Oyo under fire for toxic culture, doubts over business model

Last Updated: Sat, Jan 04, 2020 15:04 hrs
OYO Logo (Image courtesy: Wikipedia)

New Delhi: Oyo, the marquee investment by Japanese giant SoftBank and one of the largest start up companies, is facing fire for questionable practices, toxic culture and a business model which is looking unviable.

As per a report by the New York Times, the "SoftBank Jewel in India" has a toxic culture and troubling incidents.

While Ritesh Agarwal's Oyo aims to be the world's biggest hotel chain, but its growth was fueled by questionable practices, employees said.

Oyo, a start-up that offers budget hotel rooms, has grown into one of India's most valuable private companies and aims to be the world's largest hotel chain by 2023.

But at least part of Oyo's rise in India was built on practices that raise questions about the health of its business, NYT said in the report adding that Oyo offers rooms from unavailable hotels, such as those that have left its service, according to the company's chief executive and nine current and former employees. That has the effect of inflating the number of rooms listed on Oyo's site.

Thousands of rooms are from unlicensed hotels and guesthouses, its executives have acknowledged. To deter trouble from the authorities over the illegal rooms, Oyo sometimes gives free lodging to the police and other officials, according to nine of the current and former employees.

Some hotel operators have sought to file criminal complaints against Oyo, which said it withheld payments primarily over the hotels' customer service issues.

"It's a bubble that will burst," said Saurabh Mukhopadhyay, a former Oyo operations manager in northern India who left the company in September, the NYT report said.

Oyo is part of a group of prominent start-ups that have sprinted to get as big as possible, fed by money from large investors such as the Japanese conglomerate SoftBank. Now some of those young companies - from the office rental company WeWork in New York to the delivery service Instacart in San Francisco - have started showing cracks in their businesses.

Any fall by Oyo could blight India's start-up landscape, which has received billions in foreign capital in recent years, spawning other multibillion-dollar companies such as the ride-hailing firm Ola and the digital payments provider Paytm, NYT said.

"It would also be another black eye for Softbank, which is Oyo's biggest investor and owns half the start-up's stock. Masayoshi Son, SoftBank's chief executive, has hailed Oyo as a jewel of his company's $100 billion Vision Fund, even as he recently wrote off billions of dollars on other investments like WeWork," the report said.

"This is the only company which went global at this scale from India," Satish Meena, a senior forecaster for the research firm Forrester in New Delhi, said of Oyo. "But as of now, there are serious doubts about the business model."

Oyo is trying to expand globally and now offers more than 1.2 million rooms in 80 countries, including the United States. It employs more than 20,000 people and has raised more than $2.5 billion in funding. "Mr. Agarwal has become a business star, hobnobbing with India's Prime Minister Narendra Modi," NYT said.

But as Oyo has grown, its losses have mushroomed. The company expects to lose money through at least 2021, according to recent government filings. Some efforts to expand in countries like Japan have flopped.

In December, SoftBank and Agarwal put another $1.5 billion into Oyo to accelerate its expansion. The funding, negotiated over the summer, valued the company at $8 billion, the New York Times reported.

"Mukhopadhyay, who began working at Oyo in August 2018, said employees were under so much pressure to add new rooms that they brought hotels online that lacked air-conditioning, water heaters or electricity. He and eight others said their managers had asked them to engage in a monthly shell game of briefly inserting these unavailable properties into Oyo's listings - complete with fake photographs - to help impress investors," the report added.

Saurabh Sharma, who worked for Oyo from 2014 to 2018 as an operations manager, said the company sometimes deliberately withheld payments from hotel owners - a practice that half a dozen other current and former employees also described.

In some cases, they said, the start-up wanted to squeeze the hotel owners into renegotiating contracts that it deemed unprofitable. In others, Oyo wanted to save money and figured that most owners would not press for full payment.

"If 1,000 people shout, we will pay 200," Sharma said Oyo managers had told him," according to the report.

"Because Oyo hotels are popular with unmarried couples looking for places for their trysts, one scheme involved workers at properties run directly by the start-up colluding to keep the guests checked in after they left. The workers then cleaned and resold the rooms for cash to other guests and pocketed the money, the people said.

Oyo has conducted surprise raids at some properties, seizing employee cellphones and checking rooms and records for evidence, they said.