This 24-Year-Old Built a $5 Billion Hotel Startup in Five Years
(Bloomberg) -- Finding clean, affordable hotels in India can be a traveler’s nightmare. Too often, what looks good on a website turns out to be a roach-infested room in a crumbling building where water has to be schlepped to the bathroom in a bucket.
Ritesh Agarwal’s solution is a booking app that promises truth in advertising and branded hotels that don’t deliver unpleasant surprises. The chain he started in 2013, Oyo Hotels, has already become the largest in India, a chaotic market worth $4.5 billion, according to New Delhi-based researcher Hotelivate.
Now Agarwal is going overseas with his franchise model, which combines a reservation site with a full stack of services for small hoteliers who want to up their game. Yesterday the company said it’s raising $1 billion from SoftBank Vision Fund, Sequoia Capital and other investors to fund expansion in countries including China, where Oyo opened in November. Last week it started service in the U.K., bringing the business to a developed market for the first time.
“By 2023, we will be the world’s largest hotel chain,” the 24-year-old founder said in a recent interview at an Oyo hotel in a suburb of New Delhi, where the company is based. “We want to convert broken, unbranded assets around the globe into better-quality living spaces.”
Oyo employs hundreds of staffers in the field who evaluate properties on 200 factors, from the quality of mattresses and linens to water temperature. To get a listing, along with a bright red Oyo sign to hang street-side like a seal of good-housekeeping approval, most hoteliers must agree to a makeover that typically takes about a month. Oyo then gets 25 percent of every booking. Rooms usually run between $25 and $85.
“Oyo is going all out to build a very large base of hotel partners and become a bona-fide brand,” said Mrigank Gutgutia, an analyst with RedSeer Management Consulting. “Their app model works well because price-conscious travelers who search by location like to feel they have lots of choices.”
Agarwal wouldn’t give sales numbers, but he said the number of transactions has tripled in the last year, with 90 percent coming from repeat travelers -- and no money spent on advertising. There are now 10,000 hotels in 160 Indian cities, with more than 125,000 rooms, listed on the site, he said. That’s about 5 percent of India’s total room inventory, according to RedSeer estimates.
“Over 150,000 heads rest on our pillows every night,” said Agarwal, a trim man who tugs at a sore ear as he talks. Constant airplane travel has given him an ear ache--one unwanted side effect of the company’s hyper growth.
Not everyone is happy with the Oyo experience. Payal Gupta, a recent guest, was disappointed by her stay at a property near Delhi Airport, which she said felt like a house that had been hurriedly converted into a hotel. The sheets were dirty and the bathroom was cramped. “It isn’t enough to have Oyo-branded shampoo and moisturizer,” she said.
Gutgutia, the RedSeer analyst, said the company will need a steady stream of capital and an army of people on the ground to maintain standards. “Sustaining a high-quality experience could be a real challenge,” he said.
Indian startups have been on a tear recently, with more than a dozen worth now more than $1 billion, according to researcher CB Insights. Walmart last month paid $16 billion for a majority stake in Flipkart, an online retailer founded in 2007.
The funding announced yesterday by Oyo values the business at $5 billion, according to a person familiar with the deal who asked not to be identified. That makes the startup India’s second most-valuable, after One97 Communications, owner of Paytm, a digital payments company with financial backing from Warren Buffett’s Berkshire Hathaway Inc.
A college dropout in a country where university pedigree is obsessed over, Agarwal has become an unlikely business star, with frequent appearances on televised award shows and a cover story last year in Forbes India.
Agarwal says he never stayed at a hotel until he was picked to represent his school at a trivia competition held in a town a few hours away from home when he was 12. He got the idea for Oyo a few years later, while traveling India on a shoestring budget and lodging at some truly horrible guest houses. It wasn’t enough to aggregate hotels on a website, you also had to repair them, he realized. To learn the hotel business from the ground up, he spent a year cleaning rooms at one of them.
In 2013, he got a $100,000 fellowship from Peter Thiel, the PayPal co-founder who subsidizes students who drop out to start their own companies. The big break came in 2015, when he got $100 million in venture funding from investors including Silicon Valley’s Sequoia Capital and Japan’s SoftBank Group Corp.
In November, Agarwal brought the business to China, starting with a single listing in the industrial city of Shenzen. Now, less than a year later, travelers in the world’s most populous country can choose from more than 1,000 Oyo-branded hotels and 87,000 rooms in over 170 Chinese cities.
For Agarwal, though, there’s still a small hitch. He says his mother keeps nagging him to take a break from the business and go back to college. “But why let university interfere with my education?” he said with a laugh.
©2018 Bloomberg L.P.