Ostrovok Capitalizing on Russia’s E-Commerce Boom

Russian hotel booking site Ostrovok.ru has raised a new $25 million round from General Catalyst Partners, Frontier Ventures, Accel Partners and other investors, almost tripling the amount the Russian hotel booking site has raised in the past two years.Ostrovok is riding a growing e-commerce wave in Russia that has produced several national champions including Ozon, often dubbed the country’s Amazon, and online shopping club KupiVIP. Russia’s e-commerce market will triple to $36 billion in 2015 from $12 billion last year, according to a report published by Morgan Stanley in January. The investment bank said 2013 will be a “tipping point” as e-commerce increases to 4.5% of all retail sales in 2015 from 2% last year.
Ostrovok said the fresh funds will be used to improve the company’s current offering, develop new products and build its sales force so it can increase accords with hotels in Russia and other countries that formerly made up the Soviet Union.. Bypassing aggregator sites and keying on direct relationships with thousands of Russian hotels has been fundamental to Ostrovok’s success in the two and a half years it has been in business.If you’re working through an aggregator like Expedia they are going to be optimized for people from the U.S., but not our customers,” says Serge Faguet, Ostrovok’s co-founder and chief executive. “The aggregator won’t show good availability for a hotel in Finland on a Russian holiday weekend.”
Eliminating the middleman, whether it be Expedia or another aggregator, also allows Ostrovok to take a larger portion of the revenue while offering better customer service by leveraging the personal relationship with hotels, says Faguet, a Russian native who dropped out of Stanford University to launch a start-up in Silicon Valley and briefly worked for Google. Ostrovok’s salesmen meet directly with hotels, many of which have little or no online presence and before the arrival of Ostrovok were advertising mostly in newspapers and at offline travel agents, two vehicles largely ignored by the majority of western hotels.
In July 2011 Ostrovok, which has about 200 employees, got $13.6 million in funding from London-based Accel, General Catalyst, Frontier Ventures, Skype co-founder Niklas Zennstrom and others. The company has now brought in a total of $38.6 million with Faguet and Ostrovok’s other co-founder, Kirill Makharinsky, together investing $2 million of their own money as part of the just-announced $25 million funding round. No investors cashed out as part of the most recent transaction.
Faguet says Ostrovok’s sales have surpassed $100 million on an annualized basis and for all of 2013 will exceed that figure. The company’s site has more than  one million monthly unique users and a total of two million users.
While Faguet says Ostrovok’s main competition is from Booking.com rather than local players, there is no lack of other Russian travel sites jockeying for position including Ozon, Travelmenu.ru, Traveltipz.ru, anywayanyday, tutu.ru and Oktogo.
Ostrovok is investing heavily in mobile and last year introduced applications for the iPhone and Android handsets that allow customers to pay for hotels with cash, an important feature for the Russian e-commerce market where many people do not have credit cards and those with them are reticent to use them online. Apps for the iPad and Android tablets are due out soon.“Our industry is moving increasingly towards mobile and we think Russia will go in that direction even faster,” says Faguet.




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