Masa’s Millions have left OYO’s Ritesh OHO i.e. On His Own

(Image Source)

Back in the 90’s, I absolutely enjoyed watching Maalamaal, a Hindi movie where Naseeruddin Shah plays the main protagonist Raj. Only recently, I discovered that Maalamaal was a remake of the 1985 American movie Brewster’s Millions, which in itself was a movie adaptation of a namesake 1902 novel. Since the time the novel was originally written, it has had at least 13 adaptations indicating how the concept transcends countries, languages, and cultures.

When I first saw the movie, it seemed like an amazingly entertaining piece of fiction. Now, much later, I realize that life is stranger than fiction. Just like Jack Slater in Last Action Hero, the story and characters of Brewster’s Millions have emerged from reel-life into real-life (YouTube 2m 11s). Even in real life they transcend countries, languages, and cultures. In real life, the role of Raj and Brewster have been played by many different people. But across those stories, only one man has played the role of the person bequeathing millions to them. I am going to ruin the suspense for you — that man is Softbank’s Masa Son.

I can imagine how you might feel by what you have read so far. But, I assure you that you were not a victim of click-bait. This is not a movie review despite the numerous movie references in this story. I am a little old-fashioned to still believe in slow build-ups rather than the instant gratification that my 9-year old son seeks. So please bear with me and continue to read for eventual gratification.

Or you can give the podcast version of this story a listen:

Prologue: Setting the Stage of Millions

For people unfamiliar with the novel Brewster’s Millions, let’s take an aside for a paraphrased synopsis (Source: Brewster’s Millions from Wikipedia)

In the 1902 novel, Montgomery Brewster inherits one million dollars from his rich grandfather. Shortly after that Brewster inherits an additional seven million dollars from another Uncle. But these seven million dollars come with a few conditions. Brewster is first required to spend every penny of his grandfather’s million within one year, resulting in no assets or property held from the wealth at the end of that time. If Brewster meets these terms, he will gain the full seven million; if he fails, he remains penniless. Brewster is required to demonstrate business sense by obtaining good value for the money he spends, limiting his donations to charity, his losses to gambling, and the value of his tips to waiters and cab drivers. Moreover, Brewster is sworn to secrecy, and cannot tell anyone why he is living to excess. Working against him are his well-meaning friends, who try repeatedly to limit his losses and extravagance even as they share in his luxurious lifestyle.

If you are anything like me, then you likely prefer watching movie adaptations of books over reading the original books. In this case, you don’t even have to feel guilty to admit this to snobs who claim otherwise. Because according to one reviewer, the novel freely disparages anyone who is non-white — apparently not uncommon in literary work for the time when it was written.

At the risk of being repetitive, below is a synopsis of the movie adaptation, Maalamaal (fully free on YouTube), which is impressively identical to Brewster’s Millions ($3.99 on YouTube):

The main protagonist, Raj, inherits 3.3 billion rupees from his grandfather. However, the inheritance comes with the condition that Raj needs to spend 300 million of it in 30 days to get the remaining 3 billion. Raj’s grandfather, in a video recording (Hindi | English), lists out the rules and motivations for putting Raj into this strange predicament. The terms themselves are fairly similar to those in the novel, except for some artistic liberty common across the Hindi and English adaptations. The movie version includes a “Wimp Clause” that offers Raj 10 million rupees with no strings attached if he walks away from the challenge.

Now imagine that the numerous founders of Softbank portfolio companies (handy list here) are modern day Brewsters. Softbank’s Masa Son is the rich uncle (The Unicorn Hunter). Early investors are the rich grandfather bequeathing the initial million. Early employees and execs of the portfolio companies are the well-meaning friends. However in real life, both the grandfather and well-meaning friends are benefiting from the resulting extravagance (Source: secondary sales and windfall gains).

Confused? I guess the hallmark of every story is to confuse the audience and bring it all together gradually.

Masa is just the Rita Hayworth of this story

In reel life, within 3 minutes of learning about the terms of his inheritance, Raj accepts the challenge. Just 5 minutes after, Raj goes on a hiring spree, recruiting people that he does not need. He offers them salaries that nobody can otherwise afford (timestamp 38m). Since Raj is sworn to secrecy, he does not tell any of these recruits that he will have to lay them off, let alone be able to afford those crazy salaries, in just 30 days when he has successfully spent the initial Rs. 300 million to win the Rs. 3 billion. Over the course of spending these Rs. 300 million, Raj even fulfills some of his childhood dreams like playing cricket with star-cricketer Sunil Gavaskar (timestamp 1h 56m).

Similarly in real life, immediately after accepting Masa’s funding, his Brewsters’ have dutifully gone to town spending millions, often without building any assets just like the movie, in their quest for 10x-ing their riches. Just like Raj, the real-life Brewsters are also living their childhood dreams as they spend these millions. Why else would Adam fly on a chartered international flight with Marijuana in tow. Or why would OYO buy the Hooters Casino Hotel? (high-five if most of the money came from OYO’s investment-partners rather than OYO’s own balance sheet)

There was however one big catch for these real-life Brewsters

While playing the rich uncle to many young founders, Masa, unlike the reel uncles, seems to have only partly explained the conditions of his benevolence to the beneficiaries.

The specific omission dawned upon Masa when Brewster Adam Newman of WeWork failed the challenge despite successfully spending all of Masa’s benevolence (Source: Failed WeWork IPO). Masa quickly corrected the omission by decreeing a new condition to all his Brewsters. The condition of demonstrating business sense even during the go-broke shenanigans focused on chasing growth (Source: Profits Matter). Nevertheless, like a good uncle, initially, Masa assured a ~$1.7B payday to Adam (Source: Adam’s exit package) — only to later renege on it, making nephew Adam want to sue uncle Masa (Source: Adam plan’s to sue).

Time for another aside, this time on Rita Hayworth:

You might know about the novel titled ‘Rita Hayworth and Shawshank Redemption’ at least from its popular movie adaptation. Rita Hayworth had very little to do in that story despite receiving a mention in the book title. The story itself was focused on the main protagonist Andy Dufresne and his prison escape. Albeit, Rita Hayworth was part of Andy’s get-out-of-jail plan by being responsible for hiding the big hole in Andy’s prison cell. (YouTube clip)

Likewise, Masa has very little do in this story despite receiving a mention in the title. And Adam merely appears in a supporting role in this story. The story itself is focused on the OYO Hotels founder Ritesh Agarwal. Masa is the Rita Hayworth of this story. Except, Masa is likely to further trap Ritesh in his prison cell instead of serving as his get-out-of-jail card. After all, a similar get-out-of-jail card bounced for cousin Adam, serving as a rude awakening call for Ritesh.

You might wonder why I would say this.

Ingeniously, Ritesh was on his OYO journey of providing On Your Own independence to travelers (timestamp 8mins). Instead, ingenuously Ritesh has been left OHO (i.e. On His Own) by Uncle Masa. However Masa, arguably disingenuously, used Ritesh as a willing pawn in a three-dimensional game of chess for financially engineering paper gains to fund far bigger Vision crusades (Source: OYO valuation). Ritesh ended up borrowing against his entire OYO stake to justify the inflated valuation for Uncle Masa while enriching his early investors in the process (Source: $2B YOYO spin). Uncle Masa hit a master stroke by offering to be on the poster on Ritesh’s prison cell while getting Ritesh to bet everything including the clothes on his back.

For his glory walks hand in hand with his doom…

Befitting to this story is a quote from the movie Troy said by Thetis to her son Achilles (Source: Quotes.net):

If you stay in Larissa, you will find peace. You will find a wonderful woman, and you will have sons and daughters, who will have children. And they’ll all love you and remember your name. But when your children are dead, and their children after them, your name will be forgotten… If you go to Troy, glory will be yours. They will write stories about your victories in thousands of years! And the world will remember your name. But if you go to Troy, you will never come back… for your glory walks hand-in-hand with your doom. [YouTube]

Very few people get an opportunity in their lifetime to make a choice similar to Achilles. Ritesh got this opportunity. He could have kept his ~10% stake in OYO and found peace. On even a bad day, he would have been a hundred-millionaire running a valued as well as valuable business. But he would have been forgotten. So he chose to play a double or nothing bet through a share buyback with borrowed money. There will be stories written about him, either as HBS case studies covering this poor decision or accolades & titles in the media if his bet pays off.

Ritesh chose to make his glory walk hand in hand with his doom.

The jury on glory or doom is still out. Many signs were already pointing towards OYO’s losing battle towards maintaining the $10B valuation. The blow from the COVID-19 pandemic could send the valuation spiraling down even further. So, the likely outcome would be that Uncle Masa will save the day by spending pennies on the dollar to bail the loan, acquiring ownership of the collateral i.e. Ritesh’s OYO stock. This would leave Ritesh with a choice between:

(a) walking away empty-handed from the company he founded (because I hear that unlike cousin Adam, Ritesh has not yet taken advantage of any secondary sale transactions)

(b) convincing the board to give him a new sizable stock grant as part of founder/CEO compensation (but then not everyone is Elon Musk)

Adam initially appeared to have pulled off the best parts of both the above options. But he ultimately failed at it, making me wonder that perhaps there really is a god. Otherwise I usually thank god for making me an atheist.

The novel Brewster’s Millions has an interesting quote:

Any man who can spend a million a year and have nothing to show for it, don’t need a recommendation from anybody. He’s in a class by himself, and it’s a business that no one else can give him a pointer about.

I admire Ritesh for doing just that without the need for a recommendation from anybody, let alone yours truly. In fact, I may have opted for the wimp clause when faced with a similar situation. Nevertheless, Internet ink is permanent yet cheap. So I will not hesitate in spilling some ink in playing armchair strategist.

How did Brewster go to war in Troy and end up behind bars at Shawshank? Because he wanted to catch a Big Fish!

I know, I know — that’s too many movie references with very different narratives. But then it is so hard to fit star entrepreneurs in one single narrative. Steve Jobs already told us about the Crazy Ones who do not follow conventional narratives. Yet they prove that whoever controls the narrative, controls the world.

What really is OYO’s narrative and how did it evolve?

I obviously do not have any inside knowledge. So, I am going to speculate a lot on what must have happened behind the scenes.

Our Brewster, i.e. Ritesh, likely started with a very reasonable and simple narrative. If I understand correctly, the narrative was:

1. Budget hotels have a lot of perishable inventory that goes to waste
2. High contribution margins can be generated by selling this inventory
3. Selling this inventory would require focussing on basics: cleanliness, breakfast, and wifi
4. These basics would need to backed with a brand to signal consistency and trust
5. The branded product could be sold across first party and third party channels
6. Utilizing all booking channels would require controlling supply in real time
7. All of the above steps are repeatable at scale
8. Scale would allow creating the OYO tax (like the AWS tax) by creating a clearing house for this inventory
9. Optimizations at scale would create competitive moats and even higher profits
10. The ecosystem has opportunity for lots of adjacent revenue streams

The narrative actually made a lot of sense. It could have created a sustainable and large business.

Most entrepreneurs would build such a business by optimizing for two and only two of the following three variables: Fast, Good, and Cheap. OYO instead conceived a new one — HUGE! And then Masa tacked on another — FAST!

In the beginning, Ritesh likely focused on Good and Cheap. Then came along early investors who often exist by virtue of upward deal flow. This upward deal flow requires the ability to tell tales taller than those told by Edward Bloom in the movie Big Fish (Lovely movie. Watch it and thank me later. Some quotes here). The tall tales told by VCs often rely on the hugeness of an opportunity. There is likely even a self-affirmation that VCs probably use before falling asleep every night: “A million dollars isn’t cool. You know what’s cool? A billion dollars” — The Social Network (movie | book | YouTube clip)

WeWork made it cool by emphasizing TAM instead of SAM and SOM (Definitions).

OYO made it cool by focusing on becoming the biggest hotel chain in the world (OYO blog) rather than the most valued hotel chain in the world (which is very different from valuable).

Uncle Masa is obviously attracted to HUGE and then he does whatever it takes to make it go FAASSST. If you wouldn’t agree, then he would go to your competitor who would. Ritesh had no choice but to shift focus to HUGE and FAST.

However Huge and Fast are steroids, which if left unmanaged, have lethal side effects on any narrative. In OYO’s case, I speculate the side effects to be quite egregious:

1. The market has more supply than demand. Now OYO owns this supply in its entirety in many markets
2. Contribution margins are negative because of minimum guarantees on supply side and discounts on demand side
3. Basics of cleanliness, breakfast, and wifi are hard to ensure at scale when you rely on someone else for fulfillment
4. Brands cannot be built with unfulfilled promises to customers or suppliers.
5. OYO has become just another supplier on expensive third party OTA channels with unclear uptake of its first party channel (especially in international markets)
6. OYO’s real time inventory info is clearly not flawless
7. All of the mistakes have been repeated at scale
8. Under the plausibly high-margin clearing house facade, OYO has actually become a low-margin hotel operator which is a much harder business and has nothing to do with tech
9. Excessive VC funding has led to creation of weak moats around sand castles
10. Adjacent revenue streams have been a distraction

So what does an OYO do?

Figure out what should be written on their tombstone!

Early in my career while interviewing for a role, I cleared multiple rounds focused on everything from case studies, impromptu presentations, quant and qual analysis, and also — what I like to call — intelligent bullshi#ing. I must have done well because I progressed through the stages and the interviewers had already started selling me on the company and the role. Then for my final interview with a senior exec at the company, I was asked “If you get hit by a bus and die tomorrow, what would be written on your tombstone?” I hated the question at that time. To be honest, I did not even understand the question. I mumbled something and obviously did not get the job. I attribute the outcome entirely on my inability to understand the depth of this question. Not that understanding the question back then would have made any difference. I had not done anything in life until then to even deserve a tombstone.

Now that I understand the question, if OYO’s tombstone was written today, it would say: “Here lies the world’s best PR team that was extremely good at raising venture capital”.

(Following is a taste of the mumbo jumbo from OYO’s PR team to create the perception of OYO as a tech-based clearing house just by using the age old commoditized tool of dynamic pricing: Oyo’s algorithm analyzes 144,000 data points every hour and makes 60 million price changes every day with a prediction accuracy of 97%. The media actually lapped up this nonsense in great strides Example 1 | Example 2)

On second thoughts, would anyone care about what’s written on OYO’s tombstone? I suspect if anyone will miss OYO as a company or product. This is quite contrary to the often criticized ride-sharing companies. Despite the accelerated valuations that Uber and Lyft got at IPO, the underlying product offering geolocation based real-time marketplace for rides is here to stay. Even Airbnb, closer to OYO in the hospitality space, has a moat in the form of a supply and demand base that has been organically curated through reviews.

The best OYO can hope to do is out-execute other players in the franchising space. But it has failed to do so until now. So if OYO goes away, hotel owners will go back to their old label or become a franchisee of a traditional hotel chain. Customers will continue to book rooms through other online travel agencies.

So let me ask the question differently. What should OYO want their tombstone to say? Heck, they should say that there is no tombstone! But defying death when you are on life support needs desperate measures.

The armchair strategist in me has four suggestions for OYO.

1. Retreat immediately from markets with a mature hospitality industry: I never understood why OYO would launch its growth market business model in mature markets such as the US. There are only two kinds of private label hotels in the US. The good kind. And the bad kind.

The good kind take pride in being boutique hotels which by definition eliminates the likelihood that they want to be part of a chain. The bad kind are private not by choice — but rather because no franchisor would want them to be a part of their chain.

So OYO is left with either (a) rehabilitating bad kind of private label inventory that nobody wants — an extreme risk to brand safety or (b) poaching franchisees of established hotel chains by purely relying on out-executing the mature hotel chains.

Neither really seem like paths that will offer the kind of return on capital that forms the basis of OYO’s existence.

OYO should immediately cut its losses by retreating from such markets. There will be opportunities in the future to re-enter with a market-specific product or niche [eg. a chain of senior homes]

2. Cull the OYO supply: In growth markets such as India, OYO should scale back its inventory dramatically to ensure high utilization rates without compromising margins. I have personally stayed at hotel properties before as well as after they became OYOs. Before OYO, such hotels had higher prices with extremely reliable service. After OYO, the prices have gone down but so has the quality of service — likely as a means to boost margins by controlling costs with trimmed staff and amenities.

3. Reshape their brand promise: The OYO brand has become like a degree from the University of Phoenix. With both brands, the perceived value of the underlying product is often lower when it carries that brand name rather than when it does not.

OYO either needs to (a) only include inventory where it can be extremely certain of delivering on its current brand promise of reliability and consistency — likely resulting in a far smaller footprint or (b) reposition its brand promise to mean extreme transparency with an option for reparations upon customer issues.

4. Rely exclusively on their first-party sales channel: OYO should immediately go the Southwest way of not listing with aggregation portals. They have the resources to market their brand and acquire customers exclusively through their own website or app. This would simplify operations, reduce costs, and increase the life-time value of each acquired customer. Exclusivity can be a very powerful moat, opening up opportunities for offering highly creative products to customers.

Epilogue: What will ‘Show Ritesh the Money’?

The 3 billion dollar question is — can any strategy show Ritesh the money (Jerry Maguire clip)? OYO’s valuation needs to be at least $10B for Ritesh to see any money. Ritesh has a greater incentive to maintain OYO’s hugeness, at least in perception, in order to find a bigger fool. Any strategy that drops the valuation below $10B, even if it makes OYO sustainable and profitable, is unlikely to align with Ritesh’s incentives.

I wonder how Ritesh would respond to the question: आप पार्टी है या ब्रोकर (Khosla ka Ghosla) i.e. Are you the Principal or the Agent? (Wikipedia)

But his answer does not really matter.

Because regardless, while on his journey to leave you On Your Own, Ritesh has been left On His Own.

If you reached this far, don’t forget to click “follow” for future stories. I read and respond to every comment. So please share your thoughts.

Also you will likely enjoy reading:

• My experience with another Softbank portfolio company: Trysts with Housing.com
• My explanation of Net Neutrality using a coffee shop analogy

[Disclosure: Ashish Agrawal, the author of this post is the registered owner of OyoHotel.com since September 2013. There is no relation between the author or domain-name to Ritesh Agarwal or OyoHotels.com, despite the similarity in the names. This post is merely a satirical attempt at preaching arm-chair strategy. Based on true events!]