Let’s start with a pop quiz.
Which is the most valuable startup in India?
Until last year, the answer would have been easy—Flipkart.
Now that Flipkart has been acquired and is no longer in the running, one might be tempted to name Paytm*. After all, the company was reportedly valued at $10 billion when it raised $300 million from Warren Buffett’s Berkshire Hathaway last year.
You could be wrong.
The correct answer could well be OYO.
If reports are to believed, OYO is in talks to raise a new round of funding that could value the company at a mind-boggling $12.5 billion, making it India’s most valuable startup by a long way.
In early 2015, OYO’s valuation was less than $100m. Which means that the company’s valuation has jumped up over a hundred times in the last four years.
This is a staggering statistic for one singular reason.
No, it’s not that OYO is still a largely unproven business. Long-time readers of The Ken would be aware of the questions we have raised about its business model. Starting from questioning whether its original partial-inventory, minimum guarantee model was a Ponzi scheme that could easily be gamed to show increasingly larger traction without any real customer uptake. Even after seemingly moving away from this model, question marks still linger over its unit economics, total addressable market and demand elasticity.
The reason is that all the funding rounds through which OYO’s valuation grew from $100 million to what now looks like $10 billion-plus have been led by a single investor—SoftBank. The chart below illustrates OYO’s valuation leaps through the funding rounds led by SoftBank.
Very rarely does the same investor lead successive rounds in a startup—the maximum number of such rounds is typically two, and even if so, in the early stages of a company (seed and Series A or Series A and Series B). So not only is SoftBank’s hyper-bullishness unusual, it is also an outlier in terms of the investor now owning nearly 50% of the company—typical ownership stakes for a single investor cap out at 25% or thereabouts.
Why? As it turns out, despite having a $100 billion fund with over 70 investments, SoftBank could be in a position where it needs OYO as badly as OYO needs SoftBank.
Say hello to what could be described as a “Russian Doll Ponzi”.
Here is how it works.
The Vision Fund – Half Goose, Half Gander
Folks often see SoftBank’s $100 billion Vision Fund as just another VC firm, only much larger.