NEW KID

Can a former OYO Rooms executive build a rival hotel aggregator that lasts?

Quartz india
Quartz india

Much before she was caught by the entrepreneurial bug, Ankita Sheth had already plunged into the world of startups.

As the head of acquisitions for OYO Rooms in Mumbai, the SoftBank-backed hotel aggregator, she had helped its founder, Ritesh Agarwal, build up the company’s business, connecting customers with available hotel rooms across India.

But that business was sometimes controversial. Last year, OYO Rooms had faced serious flak, primarily because of its “minimum guarantee” policy—which offered hotel owners an assured sum, even if a portion of their inventory was not sold—as well as the deep discounts used to bring in customers. For critics, these practices raised concerns over the viability of the company; nevertheless, OYO is now worth some $850 million.

At Vista Rooms, the two-year-old startup Sheth co-founded after seven months at OYO, the business model is different. Sheth says her time at OYO taught her both how to run and how not to run a hotel aggregation platform. According to her, the company does not believe in offering deep discounts to acquire customers, nor paying any minimum guarantee to hotel owners. Instead, the goal is to build a sustainable business within the Indian online hotel-booking industry, which is estimated to be worth around $1.8 billion.

On Vista Rooms, prices range from Rs1,000 to as much as Rs25,000 per night (for a seven-bedroom villa), and the hotels are mostly located in the western and southern regions of India.

“We are largely focussed on building up hotel infrastructure across India’s tier II and tier III towns,” 33-year-old Sheth told Quartz. Currently, the company has tied up with 1,000 properties, including a few in Sri Lanka and the Maldives; in comparison, OYO Rooms has over 7,000 properties in India, Nepal, and Malaysia.

So far, Vista Rooms’ strategy seems to be resonating with individual investors. Last year, the company raised a little over Rs5 crore ($776,000) in pre-Series A funding from Google India’s head Rajan Anandanone of the country’s most prolific investors—and Freshworks CEO Girish Mathrubootham, among others. Much before that, the company raised Rs3 crore from another group of angel investors.

Unlike OYO, like OYO

Sheth met co-founders Pranav Maheshwari, a former strategy expert at Accenture, and Amit Damani, a consultant at Dalberg Global Development Advisors, through common friends in early 2015; within three months they had decided to launch Vista Rooms, beginning with four properties in India’s financial capital, Mumbai, before expanding to Pune, and then to small towns in the southern and western regions of India. Over the next six months, the company went on to partner with some 500 properties, and is now spread across cities such as Mumbai, Kohlapur, Mysuru, and Hubli, among others.

Initially, Vista Rooms wanted to follow a “complete management control” model, where its partner hotels would only sell rooms through its website. But this didn’t work out, as some hotels preferred to sell their rooms using multiple channels. So, Vista instead focused on offering standardised rooms, notably in places where this wasn’t always easy to find.

“We didn’t have much competition, because everybody else was looking at cities, while we focussed on small towns,” said Sheth. “We also didn’t believe in giving money to hotels, unlike the competition.”

Vista Rooms also took a different route when it came to offering discounts to attract customers. While the company does offer a small discount on room rates, it doesn’t offer rooms at a loss or to acquire customers, Sheth says.

“We don’t see value in discounts. It is going to backfire,” Sheth added. “From a customer’s point of view, if we give discounts, then they will expect that from us all that the time. So, we don’t see that working out in the long term.”

Since Vista Rooms’ launch, India’s online hotel industry has been growing fast. Online bookings are expected to account for 28% of gross hotel bookings by 2020, up from 19% in 2016, according to a report by Deutsche Bank AG.

But competition is heating up, with casualties mounting, too. In February, for instance, Chennai-based Stayzilla, a homestay marketplace, said it was shutting down as a result of an unviable business model. The startup was backed by investors such as Matrix Partners and Nexus Venture Partners.

“I would be slightly worried about Vista Rooms,” said Sanchit Gogia, chief analyst and CEO of Greyhound Research. “Minimum guarantee is not a viable model, and Vista is right in (avoiding that). But, ensuring the quality of service is always a big concern. These companies are more focused on solving the problem of rooms, which has already been solved. The question is over quality assurance, and that is a people-intensive model.”

Sheth, however, says the company is working to ensure high standards—from the quality of linen used to the times it’s washed, for instance—and takes tough measures when service providers don’t meet them. Moreover, in the middle of 2016, Vista Rooms decided to try out a full-control model once again, inspired by its foray into Sri Lanka, where full control ensured a more standardised service. Now, the company says it has become more stringent with partners and has begun seeking out full management control on sales, sharing revenue with hotel owners.

“All our new properties are fully controlled, and (that) helps in better customer experience. We are now in the process of converting the old ones,” Sheth said.

And that’s a strategy rivals are also playing by. Over the past few years, OYO and others, such as Bengaluru-based Treebo and Gurugram-based Fab Hotels, have also been working on the full-control model.

Not an easy ride

It hasn’t always been easy for Vista Rooms to attract hotel owners without minimum guarantees and upfront payments.

“I think it is a trust game. The supply is huge. So, let’s say I am talking to 10 properties, it is human nature that if you get money upfront, you could choose that,” Sheth explained. “(But) if some of them chose to do that, we still kept our options open and had to work hard to get a few others to sign up. In that sense, some owners were also smart, and chose to back a more sustainable business.”

Vista Rooms now has big plans to sign up more businesses across the southern and western parts of India, as well as in the international market. It also wants to develop properties such as guest houses, villas, and havelis (traditional mansions) across India’s small towns. But it continues to remain a small player in India’s online hotel ecosystem. Rival OYO is already racing towards becoming a unicorn—the name given to startups valued at over $1 billion—while others, including Treebo and Fab Hotels, have managed to raise some significant funds from venture capitalists. So far, Treebo has raised over $23 million while Fab Hotels has raised over $10 million.

For Greyhound’s Gogia, Vista Rooms will need to think bigger.

“What the company must focus on, rather than just being an aggregator, is to offer the full experience of a travel,” he said. “Being a full-fledged hospitality player, starting with tie-ups with airlines and cabs, is a more viable option. Because more and more people are now looking to a unique service, than a standardised service.”

For now, with the support of some marquee investors, Vista Rooms is just gearing up for the long-run.

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