Derive Ventures on small checks and strategic partnerships – PhocusWire

A quick glance at the recent financial results of online travel giants reveals that despite being decimated by the pandemic, travel has bounced back.
And, although there has been a dip in funding available for travel startups this year, many continue to see the sector as a good bet.
After meeting at a Phocuswright conference, Tyler Carrico and Mike Scott formed Derive Ventures, a spin-out of Thayer Ventures and KSL Capital Partners, in 2021. PhocusWire speaks to Scott about the opportunities, what the fund is looking for and the current investment landscape.
This conversation has been edited for brevity.
What are your backgrounds?
We’re a spin-out of two other ventures – Thayer Ventures and KSL Capital Partners. I’m the KSL side and was previously in private equity. KSL is a travel and leisure private equity firm, so I was buying and selling hotels. Tyler, my co-founder, was the venture capitalist. He spent four years at Thayer. We met more than five years ago at Phocuswright and developed a relationship from that point on, trying to figure out ways to connect the dots between KSL and Thayer. 
KSL had no venture or growth equity platform, no way to invest in a business like Airbnb or any of the other big tech or emerging concepts. So I was always trying to figure out an opportunity to invest in these types of businesses. Then Tyler with Thayer, which had moved a little later stage and that kind of left a white space in the earlier stage side of travel venture, the seed to series A stage. That gave us the opportunity to spin off and attack that category and take best practices from each. After a year and a half we have raised a little over $30 million of capital, and we’re trying to reach $50 million. We have made over $10 million of investments, all within the travel and hospitality category. This is fund one; we’re looking to build a large platform here and this is just the beginning.
Why travel given what a hard time it has had?
The fundamental thesis is that travel is extraordinarily large. It’s one of the largest contributors to world GDP, it’s the largest employer and an operationally complex industry that is highly fragmented and built on a lot of legacy technology. There’s tons of opportunity to create value and new ideas, and I think it has been underserved in that respect.

I think part of what we’re trying to do here is the way hotels are structured creates this misalignment to adopt new technology. Typically owners of properties or businesses hire or contract third-party brands, operators or tech companies to run their assets. The third parties are the groups touching the technology, but the owners ultimately realize the benefit technology brings to the bottom line. We strive to educate the owners to make investments in tech and connect them with the right third parties to facilitate innovation.
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Another prong of our thesis is that half of the businesses we’re trying to invest in are travel vertical businesses and the other half we’re looking for are horizontal technology companies, which we call derivative businesses. They’re enterprise software, not travel companies, they’re other tech-enabled businesses that sell to all different types of companies. And we want to grow them within the travel industry and help them navigate that space. One example we use to illustrate that is a businesses called Twilio, an SMS-based messaging platform enterprise software business. It’s not a travel company, but some of its biggest customers are the airlines and hotel companies, and they powered a lot of the SMS texts that those businesses would send to their guests and passengers.
What are you looking for and how much are you investing? 
In terms of stage, we’re looking at seed and Series A businesses that have come up with their product, their go-to market strategy, maybe started a few pilots or just started to generate revenue. We won’t do anything pre-seed, we’re looking for a bit more traction. And, in all sorts of different types of categories, we spend time with hotel operators, airlines, travel distribution companies and vacation rentals and ask them what their pain points are in the business and how can we be helpful. So it’s loyalty, experience technology, labor management, figuring out what to do with AI, etc.
Right now we have 15 companies in our portfolio, and the average check size has been $250,000. We’ve made one conviction check into this business called MarginEdge, an inventory management software business for restaurants. Our two largest investments are Mews and Life House, which were done outside of the fund given they were later stage companies. Those were two businesses that we wrote $4 million checks into each. 
As an investor in travel what is your greatest challenge right now?
The perception of the rebound and whether travel is over-heated. It’s never an equilibrium. It’s articulating the fact that people yearn to travel, and even if we go through a deep recession now and the U.S. consumer has to pull back significantly on their leisure spend, they’re still going to be, rather than taking the European vacation or international trip, they’re going to drive to closer destinations. Or is the international traveler that has been nonexistent, whether Europe or China, are they going to build demand where other sources are not? As you look holistically at this travel market, the demand is resilient and has proven the ability to rebound after periods of disruption. The travel sector is one of the top contributors to global GDP (~10%), and since 1960 travel and leisure spend in the U.S. has grown by about ~7% per year, more than double GDP over that same period.
What trends and opportunities you are seeing in travel?
We’re seeing a lot of lines blur into other categories. One trend we’ve been watching really closely is how other types of real estate are finding alternative uses that resemble hospitality. Can we go to a traditional multi-family or office real estate investor and come up with unique opportunities for them to change how they concept or how they treat their tenants? A lot of our investments are aligned with that. Mews, for example, is a [property management system] company in the Netherlands, and they’re at the forefront of trying to change different real estate types into a more hospitality-centric model and can we bring travel tech to other types of businesses.
Maybe one other opportunity, and it will be interesting to see how we can execute this as a VC investor where we have minority interest, is the many small tech players that are trying to attack particularly the hospitality category. You have all these different types of software that solve different things. Look at Mews and its marketplace, how many different softwares plug into its API. Rather than the hotel management company or operator having to deal with so many different softwares, is there a way to streamline or consolidate some of these businesses? Or, through partnerships, integrate them in such a way that it allows them to work a lot more efficiently? 

One of our investments is Operto, they’re keyless door entry but can we pair them up with a [customer relationship management] tool or a guest experience messaging tool to create a more seamless guest experience where they’re only receiving messages from one provider instead of three disparate ones? Can we bring some of these companies together to create synergies? I think it would be a really interesting value opportunity. There’s a lot to navigate there, you’ve got investors, you’ve got CEO egos and everything else, but I think there’s a lot of opportunity there to consolidate something like this, and the marketing conditions could create some interesting opportunities.
What’s it like being the non-lead investor?
One thing we try to insist on even when we’re writing small checks is information rights, pro-rata rights, because our investment strategy is to write a really small check at that seed/series A stage. Then we take that business and we start talking to whatever relevant partner in the travel space. We have connections in the hotel space, airlines, booking and distribution – whatever the technology or company may be we put it out there and see if we can create strategic value.

We watch the business grow, and when it comes back round to us, that’s when we’re looking to write a conviction check which is $1 to $5M. At that point we might ask at the very least for a board observer seat or slightly more enhanced investor governance. It’s a little vulnerable at times to be in this position, but I think we mitigate that through a large portfolio. We want to have 50 companies in this first fund and we realize not every single one is going to be successful. 
What are your criteria for investing in travel companies?
There are four buckets we look to invest behind. The first is the changing customer demographic so millennial and Gen Z momentum and the companies at the forefront of that change. The second is commerce enablement, are there ways to create efficiencies in payments, back office, transactions? Then, the future workforce, labor solutions, changing trends of where people work/how people work. Last is broadly sustainability, what are some tangible [return on investment] businesses out there supporting sustainability. Those are the four broad buckets we look at, and then we take it down a layer and we’re playing in traditional hospitality, hotels, short-term rentals, transportation, experiences and really just broadly across all travel categories. 


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