default logo

Indian venture-funded hotel booking apps succeed with new models

Skift grip

Apps in India such as Oyo Rooms and Zo Rooms are tackling real problems: the lack of standards and quality in the country’s hotel rooms. Their creative solutions to the problem are promising.

Denis Schaal

At 17, Ritesh Agarwal spent three months living in a suitcase. His mother wanted him to get an engineering degree; instead, he began hopping among dozens of hostels and guesthouses across India, briefly manning reception desks and cleaning rooms at one.

It involved researching, he says, an online database of reliable places to stay. By the end of that trek in 2011, he was convinced that the industry’s biggest problem was a lack of consistent quality, especially among the independent budget hotels that account for almost 60% of India’s accommodation market. $7.2 billion. Respectable-looking exteriors often hid leaky faucets and stained linens.

Agarwal’s solution was a hotel booking app called Oyo Rooms, which allows room seekers to choose from an approved list that his team selected based on certain minimum standards of service, cleanliness and safety. Hoteliers undertake to maintain these standards and a price. Oyo takes a 10-30% discount on reservations. “When you book a room through Oyo, you know exactly what you’re going to get,” says Agarwal.

Founded in New Delhi in 2013, the company claims to list around 30,000 rooms in 120 Indian cities. Hundreds of field employees rate properties on 200 factors, from quality of mattresses and sheets to maximum and minimum shower temperatures, according to the company’s vice president for product management, Anurag Gaggar. Hotel owners are often asked to buy new linens or apply a fresh coat of paint to get or keep their Oyo listing, says Gaggar. Field staff member Krishan Kumar says he visits 32 hotels each week, logging details of his inspections on his smartphone.

The next step, says Agarwal, is to incorporate more customer feedback, using bad reviews to encourage repairs. “If you can’t keep up with it, you can’t make it any nicer,” he says.

Agarwal gave Oyo $50,000 from a local startup accelerator, but he credits the company’s continued existence largely to a $100,000 scholarship from Peter Thiel, the co-founder of PayPal that subsidizes startups. students who drop out to start a business. Since then, Oyo has raised $125 million in venture capital from companies like Sequoia Capital and Japanese telecommunications company SoftBank, and it claims to make around $200 million in bookings a year. There is plenty of room for growth, says Agarwal. India has about two hotel rooms per 10,000 people, compared to 40 in China and 200 in the United States. The inventory of hotel chains in India will grow by 30% by 2020, according to estimates from consultancy firm HVS.

The founder of Oyo comes with some baggage. A January investigation by India’s Livemint newspaper alleged that it kicked out early partners, withheld employee salaries and presented investors with inflated registration numbers. (Agarwal denies all this.) Moreover, many Indians are not yet convinced that hotels are a worthwhile investment. The country’s major chains reported 57% occupancy last year, an eight-year low, as more travelers stayed with relatives. “There are a lot of hotels where guests walk in thinking, ‘Will there be rats in my room?’ “, explains Chetan Kapoor, analyst at the researcher Phocuswright.

A $7.2 billion hosting market

As well as providing reliable cleanliness, Oyo tries to lure in skeptical Indians by negotiating with hoteliers to keep prices low. The cheapest rooms in the app are under $15 a night, and the average is around $22. A basic room in the budget hotel chain Ginger costs $32 a night.

Oyo’s early successes and interest from foreign investors inspired its rivals. Zostel, founded last year, has 600 hotels under its Zo Rooms brand and received $30 million from New York-based investment firm Tiger Global Management in July. The “vigorous efforts” of competitors helped drive online hotel bookings up 32% to $80 million in 2014, according to Phocuswright.

The rivalry is good news for hotel managers like Ashutosh Parashar, who six months ago opened the 21-room Maven’s House in Gurgaon, a city near New Delhi. Early on, Oyo listed her rooms at 75% off and paid her the difference. “All these companies are fighting for customers, and they are investing money on us to make us successful,” Parashar says. “It’s great for us.”

Bottom line: Oyo has raised $125 million in venture capital in two years as it tries to change Indians’ view of hotels.

To contact the author of this story: Adi Narayan in Mumbai at [email protected] To contact the editor responsible for this story: Jeff Muskus at [email protected]

This article was written by Adi Narayan of Bloomberg and has been legally licensed by the NewsCred network of publishers.