Investors are prepared to take a risk on travel start-ups, but founders need to be more realistic on valuations.
Speaking about the winners and losers in the sector due to COVID-19 sector veterans and serial entrepreneurs Steve Endacott and Ian Brooks highlighted start-ups.
Brooks said that firms will little or no debt will be better positioned following the pandemic, and there is a lot of available talent to bring into young firms.
However, he doubted whether there is the investment available. Discussing industry prospects in a regular ‘pubcast’ webinar, Endacott said:
“If you look at the nature of Enterprise Initiative Schemes, basically you need to be a gambler.
“You get 50% of your initial investment back against your tax, so you have to be a tax of a large amount to make it worthwhile.
“Once you’ve got that initial 50% back you don’t want it to tick along. You either want it to be spectacularly successful or you want it to fail because if it fails you can claim the other 50% back.
“It’s what I call ‘shit or bust’ investments. So, there is money out there for start-ups because people will say either its going to be spectacularly successful or go bust and I get my money back, it’s low risk.
“Don’t assume you can’t get the money. It’s not easy but valuations are going to have to come down. I see plenty come past my desk and I think ‘really, it’s worth £3 million’.”
Endacott warned looming “cash wars” could leave many travel firms stuck between having to hold on to customer money to survive or go bust and leaving suppliers out of pocket.
Although many travel firms have been able to access Covid Business Interruption Loans (CBIL) it remains unclear whether this will be enough to keep them afloat.
Endacott said for small firms, that can claim up to £50,000 or 20% of annual revenue, the loans will be a considerable help, but less so the bigger the firm is.
Brooks said: “I’d rather be a smaller travel company than a bigger one at the moment.”
“The bigger you are the harder you are hit,” agreed Endacott, citing Tui which has had to borrow €2.4 billion.
“The larger you are, the bigger your debt mountain, the less likely your shares will be worth anything in two year’s time because the only way to get rid of your debt mountain is to change it for equity.”
Brooks said hanging on to customer cash could be the only way for smaller firms to survive.
But Endacott suggested going bust and starting again may be preferable due to the reputational damage of denying customers their money.
“Pay your customers their money and go bust and the suppliers get hurt. Then Phoenix your business,” he said.
Brooks agreed there could be failures followed by deals to revive brands once they are freed of their debts. “I can see a lot of pre-packs happening,” he said.
Endacott said airlines and operators with airlines have not been operating profitably this summer as they chop and change their capacity according to government quarantine rules.
“I dread to think how much money they are losing,” he said. “That loss will be greater than the profit from that destination. It’s a pure cashflow exercise.
“The bigger you are the more you need cash. It’s not about profit, it’s about survival with cash. Cash wars are coming.”
He said this is why airlines are holding on to customer money passed on by agents because companies that have retained cash have the upper hand.
“The airlines are being really nasty to agents because they know the customer has paid the agent and if they hold on to that cash the agent goes bust and they don’t have to pay the cash back.”