HotelTonight Is Having ‘Difficult Discussions’ With Hotels About Margins

After months of downplaying its problems despite carrying out layoffs in November, HotelTonight co-founder and CEO Sam Shank now admits the company was overly focused on growth at the expense of profitability and is currently conducting “difficult discussions” with hotels about their margins.

In a Re/code podcast with Kara Swisher published February 29, Shank said: “We started moving toward improving our unit economics but we didn’t move aggressively enough on reducing credits and coupons and discounting, and talking to suppliers about their margins that we are paying, about just having those difficult discussions.”

“We are having those now,” Shank said. “Those discussions are going well. There is still a very, very strong partnership with our suppliers and with our hotels and our customers. It’s never been better. But we didn’t move as quickly as I think we should have on that.”

Arguing that HotelTonight doesn’t need to raise additional venture capital funds beyond the $80 million it already took in, Shank said the fundraising climate has changed because of uncertainties about the stock market, economic growth in Asia, the U.S. presidential election, and other factors.

Give Up A Lot If You Raise Money

“When it shifts you go from a company that can raise money at any terms to one that has to give up a lot to raise money,” Shank told Re/code. “We will be in a position where we can choose to raise money or not by this summer.”

Shank told Swisher that HotelTonight, which offers same-day hotel bookings and stays up to one week ahead through its apps and on the mobile Web, shifted its focus toward obtaining profitability and more favorable unit economics because “we didn’t want necessarily to put the risk for the employees, even for the existing investors into we have to raise the next round.”

An extensive round of layoffs at the startup, which was founded in 2010, took place in November.

The HotelTonight CEO said his company is currently “near profitability” and would be profitable “in the next few quarters, if not the next few months.”

Concessions From Hotel Partners?

On travel industry entrepreneur, who is not a competitor to HotelTonight, doubts that HotelTonight will be able to prod significant margin concessions from hoteliers although this industry veteran does believe that HotelTonight can get to profitability.

“The hotel space is a ‘perfect market,’and there are lots of alternatives for hoteliers,” the entrepreneur says. “I don’t believe that they have much room to negotiate up. If they were pricing below market, and getting better inventory access in exchange, then I’d expect to see access drop as he raises margins. Margins isn’t where they win the game. It’s growth. And if he has decent growth at a low cost of customer acquisition, then they’ll be in good shape.

“The problem is and always has been more macro: They’re going after a sliver of the market and their valuation doesn’t fit that sliver. And there’s zero way to compete head to head with Expedia and Priceline. I think he’ll get to profitability, then he’ll have a long, slow/reasonable climb into his valuation. But if he has to raise, even if profitable, I’ll bet that the valuation drops. Their upside is capped, in my opinion.”

What prompted the new strategy?

“So we had people saying this two years ago,” Shank told Re/code. “That wasn’t the right time to listen to them. We had people that were saying grow, grow, grow even until the last minute. So it is really hard to ultimately make the call based on external information. I think for me it was looking at what are the goals, where is this modeling out at and sitting down with our great CFO and going over it and then seeing what we needed to do to get to sustainability.”

Credible Performance?

As a private company it is difficult to verify whether Shank’s reporting about the company’s metrics is on the mark or mere public relations spin.

But there is reason for skepticism.

Consider that in a Skift interview in August, when we raised the question whether it was crisis time for HotelTonight, Shank said the company was on track to post 100 percent gross bookings growth in 2015 versus 2014.

Yet despite conducting layoffs three months later in November 2015 and now acknowledging that HotelTonight is downplaying growth somewhat in order to focus on unit economics, Shank told Re/code yesterday that HotelTonight’s revenue leapfrogged 200 percent year-over year in January 2015.

How could HotelTonight have grown its revenue 200 percent in January while deciding to slow down and focus on profitability?

If it indeed occurred, then that growth spike would be a really neat trick for a company that pivoted to focus on unit economics while ratcheting down its growth and supporting itself with 20 percent fewer staff than it had in November.

When Swisher asked Shank if HotelTonight were a unicorn and what the company’s valuation is, Shank replied: “We are sub-unicorn and we can talk about that but [we are] happy with where we are.”