Soon-to-become Unicorns: OYO inches closer to $1-billion valuation mark

In the second part of a series on soon-to-become Unicorns, we take a look at OYO's business model

A little over five years ago, teenager Ritesh Agarwal and his five colleagues, who were set to launch a hospitality company, spent Rs 99 to buy the domain name oyorooms.com on GoDaddy. At that time, the start-up had just signed its first property in Gurgaon. 

Today, OYO has transformed into the biggest hotel network in the country with an inventory of about 100,000 rooms. 

It is not far from a valuation of a billion dollars, which would make it a unicorn in the start-up world. The first property, Agarwal recalls, was branded as OYO Hotels. But then, it was a small asset and some felt that it cannot be called a hotel. The team then called it OYO Inn but again there was a thought that many users will not relate to the word Inn. The next thought was to name it OYO Stays but that domain name was expensive and so the team settled for the name OYO Rooms since it got it for Rs 99. 

One of the B-Schools had a case study done on why OYO Rooms was a great name as it refers to the experience that a guest is offered while staying at the room. “But that is not the reason. We named it OYO Rooms since we managed to get this name for Rs 99,” says Agarwal, who is the founder and chief executive officer.

Cash is no longer a problem for OYO and it now sits on a reserve of $240 million raised from investors including SoftBank, the single largest shareholder in the start-up. 

Based on its last funding round, OYO is valued at $850 million and could cross the $1 billion mark soon. 

Apart from building a branded hotel network in the country, OYO is now also present in Nepal, Malaysia and China, where it has over 11,000 rooms already. In India, OYO has demonstrated the large unmet demand for quality living spaces at affordable price points from business as well as leisure travellers. It has managed to standardise the experience for users and also improve the revenue for owner partners.

OYO, which operates at price points up to Rs 3,000 per room night, said it is seeing a brand level occupancy of 70 per cent for its 100,000 plus rooms spread across more than five thousand assets in the country.  The company started with the concept of offering budget rooms to users under the OYO Rooms brand. 

It initially followed a simple distributor model — where it sold part inventory of a hotel as OYO Rooms, while the hotel sold individually on online travel agencies (OTAs). It then adopted the exclusive model where all rooms became OYO-branded. 

Its next major step was a foray into a slightly premium offering under OYO Townhouse. It also has presence in homestays under the OYO Home brand. Its latest move is to get into apartments aimed at serving project-based stays of corporate travellers under the Silverkey brand. It is now piloting with two new hotel brands — Capital O and Edition O — focussed exclusively on corporate travellers. Agarwal said these two are designed for a business traveller in a way that the check in and checkout is super fast, besides a super fast wi-fi and a breakfast with a takeaway option.

OYO is seeing a per room realisation of Rs 1,650 on an average after discounts and incentives. An inventory of about 100,000 rooms with 70 per cent occupancy implies annual revenue of Rs 42 billion. 

“Our run rate is not very far from a billion dollars at an annualised level. With 100,000 keys on a stable state you should be able to deliver that kind of revenue,” maintains Agarwal. The inventory of rooms is slated to double by March 2019 to 200,000. The company is not profitable but he says it is not away from operating a very well run economically positive business. Interestingly, 94-95 per cent of the bookings at OYO come from the brand owned booking channels and it depends on online travel agencies (who need to be paid a commission) only for a small portion of its sales.

Are investors excited about OYO’s imminent entry into the unicorn club? Not really. Mohit Bhatnagar, managing director at Sequoia Capital and one of the early investors in OYO, said the term unicorn is a ‘misnomer’. “I dislike the misnomer of unicorn. Revenue of a billion dollars is a much more appropriate milestone rather than a billion-dollar valuation,” Bhatnagar, also a board member at OYO, told Business Standard.

He said competitors find it difficult to replicate OYO’s online and offline models. “The start-up has uniquely figured out how to use technology and processes to profitably service the budget hotel room segment. It is very hard for traditional hospitality players to operate at these mass market price points,” said Bhatnagar.

According to Bhatnagar, things like organisational capacity building and execution capabilities make OYO stand out in the sector where other players have also tried their hand at a similar business model. 

“It is very hard to replicate the audacity of ambition that Ritesh brings. He invests early in people and builds capability six months before it is actually needed,” adds Bhatnagar.