OYO Rooms is Going to Be India's WeWork: A Case Studyby@ndisisnd
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OYO Rooms is Going to Be India's WeWork: A Case Study

by Andy ChanJanuary 7th, 2020
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Oyo Rooms was rife with non-compliant, fraudulent and predatory business practices. Oyo often listed thousands of rooms from unlicensed hotels and guesthouses. The company also withheld payments from hotel owners into renegotiating contracts that it deemed unprofitable. Oyo is now facing a series of regulatory investigations and legal run-ins, as evidenced by their prima facie case with the Competition Commission of India. Hoteliers are dropping off from the platform in the hundred. Hotel and restaurant associations in Gujarat, Mumbai, and other major India cities are also boycotting their booking portal.
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Another Softbank Portfolio Company That Has Toxic Culture and No Clear Path to Profitability

“The culture is really very toxic.”

Those were the words of Mohammad Jahanzeb Gul, who supervised 23 Oyo properties for nine months since January 2019. In a startup growing so blazingly fast even after almost a decade since its founding, Jahanzeb often found himself staring at the computer all day and night to meet deadlines.

In this growth stage, current and former works are feeling the increasing pressure, which brought about a slew of toxicity.
Some, are simply the inherent nature of a growth-stage startup. Some, are simply criminal acts.

Regardless of how Oyo spins their press release to claim that they are ensuring strict adherence to their Code of Conduct, it was clear that those mandates were either riddled with wrongdoings or lacking a moral compass.

To some, it contributed to their decision to leave.

“There’s something called integrity,” said Saurabh Mukhopadhyay in a New York Times article, “I can’t compromise on that.”

It is clear why Mukhopadhyay would resign from the company: Oyo was rife with non-compliant, fraudulent and predatory business practices.

Just last year, Oyo founder Ritesh Agarwal and his representatives were booked by Bengaluru police under a criminal breach of trust, after a hotelier alleged that the trio cheated him of about US$149K.

In another report, a Bengaluru hotelier cited criminal conspiracy, abetment and criminal breach of trust. He claimed that Oyo frequently created non-existent room bookings, then marking them as no-show or cancellations, just to give the illusion that the hotel is being booked constantly.

The company also frequently withheld payments from hotel owners: in some cases, they wanted to squeeze hotel owners into renegotiating contracts that it deemed unprofitable. In other cases, the company wanted to save money, figuring that most owners would not press for full payment.

“If 1,000 people shout, we will pay 200.”

That also contributed to Saurabh Sharma’s decision to leave, who was the operations manager from 2014 to 2018.

“If 1,000 people shout, we will pay 200,” as some Oyo managers told Sharma.

The fraudulent, predatory practices don’t just stop there. According to The New York Times, Oyo often listed thousands of rooms from unlicensed hotels and guesthouses.

According to Mukhopadhyay, under the pressure to add new rooms, employees even brought hotels that lacked air-conditioning, water heaters or electricity onto the platform. These unavailable properties were inserted complete with fake photographs.

It’s all one giant shell game, despite Agarwal claiming to be devoid of “corporate governance issues”.

As such, Oyo is now facing a series of regulatory investigations and legal run-ins, as evidenced by their prima facie case with the Competition Commission of India.

Across the country, hoteliers are dropping off from the platform in the hundred. Hotel and restaurant associations in Gujarat, Mumbai, Delhi, and other major India cities are also boycotting their booking portal.

To top it off, Agarwal himself is being sued by hoteliers too. Betz Fernandez, the owner of Bengaluru-based Roxel Inn, claimed that Oyo has not paid rent for the last five months.

Yet, to Oyo, they would rather placate the authorities by giving the police and other government officials free rooms on request, according to a WhatsApp group in which The Times reviewed.

This was despite Aditya Ghosh, former Oyo CEO and current board member, claiming that they “do not encourage or involve [themselves] in any kind of bribery or graft.”

With all the contradictory statements and legal disputes, Oyo is now, very obviously, falling apart. Cracks in the business model and depleting war chests are quickly making it look like Softbank portfolio company (and counterpart) WeWork.

Agarwal may be optimistic about his company, even though he claimed to not have guidance on “when [they] will be profitable”. Unfortunately, the reality is that WeWork’s troubles have quickly spiraled out of control, from bleeding billions per year down to the smallest of things.

Oyo is looking like they’re on the highway to WeWork-land and they have broken the speed limits a long time ago.

Yet Another Bubble Priming to Pop

It’s a bubble that will burst”—a quote by the aforementioned Oyo operations manager in this story—seems less like a prophecy and more of a fact at this point when you look at the burgeoning losses and questionable financial practices.

Despite so, Agarwal claims that it is “only a matter of time before getting [to profitability]”.

valuation report filed by the company with the Registrar of Companies showed something entirely different, as Oyo’s operating expenses ballooned by 390%, resulting in a $331 million net loss.

Besides hemorrhaging in their homeground India, efforts to expand overseas have also flopped. In Japan, their “Project Yukichi” code-named sales initiative failed to reach ambitious goals. Yahoo Japan even exited the joint venture between them and Oyo December last year.

Ambitions in China are also marred as Oyo prepares to layoff at least half of its China team, according to China news site 36Kr, to which Oyo heavily denies. Yet, China alone accounted for about 40% of Oyo’s company-wide losses in 2019.

Softbank’s Shakiest Bet

No matter how you look at it, Oyo is burning cash faster than they can produce them. While observers may marvel at Oyo’s meteoric expansion, the unfettered growth came at a heavy price. As the third-largest hotel chain in the world, Oyo has transformed from a lodging startup to a terribly pieced conglomerate.

Despite mounting losses, Oyo still managed to acquire @Leisure Group for $415 million and Las Vegas Hooters for $135 million. They also made their foray into co-workinghomesresortsvacation rentalsweddings, and even cloud kitchens.

With Agarwal’s fervent product diversification, it seems like the capital moat they had is gradually drying up.

That’s unfortunate news, as Masayoshi Son recently told Oyo and other loss-making Indian startups in a private gathering: get profitable before IPO, with a hard deadline of 2022–2023 for an IPO in the United States.

If Oyo were to survive till their IPO and actually make their public debut unlike embattled co-working giant WeWork, what kind of multiple would they have? Unlike most startups, Oyo has seemingly inflated its valuation artificially they raised money through loans backed by pledged shares.

After taking out bank loans pledged by his stake in Oyo, Argawal bought back shares worth $1.5 billion from venture capital investors Sequoia Capital India and Lightspeed Venture Partners. A consortium of Japanese financial groups including Nomura and Mizuho helped to finance Agarwal’s purchase.

It’s an unusual transaction as Argawal puts more skin in the game—a show of faith in the business model by giving the company more resources to grow with all the risk shouldered by the founder himself.

After WeWork’s spectacular implosion at the end of 2019, we’re now looking at Oyo potentially experiencing the same.

Oyo previously enjoyed huge growth as they undercut themselves to get more hoteliers on the platform, yet, with profitability in mind, they would even withhold payments just to save money.

Public market disappointments like Uber, Lyft, and Peloton have also shifted the needle in the startup scene. Coupled with a tepid global economic outlook and tightened venture capital fundingentrepreneurs now need to focus on profits more than anything.

As such, Softbank’s bet on Oyo seems to be one of the most uncertain in their portfolio. However, the Japanese conglomerate is still blazing forward with their “gutsy” investment choices, despite their new tech fund falling shy of their target, according to the Telegraph.

Softbank is still dishing out big checks, according to Pitchbook, with about 85% of the Vision Fund being deployed in unique deals.

With an operating loss of $8.9 billion in the fund, Softbank needs more financial commitments to keep its investment strategy going.

Unfortunately, the likes of Microsoft, Amazon, and Foxconn are not able to give them Vision Fund 2; Softbank has only announced Kazakhstan’s sovereign wealth fund in the mix, with no Saudi Arabian and Abu Dhabi money in sight.

Rather than claim that Oyo’s financial sheets will sort themselves out in time, it would be more realistic to expect their downfall.

Oyo needs to shave off their loss-making ancillary business as soon as possible, double down on the regions most likely to make a profit in the short term, then fix their culture issues.

Regardless, turning their circumstances around is going to be extremely tough. Despite having more customers check in to Oyo, more hoteliers are checking out, joining other platforms or going independent.

In a battle for market supremacy, winning that battle in the first decade may prove to be Oyo’s reason to losing it in the next decade.