Is Oyo the Next WeWork?

Unprofitable and aggressive, will Softbank-backed Indian hotel chain implode as WeWork did?

When you look at a building with a red background and thick typography spelling “OYO”, you are also looking at a company that is in the red as bright as their company color.

“…do we have guidance by when we will be profitable? We don’t really.”

Unsurprisingly, that was what Oyo-founder and CEO Ritesh Agarwal said in an interview with Livemint about his sprawling hospitality unicorn—or is it? Oyo has ventured south from its original business idea, from being a budget-chain to making investments across hotels, homes, resorts, vacation rentals, weddings, cloud kitchens, and even co-working.

According to Agarwal, Oyo is “successful because of its business model”: which is kind of a stretch, much like Oyo’s fervent product diversification and capital moat. With burgeoning losses, mounting concerns over profitability with none in sight, it is no small wonder why one could draw similarities to the embattled co-working space giant.

Yet, even with a six-fold rise in losses, Oyo is insisting that they are unlike their Softbank-backed counterpart, WeWork. Press release after press release, Oyo claimed that profitability is in sight, specifically after 2022. Oyo’s losses are not even mainly due to breakneck expansion speeds; the budget hotel chain is making losses even at their Indian home ground.

To put it to perspective, if you are staying in an Oyo-branded place in the United Kingdom, Brazil, Mexico, Indonesia, Thailand, China, and the United States, you are staying in a room that does not make Oyo profit—China alone accounts for about 40% of Oyo’s company-wide losses.

With a valuation of US$10 billion after Agarwal’s consolidation of ownership, it is a company that drew scrutiny from analysts, investors and the public alike: is this Indian startup going to end up looking like their Softbank counterparts or are their unit economics making sense?

With barely a billion in revenue, Oyo is not stopping its billion-dollar expenditure quarter on quarter.

That makes it easy to draw parallels between Oyo and WeWork. One, a questionable business model. Two, Oyo being in the red with projections until 2023. Three, a sky-high private valuation propped up by Softbank’s maneuvers. The common DNA between the two can make many raise similar questions, especially on whether Oyo will eventually suffer WeWork’s downfall.

What The F — Is Oyo About?

Oyo made sense in the beginning. Budget, low-end hotels posed danger to local and foreign travelers: under the branding of a common reservation platform, together with minimum quality standards that Oyo brought in, the appeal is there for travelers.

However, Oyo did not plant themselves there.

The platform underwent a metamorphosis when Oyo began investing its own money to the hotels in its network. To ensure that they met uniform minimum standards, Oyo burnt cash for physical improvements.

They went even further and started leasing rooms from hoteliers, promising to pay them for the room regardless of whether it is booked or not.

If Oyo did just that, they would have at least stayed in the lodging industry. The problem was that Oyo was burning money while abandoning their original business model.

WeWork has shed their side businesses to refocus on its core, which comes as an unsurprising business move. Oyo is the opposite: like a true upstart, it is venturing headfirst into different markets like cloud kitchens and wedding planning. Acquiring shared workspace firm Innov8 was a US$28 million deal, putting Oyo as a direct competitor to the company that botched that their IPO.

As then-chief executive Aditya Ghosh puts it, Oyo finds its core area when there is an intersection of three things: real estate, a large number of consumers, and technology. In a discussion comparing Oyo and other Asian unicorns like Grab and Gojek, Oyo found it difficult to succinctly describe its business.

Is it a super app? No, for it did not lock consumers into one single online window. Rather than uniting all the brands under a single application, Oyo’s businesses seem to operate separately, coming together like an awkward online-offline conglomerate.

Then, is it an accommodation and hospitality chain? Not quite. Though Oyo did acquire @Leisure Group for $415 million and make a $135 million bet on Las Vegas Hooters, Oyo has made other acquisitions in the past as well. Saying that it is an accommodation chain would also effectively ignore Oyo’s other — albeit loss-making — bets.

Even the hospitality bets came off as uncertain prospects: these are businesses that have no roots in the company’s original business model or expertise, which looks like a random accumulation of real estate investments rather than a strategic acquisition move.

Indeed, Oyo is expanding everywhere fast, not just in terms of location but also in the industry sector. Unfortunately, that is typically the surefire way for more hemorrhage.

Oyo’s Homeground & Overseas Disputes

Any company as big as the third-largest hotel chain in the world would have its own fair share of commercial disputes, but Oyo’s disputes were usually centered around money, fraud and contractual obligations.

Hotel and restaurant associations in Gujarat, Mumbai, Delhi, and other major India cities are giving Oyo a giant finger after “[sensing Oyo’s] monopolistic and arm-twisting tactic” which were a result of aggregator conglomerates. Initially, OYO provided deep discounts to attract consumers. At the back end, they have to subsidize those discounts or provide guaranteed revenue to hotel partners.

That was clearly not the case, as Oyo is alleged to have told hotels to change the agreements or forfeit payment. In response, hotels are choosing to end their agreements which number at the hundreds, according to industry associations.

Oyo will face more legal struggles as more hoteliers allege that the company has been fraudulent and using unfair business practices. Protests have now erupted around the country against the platform, with owners upset about Oyo’s business dealings:

• Oyo gave no minimum guarantee. Initially, Oyo offered to pay for rooms even if it was unbooked for the night, which got many hotels on the platform at lightning speed. Without the minimum guarantee, hoteliers are now facing their biggest pain point. For small budget hotels, minimum guarantees are great for balance sheets. Problem was, protestors saw no such thing. Rather, Oyo deducted sums from their payments to hoteliers, citing penalties as a reason. At times, due to Oyo’s accounting and auditing process, some hotels find themselves owing money to Oyo at the end of the month.
• Oyo charged hidden fees. Bookings done outside of its platform? Additional charge. If there was a complaint about the hotel? Additional charge. Oyo-conducted audit? Charge. Not hitting the minimum number of bookings for the minimum guarantee threshold? Hoteliers allege the Oyo will apply arbitrary charges to bring the fee down—typically at large sums. An example given was that a payment of US$3.5K will be reduced to a sum of US$1K.

Margins are shrinking for hoteliers and these unhappy hotel owners are already taking legal action. A hotelier complaint led to Bengaluru police booking Agarwal and two of his representatives under a criminal breach of trust, as the hotelier alleged that the trio cheated him of about US$140K.

Just last month, a Bengaluru hotelier filed a report against Agarwal and six other Oyo executives as well, citing criminal conspiracy, abetment, cheating and criminal breach of trust. The hotelier claimed that Oyo created multiple non-existent room bookings, which is then marked under no-show or cancellations.

By giving all the revenue management powers to Oyo, hotel owners are powerless in the face of Softbank money.

“[Oyo’s property management system] is messed up,” said Sachin Patel, the owner of Oyo Hotel New Philadelphia, Ohio. Revenue guarantees are not seen and Oyo slashed the price of rooms in the hotel by half.

The general manager at Oyo Hotel JFK Airport said the same of Oyo’s system, claiming that it is the “worst system around”. Another owner in Texas said that Oyo even made the hotel charge lower than their costs.

Artificially Ballooned Valuations

A year ago, Oyo was worth only US$5 billion. This doubled and ballooned to $10 billion, involving loans backed by pledged shares.

Agarwal himself took out bank loans, backed by his Oyo shares, amounting to US$2 billion from the likes of Mizuo Financial Group and Nomura Holdings. 65% of it went to buying back shares from venture capital shareholders like Lightspeed Capital at a US$10 billion valuation, with rest in fresh equity.

Many investors are wondering: why put more skin in the game instead of getting an external institution?

In the future, there is a potential for them to prove that these are strokes of investment genius. Pledging shares to buy more shares at ethereal valuations will always drive private valuations up—the only way to test their assumptions is to go public. For now, the company has no plans to list itself.

Here’s my take. Undoubtedly, Oyo is under fire from both the inside and outside: balance sheets and hoteliers are simply not cooperating with each other. Startups are always soaring until regulators step in, and today, Oyo is facing a prima facie case by the Competition Commission of India. Monopolistic behavior and alleged predatory business practices have turned many hoteliers away—should Oyo not address these concerns aptly, they’ll see more crime, complaints, and protests.

Regardless of how big your capital moat can be, losing one of your consumer brackets will tear any company apart. For Oyo, that’s the hoteliers. What initially was an amicable relationship turned sour. When hoteliers leave, listings leave the platform.

Let’s not forget that though Oyo is compared to WeWork, Oyo does not have the money that WeWork had.

Unlike legacy hotel chains like Marriott that is earning billions, Oyo only has a paltry $900 million to offer, despite being much bigger (according to Oyo, with 1.2 million rooms, they stand at being the third-largest hotel chain in the world). WeWork’s debacle has caused an uproar in the venture capital and startup world, as the pendulum swings back from founder-led speedboats to slow-moving profit battleships.

Unfortunately, for the startups that are being listed on the market like Peloton, Uber, and Slack, there is no turning back unless they have hundreds of billions to go private again. For Oyo, Agarwal needs to look at WeWork as a lesson to learn from, no matter what Softbank says. With a 30% ownership stake today, Agarwal has much to lose should Oyo’s valuation turn out to be artificial.

Oyo needs to quickly find out the road to profitability in both India and China. The company also needs to dump other lagging business to go faster with its original business idea. It’s great to amass real estate investment which WeWork did not, but they must also be strategic: how do they contribute to Oyo’s mission and how can they be integrated together smoothly?

The most critical problem of them all is infrastructure. For a Softbank-funded startup with billions in the bank, Oyo’s software seems to crash more than autonomous vehicles during a test. Broken software spoils customer experience which includes both the hoteliers and the guests. To deliver on their promises, Oyo needs to double down on tech spending. Rather than acquiring a data science firm, the company should dump their millions in hiring tech talents.

At US$10 billion, Oyo is officially worth more than WeWork. Both companies are massively unprofitable—at the very least, Agarwal claims to be devoid of corporate governance issues.

One thing’s for sure, as the second most valuable India startup, Oyo is poised to disrupt a slow-moving, legacy-dominated hotel industry. The problem is, if Oyo does not take a step back, it will join WeWork in the history books under the biggest startup failures.