really three big factors that impact this,” Schneider said, pointing to macroeconomic uncertainty, geopolitical tensions and inflationary pressures.

“These are huge limitations to venture capital and to fundraising as I see it,” said Schneider.But she acknowledged that challenges and pain points that persist across the industry will drive ongoing innovation.

“I think it's always helpful to also have an optimistic eye on the outlook going forward,” she continued. “There are areas where innovation needs to happen.”

Tuli believes the market is in recovery after a “deep” correction in the years following the COVID-19 pandemic. “We've only reverted back to the levels we were at before a massive run up in the market.”

He added: “We're seeing great companies actually get funded now, and we're starting to wash through a lot of the noise and aftermath of the last two years.”

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

During their conversation, the pair touched on what’s happened with funding in the past few years as well as where they believe investment trends are headed.

Investment trends: AI, core function improvement, personalization

There is plenty of room for innovation in the travel industry still, whether it be in the name of addressing ongoing pain points or with moving forward with the times.

“Does this reduction in VC [venture capital] funding imply that innovation within our industry has stalled?” Schneider asked in the report. “Not necessarily. While VC funds are becoming more cautious, the persistent industry challenges demand ongoing innovation.”And in terms of corporate investments, travel and mobility ventures have been remarkably stable, Schneider wrote.

In the TNMT report, Schneider looked at how investors operated in the past half decade with a lens on 60 corporations across the ground transport, aviation, online travel and hospitality sectors covering upwards of 1,200 investment deals.

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

AI investments aren’t new - despite recent hype around generative AI - and have been consistent for six years, accounting for between 60 to 70% of investments by travel and mobility companies each year during that period.

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

And that trend is not likely to end anytime soon.

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

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

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

The report states that hospitality has been focused investments that can prompt market expansion - as it has been traditionally - however the sector does now have more of an eye trained on investments to bolster operational efficiency. Likewise, the TNMT report found online travel agencies have also focused on expansion - and it was the only segment that saw an uptick in investments between 2022 and 2023, driven by investment targets in Asia. Ground transportation also focused on expansion, despite being highly sensitive to economic changes.

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

Operational efficiency could reign supreme looking ahead.

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

Automation, too, she said, will be a priority area. “More automation also means that you know you can reduce your costs right in the medium to long term,” Schneider said, pointing especially to airlines and how they might use automation to improve core functions.

Tuli supported her point and weighed in, noting how much has changed at travel’s surface level.

“So much has changed with how consumers want to interact with travel providers,” said Tuli. “And yet the infrastructure hasn't been able to change.” 

There are good reasons for that, according to Tuli. But that doesn’t mean that the travel industry should remain stagnant - and addressing that sort of blemish is what he, as an investor, is looking toward next.

“Some of the great companies we know and love that have been around for decades, it is hard for them to necessarily keep up with the innovation happening on the surface. And so the thesis that we are most excited about is, like, how do we bring … that modern experience that consumers want, even if you're not a consumer facing travel start up?”

As for how Tuli sees the long-held industry focus on AI, what excites him most is the ability - through generative AI specifically - to advance personalization.

“I think that personalization experience needs to permeate through a lot of consumer-facing apps over the next 5 to 10 years,” he said.

All things considered, Tuli said he feels “bullish.” Check out Schneider and Tuli’s full studio interview.

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