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Why OYO Hotels' recent funding round seems like a face-saving act of SoftBank

The rooms-aggregator-turned-hotel-chain OYO, in a press statement, said that a significant part of the funds will be diverted towards continuing growth in OYO's fastest-growing US market, in addition to strengthening the start-up's position in the vacation rentals business in Europe.

twitter-logo Manu Kaushik        Last Updated: October 14, 2019  | 19:54 IST
Why OYO Hotels' recent funding round seems like a face-saving act of SoftBank
The homegrown OYO Hotels and Homes has recently announced that it will receive fresh investment of $1.5 billion.

The homegrown OYO Hotels and Homes has recently announced that it will receive fresh investment of $1.5 billion. As part of this funding round, Cayman Islands-registered RA Hospitality Holdings, which is controlled by OYO founder Ritesh Agarwal, will infuse approximately $700 million as primary capital in the company, with the balance $800 million being supplemented by other existing investors.

The rooms-aggregator-turned-hotel-chain, in a press statement, said that a significant part of the funds will be diverted towards continuing growth in OYO's fastest-growing US market, in addition to strengthening the start-up's position in the vacation rentals business in Europe.

The investment from Agarwal - through RA Hospitality Holdings - is part of a larger $2 billion investment that the founder is investing in OYO for which he has already received approval from the competition watchdog CCI. Agarwal's $2 billion will come into the company as primary and secondary management investment round.

Also Read: Oyo faces backlash from hotels over increased fees

For the uninitiated, a primary investment round is typically a direct funding into the company whereas secondary round is when an investor acquires stake from other existing investors. In the case of OYO, Agarwal is reportedly planning to buy stake from its two early investors - Sequoia Capital and Lightspeed Venture Partners - giving them a handsome return.

Fair enough. In fact, OYO's existing investors, which includes SoftBank, Airbnb, Greenoaks Capital and the two names mentioned above, are so gung-ho about the start-up that they want to plough another $800 million in the start-up. Of course, they see more potential upside in the OYO's valuation, and not to forget that the valuation has nearly doubled in just over a year - from $5 billion in September 2018 to $10 billion now - and since Agarwal still has $1.3 billion to invest, who knows where it would be pegged at in the next round.

The question is how did it manage to double its valuation in such a short period? Often, the valuations of start-ups are not backed by their current performance but on their future promise. VCs, who tend to suffer from FOMO (fear of missing out), make large bets on companies that are making a lot of buzz - even if those valuations seem crazy to a layperson.

OYO is surely ticking all the boxes when it comes to catching attention and staying in the news. It is expanding like never before, getting into different geographies (US, China, Europe, Japan), and venturing into new areas (co-working, vacation rentals, managed homes, weddings, coffee chain). In May, the start-up agreed to buy Amsterdam-based Leisure Group followed by the acquisition of Las Vegas-based Hooters Casino Hotel and 80 per cent stake purchase (along with SoftBank Group) in Japanese rental apartment operator MDI early this month.

"OYO Hotels & Homes has emerged as the world's second-largest hotel, and fastest-growing chain of hotels, homes, living and workspaces, leaving behind several traditional and long-standing hospitality brands. In a short span of six years, OYO has expanded its presence to 80-plus countries around the world. This fast-paced growth is fuelled by the company's success in China, followed by fast-paced growth in Indonesia, the UK, and more recently in the US. This year, the company has seen a 3.8 times year-on-year growth in revenue in August 2019 (as compared to August 2018), with 1.2 million rooms under management across hotels and homes," the start-up said in a statement.

But all this would not have been possible without OYO's largest investor SoftBank that till recently owned 45 per cent stake in the company - after the recent funding round, the stakes would change though. SoftBank led a $1-billion funding round in OYO last year, and through its Vision Fund-I, that has a portfolio of 70 investee firms, the Masayoshi San-led investing firm owns stake in half-a-dozen domestic firms such as Paytm, Policybazaar, Grofers, Delhivery, and Firstcry.

Also Read:Big boys of hospitality beware! OYO enters the premium segment

A closer look at the recent funding round shows that it's largely a matter of shares changing hands between the existing shareholders, and adding another $5 billion to the OYO's valuation in the process. The only new set of institutions that have come into the picture are Japanese financial groups Mizuho, Nomura Holdings and one unidentified bank who have loaned Agarwal $2 billion for three years against shares. These financial institutions already have deep bonding with SoftBank. They are expecting repayment three years down the line when OYO's proposed IPO (initial public offering) hits the market. But that's far into the future given that start-ups like OYO have to first conquer a lot of challenges to reach that stage.

For SoftBank Group, the OYO's recent valuation might help it navigate the tough times - to some extent. After the failed WeWork IPO and fall in ridesharing company Uber's share price - its two investee companies - SoftBank is reportedly staring at cuts in profit estimates of over $5 billion in its Vision Fund-I, as per global analysts.

Also Read:OYO commences hotel business in Japan via JV with SoftBank

WeWork, the co-working arm of We Company in which SoftBank owns a large stake, is facing flak due to the flawed business model while Uber's path to profitability is being seriously questioned. That's not all. There are reports that SoftBank is now struggling to raise money for its second technology fund (Vision Fund-II) after issues with previous investments cropped up.

In 2017, telecom firm-turned-tech investor stunned the global community by raising $100-billion corpus under the Vision Fund-I that included funding from Saudi Arabia government's Public Investment Fund and Abu Dhabi's Mubadala Investment Co.

Back in India, the situation is not hunky-dory at OYO on the operational side. Some of its hotel partners - out of about 10,000 in the country - have broken up ties alleging hidden charges and lack of transparency. The number will continue to grow until it finds a permanent solution since the problem is simmering for some time now. In the hospitality business, maintaining healthy partnerships with hotel owners and getting the distribution strategy right are key elements.

With these concerns at OYO, troubles at its first fund, the virtue of being the largest shareholding in the company and its past track record of steering the investee companies, SoftBank's role in driving things with the latest round of funding at OYO cannot be completely ruled out.

Also Read: SoftBank reports 66% increase in operating profit at 397.6 billion yen

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