SoftBank leads $250m funding of Oyo to fight rivals in budget hotels with sheer scale

Oyo founder and CEO Ritesh Agarwal. Photo credit: Oyo.

Japanese giant SoftBank is keeping its faith in India’s budget accommodation provider Oyo, despite its mounting losses and growing competition. The SoftBank Vision Fund has led a whopping series D round of US$250 million for Oyo. Existing investors Sequoia India, Lightspeed Venture Partners, and Greenoaks Capital participated in the round, while Hero Enterprise joined in as a new investor.

Just last week, Hong Kong-based hedge funds Ward Ferry Management and Karst Peak Capital led a series C round of US$34 million in Treebo, one of Oyo’s key rivals. Unlike Oyo, which markets a few rooms in each of the hotels on its platform, Treebo adopted a full inventory model, with its partner hotels operating like franchises. This aims to create a differentiator in quality assurance, which can be harder with a partial inventory.

We are developing capabilities to add 10,000 rooms to our network each month.

Oyo too has moved to a full inventory option with its recent launch of a chain of hotels under the Townhouse brand. While this improves its ability to ensure a standard quality for customers, it’s a cash-burner. Oyo’s losses widened to US$77.5 million in the last financial year, 25 times larger than its losses during the previous year, according to regulatory filings.

Thus the fresh funding, which takes the total capital it has raised to around US$450 million, comes at an opportune time. But Oyo faces stiff challenges in driving home its advantage with funding and scaling. Apart from other startups like Treebo, FabHotels, and Vista Rooms – founded by a former Oyo executive – India’s leading travel portal MakeMyTrip has also been aggressively pushing into the budget hotel and alternative accommodation space. In such a milieu, India’s largest homestay portal Stayzilla shut down earlier this year.

See: Why Stayzilla backed by Matrix and Nexus shut down

Apart from financial muscle, MakeMyTrip has the advantage of offering package deals to travelers booking flights. While it earlier partnered with budget hotel aggregators, the travel portal now prefers to deal directly with hotels to build a parallel line of business.

The fresh capital infusion will revive Oyo’s hopes of outdoing its rivals by sheer scale. “We are developing capabilities to add 10,000 rooms to our network each month,” says Oyo founder and CEO Ritesh Agarwal.

SoftBank has been on the rampage in India this year, after writing off its losses in ecommerce company Snapdeal whose founders refused at the last minute to merge it with rival Flipkart. The Japanese investor then pumped US$2.5 billion directly into Tencent-backed Flipkart to counter Amazon. Earlier, it had made a solo investment of US$1.4 billion in ecommerce and payments company Paytm, which also has the backing of Alibaba.

See: Clash of the Titans: SoftBank invests $2.5b in Flipkart to stop Amazon

The latest investment in Oyo reaffirms SoftBank boss Masayoshi Son’s bullishness on the long-term potential of India’s consumer internet market.