Ritesh Agarwal to invest $700M in Oyo’s new $1.5B financing round

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India’s largest budget lodging startup Oyo Hotels and Homes said today it plans to raise about $1.5 billion as part of a new financing round as the startup looks to expand its footprints in the U.S. and Europe.

Ritesh Agarwal,  the founder and CEO of Oyo, said he will invest $700 million in the startup’s new financing round — Series F — as he looks to buy more shares in the company, which has already become one of the largest hotel chains in Asia. Existing investors SoftBank Group, Lightspeed Venture Partners and Sequoia India will also participate in the round, which would value the six-year-old startup at $10 billion.

In a statement, the 25-year-old founder said the “continued support of our investors like SoftBank Vision Fund, Lightspeed, Sequoia Capital is a testament to the love, trust, and relentless support of our asset owners and customers.”

He added that the startup, which today operates in more than 80 markets and manages more than 1.2 million rooms, “can build a truly global brand out of India, while ensuring that the business is run efficiently and with a clear path to profitability.”

Oyo, which employs about 20,000 people, said it maintains a strong balance sheet of about $2 billion across different verticals, and plans to invest a significant part of it in the business. Agarwal said the startup is “operating profitably at the building level but at the same time our EBIDTA has also improved by 50%” over the last year.

Oyo, which entered China last year, claims to have 590,000 rooms there, and presence in 332 cities. In the U.S., it has established presence in 21 states and 60 cities. In August, Oyo acquired the Hooters Casino Hotel Las Vegas in its first U.S. property purchase, for about $135 million. In the same month, the company said it was investing $335 million in its rental business in Europe. In May, Oyo acquired Leisure Group for $415 million in a major Europe push.

Agarwal’s push to raise his stake in the company remains a bold and unprecedented move for startups in India. In July this year, he said he was planning to spend $2 billion through an entity called RA Hospitality Holdings to raise his stake in the company from 10% to 30%. Early investors Lightspeed and Sequoia have agreed to sell part of their stake in the startup.

While startup founders and investors have cheered the move, it has also raised some questions. What Agarwal seems to be doing is putting his existing shares as collateral to buy more shares. He is then putting those new shares to buy even more shares. As an industry source told TechCrunch, “it’s like getting a new credit card to pay for the older one.”

In simpler words: “You build a three story house but to run it you need money. So you sell the house and just have a bathroom in your name. You want to buy the entire ground floor. So you put the one bathroom as collateral and raise enough money to buy a room with an attached bathroom. How? The bathroom’s worth can’t be worth a room and a bathroom. Then you put the new room with an attached bathroom as a collateral and buy the living room and kitchen. And then you own the entire ground floor. But in reality, you still only own the bathroom. And you hope that one day, the bathroom’s worth would be enough to pay for the entire floor,” the aforementioned industry source said.

We have asked an Oyo spokesperson for clarification.

The $10 billion valuation makes Oyo one of the most valuable startups in India after financial services firm Paytm and e-commerce giant Flipkart, which sold a majority stake to Walmart last year for $16 billion. The growth of Oyo would also provide some comfort to SoftBank, which has seen some of its recent bets — in WeWork and Uber — deviate from the plan.

Prior to today’s announcement, Oyo had raised about $1.7 billion — $1 billion of which came from last year’s financing round. Oyo today counts Airbnb as one of its investors.

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