Travel startups seen as ‘high risk’ by VC investors

May 15, 2024, 10:40 AM

Tourists photograph the Abu Dhabi skyline. Travel funding is small compared to how much tourism contributes to the economy

Small fraction of funding goes to startups
Travel ‘not sexy’ says Dharma CEO
Regional sector receives 5% of funding

The co-founder and CEO of Dharma, an Abu Dhabi business travel management platform, has claimed the tourism sector isn’t seen as attractive enough for investors.

Dharma, which was one of the first startups accepted into Abu Dhabi’s Hub71 incubation programme, closed a $4.7 million Series A funding round last year.

“I think for venture capital travel is not sexy,” co-founder Charaf El Mansouri said this week at Arabian Travel Market. “ It’s not AI, it’s not Web3, it’s not crypto. I do think travel is seen as this high-touch, unscalable industry.”

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While Dharma investors included Mubadala-backed Shorooq Partners, Matt Higgins from Shark Tank and football icon Eric Cantona, El Mansouri said 85 percent of the company’s funding actually came from the US.

Latest figures reveal that just a fraction of funding makes its way to tourism industry startups.

The travel sector contributes roughly 10 percent to global GDP and yet receives around 1 percent of funding, according to research from McKinsey. In the Middle East that number is slightly higher at 5 percent, although it has grown from just 1 percent back in 2019.

“It’s really tiny compared to how big this industry is to our economy,” said Margaux Constantin, partner at McKinsey & Company.

Over half the funding in the last three years in the Middle East has gone into booking-related startups, with 17 percent on transport and 24 percent on hospitality.

“There is a high-risk perception among investors. There’s a perceived longer time to get that investment back. In travel and tourism the sales cycle is longer and it takes a bit longer to get things going,” said Danny Cohanpour, CEO of Trove Tourism Development Advisors.

Globally, VCs are leading the push for travel innovation. With $72 billion of investment between 2015 and 2021, they spent nine times more than travel corporates – companies such as Airbnb or booking.com that offer in-house incubators, ventures or provide direct support or partnerships.

In total Dharma, launched in 2018, has raised $10 million in equity funding. The most recent, a $4.7 million pre-Series A round in October last year, included notable investors such as Mubadala-backed Shorooq Partners, Matt Higgins from Shark Tank, football icon Eric Cantona, consumer fund Goodwater and Skift founder Rafat Ali.

“The PR story is often very different from the internal story, but we were two weeks either way to shutting down (before the initial raise in 2020),” said El Mansouri.

“And I think that’s an important story to tell because by the time you write the press release you’ve made it.

“But it’s important to understand the turbulence behind the reason why we have such a varied and diverse capital. At the time of our initial raise in April 2020, we made about 200 calls with whoever would talk to us.”

Constantin said during the Nurturing Travel and Tourism Entrepreneurship to Drive Economic Growth panel discussion at ATM that 90 percent of McKinsey’s clients interested in investing in travel and tourism in the Middle East have three parameters: asset-light, Ebitda-positive and minimum-ticket-size companies.

“The reality is that this intersection is incredibly thin, so investors are going after the same very small pool of companies. We need a change in expectations and interests from investors to fuel entrepreneurship in [the region’s travel] sector,” she said.