How SoftBank-Backed Hotel Chain Oyo Lost Its Way in the U.S.

The stumbles have big implications for SoftBank’s Vision Fund, which owns about 46% of Oyo. SoftBank invested $1.5 billion in Oyo over three and a half years, most recently at a valuation of about $8.5 billion. Having taken a battering with the loss of several billion dollars on WeWork, the Vision Fund can ill afford to lose money on other investments. 

Oyo’s predicament parallels that of several other SoftBank-backed startups, which used funds from Vision Fund to expand aggressively—sometimes at a huge cost. In Oyo’s case, SoftBank CEO Masayoshi Son had encouraged Agarwal to rapidly expand internationally, even if it meant losing more money, a person close to the company said. 

Interviews with nine current and former employees described a fundamental problem in Oyo’s approach: it didn’t seem to understand the U.S. market it was entering, such as how to set room rates and where to poach hotels. While Oyo’s tactics to sign up hotels as quickly as possible worked well in India and Southeast Asia, they didn’t make as much sense in the U.S. Hotel owners in the U.S. already have their choice of many franchises to sign up with, including Days Inn, Knights Inn and Super 9. That left few potential hotels for Oyo to sign. 

Mistakes during the rapid buildup could sour Oyo’s chances in the U.S. overall. Former employees said there was little oversight into how hotels spent the money Oyo gave them for improvements. Hotel owners complained that Oyo’s technology, which it pitched as helping them book more rooms, turned out to be so buggy that it hurt their ability to sign up guests.

Broader Challenges

These problems came amid broader challenges for Oyo. Between 2016 and 2018 it expanded aggressively outside India, into Malaysia, China, Europe and then the U.S. Oyo controls room pricing and markets the hotels in exchange for a cut of the revenue. The company now boasts it is the second-largest hotel chain in the world by number of rooms, after Marriott. Hundreds of thousands people worldwide sleep each night in hotels affiliated with the company, its logo emblazoned on their signs.  

The expansion has been costly: Oyo lost $335 million globally in the 12 months leading to March 2019, up from a $50 million loss a year earlier, it has reported. It has also run into widely reported protests from hotel owners in China and India, who say Oyo has gone back on agreements and delayed payments. 

Some of Oyo’s earliest investors have cashed out. Greenoaks Capital, a San Francisco–based venture capital firm that was an early backer of Stripe and Robinhood, sold nearly all of its stake to SoftBank last year, people familiar with the matter said. The Indian arms of Sequoia Capital and Lightspeed Venture Partners still sit on Oyo’s board but sold large portions of their positions last year. Agarwal borrowed to invest his own money into Oyo, increasing his stake from 10% to 30%.

An Oyo spokeswoman said Greenoaks, Sequoia and Lightspeed “continue to hold a significant stake in Oyo.”

In the interview, Agarwal defended the company’s underlying business model and approach to expansion. He said, “In most countries the gross margins are very healthy.” He said Oyo had dropped the complaining hotel owners in India and China due to their own poor service quality. 

“We are not afraid to acknowledge mistakes if there are some, and we aren’t afraid to talk about aspirations we have in the future,” Agarwal said.

He denied that the company had set a goal for 100,000 hotel rooms in the U.S., noting that the internal management goal was more like 30,000. One former employee familiar with the company’s financials said it had downgraded its forecasts over time. Agarwal said the company is making changes so that “in the future we can achieve our targets.” He also said the company may slow its pace of expansion slightly in the U.S. 

Appealing Pitch

When Oyo decided to expand in the U.S., its top executives went all in. It set up corporate offices in a WeWork in Dallas and in a smaller office in Palo Alto, Calif. Several executives,  including chief operating officer Abhinav Sinha, relocated from India to California. Agarwal started spending a week every month in the U.S. Oyo hired dozens of people with vice president titles, poaching former leaders from Uber, Amazon and Netflix. 

To sign up hotels, Oyo sent hundreds of salespeople across the country. Executives told new recruits that the company aimed to be one of the 10 largest hotel brands in the U.S. in just its first year, according to two people familiar with the presentation. “I’ve seen ‘Shoot for the stars, land on the moon’ [strategies]. It was ‘Let’s shoot for a different universe,’” a former Oyo manager said. 

Oyo made a lavish pitch to motel owners, promising them improved software, higher occupancy rates and money for some physical refurbishments in exchange for signing up. 

For instance, Oyo offered to give owners about $1,000 per room for upgrades such as nicer linens or pest control. It paid a Kissimmee, Florida, hotel $20,000 to cover termination fees associated with its existing hotel brand agreement with Magnuson Hotels. By signing up with Oyo, hotels also got new listings on travel booking sites like Expedia, giving them a fresh start with new reviews and photos. 

The pitch appealed to many budget hotel owners, who often grapple with high fees from decades-old brands such as Motel 6, Best Western and Travelodge. Oyo also claimed its technology could help hotels acquire more customers and better handle complaints.

“The hotel industry has been behind the curve technologically compared to other consumer businesses,” said David Katz, managing director and equity research analyst at Jefferies. 

Cars Instead of Upgrades

But problems quickly arose. Oyo often struggled to track how hotel owners actually spent the money it gave them for upgrades. One former sales staffer said he was instructed to tell hotel owners that they could use the money however they wanted, such as for purchasing a car. Meanwhile, several owners pocketed the money instead of making physical upgrades, and cancelled services such as free breakfasts and airport shuttles, said an employee.

An Oyo spokeswoman said the company closely monitors how hotel owners use capital expenditures “to ensure the fund is used appropriately.”

Another big problem was that not many hotels weren’t already affiliated with a big company—and those that were available were low quality. Jason Cronen, a New Orleans–based hotel industry consultant who has been tracking Oyo’s expansion, said the hotels that Oyo targets “have been passed over” already by larger budget hotel brands.

To entice more hotels to sign up, in the middle of last year Oyo started telling them it would guarantee they generate roughly the amount of revenue they produced the previous year. Oyo would get about 10% of the money that hotels made over that threshold. If hotels didn’t make that much, Oyo would eat the difference, according to employees and a sample hotel contract Oyo used that The Information viewed. Other hotel franchising companies charge hotels upfront fees that can total tens of thousands of dollars. 

Despite the enticing offer, Oyo’s pricing policy scared off some hotels. It set rates of $25 a night in some places, well below the $74 a night average rate for lower-end hotels in the U.S. as estimated by STR, a research firm. Some hotel owners worried they would lose money on their properties with that lower price.

KJ Shah, who owns a hotel in Virginia branded as a Wyndham Travelodge, considered working with Oyo. He said other hotel brands he has worked with, such as Best Western, didn’t want him to lower prices too far because it would indicate lower quality. Last year he explored switching to Oyo, but he didn’t want to give up control over pricing. “If you can’t control revenue, how do you pay all your bills?” he said.

“Oyo’s reputation is not very good among the people I know,” he added. Employees noticed that hotels increasingly balked at Oyo’s deals. Agarwal has said that Oyo’s guarantee of minimum revenue should offset hotel owners’ fear about low prices.

But the pressure to sign up more properties meant Oyo kept turning to hotels that were in poor shape. Last spring, Oyo hired construction workers to do upgrades. As one U.S.-based Oyo executive told employees, they needed to put “lipstick on a pig,” two former employees said. The company ended up requiring hotel owners to figure out how to hire their own construction crews, as Oyo fired its own workers. 

In the interview with The Information, Agarwal said Oyo had erred in not establishing formal rules with hotels to keep standards higher. Instead, it had an “unspoken” agreement with its hotels. Oyo now writes firmer rules into contracts and creates incentives to get better ratings, Agarwal said. He also acknowledged customer ratings on third-party booking sites were lower than for other Oyo hotels worldwide, but he said they would improve this year. 

Grand Ambitions

Meanwhile, Oyo’s revenue guarantees were costing the company. It planned to take a 10% cut of the revenue that went over the minimum revenue threshold. That created a potentially profitable setup if enough hotels beat the revenue guarantee. But Oyo miscalculated how to set the guaranteed revenue in many cases, forcing it to renegotiate or cancel some of its deals. 

An Oyo spokeswoman disputed this: “Oyo has a financially prudent system that ensures we maintain strong margins.” She added: “We have a mixed bag where there are many deals that have done better than our plans and some that have not met expectations.”

Its technology—including what Oyo promised included a smart pricing algorithm to help hotel owners fill their rooms—turned out to be clunky and inefficient. Early on, Oyo employees had to enter data manually until it had enough data points for an algorithm. 

Some hotels that struck deals with Oyo quickly tried to get out of them. One such was Maingate Florida Hotel, near Disney World in Florida. Its agreement with Oyo stipulated that it would get $200,000 for physical upgrades. Oyo would handle bookings and take a fee, giving the rest back to the hotel owner, according to Phil Calandrino, Maingate’s lawyer. But things quickly turned sour. Calandrino found that Oyo’s “buggy” software prevented Maingate from getting guest reservations.

Maingate broke off the agreement with Oyo and is now controlling its own revenue, he said. Calandrino added that he thought Oyo should have to follow stricter franchising rules in the U.S., rather than signing “marketing agreements.” An Oyo spokeswoman said its model was a “consulting model” that also followed U.S. law.

Oyo’s lawyers wrote in a court filing last month that “Maingate Hotel and Oyo Rooms both contend that the other has breached the marketing agreement in various ways.” It is arguing the companies should resolve the dispute through arbitration in Texas, where Oyo is based.

New Deal

Recently, the company started developing a new deal strategy, charging a flat fee to use the Oyo brand while providing hotels with its room-booking software, without minimum guaranteed revenue or an offer of money for physical improvements, an Oyo spokeswoman said. The company also is focused on trying to reduce how many hotels try to get out of its deals, a person familiar with the matter said. Employees noticed a shift to cost consciousness around when WeWork, another SoftBank company, pulled its initial public offering.

At a leadership retreat in India in December, U.S. Oyo executives talked about the need to have more honest conversations about how it would achieve growth goals. The company shifted some decision-making about what goals to set to each U.S. region rather than the central headquarters in Texas, a person familiar with the matter said. But, under pressure to start generating cash, Oyo will have to do a better job of straddling the line between growth and profitability.

Oyo has partnered with more than 300 hotels in the country, roughly one per day since it started expanding last spring. It still hopes to open one per day the rest of the year. “If we need to do 0.9 [per day] we’ll live with that. That’s not bad. That’d be a big company, one of the biggest hotel chains in the U.S.,” Agarwal said.