Around a year ago, I had written a post on OYO Rooms on LinkedIn questioning if its business model was the startup equivalent of a Ponzi scheme.

At that time, OYO Rooms was a managed marketplace for budget hotels in India and had gained fame on account of the tender age of its founder, Ritesh Agarwal (who had started the company at the age of 18) and more importantly for being one of few early-stage Indian startups backed by over $100 million in funding from marquee investors like SoftBank.

The main concern expressed in my post was that OYO’s financials for the financial year ending March 2015 threw up some serious questions about the company’s business model—specifically the fact that its model of booking partial inventory in a hotel with an upfront minimum guarantee gives rise to many perverse incentives and acts of bad faith for both the hotels and OYO itself. Such acts of recidivist gamification to artificially boost numbers were akin to a Ponzi scheme.

Today, I realise that I was wrong.

I was not wrong about the pernicious aspect of the upfront minimum guarantee. This was admitted by Agarwal himself when in response to my post, he wrote that “our take rates are now positive across the network” and minimum guarantees are less than 3% of the overall business. So it is clear that the dangers of minimum guarantees were recognised ex-post facto and done away with. More importantly, by saying that take rates are “now positive”, it was an admission that they were negative earlier. A negative take rate means that OYO’s product, for what it was worth, essentially had a negative selling price. Far from taking a commission from the hotel for a booking, OYO basically paid an additional fee to the hotel for the privilege of being a partner.

I was wrong because I naively looked at the wrong place to determine if the company was a Ponzi.

What it costs

A negative take rate means that OYO’s product, for what it was worth, essentially had a negative selling price

I shouldn’t have looked at the business model in the first place. Business models are ephemeral—they can be changed over time like OYO seems to have done with respect to minimum guarantees. But more crucially, no one cares about the business model—the company, the founder, the investors and the media.

Instead, what they care about is the narrative on which the company is positioned. The ‘vision’ that will disrupt large industries and markets.

This is actually the real Ponzi that OYO succumbed to. The “Ponzi scheme of ambition”.

Originally coined by Anand Sanwal of CB Insights with reference to Uber, the Ponzi scheme of ambition refers to the inexorable urge of startups to constantly change their narrative around their vision and the markets they are out to disrupt and in the words of Sanwal, “keep highlighting their entry into larger and larger markets and so investors keep ponying up $ for the ambition”.

AUTHOR

Sumanth Raghavendra

Sumanth is a serial entrepreneur with more than eighteen years experience in running startups. He is currently the founder of Deck App Technologies, a Bangalore-based startup attempting to re-imagine productivity software for the Post-PC era. Sumanth’s columns appear regularly in leading publications. He holds MBA degrees from the Indian Institute of Management, Bangalore and Thunderbird, The American Graduate School of International Management, USA.

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