OYO enters long-term fully managed housing rentals biz with OYO Living

OYO has entered into long-term fully managed housing rentals – OYO Living, geared to provide upgraded living experiences at an affordable price for India’s young and growing population.

OYO Living will offer end-to-end managed, a comfortable, high-quality living experience that eliminates the hassles of finding, accessing and managing everyday housing.

OYO – ROOMS.

Starting with INR 7999, per bed, per month, OYO Living will help residents save on brokerage, lock-in periods, and the hassle of searching for house help and support services involved while moving to a new residence.

For asset owners, OYO takes complete control of their property, including regular maintenance and professional upkeep of their properties, while ensuring guaranteed rental yields.

At the time of launch, OYO Living will have 35+ live properties, with over 2000 beds in Noida, Gurugram, Bengaluru, and Pune, targeted at the always-on generation of millennials and young professionals. With most assets currently operating already resulting at full occupancy, OYO Living will aim to expand to the top 10 metros by the end of 2019 and will offer over 50,000 beds.

Is Oyo Rooms The Startup Equivalent Of A Ponzi Scheme?

Prologue—A tale of two graphs

Last week, SoftBank released its quarterly report that contained an update summarizing the state of state of Oyo Rooms, the Indian startup in which it had famously invested $100m late last year.

The slide contained the following graph claiming that Oyo has grown 15X year-on-year in the last one year.

SoftBank quarterly report May 2016—Oyo Rooms update

Ritesh Agarwal, the CEO of Oyo Rooms, released a statement claiming that this 15X growth implied that the company has delivered 2.3 million booked room-night transactions in the first quarter of 2016 – this translates to more than 766,000 rooms a month.

All of this would have been fine if not for one little fly in the ointment.

A little less than a year back, Oyo had released a similar statement claiming that it was booking “400,000 rooms a month”!

Clearly, Oyo was either “exaggerating” the numbers then or they are doing so now.

What makes this even more interesting is a similar graph that SoftBank had inserted in an earlier report where Oyo was said to have grown a mind-boggling 34X times year-on-year with 895,000 rooms per quarter (approximately 10,000 rooms per night) for the Oct-Dec 2015 quarter.

Graph from SoftBank quarterly report—Jan 2016

But this graph is interesting for one more reason—rather than “booked room nights”, it speaks of “used room nights”.

Therein lies the tale of how Oyo is, in all probability, the startup equivalent of a Ponzi scheme!

Let’s take a step back to figure out how this scheme operates.

What exactly does Oyo Rooms do?

“When I heard Ritesh (Oyo) speak, I thought how a tea seller like me didn’t think of setting up a hotel chain”—Prime Minister Modi, Jan 2016

Contrary to this widely-believed notion, Oyo is not a “hotel chain”. Despite Ritesh’s constant attempts to position his company as “India’s largest hotel chain” comparable to the likes of ITC, Oyo is at its essence merely a hotel aggregation platform which delivers customer leads to low/mid-budget hotels. Oyo owns exactly zero hotels. Oyo operates exactly zero hotels on behalf of others. So Oyo is as much a hotel chain as MakeMyTrip is an airline company.

Oyo does do one thing somewhat uniquely—the hotels to which it routes customer leads to are co-branded with the Oyo brand. This ostensibly guarantees customers predictability and standardized room quality.

How does Oyo make money?

Traditionally, this works on the basis of commissions—a MakeMyTrip or ClearTrip kind of agent will walk to a hotel and tell him “I’ll be an agent, give me commission”. Sure, says the hotel owner. If the hotel has a good room booking system, then the agency will set it up so that they can request for room availability at any time, and they will negotiate a rate that they can use for different days. If the hotel does not, the agency will attempt to “block” rooms for certain days, adjusting the blocks on a regular basis so that the hotel can continue to accommodate walk-ins while the agency manages to book their inventory too. The commission for a booking is typically a percentage of the room rate and ranges from 15% to 30% of the total.

One big problem with this model, at least from the perspective of agents like Oyo, is that the hotel owner sees this as a purely commercial/transactional type of arrangement?—?a hit-or-miss “race to the bottom” business model with progressively tighter margins given the fact that there is zero stickiness and the hotel owner can tie up with any number of agents simultaneously.

To secure an initial mandate from the hotel owners around using the Oyo brand, they offered sweeteners in the form of “soft loans” (ostensibly to refurbish or improve hotel infrastructure—supply new mattresses, equip them with WiFi, new paint jobs etc) but the broad model was still the same.

Enter “Minimum Guarantee”.

To ward off competition and to build a deeper relationship with hotels, Oyo came up with a “minimum guarantee” offer.

The minimum guarantee model involves the agent committing a certain amount of business to the hotel and only taking a cut on the incremental revenue. So let’s say a hotel has 10 rooms. The agent pre-blocks say 5 rooms and guarantees the hotel owner with a certain sum of money per year for those rooms. Let’s say Rs. 4 lakhs. The agent now has to fill this inventory—if he is unable to drive at least Rs. 4 lakhs of revenue for these rooms and say does only Rs. 3 lakhs instead, he has to pay the hotel owner the difference of Rs. 1 lakh out of his pocket. If he is able to generate say Rs. 6 lakhs of revenue for these rooms, the hotel owner gets to first keep Rs. 4 lakhs and the incremental Rs. 2 lakhs is shared between the hotel and agent usually in a 70–30% split or thereabouts. So at the end of all this, the agent gets Rs. 60,000 (30% of Rs. 2 lakhs).

This is a great model for the hotel as it derisks his inventory risk and shifts the burden to the agent.

However, this wasn’t enough for Oyo to win the game.

Competitors soon cottoned on and started offering minimum guarantees to hotels and the market became increasingly crowded and noisy.

That’s when Oyo took the step that took them down the Ponzi rabbit-hole.

Take a look at the note below extracted from Oyo’s financial statement. Do you notice anything unusual?

Extract from Oyo Rooms annual report for FY 2014–15

Minimum guarantee is listed as an operating expense!

What does this mean?

Well, ideally there should have only been one operating cost item related to minimum guarantees—“Minimum tariff loss” that recognizes the shortfall the Oyo would need to pay out of its own pocket. But the fact that Minimum guarantee itself is an operating expense implies that Oyo was not only offering such guarantees, it was actually paying these amounts up-front!

While this might seem like a harmless thing that buys hotel loyalty, it is in fact a dangerous step that leads to all kinds of perverse incentives and adverse behaviour.

Unraveling the Ponzi

The hotel owners were delighted to get this upfront minimum guarantee?—?not only were they derisked from unused inventory, they got paid in advance which greatly helped working capital requirements.

But it created two specific types of perverse incentives for hotel owners.

Firstly, now that they were paid in advance, they were under no pressing obligation to maintain the hotel to the standards that Oyo aspired towards—after all, even if they gave poor-quality rooms to Oyo’s customers, what is the worst that Oyo could do? They couldn’t terminate the agreement or even if they did, they wouldn’t get their investment back. So, a cursory search of any of the hotel review sites will show you a great number of complaints from consumers who got stuck with pathetic rooms that they booked through Oyo.

Secondly, the minimum guarantee was an unexpected bonus in another way. Since Oyo rarely picked up the entire inventory of a hotel and because the hotels themselves hardly had any type of dashboard that would show details of walk-ins, hotel owners could give out rooms that Oyo has already paid for to their direct customers! While in theory Oyo monitored inventory usage, in practice, they had close to zero visibility. This would often lead to situations where customers who would book rooms on Oyo finding the hotel refusing to honor the booking by claiming that they were overbooked. Again, one can see numerous examples of customer complaints of this nature on the hotel review sites.

This essentially meant that both the benefits— standardized room quality and predictability—that Oyo touted as its core value propositions were completely frittered away. Oyo had basically shot itself in the foot.

While this was a bad thing, there was something even worse.

Oyo would buy rooms at say Rs. 1,999 per night—the only way it could make any money was if it sold the same room to a customer for Rs.2,000 or more. Not only did Oyo discover that this was easier said than done, especially during lean and off-peak seasons where uptake was very low but they also realized (rather belatedly?) that these rooms have zero inventory value! If a night passed without being used, the entire Rs.1,999 was down the drain with nothing to show for it.

But if they could sell a room even for Rs. 1 per night, they could at least count this as a “used room night”. Of course, this wouldn’t make much of a difference to their revenue figures but what if they could bandy this as a metric that is shown growing up and to the right?

This imperative kicked off the fire sale—not only did Oyo offer rooms at severely discounted prices (losing as much as Rs. 1,000 on each room night as per some estimates), they literally gave away rooms for next to free! There are well-traveled stories that Oyo grew so desperate to shore up this metric that their representatives went out to local colleges and handed out coupons in the parking lot to any student couple who could use the room for as little as one hour for a session of “joint studies”! This one-hour type of booking also meant that they could potentially turn over multiple bookings per day and further boost their used room nights count (of course, some hotels refused to honor such bookings while others weren’t so puritanical).

Now, if you are thinking that all of this is fine (maybe unethical on multiple fronts but not illegal) but how exactly does it constitute a Ponzi?

Let’s take a step back and revisit what the metric “booked room night” means. It implies a transaction where a hotel room night was booked. But nowhere does this guarantee or explicitly say that the room was booked by an actual customer. So a minimum guarantee paid upfront is also technically a room booking in itself!

So we have a potential situation where Oyo could be selling zero rooms but could still tout a huge count for booked room nights because…they are buying the rooms! This essentially means that they could be touting traction not on the basis of SKUs that they sell but those that they—a bizarre turn of events that gives the phrase “buying traction” a completely new spin! This also means that forget about having negative gross margins, we could potentially be looking at a situation where a product has a negative selling price!

Admittedly, there is no way to know for sure whether the numbers reported by Oyo fall in this hoary category but the point is that Oyo is now reporting vanity metrics that can stage-managed and gamed in any which way they choose and quite easily at that. While vanity metrics are bad for a number of reasons, in most cases, they are at least directionally correct but in this case, there is hardly any correlation.

But this is only half the story.

Part 2 of this deep dive will attempt to delve into the other half—the imperatives behind Oyo’s Ponzi and the larger issues that merit scrutiny.

[About The Author: Sumanth Raghavendra is Founder of DeckApp Technologies]

Confirmed : Oyo Acquires Zo Rooms

We earlier reported this morning that Zo Rooms has been out of sight for almost 24 hrs and Softbank earnings now confirms the report that Oyo has acquired Zo Rooms.

OYO Acquires ZoRooms
OYO Acquires ZoRooms

ZO Rooms earlier raised $30mn led by Softbank.

OYO : ZO Rivalry

The two companies have used a lot of guerrilla tactics to market themselves against the other, especially when Zo did some cheesy ambush campaigns during Oyo’s app launch. In fact, the two companies have taken the battle to court as well in the past, so be assured that this merger is purely driven by investors and not founders.

Both Oyo and Zo had similar revenues in FY14-15 (Zo: Rs. 2.6 crores, OYO: Rs. 2.4 crores), but Oyo has gained an edge owing to the massive funding ($100mn) they raised.

Exclusive : Zo Rooms Goes Out Of Sight [#shutdown]; Oyo Deal Done ?

It’s been almsot 24 hours and Zo Rooms, which last raised $30mn led by Tiger has been out of sight.

The site is not at all accessible and even the app isn’t functional (the servers are down).

OYO : ZO Deal

We earlier reported that OYO-Zo acquisition is almost in the final stage and from what we know, the deal is finalized and will be announced shortly.

But a shutdown without any announcement? That’s quite on the wrong side for any (consumer) business. This is where consumers/vendors start to lose trust in ‘startups’.

Both Oyo and Zo had similar revenues in FY14-15 (Zo: Rs. 2.6 crores, OYO: Rs. 2.4 crores), but Oyo has gained an edge owing to the massive funding ($100mn) they raised.

Oyo : Zo Rooms Deal Almost Done

Oyo is in final stages to acquire its competitor, Zo Rooms.

Sources tell us that the deal is done and Zo Rooms is laying off its staff in big numbers  (except tech and call-center employees).*

Both Zo and Oyo rooms have done almost similar revenue numbers in FY14-15, but the biggest factor that tilts the equation towards OYO is..well, the massive funding it has raised.

OYORooms Vs ZoRooms
How OYO Was Trolled By ZoRooms During Their App Launch

OYO last raised $100mn led by Softbank while ZoRooms’ raised $30mn funding from Tiger global. Both of these companies are trying to raise another round – so we are guessing that the consolidated entity will raise a bigger round to combat the growing competition.

From what we know, Zo rooms has laid off its employees in all departments except tech and call-center*.

*Update : Zo Rooms has written to us that there are no layoffs being done in the company.

#IndianStartupData : OYO Rooms Had A Turnover Of INR 2.4 crores in FY 2014-15

[Editor Notes : Nothing is as powerful as data and these articles are part of our coverage of #IndianStartupData – i.e. an overview of financial performance of selected Indian startups with a hope that it gives you a good picture of the companies and the ecosystem in general.
Our Mission : A PR-less startup ecosystem which thrives on great products and services!]

If you have been around in your city any time recently, more likely than not, you would have spotted an OYO Rooms board. OYO is a branded network of hotels and is one of the fastest growing startups in India.ritesh-agarwal-oyorooms

Founded by Ritesh Agarwal (aged 19 years then) in 2012, OYO claims to be India’s largest branded network of hotels spread across 152 cities with more than 3000 hotels. Oravel Stays Private Limited, which owns and operates OYO Rooms, reported a turnover of INR 2.4 Crores in FY 2014-15, growing from a turnover of INR 51 lacs in the previous fiscal.

However, at the time, OYO appeared to have been present only in 10 cities with 200 hotels. They have seen a phase of exponential expansion in FY15-16 with two major funding rounds this year (OYO raised $100mn led by Softbank). More details are awaited on OYO’s financials and will be updated soon.

OYORooms Turnover
OYORooms Turnover

OYO’s Shareholding Structure

With the latest funding round from Softbank Group in August 2015, OYO’s current shareholding looks like this:

Founders 18%
Lightspeed Venture Partners 19%
Sequoia Capital 18%
Softbank Group 15%
Greenoaks Capital 10%
DSG Consumer Partners 4%
Others 16%

With one of the youngest CEOs at its helm, OYO surely has managed to disrupt the hospitality sector in India so far. Going ahead, it’s going to be a tough battle with competitors like Zo Rooms and a number of others fighting it out.

[About the author: Vishal and Anchal form the team that runs the Tofler blog. They like to explore and track companies, their performance and senior management. Tofler (tofler.in) is a Business Research Platform.]

OTAs Strike Off Oyo and Zo Rooms From Their Websites

Oyo and Zo rooms’ properties have been listed off of the major online travel agencies’ websites such as MakeMyTrip,Goibibo, Yatra.

Commenting on the move, budget hotel aggregator Oyo Rooms said that it was an expected move and will not impact their business much as it contributed less than 10% of business while Zo Rooms expect to overcome the shortfall through their app. [source]

OYO Rooms had raised $100 million in August and expanded its network to 135 destinations in India. Zo Rooms had also raised $30 million in August and expanded its network across more than 50 cities and towns.

Ritesh Agarwal, OYO Rooms : Aims To Do 1000K Booking Nights Per Month By Year End [Interview]

Oyo rooms recently raised a massive $100mn round led by Softbank. Here is an interview with Ritesh Agarwal, the founder and CEO of OYORooms talking about the company growth and future plans.

ritesh-agarwal-oyorooms

1. What has been the traction so far? How many rooms is OYO doing per day?

We are extremely encouraged by our growth and are currently at a run rate of 4,00,000 booked nights per month. We have built strong processes that are run by high quality teams and that has helped us scale very quickly. The biggest addition to our run rate has come from our app. It’s revolutionary in its own way as it’s the first time globally that there’s an app for hotel managers (no check in happens without the hotel app) similar to the Uber driver app.

This enables an easy to adopt app ecosystem which ensures extremely easy instant booking, turn by turn directions, check in, order tea/coffee, request room service and seamless check out. We are confident that by the end of this year we will be booking over 10,00,000 room nights per month.

2. What about mobile vs. desktop traffic / conversion ?
50% of our guests book OYO Rooms across 80 cities using the mobile app. Significant growth has been achieved on the app with more than 6,00,000 downloads just within 3 months since launch.

More than 10 business enabling apps such as hotel verification, standardization audit, quality audit, reconciliation and property performance trackers have been built and are running successfully across 12,000 plus rooms. For instance, the world’s first hotel audit app which is geolocation mapped by means of which we can on real time, identify and fix issues at a room by room level.

Our belief is that we are building a mobile-first company.

3. Plans going forward? Are you guys going International? What’s Next.Big.What for OYO?
When people buy a new smartphone they download Ola and Uber apps for commuting, Whatsapp for communication, facebook for social interaction and we see a future where they will download the OYO app for “staying when not at home”. That is the Next.Big.What for OYO.

OYO is a product that has never been built or attempted before anywhere in the world. It’s a “make in India” business that we take pride in and will be adopted by entrepreneurs and user globally. India is a very large business for us and we will explore international launches when the time is right.

Our processes are strong enough to activated 43 cities in a single month (July) despite the complexities that this model presents. Our long term plan is to be present in 250 cities across the country with 5,00,000 rooms extending our dominance in a market pioneered by us with a massive $100mn investment in demand, supply, technology and customer experience initiatives.

4. Typically, what’s the repeat purchase from customers?

About one third of our customers come back to us to stay again, a number much higher for the hospitality industry that otherwise also runs detailed loyalty programs.

We are able to cater to a variety of interesting use cases that were typically unsolved for, in the hotel industry. For example, during the recent Champions League matches, friends came together at OYOs to view late night matches. All they had to do was fire up our app, three taps and they had an OYO booked for the night. We run a robust customer feedback system consisting of 5 different channels, 24×7 to ensure superior experience to our customers.

5. Plans with the $100 MN? What do you think is the runway like? Will you guys start the fundraising process in 6 months (What’s the burn like) ?
We are very energized right now with our current funding and will focus on building great customer experience, new technology products and expansion across new cities as well as going deeper into current markets.

This Is How Zo Rooms Trolled OYORooms During App Launch Event [Ambush Marketing]

Today, OYORooms launched its mobile app and rival, Zo Rooms did a great bit of ambush marketing at the event venue.
Adding to Delhi summer, there was a lot of heat at the event launch venue, India Habitat Centre Delhi where the guests were greeted with interesting Signboards and Standees from Zo Rooms (Zostel’s budget hotel aggregation wing).
Using billboards to troll the rival and grab some attention has a ‘long-way in the history’ – Zoho did a great bit of ambush marketing at Salesforce event.

OYORooms Vs ZoRooms
Zo Rooms Congratulating OYORooms for Launching their mobile app.

 
OYORooms Vs ZoRooms 2
A Zo Rooms standee at India Habitat Centre, Delhi where iOYORooms launched its mobile app.

Wait, Zo Rooms had its Zostel Hospitality Meet in the same hotel where OYORooms had called for a press conference on its app launch.
Coincidence ? Nopes – a very planned move!
Same Hostel, but that's ok venue is different.
Same Hostel, but that’s ok venue is different.

OYORooms Vs ZoRoom
OYORooms Vs ZoRooms

Recently the tough competition between OYOrooms and Zostel had turned bitter in court with the Delhi HC issuing a stay order against Zostel on allegations of theft of copyright material.
Read : How Indians startups are trolling each other.

Oyo Rooms Vs Zostel: Delhi HC Issues Stay Order Against Zostel’s ‘Zo Rooms’

ZostelDelhi HC has issued a stay order against backpacker hostel startup Zostel on a complaint from the hotel rooms aggregator Oyo Rooms on allegations of theft of its copyright material.
The HC in its stay order banned Zostel from continuing with its budget hotel aggregation segment ‘Zo Rooms’ from using ‘confidential information and software’ of Oyo Rooms.
Recently, Zostel launched its budget hotel aggregation business ‘Zo Rooms’, which the rival competitor Oyo Rooms alleges is based upon copied data. Oyo Rooms produced evidences in the court such as emails, CCTV footage and theft of its ‘software’ by few of its former employees who joined Zostel.
Whereas, Zostel denied any of the claims made by Oyo Rooms.

“No illegality has been committed by us. We are in possession of the material that would demonstrate how a false and fabricated story has been created by OYO only out of business rivalry, just to kill any competition,” said Paavan Nanda, Co-Founder, Zostel Hospitality Private Limited.

OYO Rooms Secures $25mn from Greenoaks Capital, Sequoia and LightSpeed

Branded network of budget hotels, OYO Rooms has grabbed $25mn from Greenoaks capital, Sequoia and LightSpeed.oyoRooms
Earlier, OYO Rooms had raised US$650,000 from DSG Consumer Partners and Lightspeed, after the parent company Oravel shutdown.
With a humble beginning from one hotel in Gurgaon in 2013, OYO Rooms has now grown to more than 200 hotels in 10 cities booking 50,000 room nights every month. OYO Rooms is planning to aggressively expand its network to 1000 hotels in 25 cities by this year end.
The company was recently in the news for a troll by Stayzilla (and controversy around the founder, Ritesh Agarwal).