India's $5 billion hotel marketplace OYO needs to win in China to justify valuation

On Your Own (OYO) is one of India's most promising unicorns that you may have never heard of. Yet its deal-making in April alone has made OYO hard to ignore, with the hotel-aggregator startup garnering widespread attention when it received around $200 million from Airbnb.

As a standalone investment, this is a certainly a coup; if you're in the home rental or hotel business, there's obviously nothing like having Airbnb in your camp. Even without Airbnb, OYO had previously already ingested a mammoth-load of funding and linked up with many storied names. It attracted $1 billion from existing investors and an investor group headed by Softbank's Vision Fund in September last year, putting the company's valuation at around $5 billion which is a little crazy considering it was started in 2013 by a teenager.

See: Airbnb acquires Gaest.com for booking offsite meetings

A big reason for OYO's fast-growing fan base has been due to the large strides it's made in Asia. In April, around the time of the Airbnb announcement, it forged an unusual joint venture with its investor Softbank to expand its collection of budget hotels in Japan. 

But it is China that has added real lustre to its global campaign. OYO has plans to deploy $600 million in China to become a dominant presence there -- a country that Google and Amazon has failed to crack. 

"India has 4.3 million unbranded rooms and China has 35 million, but there is only a 25% occupancy rate. We want to change that," OYO founder Ritesh Agarwal said. "We are currently focused on Tier-2 and 3 cities in China, however we plan to expand this to Tier-4 and 5 too."

These ambitions may seem too grandiose for an upstart Indian company, but what makes it ostensibly possible is that OYO has a godfather in Huazhu Group, a multi-billion-dollar hotel management firm that is an early investor in OYO. Huazhu Group injected $10 million into the company back in 2017.

See: What Amazon's rare defeat in China could mean for its tough slog ahead in India    

These moves are not too shabby for founder Agarwal, a small town boy from Orissa who was flat broke and had once been forced to use stairs as a bed when he first started the company in 2013. Agarwal had his epiphany for OYO a few years prior to 2013, when he undertook a lengthy backpacking tour around India in his late teen years and experienced first-hand the lack of quality, cheap accommodation. He thought homestays were an opportunity begging to be organised and thus, OYO was born under the then-name 'Oravel Stays'.

However, Agarwal quickly realised that the scarcity of reliable homestays in India meant a business model pivot was needed, and accordingly, he decided to ape Airbnb. He made enough of a splash through both achievement and self-marketing to land a '20 under 20' Thiel Fellowship which awarded him $100,000 along with mentoring sessions in Silicon Valley to further develop his outfit.

Today, OYO has established beach heads in the US, United Arab Emirates, and the Philippines. In India, its home turf, the startup has its stamp on 173,000 rooms in 8,700 buildings across 259 cities so it's easy to see why Airbnb -- with its 6 million listings across 81,000 cities in 191 countries -- fell in love with it. Each of OYO's properties are subject to scrutiny across 200 categories such as reliable hot water and WiFi connectivity before they are given a red OYO sign -- the company's symbol for quality assurance. In return for the red OYO sign and customers, hotels give a 25% cut to OYO.

This erstwhile little startup has grown up so quickly that it already claims to be the world's seventh-largest hotel group with 515,000 rooms under its managerial belt. It is also confident that it can outstrip global powerhouse Marriott, which expects to have 1.29 million rooms under its management by 2023.

See: Marriott reveals data breach affecting 500 million hotel guests

And yet, despite weighing in among the top five hotel operators in China and posting an annualised gross sale figure of $1.8 billion that is four times bigger than what it made the year prior, Mint reports that all has not been hunky dory for OYO in the country. OYO's rooms in China are apparently still not available on important travel platforms; it has yet to launch its website; and it is still getting much of its bookings from offline sources. More recently, the Economic Times reported that OYO was forced to fire 25 employees for "unethical practices" while another 110 or so were given warnings.

Obviously, there are many lessons to be learnt on the road to business greatness, but the hurdles in China will not be the first that OYO has experienced. After the glory days of the post-boom internet boom in 2015, OYO struggled with low occupancy rates and maintaining quality control across its rooms. However, it dug itself out of its hole by getting a firmer grip on inventory. It also improved its image by upscaling offerings through its Townhouse Properties, which are self-owned and managed by OYO. Recently, it diversified into the $40 billion wedding management industry by snapping up Weddingz.in, which will allow it to re-invent the banquet and venue management business. 

This and other similar efforts at risk mitigation should at least momentarily allay Oyo's money men who may be getting a little jittery about its China travails.

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