On 24 January, Manoj Thelakkat, a Bengaluru-based recruitment professional, took to social networking platform Facebook to share his experience of being an OYO Rooms customer. The roughly 1,400-word post, headlined ‘The Ordeal called OYO Rooms’, details his frustrating experience of first being denied a pre-paid room at a Mumbai hotel, OYO’s shoddy customer service when contacted for a solution and, ultimately being checked into a room that (going by the photos posted) was uninviting, to put it mildly.
Thelakkat’s experience isn’t an anomaly. Rather, judging from the even longer comments thread that follows the post, it’s par for the course.
OYO is among India’s celebrated consumer Internet start-up brands. It is owned by Gurgaon-based Oravel Stays Pvt. Ltd. The company aggregates budget hotel rooms and claims to offer a standardized staying experience under its brand across the country. Something like an Airbnb. Its founder, 22-year-old college dropout Ritesh Agarwal, has charmed frontline investors such as Sequoia Capital and SoftBank Corp. into pumping a reported $125 million into the company in less than three years. In August, a CB Insights report for The New York Times put OYO on a list of the next 50 companies tipped to enter the coveted start-up unicorn club.
Unicorn, as we all know, is the universal term used by venture capitalists for start-ups that are valued at a billion dollars or more. In order to get into that club, OYO will have to raise more money. It will also have to convince the next investor that comes calling to write a large cheque at a hefty valuation. Its existing backers will naturally want a more-than-generous premium on the valuation they paid when they bought stakes in the company.
But there’s a small problem. It isn’t much fun being a unicorn in India these days. In fact, it hasn’t been for a good six-eight months. New York hedge fund Tiger Global Management, chief benefactor to the country’s consumer Internet start-ups, is beating a retreat from the market. It has a reported $2 billion-plus invested in start-ups here and most of it locked in three unicorns—e-tailer Flipkart, cab-hailing service Ola and classifieds platform Quikr. The firm is concerned that while a lot of money has gone into India, not much has come back out and it may have a longer wait than anticipated to see any profits.
Unlike Tiger Global, venture capitalists are still interested in Indian start-ups. So are a bunch of strategic investors such as Japan’s SoftBank and Chinese e-commerce giant Alibaba. Between them, there’s still a lot of money in the system. However, it isn’t going to be easy to get to them to hand out the greenbacks either. They will wait for the ongoing correction in the two-year fund-raising frenzy to play out and let valuations settle a bit before deploying fresh capital, especially in the later stages.
This is already happening. Mint reported this week that Alibaba is sniffing around for a stake in Flipkart, but is unwilling to pursue a deal at the latter’s current valuation, reported at $15 billion. The Bengaluru-based e-tailer is currently reportedly in the market to raise a massive $1.4 billion funding round. Several folks in the venture capital industry familiar with developments at the company say with Flipkart’s largest investor, Tiger Global, unwilling to participate meaningfully in large funding rounds, the $1.4 billion round is likely to be a down round (where the valuation is lower than the valuation in the last funding round).
The January numbers for venture capital investments are further evidence of the ongoing correction. According to data compiled by VCCEdge, early investors put about $145 million to work at the Series A, B and C stages across 13 deals against $297 million across 27 deals in January last year. That’s a 51% and 52% drop in value and volume terms, respectively. Notably, in each of the three stages, the total value of deals concluded have declined more than 50%.
Of course, it is early days. Venture capitalists are just warming up for a new dealmaking season and the overall numbers may look different at the end of the first quarter. Still, it looks unlikely that fund-raising levels will jump back to the merry days of 2014 and early 2015 any time soon. Investors would first like to see companies, especially the celebrated unicorns where annual cash burn rates range between $30 million and $70 million, bring capital efficiency into their businesses and show a path to profitability.
That’s going to take time. And that spells big problems for companies such as OYO. If the current generation of unicorns is struggling to attract investors, future aspirants such as OYO can ill afford to alienate customers such as Thelakkat on account of misplaced priorities and badly managed businesses.
Are the Ritesh Agarwals out there ready to grow up?
Snigdha Sengupta is a freelance journalist in Mumbai and founder of StartupCentral. She contributes stories on private equity and venture capital to Mint.