„The topics discussed at Hostelskills #6 have been incredibly engaging and speak to the sophistication of a sector that many people would assume lags the hotel industry. There have been some fascinating discussions on the topics of revenue management in a “per-bed” world, data-driven approaches to OTA selection and even re-inventing the map to boost your location rating!“, sums up his Hostelskills experience Peter Nichols, an analyst at London-based investment group Vor Capital, the leading internet investor specializing in niche monopolies.
Tell us about yourself and Vor Capital?
Vor Capital is a London-based investment group. The business was launched in late 2017 by Brant Rubin, formerly of Luxor Capital. I joined him shortly thereafter as a founding member. We invest in niche monopolies, with expertise in consumer, media, and Internet. I will emphasise Internet, in particular, as we find this sector compelling today, and particularly in Europe — which is often overlooked in comparison to US and Asian markets, and thus where we are typically able to find value. When we find something we like, we employ a concentrated approach to investing, building large positions, backed by our expertise and a thorough research process. We think this is a great formula for success and will generate attractive returns over the long term.
What brings you to the Hostelskills conference?
We love marketplace business models — and models like Rightmove or Just Eat, as examples, are core to our expertise. We’re intrigued by the Online Travel Agency (“OTA”) sector given its similarities. The dynamic that you typically see on the supply side of a successful marketplace business is applicable in the travel sector, where accommodation providers are competing to sell room-nights, are price-takers, and generally have a fairly limited ability to self-distribute their product. This is where an OTA, which funnels travellers to accommodation providers, proves valuable. Then, from the traveller’s perspective, an OTA provides a one-stop-shop for all available accommodation on a given night in a variety of locations. Booking.com is a great example of this model. Booking is inching closer to the point where travellers don’t even Google “hotels in…” anymore, but simply go straight to Booking.com or, increasingly, visit the Booking mobile app directly, when looking for hotel accommodation. Booking.com earns a 40% EBITDA margin, and still has room to improve profitability while still re-investing in its business to drive further growth. It also serves a very real need of the hotel community — helping them distribute room nights and reducing excess capacity in the sector.
From an investment perspective, Booking.com is a known quantity now; most investors are aware of the strength of its model, and it already carries a $90bn market capitalisation. What we’re more interested in is finding OTAs that focus on a particular category or geography, that can truly dominate in that niche, despite Booking’s broader scale, and where the value in the platform might be less recognised today. Hostelworld may be such an OTA. We are intrigued by its strong position with the hostel booking market, and think it might be able to dominate this niche. Thus, to answer your question, finally, we are at the HostelSkills conference primarily to learn more about Hostelworld, which is based in Dublin and trades on the London Stock Exchange.
Talking to hostel travellers has been quite powerful in informing our understanding of what the Hostelworld value proposition is, and what it could be in future. This supplements the financial and data-driven side of our diligence process, among many other avenues we’ll explore as we build comfort with Hostelworld’s business model and its consequent investment opportunity. Our next phase of work is centred on understanding what hostel owners think of Hostelworld and how they interact with it on a daily basis. I came to the conference here in Lisbon to spend a more meaningful amount of time with hostel owners, understand the day-to-day challenges their businesses face, observe them using the Hostelworld product, get their perspective on the industry and the value proposition of an OTA, as well as simply to build relationships with people who are working in a really fun and exciting industry. It’s obviously incredibly valuable to us to be able to develop contacts at this level – for understanding the on-the-ground implications of events that take place at the OTA level – but what is eminently more important is to spend enough time with people in the industry that you instinctively know what those implications would be. We want to get to the point where we truly understand this industry, such that we have an informed view on where the value lies within it.
To that end, has the Hostelskills conference been valuable to you?
Absolutely it has. In terms of the formalised portion of the conference, some of the topics discussed have been incredibly engaging and speak to the sophistication of a sector that many people would assume lags the hotel industry. There have been some fascinating discussions on the topics of revenue management in a “per-bed” world, data-driven approaches to OTA selection and even re-inventing the map to boost your location rating! Any fears we had about the sector not behaving rationally in an economic sense, have been eased. For our diligence process, simply getting a sense for what the day-to-day challenges are for a hostel owner is essential.
Secondly, there is a very broad representation of hostels here. That’s been incredibly helpful to us because the sector is actually quite diverse – you have the traditional hostel model with dorms, a great bar, organised cultural activities and pub crawls etc. – these types typically rely on Hostelworld to send them the customers that help create that authentic hostel experience, and you then have the so-called ‘poshtels’ that are essentially hotels but operate at a slightly lower price-point and retain somewhat of a social feel. These latter types will typically get a higher proportion of their bookings through Booking.com, given overlap in target customer. It’s been fascinating to hear the opinions of a multitude of different owners, and prompt debate on where they see the industry going. More specifically, we’ve been able to gather the views of more than 50 hostel owners, giving us a much more detailed understanding of Hostelworld’s systemic importance in the industry, as well as where it has ancillary opportunities to cater for more of the daily needs of hostel owners.
The opportunity to meet consultants to the sector has also added another perspective to the mix. Their data-driven approach has helped us to firm up our view on the competitive landscape, and tap into their insights on pricing dynamics. These are relationships that we’ll look to develop over time and hopefully leverage in our work on other travel categories.
The conference has also been a lot of fun. The events have been really well run and the Hostelskills team have created an environment where people are wanting to proactively share their insights and help each other run their businesses. There is definitely somewhat of a family feel in the hostel community and that has been on show here. It’s great to see so many service providers represented as well – it just gives an observer a further perspective on the industry.
What has been the most surprising fact you’ve learned about the hostel market?
I think the most interesting observation is how technologically advanced many of these hostels are. If you speak to Daniel and Ambrose at Podstel in Bucharest, they’ll tell you they are looking to use AI to have people checked-in automatically as they walk through the front door. In this way, the check-in process can be more of a welcome drink than a formal administrative process. I don’t even know of a hotel in the world that is doing that, it’s really impressive. I spoke to other hostel owners who have developed their own channel-management software in-house because the standard hotel offerings weren’t specific enough. This tells us that there is both a desire and a need for hostel-specific SaaS capabilities; something that we think Hostelworld could play a leading role in over time.
We’re still a young event and growing fast. This conference is mostly attended by hostel owners and managers. Our growth plans include gathering youth-specific tour operators and travel industry startups. When we get to this point, do you think it could also be attractive to investors as a sourcing opportunity?
Yes it’ll likely be something you can’t avoid in reality. Already, I’ve come across 3 or 4 different groups here who are interested in raising capital to fund expansion and we’re always happy to connect people to our VC network when we see good ideas. You only need a few of these sorts of introductions to bear fruit and then you’ll get new people coming here each year specifically seeking those sorts of connections. It’s another example of the network effect at work. I’ve been actually really impressed by how many people here have been able to just reel off an investment pitch without any preparation, and with well-considered plans.
Hostelling is pretty fragmented in the sense that most businesses function as stand-alone ventures limited to just one location. What would be a good model for hostels to become more interesting to investors?
That’s drifting a little from my area of expertise, but at a high level if you’re looking to raise capital to expand, you’d want to start by showing that you have proof of concept. So firstly demonstrate your business can operate profitably in one location; show that you understand why you’re profitable and why you’ll be profitable, even if macro-economic conditions worsen. Then the next step would be to demonstrate that the business is scalable. In practice, this would mean demonstrating that your hostel can work in multiple cities around the world, not just in your flagship location. Lastly, I’d just encourage hostel owners to form a long-term vision for the business, and make sure you’re looking for investors who share that vision. It’s incredibly important to partner with the right people.