"We could not afford to give up on slack because of people who did not believe in our business for a billion dollars. If we did not believe, how could we convince others? A well-built communication base is what we have talent for. Send us to a strange town and we will meet the people who are needed. "
When 14-year-old Sergei Fage closed the book “Boo Hoo: From Idea to Disaster,” he already knew what he wanted to do in life. Internet retailer Patrick Gedlin confessed how he spent $ 135 million, so exciting that the student was inspired by the idea to build a large-scale company on the network. Voo collapsed after the collapse of the dotcoms. Investors took money from a startup, and Fage learned from his failure.
After another 14 years, the “Phage Islet” is an irritant, a red rag and the loudest startup in Russia. Here is an incomplete list of charges: burning investment, sky-high salaries, dubious methods of promotion. For a fee, the Islet helps hotels sell rooms. The company is outside the top 5 in the online travel market, but is not shy about claims that it will cost a billion dollars soon.
However, even haters admit: Fage and his partner Kirill Makharinsky know how to work with famous foundations and built a company with the spirit of the Valley (whatever that means). In two years, the startup raised three rounds of investment by $ 39 million and got experts in experts on the largest online travel markets in the world.
The "island" with Peter Thiel and other eminent investors in the pool embodies the myth of an ideal startup of the IPO era of giants with fantastic animators. H&F understood the economics of this myth.
Cyril Makharinsky and Sergey Fage graduated from high schools in England - one in London, the other in Winchester. At age 16, Fage entered Cornell's American University and skipped classes, faxing homework to professors. Being an excellent student and winner of the mathematical olympiad, he resembled anyone, but not an introvert-nerd, and built a network of contacts. Three years later, he threw at Stanford for an MBA.
Once Fage noticed in the Cornell alumni network a partner of the legendary Seqouia Capital fund Douglas Leone and, without delay, invited him to a meeting. They met, and the next rendezvous was business - in 2004, Fage launched the TokBox video chat service. In addition to $ 100,000, Seqouia invited the team to hang out at his office - with a golf club, Aeron seats and other bonuses.
After a couple of months, TokBox decided that it would take another $ 300,000 to develop. “We will not invest three hundred thousand in you,” the representative of the fund began, after which there was a pause. “We want to invest $ 4.5 million.” When everyone exhaled, he made a condition - Fage should quit school. Without thinking twice, he spat on the MBA and went headlong into the business.
His partner, Maharinsky, worked as a product analyst with Max Levchin, one of the founders of PayPal, at Slide, which was subsequently acquired by Google. There he met with the PayPal mafia and its leader Peter Thiel, whom Fage called "one of the five most important people in the world" (as, for example, Businessweek).
Makharinsky earned the first tens of thousands of dollars by selling his stake in Slide. He invested money in the YouNoodle startup database. “We wanted to build the largest movement of innovators,” Makharinsky recalled in an interview with H&F. “Google, Paypal, Facebook left universities - to unite all these people meant to unite the most important technology companies around us.”
Apparently, even then Makharinsky studied the motives and psychological nuances of fundraising - from the entrepreneur and investor. For example, the most popular feature of YouNoodle was an online soothsayer - an algorithm that, after filling out a questionnaire, announced to a neophyte how much his project would cost. Levchin and Tila's Founders Fund invested in Makharinsky.
"You wake up in an expensive hotel, drive a Ferrari and don’t know what to do next"
Once, Makharinsky saw on Facebook a message from the user Sergey Faguet: "We are probably the only ones who come from Russia, studied in England, and now we are creating startups in the Valley. Let's get acquainted." After discussing the outlook on life, they became partners, and Makharinsky invested $ 5,000 in TokBox.
A year later, Fage sold his stake for several million dollars. “Too many people were swimming in different directions, and at 19 I didn’t have an understanding of how to make them listen to themselves,” he explained. “I found out that democracy does not work - business needs a dictatorship.” In contrast, Maharinsky retained small stakes in YouNoodle and Quid.
Both failed to thunder, but managed to earn and learn how to make a company in a million. Aaron Sorkin has not yet written the classic "billion - that's cool", but the smell of big money was already in the air.
Electrons move faster than atoms — that’s why IT-related technologies are developing so fast: moving them is cheaper than moving atoms. "This is not my theory, but Peter Thiel, but I like it," - so Fage explains why he finally chose the Internet business.
He was 21 years old, millions were on the account, and he traveled for six months - from London to the Maldives. The euphoria grew into a depression: “You think maybe nothing else will happen in life? You wake up in an expensive hotel, drive a Ferrari and don’t understand what to do next.”
Arriving at home, Fage and Makharinsky marveled at empty markets and chose tourism - the segment grew rapidly. They were shocked by the high percentage of conservatives who purchased tickets at train stations and tours at agency offices. The disposition, according to Makharinsky, was as follows. Air services had a small margin (1-3%), and booking allows you to earn 12-15%. Booking.com had a huge share, and the second number was absent.
“The volume of US online booking is 4 times greater, and competition is 10 times, while the market is growing much slower,” Fage wondered. “In the Valley, the risks of the market and product are high, because it’s often difficult to understand if you get Snapchat or something, but no one an unnecessary product. And in Russia it’s a risk of execution. There are good developers, but no high-quality business schools. "
The decisive argument was the highest check in online booking ($ 600; in the US $ 250, in China $ 50- $ 70), as well as the conviction that "Russia is full of people who like to travel and spend money."
To build the first version, Fage and Makharinsky needed two developers, a designer, an office manager with the functions of a recruiter - they planned to raise $ 300,000 for this. Is it a little compared to the millions earned by Fage? He does not disclose how much he invested in starting a business.
Sergey Fage (left), Kirill Makharinsky
“The message for the funds is very simple - there is Russia, and this is a huge market. You don’t know anyone else, so you invest in us or you’re left behind” - sitting in the office at Trekhgornaya manufactory, Fage talks about investors, not emphasizing the simple “us "for which the whole life path and the connections of the founders worked.
The strategy of Ostrovka was to invite more advisors - investors with a small share and powerful competencies. The first business angel was Naval Ravikant, the founder of Angellist and an acquaintance of Maharinsky. He invested $ 100,000 after a half-hour conversation on Skype. At the PhoCusWright travel conference, the partners met Gregg Brockway (Hotwire) and Sam Shank (Hoteltonight) - now they are investors who once every two months share news from Brazil, China and other markets.
Another investor, Fritz Demopulus, has created Qunar, a hotel search service in China. From communication with him, it became clear how similar the patterns of behavior of Russians and Chinese are: for example, they are both afraid to leave bank card information when paying for a reservation. From domestic funds, Kite Ventures invested in Ostrovok.
The share also included manager Yuri Milner, familiar to H&F readers on the history of taking a laptop away from entrepreneur Kryuchkov, Felix Shpilman. He met Fage and Makharinsky in the early 2000s when he studied at the University of Southern California. Shpilman helped the “web gravedigger” invest in promising projects - in DST, and then in the StartFund fund.
“Everything I did in my professional life, I invested in other people's projects, and I was interested in the one in which I could take part,” said H&F Shpilman. “I wanted to work in a company that could increase capitalization by 25 50 times. "
In total, Ostrovka had three calls by investors - and in each company’s valuation grew like at an auction. In the first round, she wagged up to $ 7 million - instead of $ 300,000, a million appeared on the accounts. This was what Fage wanted: "Whenever possible, you should always attract more money on good terms."
Year after year, the Ostrovka staff doubled. We recruited developers, designers, programmers to create mobile applications, and most importantly - sales, signing hotels directly.
In 2011, rumors reached Ostrovka that Andrew Payner, the head of Booking.com’s Russian office, was leaving the company. Fage tells that he could not fall asleep and was thinking how to get an experienced manager. Sergei called Peiner several times, invited him to meetings, promised "an interesting job and decent compensation." But he was adamant, because he wanted to connect his future with a company that has real influence.
Then Fage bought Peiner a ticket to Boston and asked him to meet with investors from General Catalyst (in the portfolio of Airbnb, Kayak, CouchSurfing). Fund head Joel Cutler managed to convince the expat to join the Russians.
Milner's share was less than 5%. The collection has replenished with another famous investor
The second and third rounds were not long in coming. “We have not spent the first million, but the stock has made it possible to choose the right investors,” Makharinsky explains. $ 13.6 million fell into the Ostrovka piggy bank. The same investor was General Catalyst.
“We didn’t need these $ 13 million, we most likely needed half,” Makharinsky admits. “But with the arrival of money, it will be possible to experiment with new projects. Costs fit into $ 7.8 million, and $ 2-3 million was left in case if we don’t have time to find a new investor. "
In March 2013, an information bomb exploded: "Yuri Milner invested in a Russian company for the first time in three years. In round B, Ostrovok raised $ 25 million." Milner's share was less than 5%. The company said it was a "financial investment, not a PR." One way or another, the collection was replenished with another famous investor.
This time, Ostrovok bought the venture capitalists a more specific promise - to become the leader of Russian online booking. "A leading local company will cost $ 3-5 billion. If you build number two, it will still cost a billion dollars," says Fage.
Investors are satisfied with this logic. For example, Dmitry Alimov of Frontier Ventures believes that "investors and founders do not set the goal to achieve profitability now; often achieving short-term profit and increasing business capitalization are two opposite goals."
“These funds need to reach 25%. They invest on average between $ 15 and $ 20 million,” Makharinsky explains. “Suppose they have a $ 400 million fund — that's 25 investments. They plan for four of these 25 companies to cost more than a billion dollars. Then, very roughly speaking, they will have 25% of these companies and $ 400 million will turn into a billion. All other fund projects, at best, simply beat off their capital. "
The market reacted nervously to this race. "In 2012, we could not attract investment, because the venture capitalists in the West had the impression that the whole online travel in Russia was Ostrovok. But if it’s not going very well, then it makes no sense to invest," one of the players complained to H&F.
So how does the business of Fage and Makharinsky really feel?
If you look at the dynamics of the online booking market, it begins to seem that the religious faith that Fage and Makharinsky instill in investors will be useful to them themselves. Russians are in no hurry to book hotels through online - online sales are growing no faster than offline (see infographic). Market players should not complain about each other, but about the consumer.
Trying to change something in the minds of Russians, Ostrovok spends millions on TV commercials. The prices do not bother them: having a money pillow for experiments, they already attracted one Internet client for $ 300 (now, according to Fage, less than $ 30 and the company earns more from the user).
Looking at the capitalization of competitors in the tourism market - for example, OneTwoTrip and Oktogo - one might think that the Paypal mafia and affiliated investors overpaid. Despite the fact that the Ostrovka margin is higher, the company earns fewer giants (see infographic).
“Most of the money in the venture capital business over the past 20 years is always an investment for which we overpaid,” Fage shrugs. “Twitter rated IPO at $ 25 billion. Investors always think it's expensive. But if you do quality work as an entrepreneur, and should be. "
In recent years, the concept of "creation myth" has been relevant in the Valley: businessmen pack charisma and a biography into a beautiful story and sell it to an investor. Paphos has become an element of strategy. A prime example is Jack Dorsey’s Twitter tricks.
“Islet” played a similar debut. What is its effect? Makharinsky claims that the company will cost a billion when the proceeds exceed $ 100 million. Moreover, the plan for 2014 is $ 10 million.
“If Ostrovok can spend another 5-7 years on a marketing budget three times greater than Booking.com’s, then it has a chance to get ahead of the leader,” comments Hotels.ru partner Denis Vasiliev.
The game is dragging on, and from the moment Fage looked at online bookings in Russia, the disposition did not essentially change - the global giant dominated, and Oktogo occupied the second place, focusing on corporate sales.
Infographics and illustrations: Natalya Osipova
Cover via Shutterstock
Photos Anton Berkasov