Inside Oyo – The World’s Fastest Growing Hotel Chain: Overhyped ‘Faux Tech’ Or A Revolution?

Inside Oyo – The World’s Fastest Growing Hotel Chain: Overhyped ‘Faux Tech’ Or A Revolution?

Softbank’s $100 billion Vision Fund is the world’s largest technology investor. It owns significant stakes in some of the biggest and most promising growing tech companies in the world. From Uber to chipmakers Nvidia and UK-based Arm to professional chat app Slack, which recently IPO-d. The Vision Fund has also invested in Oyo – heavily. It led the Indian start-ups Series B ($100 million), Series C ($90 million), Series D ($250 million) and Series E ($1 billion) investment rounds and owns 48% of the company.

But Oyo doesn’t fit the tradition definition of a tech start-up. It’s a budget hotel chain, founded in India in 2013 as Oyo Rooms by a university dropout – Ritesh Agarwal. Agarwal is still only 25 years of age. His company, flush with Vision Fund cash is currently valued at $10 billion, is the largest hotel brand in China and India by number of rooms, is estimated to now be the fifth largest hotel brand in the world and is growing at a phenomenal rate.

But like WeWork, the co-working brand also largely funded by investment by the Vision Fund, many observers question why a hotel operator is being called a ‘tech start-up’ and valued accordingly. Traditionally, tech companies attract valuations that are many multiples of those in other sectors because of their scalability. Their products or services are software based so can be almost infinitely scaled very quickly as their customer base grows with comparatively little increase in overheads. By far the biggest variable in a traditional tech company’s growth trajectory is customer demand.

Tech companies also traditionally benefit from high margins. Once software has been developed once, replication of the same code, which is not a physical product, costs practically nothing. And even if the code is a platform that supports many users, like a social media, scaling it is simply a case of increasing server capacity to be able to handle more traffic.

Surely the same can’t be said for a hotel brand, which relies on a multiplication of physical, bricks and mortar locations, each with their own team of staff and management, to grow. So why is Oyo’s biggest investor a tech fund and why is it being valued like a tech company? Is it just smoke and mirrors – a hotel operator masquerading as a tech ‘disruptor’? Or does Oyo really have something special that means it will relatively soon become the world’s biggest hotel brand? What makes Oyo different?

Oyo’s Growth Story

Despite being just 6 years old, Oyo already has 23,000 hotels globally. For now, Oyo earns the majority of its revenues in China and India, which is why it has only recently come onto the radar of many in the West. But it entered the UK market a year ago and already has 100 operating franchises in the country. Europe currently accounts for 10% of Oyo’s revenues. In June a $300 million investment in expanding its US business was announced and new locations will soon pop up in New York, LA and San Francisco. The stated ambition of Agarwal is to be the biggest hotel chain in the world by 2023.

Richard Clarke, a hotels analyst at Bernstein Research pertinently comments

“It’s been fairly frightening how quickly Oyo has grown.”

The pace of Oyo’s growth has been possible, while still a remarkable achievement, because it doesn’t actually own any properties. So what exactly is Oyo’s business and how did it get to where it has so quickly?

Agarwal hails from Bissamcuttack, a village in Rayagada district of Odisha, a state in eastern India formerly known as Orissa. His family was well off but not ‘rich’. Seemingly something of a child prodigy, the young Agarwal is said to have started coding software at the tender age of 8 and at 16 was one of 240 children selected to attend the Asia Science Camp. He started out as an entrepreneur early and at 17 founded Worth Growth Partners, a company set up to help foreign companies enter or expand in India.

It failed but a year later he’d started his next company – Oravel. An Indian copy cat of Airbnb, Oravel managed to get some funding from VentureNursery, a local tech start-up accelerator programme. That experience led Agarwal to the conclusion that India lacked budget hotels that still met certain basic standards and he established the first Oyo location in Gurgaon, a satellite town of New Delhi.

He had applied to a fellowship programme for young entrepreneurs launched by PayPal co-founder Peter Thiel and was the first candidate from Asia to be accepted. He travelled to California and put Oyo temporarily on ice. He returned from the experience enthused by the tales of Silicon Valley and the teaching of the programme. He was also armed with a $100,000 prize and quickly set about using it to restart Oyo.

And his idea was polished. Rather than open Oyo hotels himself, the evolved business model was to run a franchise. Agarwal approached independently owned small hotels and offered them help with improving their occupancy and income. That help came in the form of access to a central booking system and hotel management software as well as Oyo branding. In return, hotel owners were obliged to bring their hotels up to basic but consistent standards of room quality and cleanliness, offer guest free, good quality wifi access and follow the Oyo branding guide. Oyo of course received a cut on all bookings – 25%, and a franchise fee as well as earning on the sale of branded products such as toiletries, sheets and towels.

The concept was to reinvigorate the tens of thousands of small, privately owned and often unloved hotels dotted all over India and allow them to compete with the major chains. The pitch to owners worked and Oyo began to quickly expand. Agarwal’s salesmanship and Silicon Valley contacts meant serious investment quickly began to flow after the promising early results. Oyo rapidly expanded across India and then internationally – initially in other Asian countries such as China.

Source: Nikkei Asia Review

As a still privately owned company, Oyo is not obliged to publish its financial results and doesn’t. However, the company is known to be loss making though claims it is profitable ‘on a hotel level’. Losses are being accrued as a result of revenues being quickly reinvested in the opening of more hotels and bulking up of the team running the company. But Oyo’s rate of growth is almost unprecedented. It became the second largest hotel network in China in just one year. With billions of dollars of investment capital behind it, it has become a runaway train.

The question is whether the business model and valuation are sustainable.

Oyo’s Technology – Is It Really A ‘Tech’ Company Or Imposter?

Like WeWork, the co-working behemoth also funded by the Vision Fund, Oyo’s claim to being a ‘tech’ start-up is often disputed. Critics say the former is a short-term office leaser dressed up with hipster branding and Silicon Valley PR and as such cannot justify its present valuation multiple. The same argument is applied to Oyo – in reality it is nothing more than a hotel franchise operation, albeit one growing phenomenally quickly.

Both companies, and their major investor, counter that the pace of their growth, and the success of their business model (or future success once their pace of growth has slowed and revenues turn to profit instead of providing expansion capital) is only possible because of the tech stack behind it. Like WeWork, Oyo says it is the proprietary suite of software that it has developed that makes it more efficient and scalable than competitors.

One Oyo software is Krypton, a mobile-based property audit application designed to identify patterns in guest behaviour to improve customer experience. In all, Oyo says it has 20 applications for customers, asset owners and employees including IoT-based applications to track use of power consumption and customise services for repeat customers based on past preferences.

The company’s chief technology officer Anil Goel has said Oyo is considering productising all or a part of its software suite to sell to other hospitality companies. But the jury is still very much out on how core an asset proprietary tech really is to Oyo’s business model. There are equivalents to pretty much all of the software applications Oyo is known to use.

Oyo’s Future

What doesn’t seem to be in doubt is that Oyo is doing a remarkable job of managing a lightning paced international expansion. Strong use of technology is obviously key to that even if the technology itself is not particularly ground breaking or unique. The question is can Oyo sustain its growth and then solidify as a hugely profitable company that dominates the global hotel industry below the ‘premium’ segment of the market without the kind of barrier to entry the unique, proprietary technology provides?

Or will the big beasts of the industry, whose revenues far exceed those of Oyo even if the number of rooms under its brand is quickly catching up, wake up and put the upstart back in its place? Western markets are likely to prove a much harder nut for Oyo to crack. Hotel owners in developed markets have more choice when it comes to improving their business than the fractured market financially constrained small hotel in Asia. Selling them the Oyo franchise will be harder – as will keeping them onboard.

Like WeWork, the sheer amount of cash fuelling Oyo’s growth will in itself go a long way towards the goal of world domination in its sector. But, also like WeWork, the strategy looks like a zero sum game of all or nothing. It will either be a spectacular success for the boy from Bissamcuttack and his extraordinarily wealthy backers or a spectacular and expensive failure.

But for a 25-year old entrepreneur already said to be worth $3 billion on paper and who started early with a failed business behind him at the age of 17, Oyo has to already go down as a business success story hard to rival. And whatever happens, few would bet against Agarwal bouncing back.

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