Founders: Lets make new mistakes and learn new lessons (not the same ones made a decade ago)

As we all know Travel & Hospitality focused Startup formation is through the roof! We are clearly at the top of one of those 5 year VC interest cycles that I have written about; but I have a feeling this one may last longer than past cycles. Innovation is all around us and investors, both those who know the space and those who don't, are writing checks and joining boards.

From my vantage point, this is a very exciting time!

With all the excitement and so many new-to-industry founders and investors coming into the space there are a huge number of bad ideas, or more accurately, ideas and ventures not informed by the past. I, along with others, have been working overtime to try to help our industry move forward by avoiding old mistakes and making new mistakes to learn new lessons and not just use the same old playbooks of the past 30 years. To that end, I have been sharing this essay a lot: Trip Planning Startups: The Holy Grail we never seem to reach. This weekend, I read a great Deep Dive published by my friend Mauricio Prieto called Vio.com: Reimagining Metasearch for Travelers. There were so many great learnings in there!! As I was reading Deep Dive, I could not help but see the overlap between these two write-ups and much of the advice I am giving founders these days.

So much great stuff that I wanted to put it all (or at least as much as I can write out right now) in one place.

Lessons & Considerations for Travel Founders & Startups

Economic Viability Cannot Wait - in the past conventional wisdom often said that in the early days a Startup does not need to worry about unit economics or business models because all of this would be worked out once the Startup scaled. This was probably always poor advice; yes, it worked for Uber but as I tell founders all the time, you should not build your business strategy assuming your Startup will end up being Facebook or Uber. Regardless of the past, it is certainly not true today, and it is seldom true for E-Commerce businesses.

E-Commerce founders, including those who start OTAs, online agencies & travel clubs, etc. seem to forget that as you scale your cost of customer acquisition often goes up; not down. When launching a Startup, one gets to benefit from the first wave of early adopters. Those who feel the problem so painfully that they are already open and seeking new solutions and willing to put up with some bugs and issues. From there, the Startup moves in to acquire the early majority; these folks are not feeling the problem as painfully so they are not as open to changing behavior to address it; thus, the cost of acquisition goes up because conversion rate goes down. And from there as the company matures into the majority of the market, it becomes ever more difficult to attract customers because of greater competition in the general market and because these consumers have less awareness and frequency of experiencing the problem being solved. And on it goes.

Thus, founders must identify sustainable business models upfront and remember that the 500,000th user does not care nearly as much about the uniqueness of your offering and thus is harder, not easier, to attract than the 5000th user.

Common pushback to this point:

• Word of Mouth - What about word of mouth from all the early users? Eric Schmidt, the former CEO and Chairman of Google would tell you that this strategy is good, same with the inside sales strategy, but that it is not sufficiently scalable to build a big business. Clip of Eric.
• Virality - I happily don't hear this one as often anymore but virality has always been a poor business strategy. First, because it is almost completely outside of your control; betting on virality in business is like betting on winning at the Casino, it happens but no one actually thinks that's a strategy. And second, who has it worked for at scale other than Airbnb?

Avoid the Squeeze - I have talked about this in the past as not building a business model on a cut of a cut of a cut. But here again, Mauricio highlights for us that it's about more than just the financial squeeze but also avoiding being overly dependent on 3rd parties for your content and inventory. I can't tell you how many founders reach out to me for help getting access to 'good' inventory or content. Accomplishing this is hard but even if you do, it becomes very hard to differentiate your platform if most of your inventory and content is also available in many other places.

Lifetime Value is impossible to Acuratly Model - I wrote a bit about this in the Holygrail essay referenced above but this has been coming up a lot lately. This is even more severe in the Tour & Activity space because repeat usage is even less frequent than for other types of travel resellers. Remember, every trip has a transportation element (by definition) and nearly all trips have a lodging element. However, many trips, maybe even most trips, do not have a pre-purchased Tour, Activity, or Attraction ticket. Thus, all the known challenges that reduce lifetime value and retention in the traditional OTA space are magnified significantly in the activities space.

B2B is Great but SaaS is hard right now - in Mauricio's Deep Dive there is some discussion of considering alternative models of value creation, aka B2B. I love B2B, that's where I found success, and this is advice I have given countless founders in our space. And it is still good advice. However, today this advice must come with a User Be Ware warning because SaaS is in a very difficult place due to AI generated Code and may lose a lot of pricing power over the coming years.

Be Ware of the Tarpit - when you stumble accross an amazing no brainer of an opportunity you must put your ego in check, ignore the internal talk about how smart you are, and remember that there is a huge number of brilliant entreprenours in the world and that this amazing opportunity may really be a Tarpit where founders' dreams go to die. Be humble, assume lots of other people have thought about this as well, and try to figure out why past attempts were unsuccessful.

More on Tarpits here from YC.