NEW DELHI -- Oyo, a startup that offers budget hotel rooms, has grown into one of India's most valuable private companies and aims to be the world's largest hotel chain by 2023.
But at least part of Oyo's rise in India was built on practices that raise questions about the health of its business, according to financial filings, court documents and interviews with 20 current and former employees, as well as others familiar with the startup's operations. Many spoke on the condition of anonymity for fear of retaliation from the company.
Oyo offers rooms from unavailable hotels, such as those that have left its service, according to the company's chief executive and nine of the current and former employees. That has the effect of inflating the number of rooms listed on Oyo's site.
Thousands of the rooms are from unlicensed hotels and guesthouses, its executives have acknowledged. To deter trouble from authorities over the illegal rooms, Oyo sometimes gives free lodging to police and other officials, according to nine of the current and former employees and internal WhatsApp messages viewed by The New York Times.
Oyo has also imposed extra fees on hotels and declined to pay the hotels the full amounts they claimed they were owed, according to interviews with hotel owners and employees, emails, legal complaints and other documents viewed by The Times. Some hotel operators have sought to file criminal complaints against Oyo, which said it withheld payments primarily over the hotels' customer service issues.
"It's a bubble that will burst," said Saurabh Mukhopadhyay, a former Oyo operations manager in northern India who left the company in September.
Oyo is part of a group of prominent startups that has sprinted to get as big as possible, fed by money from large investors such as Japanese conglomerate SoftBank. Now some of those young companies -- from office rental company WeWork in New York to delivery service Instacart in San Francisco -- have started showing cracks in their businesses.
Any fall by Oyo could blight India's startup landscape, which has received billions in foreign capital in recent years, spawning other multibillion-dollar companies such as ride-hailing firm Ola and digital payments provider Paytm.
It would also be another black eye for SoftBank, which is Oyo's biggest investor and owns half of the startup's stock. Masayoshi Son, SoftBank's chief executive, has hailed Oyo as a jewel of his company's $100 billion Vision Fund, even as he recently wrote off billions of dollars on other investments like WeWork.
"This is the only company which went global at this scale from India," Satish Meena, a senior forecaster for research firm Forrester in New Delhi, said of Oyo. "But as of now, there are serious doubts about the business model."
SoftBank declined to comment.
Ritesh Agarwal, Oyo's chief executive, acknowledged in a recent interview that some of his company's room listings included hotels that it no longer worked with. He said Oyo left those listings up and marked them as "sold out" as it tried to woo the hotels back.
Aditya Ghosh, Oyo's head of India operations, also said in an interview that many hotels lacked required licenses, leaving them vulnerable to the occasional government raid. He denied that Oyo gave free rooms to officials.
Ghosh dismissed what he called "noise" from hotels about extra fees and nonpayment of bills. "The disagreement is about the penalties we charge on customer service failure," he said.
He added that nearly 80% of Oyo's employees had been at the company for less than a year, so training has been a challenge. "We have just grown very, very fast," he said.
Founded in 2013 by Agarwal, then a 19-year-old student, Oyo set out to organize India's budget hotels, which have traditionally been small, family-run enterprises. The company coaxes the hotels to become Oyo-branded destinations that list exclusively through its website; it then markets those rooms online to travelers and takes a cut of each stay. The startup also runs some hotels itself.
Oyo is trying to expand globally and now offers more than 1.2 million rooms in 80 countries, including the United States. It employs more than 20,000 people and has raised more than $2.5 billion in funding. Agarwal has become a business star, hobnobbing with India's prime minister, Narendra Modi.
But as Oyo has grown, its losses have mushroomed. The company expects to lose money through at least 2021, according to recent government filings. Some efforts to expand in countries like Japan have flopped.
In December, SoftBank and Agarwal put another $1.5 billion into Oyo to accelerate its expansion. The funding, negotiated over the summer, valued the company at $8 billion.
At the same time, two other big investors, Sequoia Capital and Lightspeed Venture Partners, reduced their holdings. The venture capital firms, which both hold board seats at Oyo, sold $1.5 billion of their stock -- about half their stakes -- to Agarwal. He borrowed money to buy the shares and paid the venture firms a price that valued Oyo at $10 billion.
Lightspeed and Sequoia declined to comment.
The current and former workers said Oyo was never an easy place to work but that pressure increased over the past year.
Mohammad Jahanzeb Gul, who joined the startup in January 2019 and supervised 23 Oyo properties, said that during the nine months he was there, he sometimes spent all day and night in front of a computer to meet deadlines.
"The culture is really very toxic," he said.
Mukhopadhyay, who began working at Oyo in August 2018, said employees were under so much pressure to add new rooms that they put hotels online that lacked air conditioning, water heaters or electricity. He and eight others said their managers had asked them to engage in a monthly shell game of briefly inserting these unavailable properties into Oyo's listings -- complete with fake photographs -- to help impress investors.
Ghosh, who left the India job last week and joined Oyo's board, said some hotels open in stages and that "there is no padding."
In a police complaint filed in November, Betz Fernandez, owner of the Roxel Inn in Bangalore, said Oyo owed him $49,000 and acted with "intention to cheat and cause wrongful loss" by charging him for nonexistent guests and refusing to pay the contracted minimum monthly payment. Oyo said the dispute was in arbitration.
Oyo's oversight of its workers was also sometimes so lax that employees brazenly stole from it, said four people who were involved in the startup's fraud-fighting efforts.
Because Oyo hotels are popular with unmarried couples looking for places for their trysts, one scheme involved workers at properties run directly by the startup colluding to keep the guests checked in after they left. The workers then cleaned and resold the rooms for cash to other guests and pocketed the money, the people said.
Oyo has conducted surprise raids at some properties, seizing employee cellphones, and checking rooms and records for evidence, they said.
An Oyo spokesman said it investigates all fraud accusations and had in some instances fired employees.
Mukhopadhyay said Oyo's growth practices contributed to his decision to leave.
"There's something called integrity," he said. "I can't compromise on that."
SundayMonday Business on 01/05/2020
Print Headline: In India, budget-hotel-room startup's methods raising red flags