Tag: OYO

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Editorial

5 Things Wrong With The Indian Startup and VC Ecosystem

Do you know what’s common between OYO, PayTM, BYJUS, and Swiggy? While they have a valuation of greater than $10 billion, none of them are profitable. Startups have for long aimed for valuation and growth. Profitability is far from visible for many unicorns. 

Speaking of India’s largest IPO turned fiasco, the PayTM IPO. The IPO was oversubscribed 1.89x and ended up listing at a discount, costing investors $900 million in just two days. The party seems to have ended with PayTM IPO, where investors have lost close to 60% of their wealth as of February 2022. Institutional investors and venture capitalists (VCs) offloaded shares right before PayTM’s IPO, while retail investors later bore the brunt. Even anchor investors exited the company as soon as their lock-in period ended.

Starting in 2022, there has been a lot of chatter on startups closing down, firing all of their workforces, employees being ill-treated, startup founders being fired for governance issues, and much more. This brings us to a question: what’s wrong with the Indian startup ecosystem?

Valuation is King! Not Profit

As of February 2022, India is home to 91 unicorns, and most aren’t profitable. While the ultimate aim of a firm used to be ‘profit maximization’, now it has become ‘increasing shareholder’s wealth’. It seems like profits are for businesses and startups earn valuation. While sky-high valuation (with no profitability) is something that helps VCs and founders grow their wealth and enterprises, it lays the groundwork for a bubble that could explode once the ecosystem runs out of liquidity.

Customer Is King…At The Cost Of Employees?

Recent startups have had reports of poor human resource (HR) practices. It seems that the entire ecosystem is following a single motto: ‘Hire To Grow, Fire To Sustain’. Unicorns like OYO, PayTM, and Byju’s have laid off employees without any benefits or even a notice period and violated essential labor laws. Gig workers for unicorns like Zomato and Swiggy often go on strikes and claim to be underpaid.

BYJUS and WhiteHat Jr were in the news after clips of management’s misbehavior with its employees surfaced on social media. Pradeep Poonia, a software engineer, exposed malpractices to startups like BYJUS and WhiteHat Jr. through social media.

LIDO, an edtech startup, shut its operations and fired all of its employees without a notice period or prior intimation. The startup closed down nearly 5 months after it raised $10 million. Tiger Global-backed OkCredit fired around 35% of its workforce. On the contrary, the company had planned to ‘double its workforce’ by the FY22 end. These are not the only reported cases. Most HR malpractices go unquestioned by the ecosystem, making ‘hire to fire’ a norm in the startup world.

High Customer Acquisition Cost (CAC)

Point blank, Indian startups have a very High Customer Acquisition Cost (CAC). At a seed or early stage, when resources are limited, startups tend to spend way too much on advertising, marketing, and promotion. Eventually, startups end up exhausting their capital on acquiring customers instead of spending more on customer service or product development.

Poor Product and Flawed Business Models

Looking around the startup ecosystem markets, it feels like any product + e-commerce = a million-dollar startup. While e-commerce is the backbone of most successful enterprises, startups fail to understand the backbone of the business. They fail to realize that a product is its best salesperson.

Startups Spread Fast and Fail Faster

Startups intend to spread like wildfire and end up getting engulfed by one. Most startups in today’s time want to expand across India. Each area in the country comes with a different set of social, cultural, economic, political, physical, and physiological challenges. Instead of focusing on one area at a time, startups scatter their locations, making it problematic to handle.

Startups have been a hot topic in our country ever since the business reality television series Shark Tank India aired. The general public is more aware that bootstrapped or seed-round startups face challenges. The startup bubbles have started popping, and VCs are now more conscious about practices that could drive a startup down. One can expect startups to have a more disciplined approach and a greater success rate in the next ten years.

What are your views on the current state of the Indian startup ecosystem? Let us know in the comments section of the marketfeed app.

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Editorial

OYO Rooms Files For IPO: Pre-IPO Review

oyo ipo review

Oravel Stays Limited, popularly known as OYO Rooms, has filed its Draft Red Herring Prospectus (DHRP) with the Securities and Exchange Board of India (SEBI). The papers filed by OYO are not final and give only insight into its intention, business model, and the challenges it faces before the IPO. The loss-making company with a valuation of close to USD 9 Billion has to confront its own set of challenges before going ahead with a successful IPO. The company plans to raise close to Rs 8,430 crore through its IPO, expected to launch by year-end. This piece analyses the current position of OYO and the challenges it has to tackle before it debuts on the stock market. 

Where Does The Company Stand?

  • OYO was started in 2012 by CEO Ritesh Agarwal at the ripe young age of 20. The company provides short-stay accommodation, mainly targeting budget travelers. OYO has more than 1.57 lakh storefronts (properties/hotels) across more than 35 countries listed on its platform, with India, Malaysia, Indonesia, and Europe contributing to more than 90% of the total revenue. 
  • During inception, OYO used to lease hotels at a particular price and rent them out on their platform for a specific rate. This model later, however, changed to a commission-based revenue model. OYO charges around 25-30% commission on most bookings. 
  • The company continues to operate at a loss. Post COVID-19, the company’s total revenue, net loss, and expenses all dipped by ~70% between FY 20 and FY21. The Gross Booking Value fell by 66.9% in the same period, and revenue from contracts with customers declined by 69.9%. 
  • In the post-COVID-19 period, the company has clearly managed to trim its expenses and play it safe. The company made plenty of layoffs, imposed pay cuts, and restructured the company’s management, leading to a ~63% reduction in employee benefit expenses in FY21. Marketing and promotion expenses were cut down by ~71% in the same period. 

Complex Structure and Shareholding Pattern

  • OYO has 80 subsidiary companies out of which 12 are yet to commence operations. Apart from that, it has 40 Joint Ventures out of which 35 have commenced operations. Many of these companies are shell companies registered in a few of the many Caribbean islands. 
  • The company has a complex shareholding pattern. SVF India Holdings is an offshore company of SoftBank that owns close to 46.9% stake in the company. SVF India Holdings is wholly owned by SVF Holdings (UK) LLP. Apart from Ritesh Agarwal’s 8.2% stake in the company, he set up RA Hospitality Holdings (Cayman), an offshore company that owns a 24.9% stake in OYO. OYO uses these offshore companies to raise funding. 
  • If OYO were to get listed, retail investors would be far less likely to understand the transactions made within the group company. OYO’s complex shareholding and group structure makes it opaque in the eyes of a common investor, is it time for OYO to simplify the company’s structure shareholding?

What Challenges Does The Company Face?

  • The COVID-19 pandemic has severely impacted the hospitality industry as well as OYO’s business. Any adverse changes in the situation could continue to affect OYO’s business.
  • The company has consistently recorded net losses since incorporation. The company’s ability to achieve profitability might be delayed.
  • Inability to retain existing Patrons and Customers or cost-effectively acquire new Patrons and Customers could impact the company’s business and finances. The company has been in dispute with many existing storefront owners who claim that OYO takes an unfair commission and has delayed or denied payment. Some hotel unions have even called for a ban on OYO in certain areas. 
  • The company is “foreign-owned and controlled” under the Consolidated FDI Policy and FEMA Non-debt Instruments Rules. It is subject to certain foreign investment restrictions, limiting its ability to attract foreign investors and its ability to raise foreign capital is subject to certain conditions prescribed under Indian laws.
  • Any adverse outcome in legal proceedings involving Zostel may materially and adversely affect the company’s business, reputation, prospects, results of operation, and financial condition.

Zostel Vs OYO – A Key Concern  

In 2015, OYO and Zostel’s subsidiary ZO Rooms were in talks for a merger. The two signed a term sheet in 2015 where Zostel promised to transfer a part of its business to OYO. In return, Zostel and its lead investor Tiger Global were promised a 7% stake in OYO. The deal however did not come into effect ultimately. Zostel claims that it has already transferred the agreed part of the business to OYO, but has not received the promised 7% stake.

After plenty of disputes, disagreements, and problems, the two companies filed a series of criminal and civil complaints against each other. Later, the Delhi and Gurgaon High Court ruled in favor of OYO, after which Zostel appealed to the Supreme Court. The Supreme Court asked the two parties to settle the dispute through arbitration. In 2021, the Arbitral Tribunal ruled in favor of Zostel and asked OYO to transfer the promised 7% stake to Zostel. 

With a winning hand, Zostel has now planned to approach SEBI and stall the IPO till OYO does not execute the deal signed in 2015, giving Zostel a 7% stake in the IPO. If OYO ultimately decides to provide Zostel with a stake, the shareholding pattern of OYO will be in a complete mess, ultimately impacting other critical shareholders of the company.  


You can read the official arbitration order here.

Where Will OYO Use The Money Raised From The IPO

OYO plans to raise Rs 8,430 crore from its IPO, out of which Rs 7000 crore will be a fresh issue of shares. The remaining Rs 1,430 crores will be an Offer For Sale(OFS) of existing shareholders, which include – SVF India Holdings (Cayman) Limited, A1 Holdings Inc, China Lodging Holdings (HK) Limited, and Global IVY Ventures LLP. Founder Ritesh Agarwal is not going to dilute his stake in the company. 

The company plans to use the net proceeds from the sale to:

  • Pay off debt worth Rs 2441 crore.  As of July 2021, OYO has a consolidated debt of Rs 4,890 crore
  • Use Rs 2,990 crore for expansion and organic growth
  • Use the remaining amount for General Corporate Purposes. 

OYO’s IPO has too many problems starting at its face. Poor finances, legal disputes, and complex company structure, to name a few. The world is staring at inflation, high oil prices, and power shortages. OYO will have to balance its expenses to steer past this rough patch. The only thing that is keeping its IPO buzz alive is the IPO bull run. If the IPO launches when the IPO bull run is still on, investors can expect a fair share of listing gains. If the IPO launches after the US Fed rate hike, global markets shall contract altogether, eventually impacting any IPO, let alone OYO’s. Do you think OYO’s IPO will be a smooth sail? Let us know in the comment section in the marketfeed app available for Android and iOS.