This post is the second part of my earlier question about Oyo Rooms - that post evoked a number of reactions with dozens of hotel owners, former Oyo employees and partners writing in to share their own experiences with Oyo. While these reactions makes for illuminating reading and it is tempting to use the information to corroborate my earlier points, it would not be fair on my part to use any of this in a public post as these folks shared their reactions in private and I have no independent means to verify the rather-shocking claims made in some of those private messages (Quite frankly, I am actually hoping that at least some of these claims are not true - the wanton egregiousness is beyond appalling).
But notably there was one public reaction - from Ritesh, the CEO of Oyo Rooms, himself.
Sadly, Ritesh didn't answer any of the questions raised in my previous post - providing data would have definitively answered the doubts and questions posed. Instead the response resorts to righteous indignation with Ritesh writing "when someone questions our intent and integrity, it infuriates us". I found this reaction a bit surprising simply because it is not like this is the first instance of someone asking tough questions of Ritesh. There is already a long list of former partners, vendors, employees and even mainstream media journalists who have accused Ritesh and co of far worse.
Be that as it may, since Ritesh has accused the post of containing "half-baked theories and insufficient data", I feel beholden to respond to his claims.
"We have always seen ourselves as a hotel chain" - Ritesh
I guess this harks back to my point about Oyo being a hotel aggregator and service provider rather than a hotel chain in any sense of the term. Now that Ritesh has reiterated this claim, I guess the simplest way to resolve it is by letting Ritesh answer himself.
How does one do this?
Simple. By seeing the filings that Ritesh and co have made to RoC and contrast that to his public pronouncements.
So do these filings say that Oyo Rooms is a hotel chain?
See for yourself in Oyo's latest filing below.
The principal (and only) business activity of the company is providing booking services related to tourism - specifically functioning as a travel agent.
Still not convinced?
Then take a look at its latest financial statement where the only items listed as operations is "sales of services", nothing related to hotels in any form or manner.
If you need even more evidence, take a look at the list of companies that Oyo considers as competition - do you spot any hotel chains here?
So why exactly is Ritesh so adamant on trying to now portray Oyo as a hotel chain when it is nothing of the sort and misrepresenting this to all and sundry including the Prime Minister of the country?
"A business that’s growing month on month with positive take rates and a clear path to profitability"
If Oyo is indeed doing as well as Ritesh is claiming, then the simplest way to settle the questions posed would have been to simply provide the numbers. In fact, my original grouse was that instead of providing meaningful metrics such as revenue and profit, Oyo was tom-toming fuzzy metrics like "booked nights" and "used nights" - metrics which, as I had alluded to earlier, are of the sort that can not only be gamed but stage-managed by the company itself to show any type of growth it wants to.
Now that Ritesh has touched upon this topic without actually providing any actual numbers, let us ourselves attempt a small exercise to show how the metrics they report are largely meaningless and underwhelming.
So, as per SoftBank's quarterly report, Oyo saw a 15X YoY jump from Q1, 2015 to Q1, 2016 in "daily booked room nights".
Now if this metric was meaningful, the growth would correlate to a meaningful metric like revenue. Let's take a look at Oyo's FY 2015 financial results.
For the full year, Oyo reported a sales turnover of Rs. 1.21 crores. Let's assume that as much as a third of this was for the last quarter (Q1, 2015 in SoftBank's terminology - the starting point of the growth report) - this sales turnover of Rs. 40 lakhs (1.2 crores divided by 3) is not Oyo's revenue, it is more like their GMV as a big chunk of this needs to paid back to the hotels. Assuming that Oyo has a generous take rate (commission) of 25%, this means that in Q1 2015, Oyo made Rs. 10 lakhs in revenue.
How much is 15X of Rs. 10 lakhs - a paltry sum of Rs. 1.5 cr.
Which translates to just a revenue Rs. 50 lakhs per month.
Now you can judge if a company with a monthly revenue of Rs. 50 lakhs for a company with 2,200 employees and hundreds of millions of funding is meaningful or not.
And if the growth in absolute terms is anything to write home about.
"With more than 5,700 OYOs on our network now, we have lost fewer than 2% hotels ever"
Now having a hotel chain of 5,700 hotels would indeed be a laudable achievement. But it is altogether another thing to list 5,700 hotels on a platform and claim that as a significant achievement.
Contrast this figure to comparable figures of other aggregators such as MakeMyTrip and Goibibo, who each has well over 20,000 hotels, and the hollowness of Oyo's claim is established.
It might have been creditable if the hotels listed on Oyo were exclusive to their platform but a cursory search shows that these hotels are hardly proprietary to Oyo - they are listed on all the OTAs.
For instance, here is an Oyo hotel in Bangalore - the same hotel can be booked on MakeMyTrip, Cleartrip and Goibibo.
Here is another example of an Oyo hotel listed on MakeMyTrip and Goibibo.
Also, keep in mind that there is absolutely zero incentive for a hotel to "leave" the Oyo network - the hotel probably got paid by Oyo for using their brand and in addition any "upgradation" expenses were at least partially underwritten by Oyo. And if Oyo is an additional free customer acquisition channel, not to mention an additional source of income (through minimum guarantees or even just ex post facto), why would the hotel want to say no to an option that costs them nothing?
Ritesh also claims that Oyo is revolutionary and has a game-changing app. Bombast apart, it is difficult to see how different this is to what say MakeMyTrip is providing with Value+ or Goibibo's mobile app.
Now that we have hopefully addressed Ritesh's points, let us go back to the original narrative and examine why Oyo is possibly the startup equivalent of a Ponzi scheme.
The answer, unfortunately, seem to lie in the old chestnut that tops the list of usual suspects.
And unfortunately, the rot seems to stem from a lot deeper than the facile VC-subsidy/discount-lead growth motif.
INTERPRETER OF MALADIES - Oyo's chimerical value proposition
Oyo's raison d'être is to add standardization and predictability to budget hotels in India.
Is lack of standardization and unpredictability a problem with budget hotels?
Sure but is it a VC-fundable business?
Like what some of Oyo's competitors are doing, the right way to solve these problems is by taking operational control or responsibility for these budget hotels and fix these gaps oneself.
The problem with this approach is that it is an arduous and painstaking journey - it involves convincing the hotel owner to give up his entire inventory to the agency and handing over control in total. Once the agency is in control, it needs to staff the hotel with professional employees and build the business and the brand in a measured and regimented manner.
So building a business this way takes time and you have to perforce grow linearly.
Neither of which are attributes that VCs particularly fancy.
So how does Oyo address these bottlenecks? Instead of taking responsibility of the entire hotel, they commit to only a partial inventory. Secondly, they adopt a light-touch method where the day-to-day operational control of the hotel/rooms is still with the hotel owners and Oyo itself doesn't play any role in this beyond the initial empanelment and occasional checks.
While this model ostensibly gives Oyo a template to grow quickly, in action it translates to a "worst of both worlds" scenario.
Hotel owners see Oyo as a free ride - giving them free money for inventory that may not even get utilized and for whom, they in return need to do pretty much nothing - which means it is essentially costless for the hotel owners.
Also the hotel owners know that Oyo's imperative is growth, so they are incented to play along with double counting, circular accounting and other unhealthy stratagems that are again costless to the owners themselves. Not only is there zero loyalty from the hotel owners towards Oyo, Oyo themselves have little network effects in play on the supply side that helps them to build any kind of moat to speak of.
On the other hand, customers are often dismayed to see that they either end up with rooms whose facilities are nothing close to what Oyo has promised (as the burden of maintaining those facilities is upon the hotel owners who may just chose to turn a blind eye to quality issues) or end up in situations where the rooms booked through Oyo are not even available to them once they turn up at the hotel (as the partial inventory model makes it extremely easy to end up with double bookings for the same room).
Which means that Oyo is not able to deliver either of the benefits it touts - standardization and predictability.
What's more, Oyo ends up functioning as just a glorified hotel aggregator, which puts it in direct competition with formidable OTA competitors like MakeMyTrip and Goibibo with precious little to show as a competitive advantage.
So not only is Oyo's value proposition largely chimerical, it is also rapidly shrinking even as its footprint ostensibly grows when it adds new hotels to its network.
Beyond this broad narrative, let's explore specific instances where a ponzi seems to manifest itself.
RITESH AND FRIENDS
Let's take a short detour and read this evocative story of how a VC found a startup to back - touchingly, the VC avers that the startup is "like a first baby to me. It is special".
The VC not only found the deal, he socialized it within his firm and championed it until it got funded.
Now, what if I told you that the VC subsequently joined that very startup as an employee in the cushiest position imaginable - Head of Strategy?
Surely, no professional VC or self-respecting founder would ever do anything like this - not because it guarantees the presence of some unholy quid pro quo but simply because it would violate every basic tenet of governance. In all my years as a founder, I have never heard of a single deal anywhere in the world where a VC who sourced a deal and socialized it within his firm eventually joined it as an employee in a startup role for which he has no unique skills or prior experience.
But that is exactly what happened in the case of Oyo - http://economictimes.indiatimes.com/small-biz/startups/oyo-rooms-hires-former-venture-capital-investor-maninder-gulati-as-head-of-strategy-corporate-development/articleshow/49488045.cms - while it is moot if this amounts to cronyism, there is no doubt that it sends out a very poor signal as far as corporate governance goes and fails the simplest of "smell tests". I wonder how the world's marquee investors, Sequoia Capital and SoftBank, would allow, much less condone, such a thing.
Would someone be wrong to consider this as a "governance/hiring ponzi"?
REQUIEM FOR A DREAM
So how much funding has Oyo raised in total?
Crunchbase says $225m with the last round of $100m coming in as recently as April 2016. But notably, only one Indian newspaper seemed to cover this last round. Which seems a bit bizarre, right? After all, we live in a land where every bit of funding news is given hagiographic media coverage. So why did only one newspaper cover such a significant fund-raise?
According to some journalist friends, this round of $100m never happened. Oyo's PR department sent out an obscurely-worded statement unofficially that any experienced journalist could see through - but looks like some unfortunate intern at Hindustan Times fell for the trap and published this planted canard as news.
Why would Oyo do such a thing?
For one thing, it scares off other VCs exploring investing in any of Oyo's competitors. For another, it feeds into the pattern of pumping up hype around their own company in its incessant march towards becoming a "Unicorn".
Would someone be wrong to consider this as a "PR ponzi"?
AND THEN THERE WERE NONE
Another manifestation of overfunding is what can be considered as the Highlander Imperative - every startup in the game tries to grow itself and simultaneously starve the competition until the number of players left standing is just one.
This creates a bizarre competitive situation where the players are basically numb to economics and are incented to resort to irrational tactics.
One such example is Oyo's now-on/now-off acquisition of its erstwhile competitor, Zo Rooms.
Irrespective of what happens to Oyo itself, its acquisition of Zo will go down in startup history as the epitome of the theater of the absurd.
We have a situation here where SoftBank, Oyo's largest investor, makes a public declaration in its own earnings report that Oyo has indeed acquired Zo.
But news then emerges that the acquisition hasn't really happened and is still work-in-progress.
Which would have somewhat understandable if not for the fact that Zo no longer exists - its founders have moved on, the hotels in its network have been transferred to Oyo's roster (ironic that it only takes only click of a button to move the entire IP of a company from its own database to another and then be left with nothing).
Never in the history of startup acquisitions have we witnessed a parallel to this where a startup has been acquired and yet not been acquired at the same time. The startup equivalent of Schrödinger's cat?
Zo's own foibles is a case study in itself but the takeaway here is that it requires a special level of incompetence to end up in a situation like this.
Would someone be wrong to consider this as an "acquisition ponzi"?
THE UNBEARABLE LIGHTNESS OF BEING....Nikesh Arora
A little while back, the Times of India named Nikesh Arora of SoftBank "Investor of the year" for 2015. “Arora emerged as a clear winner in a year when the Japanese internet and telecoms giant doubled down on the Indian market with fresh investments in Oyo and Grofers,” the newspaper said (incidentally, Oyo was named as "startup of the year" in the same report).
Glossing over the fact that celebrating someone as investor of the year for making an investment rather than making an exit seems rather misplaced, another subtle point seems to have been completely missed.
Nikesh Arora is not a VC. He has never been a VC.
But he is enormously powerful - as the President of SoftBank, he controls vast funds that can make or break fortunes.
One of the startups who received a benediction from Nikesh Arora was Oyo (interesting enough, Housing was another).
SoftBank made a $60m investment as part of Oyo's $100m Series C. This investment gave SoftBank 15% of the company - this essentially means that Oyo's valuation post this round was as much as $660m (ignoring the higher-order adjustments) - nearly equal to the valuation of MakeMyTrip.
At that point of time, Oyo's revenues were probably less than $100k.
You might be tempted to think this was irrational but you would be mistaken.
From Nikesh's perspective, this made ample sense. Pick who you believe to be an early winner in what you perceive to be a large and growing market and back them with enough funds to take them through a lifetime. After all, didn't this model work when SoftBank invested in Alibaba?
Also, unlike other "normal" VCs, Nikesh had no pressure to provide a time-bound return in the form of an exit - SoftBank can play the long game for as long as it wants to.
Unfortunately, Oyo is not Alibaba and India is not China.
While Nikesh might have been justified in making large early bets that fits their investing thesis, I am not sure if he thought through the scenarios on how this funding would impact the landscape as a whole.
As Housing has already shown and as Oyo is fairly likely to show soon, neither the startup nor the ecosystem can prematurely digest such large sums of money. Except for the rarest of cases, throwing large sums of money at a market in India doesn't accelerate the market development or growth - it only leads to perverse incentives, irrational imperatives and generally bad behaviour.
It leads to a scenario where the tail wags the dog to create mythical unicorns, where the sides for multiples between investments and returns is reversed.
It incents companies to stage-manage metrics, embark on price wars and adopt a scorched-earth approach that poisons the market and kill competitors who are more capable and deserving.
It also means that companies like Oyo are running a fast race on the gerbil wheel - burning upwards of $5m a month on discounts and incentives to show growth that gets them the next round of funding. So on and so forth...the funding ponzi.
The portents for Oyo are ominous and time will tell if they can survive this indigestion and emerge unscatched from the moral hazard of playing with other people's money.
While you are free to make up your own minds as to whether Oyo is a ponzi or merely a startup exhibiting exceptionally bad behaviour, I would like to leave you with one piece of advice...something that cases like Oyo has taught me. Rather than follow the advice of taking in as much funding as you can get when you get it, you should instead temper your funding expectations to be commensurate with the stage at which your business is in and the rate at which you want it to grow.
While it is tempting to take in all the funding you can get, it is a Faustian bargain...a deal with the devil. In such a scenario, falling into the trap of operating like a ponzi scheme is hardly a surprise.