New Delhi/Bengaluru: Budget hotel site Oyo Rooms (Oravel Stays Pvt. Ltd) has expressed interest in buying smaller rival Zo Rooms, which is scrambling to raise a fresh round of funds in order to avoid being sold, three people familiar with the matter said.

The overture from Oyo Rooms follows the entry of large online travel firms MakeMyTrip, Yatra Online Pvt. Ltd and Goibibo into the budget hotel segment.

Though Zo Rooms, run by Zostel Hospitality Pvt. Ltd, is currently in conversations with at least two investors for a fresh funding round, it faces an uphill task as its biggest investor, Tiger Global Management, has decided to go slow on writing large cheques for the smaller companies in its portfolio, the three people cited above said on condition of anonymity.

“Zo has held talks with several new investors though a deal is not near any closure," one of the people cited above said.

Zo, which is under pressure to cut costs, may shut its operations in Goa, one of the three people cited above said.

Zo raised roughly $35 million from Tiger and Orios Management this year.

Oyo approached Zo last month with a buyout offer to widen its lead in the budget hotels space, the three said.

“We do not comment on market speculation and rumours," a spokesperson for Oyo said in an email response.

Zo did not respond to email queries seeking comment.

Oyo Rooms is the early market leader among budget hotels, having raised $100 million from Japan’s SoftBank Group and others in August.

Budget hotel aggregators were supposed to be the next big thing for investors and entrepreneurs, but as with most other new, unproven businesses such as food-tech, investors and entrepreneurs seem to have overestimated the potential of the business.

All told, investors have pumped money into at least 10 such start-ups (some of which have different models). Now, as a slowdown in start-up funding takes hold, investors are unwilling to fund too many nascent, unproven business models and start-ups which aren’t market leaders are most at risk of being left in the lurch.

Budget hotel launches by online travel agencies has only made investors in hotel start-ups more cautious. MakeMyTrip, Yatra and Goibibo launched their budget hotel businesses, putting them in direct competition with Oyo and Zo and potentially triggering consolidation among the start-ups, Mint reported on 17 November.

The online travel firms have already delisted Oyo and Zo from their platforms, indicating their ambition to build a budget hotels business independently.

While the market potential may be large and analysts have frequently said that the supply of hotel rooms in India is way below demand, building a viable business in budget hotels is challenging.

Budget hotel start-ups invest millions of dollars in branding unorganized and independent hotels, training their staff and also buying inventory (hotel room bookings) for months.

Occupancy rates inevitably tend to remain low, partly as these brands are new. Despite being relatively well-funded, budget hotels have failed to show meaningful revenues so far, investors said.

A merger of Oyo and Zo could change that, experts say.

shrutika.v@livemint.com

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