SoftBank’s most problematic Indian investment is heading for a $1.1 billion IPO
Failed global ambitions, losses, layoffs, and bad reviews aren’t holding back controversial Indian hotel startup Oyo from going public.
On Oct. 1, the eight-year-old Indian budget hotel chain filed its draft red herring prospectus, seeking to raise around Rs8,430 crore ($1.14 billion).
The company, which raised $660 million in debt financing in July to repay past debts, plans to use $330 million from the IPO funding to repay debt.
Besides being among India’s highest-valued unicorn with its most recent fund-raising pegging it at $9.6 billion, Oyo is Softbank’s choice investment pick in India. The Japanese giant started investing in the company in 2015, two years after it was founded by then 19-year-old Riteish Agarwal, and then transferred its stake to the Vision Fund in 2018. The fund has invested around $2 billion in Oyo since.
Now Oyo’s biggest investor with an over 46% stake, Softbank is looking to sell shares worth over $175 million. Founder-CEO Aggarwal, who has an 8% stake, is not selling any of his shares.
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Is Oyo Softbank’s Indian “WeWork”?
Many of the Vision Fund’s biggest bets have tanked. Some problem children in Softbank’s investment roster that have ambitious tech blueprints but no real performance to show for them include delivery platform DoorDash, car subscription service Fair, and construction firm Katerra.
The biggest black spot has been co-working startup WeWork. Its implosion after its failed IPO in 2019 was so bad that it had to delay layoffs because it didn’t have money to even dole out severance pay. Softbank, which had at one point valued WeWork at $47 billion reduced that estimate to under $3 billion last year, called the investment “foolish.” Softbank’s loss from writing down its Uber investment was even greater.
Worryingly, Oyo seems to be following in WeWork’s footsteps. For one, the pandemic-induced lockdowns weren’t kind to hospitality businesses and its losses keep piling up. At the start of this year, the company was losing around $15 million a month, even after cutting expenses by around 70% compared with the previous year.
Going public will only increase the pressure on finances. “As a listed company, we will incur significant legal, compliance, accounting, corporate governance and other expenses that we did not incur as an unlisted company,” the filing says. The company may also “need to hire additional legal and accounting staff,” it acknowledges.
Quartz has reached out to Oyo and Softbank for comment.
On the customer front, the brand’s image has suffered as discontented customers have shared many horror stories about hygiene and safety on social media.
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Additionally, Oyo is embroiled in a legal battles over allegations of colluding with online travel agency MakeMyTrip and, separately, a failed merger dispute with rival Zostel. And it’s been accused of other illicit activities like listing unlicensed hotels and guesthouses, and then offering police officials free lodging to deter trouble from authorities.
Furthermore, its failed global expansion plans are a major reason for its fall from grace.
Oyo’s retreat from China, Japan, and the US
In August 2018, SoftBank chief Masayoshi Son boasted that Oyo was growing 10 times faster than Marriott, the world’s largest hotel chain. However Softbank’s push—both with money and ambition—were too much too soon.
In India, where ubiquitous budget hotel chains are less common, Oyo’s model of bring small hotels into its network, sprucing them up, and listing them under a single brand with proprietary software in exchange for a commission worked. But abroad, where there are established budget hotel brands, the holes in Oyo’s model were quickly exposed.
In China and the US, hoteliers began making noise about unfair treatment, unfulfilled payments, and dramatic cuts in hotel rates, among other things. Oyo’s technology also turned out to be clunky and inefficient.
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Between late 2019 and March 2020, the company laid off almost 7,000 people—72% of the local staff—in China. Then, due to the blow dealt by the pandemic, the company laid off over 90% of its US workforce by mid 2020.
In Japan, it had even loftier dreams given that Oyo Japan was a joint venture between the Indian operator and Softbank’s domestic telecoms unit. But having the behemoth investor as a partner did not really help. Even before the pandemic, Oyo Japan did not reach even 1% of its goal of hosting one million rooms. Then when the virus wreaked havoc and punctured tourism in Japan, Oyo had to close down its provincial centres, downsize its Tokyo headquarters, and encourage employees to quit with four months severance pay.
With revenues falling short of expectations, thousands of hoteliers left Oyo’s network globally. The number of hotel rooms on its network worldwide declined by more than half in the past year to around 530,000, according to a Wall Street Journal analysis in January.
Currently, four markets—India, Indonesia, Malaysia, and Europe—account for about 90% of its overall revenue, Oyo’s filing notes.
