Mumbai: Budget hotel brands Treebo and FabHotels have initiated merger talks, as investor appetite to fund hotel startups is waning following the massive funding round by market leader Oyo Rooms, three people familiar with the matter said. Oyo, India’s largest and fastest-growing hotel chain, had secured $800 million from the SoftBank Vision Fund last month.

The talks between Treebo, run by Ruptub Solutions Pvt. Ltd, and Casa2 Stays Pvt. Ltd-owned FabHotels are at an early stage, so it is difficult to say whether the deal will go through or not, the people cited above said, requesting anonymity. The talks are being led by investors of the two companies, they added. Treebo and FabHotels have been trying to raise fresh capital, but potential investors have so far shied away from putting money into companies competing with SoftBank-backed Oyo, the people said.

Treebo has raised more than $55 million from Matrix Partners, SAIF Partners and Bertlesmann India among others. FabHotels has raised $35 million from Accel Partners, Aarin Capital, Goldman Sachs and Qualcomm Ventures.

When contacted, FabHotels founder and CEO Vaibhav Agarwal said: “We have terrific business momentum, growing by more than 35% in the last three months. As a policy, we don’t comment on market speculation and there is nothing to comment on anyway. If anything, recent investments in this sector only reinforce the massive opportunity in improving traveller experience in the budget segment, where there will be multiple winners."

Treebo did not respond to an e-mail seeking comment.

The proposed merger between the companies is a direct consequence of the massive fundraising spree by Oyo, which has raised more than $1 billion in the last year alone, mostly from SoftBank.

Earlier this year, Oyo had signed a strategic agreement with MakeMyTrip, more than two years after the country’s largest online travel platform had delisted Oyo’s hotel inventory. A few months after the deal, MakeMyTrip stopped working with both Treebo and FabHotels. The move came as a big blow to the startups.

“Oyo’s funding and the MakeMyTrip tie-up have spoiled the market for Treebo and Fab. Very few investors would want to go up against SoftBank, so fund raising has become very difficult. Treebo and Fab used to get a good amount of bookings from MakeMyTrip, now the delisting has come as a setback," one of the people cited above said.

Oyo’s $800 million funding in late September was at a valuation of $5 billion, making it India’s second-most valuable startup after Paytm. Besides SoftBank, Lightspeed Venture Partners, Sequoia and Greenoaks Capital, had also participated in the round. Over the past three years M&As in the internet business have picked up, as investors have moved to cut losses and back market winners.

Mint reported last month that grocery startups BigBasket and Grofers have revived talks for a merger, with investors Alibaba Group Holding Ltd and SoftBank Group Corp. looking to join hands ahead of a costly market share battle with Amazon India and Walmart Inc.-owned Flipkart, to dominate online grocery market.

Treebo was started in 2015 by former McKinsey executives Sidharth Gupta, Rahul Chaudhary and Kadam Jeet Jain. FabHotels was started in 2014 by Vaibhav Aggarwal and Adarsh Manpuria. Aggarwal had a stint in coupon website GroupOn, besides being instrumental in setting up furniture e-tailer FabFurnish for German Internet giant Rocket Internet.

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