3 min read.Updated: 14 Aug 2020, 07:45 AM ISTSalman S.H.
It’s become tough to pay vendors, supplers amid covid
Under MBG contracts, owners who leased their assets to startups received a fixed minimum amount per month
Consumer internet startups in hospitality, co-living and urban mobility are struggling to keep up with minimum business guarantee (MBG) payments to their vendors and suppliers—essentially property and vehicle owners—forcing them to suspend or tweak contracts.
More than four months of lockdown has sharply affected demand, with the hospitality and mobility segments taking the biggest hit in revenues.
Property owners who leased their homes and hotels to Oyo and NestAway were in for a shock when the latter invoked force majeure to suspend all minimum guarantees by April. Mobility startups, including Drivezy and Zoomcar, have also stopped paying vehicle vendors since March, forcing vehicle owners to move courts and file police complaints.
Hotel aggregator Oyo and co-living platform NestAway would rely on MBG contracts to attract property owners in the past. Owners who leased their properties to them received a fixed minimum amount every month. Both Oyo and NestAway would take over the leased property, renovate and rent it out to customers.
In recent months, Oyo has suspended contracts with over 250 hotel owners for its “Townhouse" properties across India and stopped making minimum payments to hotel partners. The startup invoked force majeure and served notices to property owners citing a negative impact on business.
Two NestAway owners too confirmed the company had stopped minimum rental payments to them since March after invoking force majeure.
Ismail Khan, chief business officer, NestAway, recently said that several property owners have agreed to temporarily end fixed rental payments. But many owners who chose to take back control of their properties have not been fortunate.
“They stopped paying my rent for between March and June and they are not even handing back the property to me. I had to file an FIR as I haven’t received any proper communication from the (hospitality startup) team," said a Bengaluru apartment owner, who leased his property in 2018.
Mint reported last month that Nestaway has also been struggling to refund security deposits to tenants as thousands of them moved back to their hometown amid the covid-19 outbreak. Some occupants have also moved consumer courts alleging fraud and extortion against the Bengaluru-based startup due to non-payment of their refundable security deposit.
Venture capitalists and investors in that Mint spoke with point out that covid-19 may now alter all existing MBG contracts since segments such as mobility and hospitality are unlikely to go back to bounce back to pre-covid levels.
“Generally any startup that has an MBG model have been forced to ditch the model for some time at least, or restructure it based on some level of performance. The truth is whether you can invoke force majeure or not, people on supply-side are also starting to realize that MGB models cannot be trusted anymore," said a partner from a tech-focused venture capital fund requesting anonymity.
In the mobility segment, vehicle rental startup Drivezy, and Zoomcar have been struggling to meet business guarantees to vendors and individuals who leased their vehicles to these platforms. According to three owners who work with Drivezy, however, payments have been pending form way back in December, well before the pandemic hit India.
“I listed my vehicle with Drivezy as I was attracted to the minimum guarantee deal the company was offering. From Dec 2018 till Nov 2019, I was paid I received my dues, but Since December 2019 payments weren’t coming in. By March Drivezy announced that the pandemic has impacted their business and hence they will be suspending all minimum dues," said a vehicle owner based in Bengaluru who listed his vehicle with the rental platform. The vehicle owner is owed ₹1 lakh in pending dues from Drivezy since December 2019.
Vehicle owners who leased their vehicles to Zoomcar under its Zoomcar Associate Program are also facing similar delays in minimum dues.
Both Drivezy, and Zoomcar initially launched as an aggregator, buying vehicles directly on its balance sheet either through equity money or through financing options from banks and other lending institutions. However, as these companies began to scale, both firms pivoted to marketplace models and began sourcing vehicles from vendors and individuals to bring down capital expenditure (capex) on procuring vehicles.