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India’s 25-year-old hotel billionaire eyes a US expansion

In just six years, Ritesh Agarwal has gone from a college dropout to one of India’s youngest billionaires.

At 19, hefounded budget hotel chain OYO in thecity of Gurgaon, just outside India’s capital.

Now, at 25, the entrepreneur has grown the brand globally and is looking to expand his empire in the US.

While India is OYO’s biggest market, with 18,000 locations, its presence in China is quickly catching up, with nearly 13,000 OYO hotels across 338 Chinese cities. And the company’s distinctive red and white logo can also be found on hotels in the United Kingdom, Indonesia, the Philippines and the United Arab Emirates.

The United States, however, is where Argawal sees the next big opportunity.”The US is one of the largest hospitality markets, both in terms of [domestic] and international tourism, and therefore presents a huge opportunity for us,” said Agarwal.

The company already has 200 US locations, but Agarwal wants more.In August, OYO bought the 657-room Hooters Casino Hotel in Nevada, which he has already rebranded as the OYO Hotel & Casino Las Vegas.

The Hooters Hotel purchase isn’t normally how OYO does business, though. In its large portfolio of hotels worldwide, only two locations are company owned. The rest are franchised or they are locations where OYO leases the hotel from the owner.

Its hotel partners become “affiliates” who retain ownership of the hotel while OYO provides management, branding, uniform service experience and guarantees a higher occupancy rate. OYO charges the affiliates a fee for these services — typically a percentage of the hotel’s gross margin — and also charges a separate fee for its partners to be listed on its online network of listings.

Each hotel has the OYO logo boldly splashed on the outside. Room rates across its markets range between $15 to $150 per night, with $30 being the average global room rate.

A college dropout with a big idea

OYO was initially born in 2012 as an online service called Oravel Travel that aggregated budget hotel room listings.”It was like an Airbnb concept,” said Bejul Somaia, a partner at venture capital firm Lightspeed Venture Partners.

Somaia first met Agarwal after he was accepted for a Thiel Fellowship in 2013. The two-year program created by PayPal founder Peter Thiel awards $100,000 in grants to entrepreneurs who either skipped or dropped out of college so they may pursue an innovative business idea.

“You don’t often see Indian entrepreneurs selected for it, so we took notice of Ritesh,” said Somaia.But Somaia wasn’t all that impressed by Agarwal’s business idea.

“I told him it wasn’t the right model for India. The sharing economy model is a challenge in India because of inconsistency in quality and safety,” said Somaia. Hesuggested a better approach was to find a way to standardize and upgrade the supply of rooms and give it a uniform branding.

That’s when Agarwal told him about OYO Rooms, an offshoot business he’d quietly launched in 2013 that was doing just that.

OYO, originally an acronym that stood for “On Your Own,” was a website that offered an inventory of branded budget hotel rooms across India with standardized amenities, such as free WiFi, flatscreen TVs, quality linens and branded toiletries.

The idea clicked and Lightspeed Ventures became an early investor, investing $600,000 in seed capital.By 2016, OYO expanded the business model. Rather than just updating and reselling available hotel rooms, OYO would rebrand the hotels entirely as OYO properties and sign on affiliates through franchise and lease agreements.

The company now has more than 35,000 hotels in 800 cities, and employs 20,000 people, half of them in India. Agarwal declined to disclose the company’s revenue, but said that it is not yet profitable.OYO, whose other investors include SoftBank, Sequoia Capital India, Airbnb and Greenoaks Capital, is estimated to be valued at $10 billion.In October, the company raised another $1.5 billion, including a $700 million investment from Agarwal, who now owns a 30% stake in the company. Agarwal also bought $1.3 billion worth of existing shares from investors Lightspeed Venture Partners and Sequoia Capital. OYO said the investment would help drive its expansion efforts.

‘I had no idea what the world outside looked like’

Growing up in the Eastern Indian state of Odisha, Agarwal led a simple life.”Probably 70% of the population [in the town] was living below poverty,” he said. “I never complained, but I also had no idea growing up what the world outside looked like.”

Agarwal knew early on he had an entrepreneurial hunger. At 13, he took a summer job selling SIM cards for mobile phones to other stores in the area.

His family wasn’t pleased. “They wanted me to focus on education first. My older siblings went to engineering school and business school. I was like the black sheep,” said Agarwal.

After finishing 10th grade, Agarwal moved to another town to attend better schools and eventually study engineering.

He’d attend school during the week, and on weekends travel to Delhi for networking eventsto meet entrepreneurs. During these trips, he would often grow frustrated by the lack of cheap and clean accommodations. That’s when he got the idea for Oravel Stays.

But when he launched Oravel, Agarwal felt something lacking with the venture. “As an entrepreneur, you have a gut feeling about whether your idea will become something big or just grow incrementally. The underlying uniqueness was missing.”

For three months, he traveled around the country staying with some of his former Oravel clients and studying the hotel industry. He eventually spotted the opportunity: smaller budget hotels.

“I wanted to pursue this. If I failed, I could always go back to university,” he said.He leased the first OYO location in Gurgaon and it took off from there. “In the first few months we were adding one to two hotels a day.”

Growing pains

In addition to its budget hotels, the company has expanded its portfolio to OYO Townhouses, which offer a more upscale experience and OYO Home for longer stays.

But OYO’s fast growth has also drawn criticism about the company’s business policies and lapses in quality control, such as inconsistency in cleanliness and hotel staff not promptly addressing customer complaints.

“We believe that when it comes to experience, there is always room for improvement and it can be achieved if one listens to customers and takes corrective actions that help introduce systemic changes,” said Agarwal. “We have introduced several checks and balances to ensure all our network hotels maintain good quality service standards.”

Agarwal added that approximately 90% of OYO’s business comes from repeat customers and word-of-mouth referrals.

The Federation of Hotels & Restaurant Associations of India, an industry group of 20,000 members, sent a letter to Agarwal in December 2018 citing complaints from OYO affiliates, who said the company’s commissions were “exorbitant” and that OYO was further discounting room rates on its web site, on top of already reduced rates.

“It is our endeavor to ensure that the hospitality industry does not get a back seat or get hoodwinked by such online travel aggregators, using their dominant position to bully the industry,” Himanshu Talwar, the group’s assistant secretary general, said.

Agarwal says his company is addressing the problems by launching a partner engagement program, which includes a hotline for hotel partners to flag any disputes and get help addressing them and an app for franchisees to track payment-related information. “I do believe [hotel] owners need support and we need to constantly do a better job in helping them.”

Agarwal recognizes that he still has a lot to learn. “I am only 25, but I am lucky to be surrounded by some of the best talent and leaders who push me to do better,” he said. “I have always believed in the big picture and aiming high. I will keep trying.”

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