Hotel tech is a massive investment opportunity and PeakSpan Capital is doubling down
How many hotels are there in the world? Back in 2012 STR estimated 187,000 hotels with more than 17.5 million rooms globally but we’ve seen estimates from Booking and Expedia north of 300,000 and that figure is growing at a rapid clip. Hotels have a stigma for being slow to adopt technology but that’s changing quickly as digital natives moves into leadership roles at hotel groups around the world.
Hotels are extremely complex businesses to run operationally with lots of moving parts. How do you price across channels? Which channels do you focus on? How do you manage bookings? How do you service guest requests across shifts? How do you recruit and train new talent in a business with massive turnover?
Hotels need software for all aspects of their complex businesses including: finance, revenue, operations, guest experience and sales. The typical hotel can run on up to 15 different technology systems. Multiply that by the number of hotels in the world and it’s easy to understand this massive market opportunity.
Shockingly, tons of hotels today still run their operations on pen and paper or via on premise systems from decades past. Cloud computing was a buzzword for the rest of the world back in 2010 but here we are nearly a decade later and hotels are finally catching up.
When venture investors look at hotel tech they see the biggest online market in the world (travel) and a massive whitespace for technology companies that can solve real business problems and deliver strong ROIs for hotel clients. They see a rapidly expanding middle class with discretionary funds for leisure travel and a booming corporate travel market for companies looking to connect employees and clients through meaningful in person experiences. Adding to these macro trends - fast, frictionless API integrations and the low delivery cost of cloud computing catalyze the perfect environment for outsized venture returns.
Here at Hotel Tech Report we get tons of calls from investors asking us which companies they should consider investing in but few understand this market like Matt Melymuka at PeakSpan Capital. Matt and his team at PeakSpan have developed a sophisticated understanding of this nuanced market opportunity and have put money to work in some of the most innovative and successful companies in the space such as Cloudbeds and Zingle. We have yet to meet an investor who understands this market better than PeakSpan so we were lucky to catch up with Matt to understand his view on the market. Top venture firms like Thayer Ventures and TCV also invest heavily in the space but few offer the level of support and guidance to portfolio companies that Peakspan offers to hotel technology companies. The firm is unique in its thesis driven approach that has identified hotel tech as a key area for investment long before this thesis became mainstream.
In this interview we’ll talk about the evolution of hotel management software, how customer messaging platforms are changing the way hotels interact with guests and why hotel tech companies need to build globally distributed teams in order to win.
PeakSpan's Matt Melymuka leads the firm's hospitality practice
How did you get into the wonderful world of venture?
I've had the pleasure of working with growth-stage software and technology businesses my whole career, and have been a tech enthusiast my entire life. I started my career in investment banking and then transitioned to principal investing, as I really wanted to work more closely with entrepreneurs and teams who have a shared passion for innovation. While every stage of company development is interesting and unique, I have always focused on companies in the "growth phase", and really believe it is the most intellectually stimulating and exciting phase of evolution - companies that have matured beyond the concept in a garage phase and have answered some of the existential "Can we build it? Will they buy it?" questions, and are looking for a thought partner to provide capital and guidance as they look to navigate the next part of the journey. The challenges and opportunities our teams face are typically related to execution and developing/implementing sensible scaling initiatives, iterating our collective way into the optimal investment plan that drives resilient, sustainable growth and long-term value creation.
How does PeakSpan operate under the hood?
PeakSpan has a simple, highly-focused mission: to be the partner of choice for growth-stage, B2B software companies. Our focus manifests itself across every area of our business, but I'll highlight three primary areas, as well as one philosophical tenet that underpins our strategy and approach to working with teams. First, we only invest in business-to-business software companies. Next, we focus on a tight roster of themes (we call them our "BluePrint Market Themes") as a firm, and Hospitality is one of those themes that I lead for PeakSpan. Third, we only invest in emerging growth-stage companies, which are businesses which as noted above have stripped away some of the binary risk levers associated with classic venture capital. The whole point and purpose of our focused approach is to develop true domain expertise in the categories we invest in, to cultivate long-term theses and informed perspectives on segment evolution (market dynamics, nuanced trends, competitive landscape, buyer dynamics, etc.) to enable strategic levels of rapport with the teams we partner with - from the first interaction and every one after that. Every time we meet with an entrepreneur, we should be bringing a distinct or unique insight or perspective to the table (informed by a breadth of experience) and adding value to that entrepreneur or team in some form or fashion. Lastly, we only put senior investment professionals (Partners) who are domain experts in the category at the tip of the spear, doing the first calls/meetings (and every successive call/meeting after that) with the entrepreneur, to enable a peer-to-peer, decision maker-to-decision maker dialogue that we firmly believe is more respectful and human beings prefer.
You've already lead some pretty sizable rounds in hotel management software companies - tell us about those investments.
We've invested in i) Cloudbeds, a leader in the cloud-based property management system ("PMS") arena, providing an end-to-end solution encompassing property management/operations and channel management/distribution for independent hotels, hostels, B&Bs and short-term vacation rental owners, and ii) Zingle, a leading provider of guest engagement solutions, enabling hoteliers to deliver personalized communications with their guests across channels, at scale, with high efficiency through the application of AI-enabled automations and intelligent process/workflows.
We led the Series B financings for both companies with meaningful 7-figure investments in each business.
Cloudbeds offers a truly end-to-end platform, providing hoteliers with the tools and technology required to efficiently identify, attract, engage and convert potential prospects (channel management/distribution), as well as everything required to manage their property on the back end (property management/operations). The platform is easy to use and navigate, encompasses a rich feature set satisfying all core needs, and is offered at a disruptive price point/solution value. The breadth and depth of Cloudbeds' platform is unmatched in market, and is supported by a best-in-class customer success effort, ensuring client experience is paramount.
Cloudbeds co-founders Adam Harris and Richard Castle ribbon cutting the firm's new San Diego office
Zingle provides a next-generation approach for hoteliers to engage with their guests in a highly-personalized, real-time manner, at scale with tremendous efficiency. The Company's platform gives control of the guest engagement and dialogue back to the hotelier, enabling direct, seemingly bespoke communications with their guests to ensure top tier satisfaction. Zingle intelligently leverages NLP and AI coupled with deliberate, intuitive workflows to deliver these individualized dialogues at scale, with strong efficiency. Guest requests are satisfied in real-time, enabling properties to differentiate through experience, while driving massive ROI through process automations and service efficiencies.
How do you come usually across your investments?
In both cases, we had developed a deep perspective and investment thesis on the market opportunity for these businesses informed by our thematic focus, and reached out directly to the founders to start a dialogue. These businesses are exhibiting top tier performance across numerous vectors, and (not surprisingly) they were garnering significant interest from the investment community, so we had to work hard to prove value and demonstrate the impact we can bring as a partner to consummate the partnerships with these amazing teams. We're privileged and humbled to work with both of these companies.
What's one piece of advice you have for hotel tech entrepreneurs when raising capital?
Similar to how we execute our own mission at PeakSpan, we're big believers in focus in company development. There is no need to cede ground on overarching vision and market opportunity, but pursue your mission with ruthless prioritization and by setting sensible, incremental goals and milestones, preserving optionality and alignment with your shareholders along the way. One founder we once worked with had a great quote that I think about every day, noting "Most companies don't die of starvation, but rather indigestion." Biting off more than you can chew and introducing unnecessary operational risk into a business can be toxic, so set reasonable goals, attack them with focus, and then reevaluate and recalibrate as you continue to turn over cards of value creation along the way.
How do you think the hotel management software space will evolve over the next 5-years?
Despite all the innovation that has taken place in the sector over the last decade, there remains massive, untapped opportunity and potential in many categories within the hospitality arena. Despite being one of the largest and most dynamic segments of the US and global economy, penetration of cloud-based technologies in the segment remains incredibly low, and the vendor landscape remains tremendously fragmented on a global basis. Cloud-based platforms combined with innovative go-to-market strategies will enable vendors to effectively and efficiently target, acquire and retain clients, delivering powerful solutions to clients across the full spectrum of property types, including the long-tail segment. Industry fragmentation and the disparate nature of data within the hospitality arena will continue to drive the need for systems to be developed with extensibility at their core, enabling quicker, lower cost implementations and seamless communication across platforms. There remain so many areas across the hospitality landscape that are under-penetrated or currently served by solutions that are deficient or ineffective - as an investor, this creates an incredibly compelling and exciting opportunity to partner with amazing entrepreneurial teams to capitalize on these opportunities!
People often say that hotels are a bit slow to adopt technology. Do you agree?
There is definitely some truth to the comment, and one of the main reasons from my perspective is the mission critical nature of the data housed in many of the platforms used by hoteliers today across their operations. This makes it harder to adopt new, innovative solutions than some other categories - even when solutions are better, faster, cheaper and more efficient, there can be operational issues that create friction when considering migration to a new platform. I believe the tide is turning, however, as new technologies and approaches are reducing those barriers, and awareness/appreciation for the need to evaluate and implement next-gen technologies and (importantly) behavior/process change to drive efficiency across organizations has never been higher.
If you were leaving venture capital tomorrow to start a hotel technology company - what would it be and why?
I won't give away my next area of focus, as there are a few areas I am really interested in investing behind, but I will categorically say that I would not want to be competing with Cloudbeds or Zingle. Both of these teams represent everything I look for in the companies I partner with - passion, grit, humility and integrity - and they are quickly establishing true market and thought leadership in their respective segments, supported by best-in-class technology platforms.
What is the most surprising thing that you've learned from investing in hotel tech?
The fragmentation of the category globally continues to amaze me. This creates a lot of opportunity, however also (typically) requires the intelligent application of a globally-distributed team to compete on a truly global basis.
What is the best book you've read lately?
Sapiens by Yuval Noah Harari is fascinating - I would describe it as Freakonomics for Anthropology. It provides an eye-opening perspective on human kind. It's not a book, but I'm also completely hooked on the Freakonomics Radio podcast.
What is one thing that most people don't know about you?
While I live in New York City and have for more than a decade, I am a die hard Boston sports fan, having grown up in the Boston area. I'll never surrender to the dark side!
For all the startups that might want to pitch in your office, what can you tell them about your investment criteria, etc. to help them decide if they are a good fit for your portfolio?
We love to develop relationships early, and I am always interested in meeting with entrepreneurs who are going after strategic segments of the universe. In terms of specific parameters, we look for companies with $3-4M+ ARR, growing rapidly on a capital efficient basis, who haven't raised significant prior institutional capital. We typically invest anywhere from $7-15M initially, and always look to lead the rounds we invest in.