Tokyo: Last March, months before the meltdown at WeWork, Masayoshi Son worked through the prospects for another one of his favorite portfolio companies — a startup from India called Oyo. In a spacious conference hall at his Tokyo headquarters, the Japanese billionaire huddled with lieutenants from the startup and his own SoftBank Group Corp. to brainstorm strategy. He figured Oyo had the potential to disrupt both the staid hotel business and short-term apartment rentals in Japan, according to people in the room.
One bullet point scribbled on a floor-to-ceiling whiteboard, in particular, caught Son’s eye: a target of one million rooms within a year. In a burst of enthusiasm, he had everyone sign off on the goals right on the whiteboard, scrawling signatures under the words “BINDING” in all caps, according to a copy seen by Bloomberg News and the people present.
Today, the Oyo unit handling apartments has about 7,500 rooms, less than 1% of the whiteboard target. Son’s aspirations turned out to be an example of dramatic overreach, part of a year in which the Japanese investor’s reputation was battered by troubles at WeWork and Uber Technologies Inc.
The shortfall, which hasn’t been reported before, signals more trouble ahead for SoftBank and one of its most highly touted investments. Perhaps more concerning, the episode reveals a fundamental flaw in SoftBank’s investment strategy: Pumping billions into startups and pushing them toward outsized growth often undermines promising businesses. With its chaotic rush to expand in Japan, Oyo infuriated potential partners, alienated workers and jeopardized its reputation with local customers, according to interviews with more than two dozen of them. One incensed local customer went so far as to set up an Oyo Life Victims Association account on Twitter. Similar frustrations have been voiced by customers and hotels in India and other overseas markets.
The troubles are so pronounced Son faced questions about Oyo during his earnings briefing in Tokyo last week. He conceded there have been “some conflicts with hotel owners,” but said that is normal in such businesses and overall the performance is good. “Oyo is a wonderful company,” he said.
SoftBank declined to comment on the startup’s internal issues and practices beyond Son’s comments, but said it believes the company can have a sustainable expansion in Japan with good corporate governance.
Also read: With Masayoshi Son joining tech investing, Silicon Valley revives belief in profits
Oyo, founded by 26-year-old Ritesh Agarwal, has drawn particular attention in SoftBank’s portfolio of startups because of its similarities to WeWork. Both are trying to change traditional real estate businesses with technology. Both have charismatic young founders. Now, skeptics say Oyo could also fall short, further undermining Son’s grand ideas about technology investing.
“Oyo is a WeWork in the making,” says Santosh Rao, head of research at New York-based Manhattan Venture Partners. “They need to slow down and pull back.”
Oyo says patience is in order. In an interview, Agarwal argues his company is bringing new concepts to a business in need of fresh thinking, especially in markets like Japan. He acknowledges “teething issues” that are to be expected for a fast-growing, innovative startup and defended the use of ambitious goals.
“Leaders at Oyo aspire for ambitious targets which act as directional north stars for building for scale,” he said. “From our shareholders perspective, they have said – you have a good business plan, you have continued operating as per your business plan, please keep delivering against that.”
SoftBank is the largest outside shareholder at the company, whose backers also include Sequoia India and Airbnb Inc.
The last thing Son needs now is another big mistake. He wants to raise capital for a successor to his $100 billion Vision Fund, but potential backers have been spooked by WeWork and Uber, as he conceded last week. At the same time, activist Paul Singer has taken a stake in SoftBank, advocating for changes to boost its share price including a buyback and more transparency.
“Son needs to focus on rebuilding his reputation,” says Atul Goyal, senior analyst at Jefferies Group. “If Oyo blows up, that won’t be easy.”
Agarwal got the idea for Oyo after roaming around India on a shoestring budget, witnessing first-hand the opportunity to bring order to the anarchic industry. At 19, he set up a reservation website and began working with small hoteliers on service, design and standardized accouterments like bedding and toiletries to draw more travelers. Oyo took 25% of sales.
In India, the concept took off. The reassurance of basic quality fostered trust with customers and brought in extra revenue. Enamored of the idea and Agarwal, Son invested in 2015, two years after founding.
But as SoftBank started the original $100 billion Vision Fund in 2017 and Son invested in the world’s biggest startups, he began to stoke Agarwal’s dreams with money and ambition, according to people directly involved. Son poured about $1.5 billion into the company and encouraged the young founder to try to become the world’s largest hotel operator by room count. That would mean surpassing Marriott International Inc., founded in 1927.
The business model that worked so well in India wasn’t an obvious fit for markets like the U.S. and Europe, which already had well-established hotel chains and largely predictable quality. Yet Agarwal slogged ahead overseas, even buying a few properties outright, including the Hooters Casino Hotel in Las Vegas.
Japan was supposed to be like a second home. Son is a local hero and SoftBank’s brand is ubiquitous: It operates one of the largest wireless carriers, runs the leading web portal and owns the Fukuoka SoftBank Hawks, which have won five of the last six baseball championships. SoftBank set up joint ventures through two subsidiaries to promote Oyo’s local business.
That support fueled Oyo’s confidence as it entered Japan in early 2019. Agarwal decided to push into both its traditional hotels business and a newer operation called Oyo Life, which offers furnished apartments without the typical hassles of security deposits or guarantors. With Son’s enthusiastic backing at the March meeting, Agarwal and his team set the audacious goal of becoming the biggest operator in both businesses — in one year.
“Many entrepreneurs want to do a land grab, and it’s often the right thing to do, but you have to balance between your desire and ability to do it,” says Ben Narasin, venture partner at New Enterprise Associates Inc., which isn’t involved with Oyo.
There were missteps at Oyo from the start. The Japan hotel team, led by a transplant from India named Prasun Choudhary, figured they could get to as many as 75,000 rooms in the first year, which would put them ahead of the Apa Hotels chain in the No. 1 spot. But they took as their starting point an inflated addressable market of 1.6 million rooms based on numbers from the local tourism authority: They included campgrounds, bed-and-breakfasts and pay-by-the-hour love hotels, which weren’t part of Oyo’s business plan, according to people involved at the time.
Oyo Life, the apartment rentals business led by another Indian lieutenant called Kavikrut (who like many Indians goes by one name), set the goal of 1 million rooms in part because it was a stunning, round number that would exceed the capacity of the Japan market leader, the people said. That was the target that caught Son’s attention in March.
To reach their goals, the two lieutenants began hiring furiously. Human resources staff conducted as many as 15 interviews a day, making offers to many the same day, people involved said. At job hunting events, prospects would get recruited on the spot, sometimes signing hand-written offer letters. Oyo Hotels surged to more than 580 people, while Oyo Life added 300, the company said.
“Oyo believes that building a highly-motivated local team and strong management leadership is an important strategy for launching and succeeding in a new market,” Choudhary said in an interview. “This team is what has made it possible for us to partner with over 190 hotels.”
But Oyo’s technology wasn’t ready. In the first three months after launch, the hotel operation double booked rooms because it had failed to integrate with local travel agencies, according to Oyo and former employees. Staff in India entered reservations made in Japanese manually, introducing errors. Some hotel owners found their rates reduced to just pennies by inscrutable algorithms. When they complained, the fix would take days because pricing was controlled in India, according to former employees.
At the same time, Oyo Life workers struggled to keep track of keys they received from landlords because of software created in India. One tenant interviewed by Bloomberg spent the night in his car outside of his new apartment because he was given a wrong code for a lock box containing the keys. Even though it was during working hours, no one was manning the help lines at the company, he said. Two other customers interviewed by Bloomberg also had trouble getting into their apartments.
“Oyo operated like they were driving a Ferrari, instead of a hatchback,” said Taito Ito, executive officer at Japan Accommodation and Lodging Foundation, a hotel industry group handling about a dozen complaints against the company from its members. “It’s difficult to see this business going anywhere in Japan.”
There were some satisfied customers, including one Oyo Life user who raved about the convenience of getting an apartment via an app and raking in points by paying rent with a credit card.
Despite the rocky start, Agarwal landed a starring role in July at SoftBank World, an annual event Son hosts in Tokyo. On stage in front of hundreds of the Japanese company’s suppliers and customers, Agarwal explained how Oyo is using data to beat the competition. Its algorithms can evaluate properties in under five days, compared with months for traditional hotels, he said. Artificial intelligence helps Oyo predict what kind of interior design can boost demand — like pictures of Marilyn Monroe — and adjust prices more than 43,000 times a minute.
Beaming on stage, Son said it was only a matter of time before Oyo, the third-biggest hotel chain by room count, would surpass the established giants.
“In three months, he will become the world’s biggest hotel king,” Son said at the time. “This would be a first in human history.”
Unbeknownst to the crowd, Agarwal and Son were in talks about an unprecedented deal at the time. To increase his stake in Oyo, the young founder would borrow $2 billion to buy out some of his earlier investors. To reassure banks including Mizuho Financial Group Inc. to lend the money, Son personally guaranteed those loans, a highly unusual arrangement. The deal would double Oyo’s valuation to $10 billion.
Just weeks later, in early August, it became clear Oyo’s hotel business in Japan was falling far short of its targets. Agarwal told Choudhary to start firing under-performing staff, according to a message reviewed by Bloomberg News. But top management didn’t realize at first that labor laws in Japan prohibit such layoffs, according to former HR staff.
Oyo had begun hiring before it set up all its operations, so many employees joined under temporary contracts through an outside recruiter with a plan of making them full-time after six months. When that time came, Oyo tried to cut salaries for a number of them as much as 50%, according to former employees and copies of documents seen by Bloomberg News.
Also read: When SoftBank’s Masayoshi Son let Paytm & Oyo tout the future of artificial intelligence
Alarmed by worker complaints, SoftBank sent its own compliance staff into Oyo for a week-long internal audit, the people said. In the end, Agarwal’s management withdrew the low-ball offers and said the revisions were an administrative mistake. Oyo says it wasn’t downsizing and was only making a fair assessment of staff. Choudhary acknowledges that, at first, Oyo thought it could manage performance in Japan like it has in the rest of the world.
Several former Oyo Life employees, who declined to be named because they signed confidentiality agreements, described a chaotic, disorganized work environment. The company poached executives from top-tier consulting and technology firms who excelled at inspirational talk, but had little understanding of real estate and even less patience for the industry’s slow-moving ways, the people said. One of them said the real estate industry just doesn’t run on startup time.
The push for growth hurt Oyo’s relationship with suppliers too. In one instance, the company placed a 100 million yen ($910,000) furniture order with Japanese maker Takumi Otsuka, clinching the deal with a handshake. A month later, Oyo canceled even though the manufacturer had already set up a dedicated line and began production, according to staff from Oyo.
Oyo denied the cancellation of any confirmed orders, but acknowledged there were lapses in communication in its early dealings with Takumi Otsuka. Oyo says the two companies now share a healthy business relationship and the furniture maker remains one of its valuable suppliers. Takumi Otsuka declined to comment.
In October, with Oyo Hotels short of its original targets, the company mobilized support staff to do sales. It launched Project Yukichi, named after a famed educator whose face is on the 10,000 yen bill, with the goal of that many new rooms a month. The workers, already struggling to keep up with complaints from hotel owners, were told they are also responsible for producing 30 new sales leads a month, according to former employees and company presentations. The “OYOpreneurs,” as they were called, got a three-day training session from Bain & Co. to get them up to speed, the people said.
With so much energy focused on sales, customer service suffered. One Oyo Life tenant told Bloomberg News he moved into his room to find bed sheets and covers, but no bed or mattress to put them on. After facing a prospect of sleeping on the floor for a week, he hauled over a futon from his parent’s house.
Yutaro Kondo, a 25-year-old entrepreneur, paid 86,000 yen for a 21-square-meter studio about an hour by train from central Tokyo. While a premium to similar listings, the contract covered internet access, all utilities and the last month free of rent. But he didn’t have heat for weeks so he moved out in December. Shortly after, he got a bill for the month that was supposed to be free.
“The simplicity they offered is attractive to a lot of young people,” Kondo said. “I feel pretty disappointed they didn’t deliver on that promise.”
Hotel owners are unhappy too, especially with disputes over money. Oyo aimed to increase business for its partners by dropping rates at first and then increasing the price as occupancy went up. To help ease the pain, it guaranteed owners a minimum level of revenue provided they met certain criteria. Instead, a number of hotels found the payments fell short and the company unwilling to make up the difference.
Oyo acknowledged such disputes and said that in some cases hotels failed to fulfill their contractual obligations. Still, it said it decided to pay in full to mend relations. One SoftBank executive said there were troubles between Oyo and about 40 hotels out of about 200, emphasizing many hotel owners are satisfied.
“Employees are exhausted from dealing with Oyo,” said Shingo Ozaki, who manages Hamakan Hotel on the southwestern island of Kyushu, which is considering ending its relationship with the startup.
Oyo said it is continuously working to improve software and it launched a call center that in the past month handled 1,700 tickets from partners and guests.
Late last year, after the debacle at WeWork, Son overhauled his approach to startups. At a gathering of portfolio companies in California, he cautioned founders that they need to have a strategy for profitability and that growth couldn’t be the sole target. Agarwal was in attendance.
But any changes may be too late for Oyo in Japan. In December, news leaked out that SoftBank’s Yahoo Japan sold its stake in Oyo Life, liquidating the partnership without any explanation. In Japan, the hotel room count has stalled at little over 5,000, with just over 300 new rooms added in December.
Oyo disclosed this week that revenue increased more than four-fold to $951 million for the fiscal year ending in March 2019, while losses surged six-fold to $335 million.
“Entrepreneurship is a game where you have to learn to crawl, then walk and only then to jog and run,” said Narasin of NEA. “Skipping steps can be dangerous.”
At least some hotels are giving up, tired of the troubles they’ve had with Oyo. Shoji Sato, president of the company that runs an Oyo affiliate called Sawara Kita Hotel, said the company didn’t pay revenue guaranteed for January after reducing room prices to draw more customers. He said Oyo workers often ignore his inquiries or are slow to respond too. Oyo said there is no delay in payment because the January cycle closes in mid-February.
“I believed in Oyo after the salesman showed me a brochure with details about SoftBank. SoftBank is led by Masayoshi Son, who is very famous and popular in Japan,” says Sato. “Now we want to end the relationship. I am angry, of course, of course.”
Also read: How 2019 saw Masayoshi Son go from tech guru to struggling venture capitalist
Great article! So much I didn’t know.
May I offer an insight into OYO’s modus operandi of making the so called profits?
This is my personal experience with Oyo as a property owner –
They didn’t pay me my mimimum guarantee amount that was agreed upon, they intimidated me with their large legal team when I objected. They increased comission unilaterally, without due notice period. They increased housekeeping charges for their pathetic cleaning services. After my emails to them, they also stopped booking any customers for my hotel and didn’t let me use my own property for months. Since there was no minimum guarantee and no customers, i lost more than 4 lakh rupees. When i complained multiple times about the 0% occupancy for months, they reluctantly started selling my rooms at ultra low rates. Oyo didn’t care if I earned anything, they just wanted to beat competition. Which is also why other players in the market almost died out and the hotel industry is in such a bad shape now. Hotel owners all over India lost so much money, a usual traveller cannot even comprehend the scale of this scam by OYO.
Imagine this scenario and multiply it by hundreds of thousands-
My Luxury double room sold at only 600Rs. by OYO . Now out of this 600, OYO was giving me 130rs. Only, while it kept the other 470Rs as comission and housekeeping and other hidden charges.
They only gave me and many other hotels only 20-25% of booking amount, in some cases even lower. They promised us 70% when they approached us for business.
Dont even ask me about the customer experience. Sometimes i had to clean dirty washrooms and dishes from customers because Oyo housekeeping didnt turn up on time and i didn’t want negative reviews. From a property owner who was earning pretty well till then even by renting out, i realized how OYO has made me their janitor.
They should be stopped here only so that they cannot have scams internationally. They are not refunding my 40000 from last 5 months. No one is there to help and now they have stopped answering my calls and emails. I cancelled my package months ago but still waiting for my refund.
Comments are closed.