Venture Capitalists Boost Travel Tech Bets

<B> Venture Capitalists Boost Travel Tech Bets</B>

By Mary Ann McNulty

<hr><center>For details on investments in existing
travel technology ventures, see table.</center> <hr>

The combination of travel and technology--particularly when it involves the Internet--is proving an alluring mix for venture capitalists looking for the next killer application.

Over the past three years, venture capitalists have invested more than $100 million in companies offering either booking or expense reporting solutions. Public stock offerings of travel technology companies have garnered more than $1.5 billion in the past year and are expected to raise millions more on initial public offerings through year-end. Interest in travel technology is in the nascent stage, most agree, with much more money to follow, provided the venture capital market continues its record-breaking pace of the past two years.

While most observers agree there is little room for additional startups, they contend that existing players will need several more rounds of financing to grow their businesses and perhaps acquire competitors. It's conceivable that investments in travel technology could double or even triple this year, insiders speculate.

"We'll definitely see more money invested in existing players," said Jeff Brody, general partner for Brentwood Venture Capital, Menlo Park, Calif., and board member to both ITN and Portable Software. "I'd be surprised if there were any new companies, as the barriers to entry and critical mass are too high to justify it."

As they mature or get ready to go public, companies frequently need huge infusions of cash. For one thing, they need money to tide them over should their IPO fail. But, according to Bill Diffenderffer, new CEO of Xtra On-Line in Dallas, "they have to have an established product, revenue stream and capital to show the public that they're worthy of investment." Instead of seeking a couple million dollars as they did in early rounds, mature companies often look for well over $10 million at a time. XOL expects to seek somewhere between $15 million and $20 million in last round venture financing before issuing an IPO next year, Diffenderffer said.

The venture capital community is hot on travel tech investments, Diffenderffer said, "as they've identified that this technology is about to take another major step forward in how it interacts with the consumer," via the Internet.

Lorraine Sileo, vice president of information services for PhoCusWright, Stamford, Conn., describes the interest even more simply: "The Internet is hot, travel is hot. When you combine the two, it seems to be a worthwhile place to invest."

A year ago, Dana Bruttig, president and CEO of Captura Software Inc., Bothel, Wash., was hard pressed to get venture capitalists to return her calls. Now having secured $12 million in financing, Bruttig said, she's receiving a call a week from a venture capital firm asking if she's seeking more funding. (She's not currently.)

Initially, Bruttig said, venture capitalists looked at travel technology startups as tainted. Early on, Portable wasn't performing to plan and TravelNet was slow to get started, she said. "Now that Portable is doing well, ITN has taken off, Galileo has gone public and we and Extensity have gotten funded, they see that there is a market to get a good return," she said of venture capital firms.

Portable President and CEO Steve Singh said progress is prompting venture capitalists to ask, "Should I have some sort of investment in this space?"

Singh agreed that there is little space for another new booking or expense reporting vendor. In the end, "the top couple of players will own the market in booking: AXI, ITN and Sabre." In expense reporting, Singh said it will be his company and another that win.

The venture capital market has changed recently, noted Larry Buchsbaum, project manager of The Money Tree venture capital survey of Coopers & Lybrand LLP.

"There are boiler room operations out there. It's phenomenal and never happened before," said Buchsbaum, who tracked the $12.2 billion venture capitalists invested in 1997, 20 percent more than in 1996.

Why all the optimism for travel, a market that until recently had few outsiders even looking at its technology?

The returns are expected to be very big, if the companies are successful in improving a distribution system that's seen as one of the most inefficient in business today, and automating the purchase and reconciliation process for business travel buyers.

On the expense-reporting side alone, vendors expect the market to surge to $1 to $2 billion by 2000 from today's $50 million to $750 million. Others point to the success Preview Travel, Pegasus, Galileo and Sabre have had with their stock offerings on Wall Street.

The venture capital community has been the force behind new technology developments for some time, said ITN's new CEO and board chairman Dick Whilden. He estimated the corporate booking market in the hundreds of billions of dollars. "Travel is the 'killer app' for the Internet," Whilden said. "Online services give travelers access to better information which allows them to make better, more intelligent decisions. With people adopting Internet travel systems as quickly as they are, the projection for growth is exponential. Investors are capitalizing on the trend."

The booming high tech sector has been helping to drive venture capital investments across the U.S. to an all-time high of $12.8 billion in nearly 2,700 companies, according to Price Waterhouse's National Venture Capital Survey. Both Price Waterhouse and C&L surveys agree that the high-tech segment leads the investment boom, garnering more than 60 percent of all funds.

Elements Of Venture Capitalism

In deciding whether to invest in a company, Weiss, Peck & Greer Venture Partners, San Francisco, looks at five elements, according to Peter Nieh, partner and Extensity Inc. board member. These are the management team, if a fundamental need exists for the product, if there is a cost-effective way to create a distribution channel to profitably sell the product and if there is a way to separate the product to penetrate the market. Venture capitalists also are looking for strong returns on their investments, whether through a public offering or an acquisition.

"Most venture capital funds are looking for a large market opportunity, not a $20 million business, but $50 to $100 million and growing in several years," said John Shoolery, founder of TravelNet, a now defunct booking software firm that secured more than $10 million in financing before selling to the Reed Travel Group in early 1997. Reed closed the company earlier this year as part of a reorganization.

Beyond market potential, everyone interviewed for this story agreed that venture capitalists look for a strong management team with proven track records.

Besides cash, what do these financiers bring to the companies in which they're investing? "A huge set of connections and credibility," said Elizabeth Ireland, vice president of marketing for start-up Extensity, a Web-based expense reporting system that has secured $7 million in financing in the past year. Extensity's investors earlier banked on Cisco, Sun Microsystems and PowerSoft. "It lends some credence in who they want to invest in," Ireland said.

Captura's Bruttig said her investors provided her "with access to a much greater pool of executive-level talent than we could have found ourselves." One board member even spent three hours on a Sunday convincing new chief operating officer Dan Vetras to relocate from Boston to run this fast-growing startup. "Venture capital firms bring a wealth of resources, not just financial ones, to help a start-up company build the right product and ensure that customers receive high value," she said.