Venture Capital Oases in a High-Tech Desert

Analysts agree that Internet and technology investment is a virtual desert these days.

Although editor Ken Andersen of VentureWire recently pointed out that the VC industry overall is on track to tally approximately 3,200 deals and US$35 billion in the United States alone this year, according to figures released by Venture Economics and the National Venture Capital Association, capital investments fell in the second quarter, cutting overall spending by 61 percent in the past year.

The question is: Are any funds going to companies that do business online?

As it turns out, the high-tech funding desert does have more than one oasis. In this article, the first of a multi-part series, the E-Commerce Times takes a look at two areas of the Internet that are getting funded -- travel and entertainment service sites -- and why they are succeeding.

Traveling All-Stars

All the good news in the Internet travel sector has convinced more than a few VC decision-makers to open the ducts in an otherwise cautious climate. Both Expedia (Nasdaq: EXPE) and Travelocity (Nasdaq: TVLY) have posted profits, and Orbitz enjoyed a stellar launch marked by a surge of traffic and better-than-expected sales.

"Online travel is an industry that is living up to its promise," Forrester Research analyst Henry Harteveldt told the E-Commerce Times. "We have two pure plays that have recorded profits (or pro forma profits at least). The dynamics are such that you don't have to retrain consumers to stop going to the grocery store or the apparel store. The Internet lets them do what they want to do: look at options at any time and research details."

As a result, the sector leaders, including both pure-play operations and the major airlines, are locked in a fierce competition to gain share in an expanding market. However, there is room for a few more niche players on the field -- or so the venture capital flowing to Web travel sites around the world indicates.

Big Blue Skies

For example, IBM (NYSE: IBM) (NYSE: IBM) and Air Canada (Nasdaq: ACNAF) have forged a seven-year, $908 million strategic partnership in which the two will develop new customer service and travel industry offerings. Big Blue said it plans to invest in various venture capital and technology projects of Air Canada.

Air Canada said it is looking to develop new products based on its express check-in kiosks. The company also wants to develop other wireless and self-service products.

Around the World

Spanish-language Internet travel site Viajo.com has also gained new funds of late. The Coral Gables, Florida-based site closed a third round of financing in early July. The amount was not disclosed, but Viajo co-chairman and founder Enrique Felgueres told Venture Wire reporters in April that the company was looking to raise between $7 million and $10 million in third-round funds.

Viajo.com has pegged the first quarter of next year for reaching profitability, and expects the latest round to last it until that time. Investors in Viajo.com include JP Morgan Partners and GP Investimentos, reports said.

Elsewhere, online travel site Egencia said that it has raised 6.6 million euros (approximately US$5.6 million) in a second round of funding. The French company is reportedly using the infusion for the development of an enhanced technology infrastructure and will not need more funding before reaching profits.

On the Waterfront

Air travel sites are not the only players in the Internet travel sector getting funded. In June, Cruise411.com, an online cruise marketplace, received $7 million in Series B equity financing from TL Ventures.

"Cruise411.com has made tremendous progress in proving consumer receptivity to booking cruises online, as well as deploying their technology to convert this demand into revenue," said Dr. Gary Anderson, a TL Ventures partner, when the deal was made.

The Newton Square, Pennsylvania-based site, which offers cruise pricing information and booking options, has said that it is looking to be profitable before the end of the year.

Tickets, Tickets

In the Internet event-ticketing realm, Vivendi Universal (NYSE: V) has poured capital into Divento, a European portal that offers online ticketing, services and information about cultural events taking place in select cities in Europe.

According to published reports, Divento will receive 15 million euros (US$12.5 million) from the international media and communications giant. Vivendi will reportedly make the investment over three years in exchange for a 75 percent equity stake in the company.

Divento is expanding the number of cities it provides ticketing for -- from 18 cities to 40 -- by the end of the year, reports said.

In another online ticketing deal, Seasontickets.com, which provides ticket management, exchange and group ticket services, announced in late July that it received a $5 million second round of private equity funding. InvestLinc Financial Services, a Chicago, Illinois-area financial services firm, was the lead investor.

The Main Event

Internet events ticketing has a dynamic similar to that of air travel and hotel bookings, Forrester's Harteveldt said. If online events ticketing sites can figure out how to offer a positive customer experience and tangible benefits from Internet-based buying, such as electronic distribution of the tickets, they also could see growth in the number of consumers moving from the brick-and-mortar channel to the Net.

"If events sites are smart and borrow a few pages from the travel play book, then they stand a better chance," Harteveldt said.

However, Harteveldt said that the Internet-based events ticketing will see likely a lower channel shift rate than the online travel industry itself, which includes air travel, hotel reservations, rental cars and cruises.

Stay tuned for Part II.