Online tourism: Ticket to ride

"For most people in China, tourism has always involved people traveling in large packs with a guy walking ahead holding a flag, but that model is changing. China is shifting gear from an export and manufacturing driven economy to a consumption- based economy and travel is going to be a big part of the that," says Jixun Foo, a partner with GGV Capital in Shanghai, who describes an industry brimming with opportunity and ripe for disruption.

The statistics speak for themselves. According to the China National Tourism Administration, the number of outbound tourists reached 37.9 million in the first five months of 2013, up 17.3% year-on-year. Domestic travelers numbered 998 million in the first quarter, an increase of 14.1%, while domestic tourism revenue reached RMB765.7 billion ($123.9 million).

This trend is replicated throughout the region. Four years ago, Asia Pacific overtook North America to become the world's largest aviation market, with around 647 million travelers taking flights within the region compared to 638 million in North America, International Air Transport Association (IATA) data show. In the first four months of 2013, Asia Pacific travel rose 6% year-on-year, the highest rate of any market.

Space to rent

In line with this growing opportunity, the region has seen a number of innovative venture capital-backed businesses being set up, particularly in the online space. Working around the handful of larger players that have emerged in the last decade, VCs continue to find opportunities, with specialist travel booking and short-term rentals emerging as particular sweet spots.

China has seen a number a successful players in the latter category - operating under a similar model to that established by US vacation rental sites Airbnb and HomeAway, where users can book anything from a single room to a beach condo retreat.

Tujia.com, which closed a Series B round of financing led by GGV earlier this year, is typical of the recent crop. The company - which claims to be China's first online vacation homes rental service - offers vacationers an alternative to the traditional hotel stay by allowing users to rent out their second homes on a short-term basis. It has a database of 400,000 rental properties in 65 Chinese cities and 45 foreign cities.

At first glance competition in the space would appear to be fierce, which a number of broadly similar sites in operation. One month before Tujia's latest round closed, two other vacation rental websites, Xiaozhu.com and Mayi.com, each received $10 million in VC backing.

However, GGV's Foo maintains the market is far from crowded. "The challenge is not competition," he says. "The real challenge is knowing the market and educating the market, getting the user to understand vacation rentals as a new way to travel."

Foo adds that the tourism space is still very nascent in China, with leisure accounting for just 30% of the travel, compared to 70% in the US.

Consolidation is seen as inevitable and a number of established players are already making strategic investments in innovative travel start-ups, in some cases alongside VC investors. NASDAQ-listed Ctrip, China's largest online travel company, and HomeAway took part in a Series A round for Tujia.com last year.

China's internet giants have also sought to move into the space. Baidu agreed to pay $306 million for VC-backed booking site Qunar back in 2011 and is in the process of taking the company public, while this year Alibaba Group has invested in travel app ZLS365 and information site Qyer to complement its existing offering, Taobao Travel.

Acquisitions have extended into other markets too with HomeAway acquiring Singapore- based TravelMob, a vacation rentals site backed by Jungle Ventures, Accel Partners, New Zealand Venture Investment Fund and Sparkbox Ventures, in July.

"There will be some level of consolidation," AmitAnand, co-founder of Jungle Ventures, told AVCJ at the time. "Travel is a business where the margins are pretty thin but there is also phenomenal amount of volume in Asia."

In India, MakeMyTrip.com - which had received VC backing prior to its 2010 IPO - has made a number of strategic investments. In 2011, it joined SAIF Partners in acquiring majority stake in Indian travel search engine IXigo for $18.5 million. It also bought Hotel Travel Group, the company behind hotel booking site Hoteltravel.com, for $25 million in November last year.

At the margins

Like China, start-ups in India have found the country's large domestic market offers plenty of scope to carve out a niche despite competition from industry incumbents. Stayzilla.com, a hotel-bookings site that recently funded by Matrix Partners India, operates in a space seemingly dominated by the likes of global online travel firm Expedia yet has managed to find its feet.

"There are 4-5 entrenched peers, but they are focusing on perhaps the top 10 destinations and hotels that are three stars or above because those have the tech infrastructure to create an online inventory," explains Tarun Davda, vice president with Matrix. "The opportunity for Stayzilla is where there was a lot of fragmentation, in the tier two and tier three cities."

By building up a network of one- and two-star hotels outside the top destinations, the company claims to have tapped into as much as 70-80% of India's personal and business travel market.

"It is challenging and it takes time to build the network," Davda adds. "But that is where there is an opportunity to become a huge differentiator - by working out a way to work with these hotels it creates a barrier to competitors."

GGV's Foo echoes the sentiment that online tourism market has the scale to allow for multiple players especially if they can find a niche to fill. "At the moment it is anybody's game," he says. "The market is big enough for more than one player; three or four players is not that big."

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• Topics
• Technology
• Consumer
• Southeast Asia
• Greater China
• South Asia
• Venture
• TMT
• Consumer
• China
• India
• Southeast Asia
• Venture
• GGV Capital
• Jungle Ventures
• Matrix Partners