Looking Inside Softbank’s Jewel in India: Oyo Rooms
With toxic culture and no clear path to profitability, are they on the highway to becoming WeWork?
“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. He often found himself staring at the computer all day and night to meet deadlines. As Oyo continues to grow blazingly fast, current and former workers are feeling the pressure.
Some, are simply the inherent nature of a growth-stage startup. Some, are simply criminal acts.
Yet, Oyo still claims to strictly adhere to their Code of Conduct.
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.
Last year, Bengaluru police booked Oyo founder Ritesh Agarwal and his representatives. A hotelier alleged it was a criminal breach of trust and that he was then cheated about US$149K from him.
This was not an isolated case either. A Bengaluru hotelier filed a report against Oyo as well, citing criminal conspiracy and breach of trust, alleging that Oyo was engaging in fraudulent business practices. One of them includes creating non-existent room bookings, then marketing them as no-show or cancellations.
Oyo also frequently withheld payments to hotel owners. In some cases, it was to squeeze hotel owners into renegotiating ‘unprofitable’ contracts. In other cases, Oyo wanted to save money, figuring that most owners would not press for the 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, employees were under the pressure to list more rooms. Out of desperation, they even brought hotels that lacked air-conditioning, water heaters or electricity onto the platform. These unavailable properties were inserted completely with fake photographs.
It’s all one giant shell game, despite Agarwal claiming to be devoid of “corporate governance issues”.
Today, Oyo is facing a series of regulatory investigations and legal run-ins, one of which is their prima facie case with the Competition Commission of India. Across the country, hoteliers are dropping off from the platform in the hundreds. Hotel and restaurant associations in Gujarat, Mumbai, Delhi, and other major Indian 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 him 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 current and former employees.
Or, you could listen to 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 falling apart. Cracks in the business model and depleting war chests are quickly making it look like Softbank portfolio company (and counterpart) WeWork. Yet, Agarwal is still optimistic about his company, even though he claimed to not have guidance on “when [they] will be profitable”.
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
“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. This is especially so when you look at the burgeoning losses and questionable practices.
Despite so, Agarwal claims that it is “only a matter of time before getting [to profitability]”.
A valuation report filed by the company with the Registrar of Companies showed something entirely different: Oyo’s operating expenses ballooned by 390%, resulting in a $331 million net loss.
Besides hemorrhaging in their home ground 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. Oyo heavily denies this, despite financial reports showing that China alone accounted for about 40% of their losses in 2019.
Softbank’s Shakiest Bet
No matter how you look at it, Oyo is burning cash faster than they can produce them. You may marvel at Oyo’s meteoric expansion but 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.
Having a huge war chest meant capital acquisition. Oyo acquired @Leisure Group for $415 million and Las Vegas Hooters for $135 million. They also made their foray into co-working, homes, resorts, vacation rentals, weddings, and even cloud kitchens.
Unfortunately, with Oyo’s fervent product diversification, it seems like the capital moat they had is gradually drying up. All these ancillary businesses are adding pressure to the already questionable business model.
That’s unfortunate news for Softbank. Softbank CEO Masayoshi Son recently told Oyo and other loss-making Indian startups in a private gathering to get profitable before IPO. There’s a hard deadline of 2022–2023 for an IPO in the United States, and the pressure is mounting by the day.
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 their 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. Is it a show of faith in the business model? Is it the founder’s folly?
Two years later, Oyo’s potential success will leave the world marveling at Agarwal’s stroke of investment genius. For now, analysts are shaking their heads.
After WeWork’s spectacular implosion at the end of 2019, we’re now looking at Oyo possibly experiencing the same.
To enjoy huge growth, they had to undercut themselves to get more hoteliers on the platform. Yet, with profitability in mind, they had to raise prices and risk hotelier relationships.
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 funding, entrepreneurs 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.
Softbank is still unfazed, as the Japanese conglomerate is still blazing forward with their “gutsy” investment choices, despite their new tech fund falling shy of their target. They are 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 for losing it in the next.