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Startup corner | Oyo new Softbank darling after WeWork setback. Should it be cautious?

Softbank-invested WeWork’s IPO hit a bump due to valuations that seemed too high. A share buy-back by founder helped Oyo’s valuation jump three-fold within a year.

September 26, 2019 / 02:47 PM IST
Representative Image

Representative Image

Oyo is reportedly in the market hoping to raise up to $1 billion at a valuation that could touch $15 billion. This time, too, Japanese technology investor Softbank is likely to lead the funding.

The valuation is a three-fold jump since September 2018 when Softbank first led Oyo’s first big round of funding (around $1 billion) and the Indian budget hotel company was valued at $5 billion. Since inception, Oyo has raised around $1.7 billion from Softbank, Airbnb, Greenoak Capital, Sequoia Capital, Lightspeed and Hero Enterprises.

The sudden change in Oyo’s valuation happened when its founder Ritesh Agarwal decided to buy back shares from investors to up his stake to 30 percent from around 10 percent a few months ago. That was an unusual transaction, and Agarwal bought back the shares at double the valuation ($10 billion).

Interestingly, Agarwal’s share buyback was financed by Nomura and Mizuho who consider Softbank as one of their top clients. Soon after, Softbank said it gained nearly $4 billion in Vision Fund-I which invested in Oyo in September 2018. Part of the gains could be attributed to its investments in Oyo doubling in value after the founder bought back shares.

With Softbank ready to lead another round of funding, it is clear that the Japanese investor’s bets on the Indian startup is quite high, and probably higher than it should be.

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The year so far has not been so good for Softbank. Most of its listed investees, including Uber, are trading much below their initial public offering (IPO) price, except two – Guardant Health and 10X Genomics.

To add to that, We Company, the parent of co-working space operator WeWork, had to postpone its much-talked-about IPO last week as it failed to attract investors. WeWork, which raised funds for a valuation of $47 billion in January, was receiving a valuation of just $20 billion for the IPO.  Softbank is the largest private equity investor in We Company. Some analysts have already raised questions about Softbank’s investment rationale.

That question will arise again if Softbank again invests in Oyo within 12 months, that too at triple the valuation. While investing in a disruptive startup that has just entered the growth phase may not be a bad decision, Softbank can’t afford having more than one WeWork in its portfolio, especially when it is struggling to raise money for its second Vision Fund.

For Vision Fund-I, it got Saudi Arabia government’s Public Investment Fund and Abu Dhabi’s Mubadala Investment Co to pump in more than half of $100 billion corpus. As of June 30, the Wall Street Journal reported, Softbank’s Vision Fund-I earned around $6.4 billion of gains since inception. Most of the Vision Fund’s investees, the Journal reported, are still burning cash and losing money. Softbank’s hope is a few (five or six) IPOs that are likely to happen by March 2020. But things do not always go as planned.

To be fair, Oyo is a good bet. It has already emerged to be the world’s third-largest hotel operator, and aims to become the world’s largest hotel chain by 2023.

Softbank’s bet on Oyo is probably based on its fast-paced success so far, especially in China and India – the world’s two most populous countries. But, these are the markets where around 80 percent of hotels are unbranded, and operated by unorganised players or independent operators. Oyo is now eyeing developed markets, including the US and the UK, where majority of hotels are branded.

Last week, Oyo rebranded the 675-room Hooters casino resort in Las Vegas, and said it is looking to get into the luxury hotels segment. Besides entering the US and UK markets, Oyo fast-tracked expansions across Malaysia, Nepal, the UAE, Indonesia, the Philippines, China and Japan. It also entered into the co-working space by acquiring Innov8 and is in talks to buy cloud kitchen operator FreshMenu, besides expansion into apartment renting, hostels, home stays among other things.

But as we have said earlier in these pages, there are multiple challenges and the going will be difficult. Moreover, Oyo’s revenues are still very small. Its core Indian business had revenues of Rs 420 crore or $59 million in year to March 2018, which the company hoped to jump to Rs 1,480 crore by March 2019, reported the Financial Times. It reported a loss of Rs 360 crore in the year to March 2018.

Softbank, on its part, is doubling down on its bets and has entered into an operational relationship with Oyo. It is not just a financial investor in Oyo anymore. Earlier this week, Oyo’s parent Oravel Stays reportedly formed two joint ventures (JVs) with SB Topaz, an entity of Softbank. The JVs will focus on acquiring real estate assets – from land parcels to fully developed properties – for its hotels business.

For Softbank, Oyo may be a good bet now. But its limited partner investors and analysts may well question this second investment in Oyo looking at its extremely fast-paced expansion into almost everything, coupled with the inflated valuation metrics.
Sounak Mitra is an Associate Editor, Moneycontrol. He has been writing on corporate issues and policy for more than 15 years, having previously worked with Mint, Business Standard, Mergermarket, The Telegraph and The Times of India.

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