Commentary: SoftBank-backed Oyo risks seeing its valuation slashed – just like WeWork

Oyo Hotels & Homes reported this week that its losses have jumped sixfold in the year ended March 2019, adding to the worrying signs that another company backed by Masayoshi Son’s SoftBank Group is looking vulnerable – just like WeWork, the US office-sharing firm that ran into financial trouble last year.

The Indian hospitality startup is undoubtedly a success story, having achieved a US$10 billion valuation after raising US$3.2 billion of capital in just six years, according to data from Crunchbase. However, it appears that a bold growth strategy may have been pushed too far, perhaps partially because of the Japanese billionaire’s grandiose goals.

Photo credit: Oyo

During a meeting with Oyo’s management in March 2019, Son’s well-documented zeal for taking wild risks was sparked after seeing the startup’s goal of securing 1 million rooms within a year, Bloomberg reported recently. The target was jotted down on a whiteboard, and the SoftBank CEO got people to literally sign off on it – everyone affixed their signatures underneath the word “BINDING” written in all caps.

Anecdotes such as this make it no surprise that Oyo’s recently released financials paint a picture of a company brashly spending cash. Even though the company reported a 450% increase in revenue to US$951 million in the fiscal year ending March 2019, it sank deeper into the red as losses jumped over 600% to US$335 million.

Sources: Oyo, Zero One

Oyo’s international businesses accounted for 75% of the losses, most of it coming from China. Launching in a new country may at times require some cash burn, but forking out a quarter of a billion dollars in an untested market within just a year is a major bet.

Sources: Oyo, Zero One

Moreover, keep in mind that while Oyo has just released financial figures, they’re for the year to March 2019 – that’s data from nearly one year ago. Given the news reports about Chinese hotel owners not being paid what they were promised and Oyo’s massive retrenchment exercise, it’s fair to expect that the year ending March 2020 could be similarly loss-making.

If FY 2020 will also be unprofitable considering Oyo’s early troubles and the negative impact of Covid-19 – the disease caused by the novel coronavirus identified last year in Wuhan, China – on travel and tourism, then back-of-the-envelope math suggests a cumulative loss of US$722 million over the last three years ending March 2020.

This rough estimate is based on the assumption Oyo will post the same amount of net loss for this year as last year, reflecting massive cumulative cash burn. Note that an estimate for the year to March 2021 – a period where Covid-19 could negatively affect Oyo’s business – also isn’t included.

Selling the dream