It was only in March that one of Russia’s hottest startups — hotels booking service Ostrovok.ru – raised $25 million in a Series B round led by billionaire investor Yuri Milner. We said at the time that this market is very capital-intensive, especially in a market like Russia.
But today we learn just how difficult this might be in the mid-term. Today the company has announced on its blog that it is letting go of a third of its staff. Staff will be compensated with three months’ full salary and bonus, and their options will also vest. To Ostrovok’s credit they are making the news public so that their staff can find new positions: “If you need great people, write to Kate (katya@ostrovok.ru)”.
The reason, writes cofounder Serge Faguet in the blog post, is that they want to “take the company to break even” something they said they’d wanted to do last year. However, it’s clearly not happening as fast as they predicted, hence the layoffs.
Unfortunately, the hotel booking space is a crowded one in Russia, and despite there being a rising middle class in Russia, the cost of travel can take out a hefty chunk from people’s expendable income.
And while Ostrovok probably needed cash to scale up, the margins in travel booking are well known to be thin, requiring a lot of scale to make sense. It’s the age-old problem of burning cash to get to that scale – or cutting costs to make the numbers work better.
Faguet, however is understandably trying to be upbeat about this move, noting that brand recognition is up “20%”, and he says they have hit 100,000 bookings and “are growing more than 50%” in the last quarter.
Faguet told us via email: “The story is pretty simple… We’ve taken on too many people and projects simultaneously and, after raising our Series B, decided to pull back and work in a more focused way (and make ourselves more attractive for future fundraising). We still have over 130 people at the company.”
He goes on to say on the blog: “Our strategy remains exactly the same as before, and the quality of customer service will not change.”
So it seems it’s more of a case of a startup cutting lots of side projects and focusing on what it does best.