INDIA IS in the throes of an entrepreneurship revolution, with online start-ups getting the support of both consumers and venture capitalists. In fact, over the years, a large number of online travel start-ups have entered the fray to cash in on the e-commerce boom that has, to a large extent, been driven by the travel segment in the country.
Going back, it was in 2000, a time when online travel bookings were still relatively unknown to India, that MakeMyTrip entered the travel domain and is now one of India’s leading travel companies. “We revolutionised the way Indians made use of travel services. Today, MakeMyTrip is much more than just a travel portal. It is a one-stop shop that offers the broadest selection of travel products and services in India,” says Rajesh Magow, co-founder and CEO, MakeMyTrip India. Soon the market was flooded with start-ups like Tripoto.com, TravelTriangle, StayZilla.com, WeAreHolidays.com, iTraveller.com, TripHobo.com, Railyatri.com, Seeksherpa.com, etc.
In fact, presently, there are around 80 online travel start-ups in India, generating a revenue of approximately $9.7 billion and showing 31% growth year-on-year. “The January-April 2015 quarter has seen the segment receive a funding of approximately $40 million (as per data by analytics firm Venture Intelligence). This is a significant increase compared to the $14.8 million invested during January-April 2014. Further, till December 2014, the segment had received a total of $115.69 million spread across 13 deals,” says Rajat Tandon, senior director of Nasscom’s ‘10,000 start-ups’ programme, an initiative to incubate, fund and provide ambient support to impact 10,000 technology start-ups in India by 2023.
Sharat Dhall, president, Yatra.com, an online travel agency, adds, “The rising Internet and smartphone penetration in India has phenomenally changed the way we communicate and do business. Rising disposable incomes are further fuelling a surge in consumerism in India. E-commerce operates in a very large retail market, so there is tremendous scope for growth, as online buying penetration increases. Therefore, valuations of these companies have skyrocketed in a short span of time. Needless to say, a great idea that is well-executed will always find a long list of investors vying to support it. All this has culminated in a huge opportunity for e-commerce in India.”
Changing ecosystems
Packages and personalised deals offered by online travel companies are helping the industry grow both in terms of value and volume. Other aspects driving growth are tie-ups with hotels and lodges, and out-of-the-box solutions offered by new entrants. Apart from this, use of innovative technology—like mobile apps to help customers connect with the portal—has become a major differentiating factor in deciding long-term association with a travel company.
Also, over the past couple of years, online shopping has become very popular, another reason for start-ups to go the e-commerce way, as their customer is online. “The e-commerce boom has helped widen the reach of the seller to the national or even global level. Also, with e-commerce, the set-up cost has decreased drastically. With no investment required for renting/leasing high-end retail space, funds may be diverted to activities that can help generate business,” points out Tandon.
Agrees Vikram Malhi, managing director, Expedia Asia, one of the world’s leading online travel companies. “E-commerce is becoming one of the most exciting spaces for today’s online community and India’s young start-up economy is in for the ride.”
Investment opportunities
Private equity firm SAIF Partners has been active in the space for a long time, starting with its investment in MakeMyTrip. It has also invested in iXigo.com, a travel search engine and, more recently, in TravelTriangle, a platform for connecting travellers to service providers. For his company, says Rohit Jain, principal, SAIF Partners, the investment parameters revolve around aspects such as the start-up’s ability to build great mobile products or go beyond just providing information.
Explaining what drives investments into start-ups, Maninder Gulati, principal, Lightspeed Advisory Services India, an advisory company, says venture capital firms generally look at large markets, disruptive business models and exceptional teams while funding. “Our principal goal is to provide early-stage capital to talented entrepreneurs solving a core consumer problem through technology. The investment size for such start-ups in the seed or Series A stage could range from $0.5-5 million,” says Gulati. “While they may not be able to displace aggregators such as MakeMyTrip, there is still a lot of room for start-ups to create large and valuable businesses by solving problems that traditional aggregators cannot. OyoRooms, for example, has created India’s largest network of technology-enabled budget hotels,” he adds.
As per Amit Somani, partner, AngelPrime, a seed stage venture capital fund, some sectors that have been popular with investors include alternative accommodations, last-minute hotels, travel research and planning, and travel services marketplaces. “Travel, as a sector, has a lot of opportunities and hence continues to be a highly competitive area. In addition to domestic players, lots of foreign players, too, have started to make inroads into India now,” says Somani. In fact, a report by UBS Securities India, a financial services firm, states that India’s e-commerce market is estimated to grow 10 times by 2020 to reach $50 billion.
IT analyst firm Greyhound Research believes it’s important to first understand why investors are willing to invest enormous amounts in e-commerce companies. “Investors who have invested an enormous amount in e-commerce companies expect a huge profit in return. While the cost of creating mobile and Web commerce has declined considerably in the past few years, the key to survival is customer acceptability and quick adaptability to changing market dynamics,” says Sanchit Vir Gogia, chief analyst and group CEO, Greyhound Research.
Learning curve
As a result of these investments, there are now numerous start-ups in India with solid funding to expand and strengthen their operations. Asked about the growing competition in the market, MakeMyTrip India’s Magow says, “Competition is good for the marketplace. We are well-funded and have a clear focus on technology-led innovation. Hence, what a competitor or a new entrant does is not a threat. Beyond price-advantage and tech-robustness, what makes a difference is user experience and service. Those are the key attributes we focus on. Also, one must be selective and smart when seeking money for one’s start-up or it could turn your dream business into a nightmare.”
From a start-up’s perspective, they have to struggle with getting the pricing right in order to be attractive, as Indian consumers are wary of companies, which do not have a huge brand value and might not go for a relatively unknown name for marginal monetary benefit, says Shiju Radhakrishnan, founder and CEO, iTraveller.com, an online platform, which allows users to discover, customise and book holiday packages.
Also, even though the segment is a lucrative business, the success percentage for start-ups is very low. The reasons for this are many. Magow says, “Most of the start-ups tend to burn out before they take flight. One of the reasons for this is the inability to differentiate in the market. It might not be an extremely different product, but you need to make a mark when a customer comes to experience your product for the first time.” Other reasons are not knowing how to allocate funds, over-promising and under-delivering, not providing adequate customer service support and an unclear marketing strategy. Also, recruiting talent, especially experienced mobile product managers, remains a challenge for most early-stage travel start-ups. “Indian consumers are price-sensitive. This, coupled with high competition levels, has resulted in high customer acquisition costs and pricing pressures. This also leads to significant challenges in developing subscription-based business models and rolling out premium products and services. Other challenges include uncertain and evolving regulatory environment, infrastructure challenges, limited payment ecosystem, declining airline commissions and entry of international players with their global supplier networks,” says Girish Menon, director, deal advisory, KPMG India.
To ensure survival in a competitive industry like travel, it is critical to focus on building sustainable competitive advantages like user community participation, deeper supplier engagement, etc. “Start-ups need to constantly innovate and gauge what the new-age customer is looking for. They should aim to become one-stop points for all their customer’s travel needs,” says Tandon.
