The world is not enough for OYO

Ritesh Agarwal has always placed a premium on perseverance and hard work. The 25-year-old founder and group CEO of OYO Hotels & Homes has often credited these two qualities for his success. He should know. After dropping out of college and starting a hotels aggregator business as a teenager, he has built up his company to become the country’s and South Asia’s largest hotel chain.

As his startup grew by leaps and bounds, he thought of reaching out to someone he believed would be ideal to help in the journey of OYO, valued at $5 billion today. And that person was Aditya Ghosh, the former president of InterGlobe Aviation, which operates IndiGo, India’s largest airline.

It was almost noon on a sultry August day last year when Ghosh, 43, got to know from a friend that Agarwal wanted to connect. Ghosh didn’t give it much thought. It had been more than three months since he had stepped down from IndiGo—which he had nurtured for nearly a decade—and several people were catching up to discuss business ideas and challenges in the business, among other things.

A couple of days later, the two met at The Quorum, an upmarket members-only club in Gurugram. The first meeting started at seven in the evening and the two were still talking at 1 a.m., almost 90 minutes past the club’s closing hours. The second meeting the next day started at 8 p.m. and this time they were at the club until 2:30 a.m. But they were still not done. So Ghosh, who lived nearby, invited Agarwal home and the conversation continued until 4 a.m.

They continued meeting for over a month, and by this time it was clear to Ghosh that Agarwal wanted him on board. But Ghosh wasn’t convinced. There was nothing “broken” at OYO, nor was it in crisis. Besides, Agarwal was doing a great job of leading the company. “Why would you even want to have someone else?” Ghosh asked. But for Agarwal, Ghosh was the ideal candidate. “Building an airline and delivering a large-scale consistent experience is a hard job. And I think the second bit was he’s a people’s person,” says Agarwal. “It’s almost like a marriage. Because you both need to be able to trust each other, believe in each other.”

Agarwal eventually managed to convince Ghosh, who took over as OYO’s chief executive for India and South Asia last November. OYO roped in Ghosh because it had grand plans of going global and expanding beyond being just a hotel aggregator to co-living and coworking spaces. “His [Ghosh’s] business acumen, his problem-solving capabilities, and his customer-centric approach to innovation that helped him build an influential brand that is loved by all make him an excellent choice for OYO Hotels,” Agarwal said in a statement while announcing Ghosh’s appointment. The release also mentioned Ghosh’s ability to “deliver growth with large-scale impact”. Ghosh too saw OYO as a perfect opportunity: “It gave me a scale of the opportunity, where I was able to completely push myself out of my comfort zone. Here is that first opportunity to create a truly global brand.”

As a full-fledged asset manager, OYO offers the full stack of renting, leasing and managing all properties it services. Under this model, it takes over hotels and homes, on franchise, manchise (a business contract that combines elements of a franchise and a management agreement in the same contract) or lease, and renovates them. It has also ventured into the co-living and co-working spaces: OYO LIFE provides long-term, co-living, fully managed, rental housing for millennials and those in their first jobs; and the company has also launched PowerStation, a fully managed workspace for startups, medium and large businesses, and freelanc ers. Reports say OYO is in the process of acquiring co-working space provider Innov8, but the company refused to comment. With nearly 25% of OYO’s revenue coming through the kitchens it operates in its hotels, experts say this is also a strong way of keeping the consumer hooked and expanding business. To leverage this offering further, it is in talks to acquire online food delivery startup FreshMenu for $30-40 million.

But India is just one aspect of OYO’s grand plans. “We want to be in 15-20 large countries across the globe,” says OYO’s chief operating officer Abhinav Sinha. He explains that OYO would select these “large, meaningful, impactful countries”, where they would take their business model, and not to all countries. A bulk of OYO’s global expansion has happened in the past 18 months. Last month OYO said it was set to acquire Amsterdam-based @Leisure Group, a vacation rental company which manages holiday homes, for nearly €369 million ($416 million), one of the biggest acquisitions by an Indian startup. Its China business is already more than double the India business. In China, OYO is present across 290+ cities with 320,000 exclusive rooms and over 7,000 buildings/ properties. Besides China, OYO is present in the U.K., Indonesia, Malaysia, Saudi Arabia, Nepal, the Philippines, the U.A.E., and Japan. “We want to be, by 2023, the biggest hotel chain, not just by rooms, but by sales, franchise fees, bottom line, rental yields, internal rate of returns (IRR), any role that you can imagine,” says Agarwal.

But the question that many analysts are asking is: Has OYO bitten off more than it can chew? Ghosh is convinced about the company’s growth potential. “For me, the India growth story is not a PowerPoint presentation, it is not something which is in a report,” he says. “I am a product of that. All the doubts that people have internally, externally—will this work, will the customer actually pay for this, this is only a leisure market, this is only a business market, nobody has done this before, look at the number of people who are there, how can there be so many properties—I am completely unfazed by that, because for 15 years I have seen the same thing. I know for a fact that India is a supply-constrained market.”

OYO’s growth has been meteoric. At the heart of everything is OYO Hotels & Homes, founded by Agarwal in 2013. In 2012, when he started a hotel listings portal like Airbnb, Agarwal would personally visit and stay at these properties, living in over 100 bedand-breakfast places in a matter of months. Shortly after launching the venture, he received $100,000 as part of the Thiel Fellowship from PayPal co-founder Peter Thiel in 2013. The same year, he pivoted the business to launch OYO. “OYO’s two capabilities—efficient transformation of existing hotels and tech-enabled property management—provide the foundation for the company to become the largest hotel chain in the world someday,” says Mohit Bhatnagar, managing director, Sequoia Capital India Advisors. Sequoia India invested in OYO when it had less than 100 rooms and has since then backed it repeatedly.

To be sure, OYO has also gone beyond budget offerings. It now has six brands, which include a range of budget to premium midscale offerings including the likes of OYO Rooms, Townhouse, Capital O, Collection O, corporate and executive hotel brand SilverKey and Palette Resorts. OYO is present across 259 cities with around 173,000 hotel rooms in India. It operates hotels, homes, living and coworking spaces in more than 500 cities across 10 countries. It has over 18,000 franchised or leased hotels in its chain, accounting for more than 515,000 rooms.

However, the spree of OYO’s global expansion has surprised the industry. Some believe that the high-paced expansion can lead to mistakes and providing a high quality living experience consistently can be a challenge. Anil Joshi, founder and managing partner at Unicorn India Ventures, an early stage VC fund based in Mumbai, says poor customer experience can lead to irreparable loss of business. “OYO has to create a wow factor for even the lowest tickets. Quality is prime and they have to pay attention, irrespective of the brackets they are catering to, Townhouse or OYO rooms. Consistent high quality is important or the company will face problems in the long run,” he says.

Recently, Kshitij Sharma, who was travelling to Chennai from Bengaluru for work, booked a Townhouse for two nights. There was no water in the bathroom and the AC of his room was not working. He complained and was told they were working on the issue. He waited for 30 minutes, but things didn’t change and he decided to check out. “I am not sure I want to try OYO again,” he says.

Agarwal is unfazed by the challenges and says the expansion is a well thought out strategy. Globally, he explains, mainstream brands (like Marriott, Starwood, and others) are primarily focussed on the premium or luxury segments. No brand has really tried to organise the low end of the market because properties are smaller and of variable quality, the economics are challenging, and there is much higher fragmentation. As a result, the unrated or 1-2 star hotel market has been neglected globally—for both property owners and travellers. The same opportunity that exists in India is also available in international markets, he says. And he should know. After all, as one of India Inc.’s youngest CEOs, he guided OYO to become South Asia’s largest hotel chain and the world’s sixth-largest. And it is the country’s third most-valued startup.

But OYO hasn’t thrown caution to the wind during its expansion drive. It runs pilots in other geographies before committing to them. It starts with a few properties in a new market, understands the nuance, makes tweaks and only starts scaling when it sees that something is working in the way it has seen work back home. “The most critical part is building exceptional local leadership and teams. If the company was to simply try and copy-paste the India approach in global markets, with the India-based team, scaling internationally would be problematic,” says Bejul Somaia, managing director at Lightspeed India, a venture capital firm. Lightspeed is one of OYO’s first investors and has been backing it since 2014. He says that OYO is “very clear” that it needs to build local leadership. And “the management team in each international market brings very strong execution skills”, he adds.

OYO has local leaders for each country it has entered. Its China business is led by chief operating officer Sam Shih, who used to serve as chief executive at Asia Pulp & Paper, a giant in the industry. Jeremy Sanders is the head of OYO in the U.K. An entrepreneur, Sanders co-founded Italian food chain Coco Di Mama. Localisation is key. In Japan, for example, the focus on cleanliness is the highest. Hence, doors that shut automatically are a must. In Saudi Arabia, each room, for example, has an arrow to indicate the direction for Mecca to help the majority of travellers pray.

The model that OYO is following is what experts call a cookiecutter model which several global brands have used to scale globally. In the past few years alone, companies such as Uber or Airbnb have created tremendous value by replicating a cookie-cutter model across multiple markets around the world. This is likely a playbook for OYO too. “The ability to standardise offerings in mid-tier properties, brand them the right way, increase traffic through online acquisition and boost occupancy rates is a model that can be applied in other places too. India seems to have provided enough proof of concept for OYO’s business model,” says Mayank Singhal, managing partner at Millennial Capital, an investment firm.

OYO’s investors agree. There is increasing confidence that this playbook can be rolled out in multiple markets, says Somaia, adding that while capital enables a company to expand, it doesn’t drive expansion. “One of the things… Ritesh has generally been very good at is letting opportunity dictate company priorities and guide capital allocation, and not the other way around.” But it’s still difficult to shake off the fact that the company has raised $1.3 billion in funding from investors.

Recently, OYO raised $200 million from home sharing platform Airbnb. Last year, it raised around $800 million from Japan’s SoftBank as part of its Series E funding. The round was followed by funding from Chinese ride-hailing giant Didi Chuxing and Asian ride-hailing giant Grab.

The industry’s focus has been on SoftBank, which is believed to be an investor which stresses on doubling down on growth plans and encourages massive scale. With SoftBank’s support and in line with their playbook, OYO certainly has the unique opportunity to become a global leader. “Fortunately for Ritesh, he seems to enjoy an incredible relationship with SoftBank and has always been receptive to their feedback,” says Singhal, adding that OYO’s and SoftBank’s objectives are aligned. “OYO’s success, I think, will therefore ultimately hinge on its ability to execute.”

The other challenge is management itself. Can Agarwal keep evolving as a leader as OYO evolves at a global scale? Both industry insiders and OYO’s investors seem to believe so. Also, by bringing in leaders from outside such as Ghosh and Rohit Kapoor, who is the chief executive officer of its new real estate business, he is already creating a deep and stable leadership team. “In some sense, the blending of the old guard and the new guard will play a critical role in enduring the organisation’s culture and sustaining its long-term success,” says Singhal. So what can trip up OYO? Agarwal feels it is complacency and arrogance. “Staying humble and hungry is crucial to our continued success,” he signs off.

This story was originally published in the June, 2019 issue of the magazine.