Even as Adam Neumann’s, and WeWork’s, 15 minutes of infamy are almost up, attention on the mastermind that enabled one of the biggest corporate travesties in the post-Lehman world, while blowing an unprecedented “private” valuation bubble by using his own company to singlehandedly create a Ponzi scheme in which he was the first, last and every buyer inbetween, is only now just starting to perk up. We are talking, of course, about Soft Bank and the person behind, Japan’s richest man (who after the dot com bubble burst almost went bankrupt for a good reason), both of which were profiled in our recent post “Is SoftBank The Bubble Era’s “Short Of The Century” (TL/DR: yes).
And while there is much to be discussed about SoftBank’s approach to investing (for those looking to literally laugh out loud, there are few things as entertaining as the Japanese bank/telecom/venture investor/whatever’s annual report), this is not the time to go on a tangent (we did that last week), and instead we will not that after the fiasco that was the Uber IPO, the snafu that was the Slack public offering, and the absolute disaster that was the WeWork non-IPO, another of SoftBank’s formerly marquee portfolio names is suddenly imploding.
As the Nikkei reports, a massive shortfall in the aggressive Japanese expansion plans of Oyo, the SoftBank Group-backed Indian hotel group, has snowballed into a nasty labor revolt.
Oyo Hotels & Homes, which seeks to become the largest hotel chain in the world – naturally, because how can Masa Son want anything except the biggest, fastest, mostest in the world, entered Japan in April. It laid out ambitious plans to become the country’s largest hotel operator with a target of signing up 75,000 rooms under its brand by March 2020, according to sources.
There was just one problem: as of Sept. 30, Oyo had signed up only 4,000 rooms, the Nikkei reports. Labor representatives said Oyo’s failure to meet this “very unrealistic goal” had subsequently led Oyo to renege on some employment contracts (because if there is one thing WeWork taught us is that while SoftBank’s ridiculous valuation marks are to be defended at all costs, even if it means doubling down on a disastrous investment, the employee s are always expendable).
In response to questions by Nikkei, an Oyo spokesperson called the figures “unsubstantiated” but said: “We are not able to disclose internal information on business plans.”
There’s a reason why he did not want to disclose anything: documents seen by the Nikkei showed that some staffers, especially in sales, were also asked to take 40% pay cuts.
Oyo’s growing pains in Japan are another headache for investor SoftBank, which this week agreed to bail out coworking startup WeWork by taking an 80% stake and providing a $9.5 billion support package, making its investment in WeWork over $17 billion for a valuation of less than$8 billion.
Like Oyo, WeWork was highly ambitious, aiming for global domination of the shared-office space. it is hardly a shock, then, that now Oyo is set to be the next WeWork.
Meanwhile, we have already discussed the labor bloodbath at the office sublettor which until a few months ago had an idiotic valuation of $47 billion, endorsed by the likes of JPMorgan and Goldman Sachs no less: WeWork staffers now face the ax as the company massively scales back its expansion plans. As part of a turnaround strategy, it will cut 4,000 jobs, or just under 30% of its workforce, the Financial Times reported Wednesday, even as it paid founder, former CEO and Chairman Adam Neumann $1.2 billion just to leave the company.
That said, the chain of events at Oyo appears to have short-circuited that observed at WeWork,: Oyo’s employees say they are suffering because of the missed expansion targets: “The number of hotel rooms is very far from reaching the target,” one company executive said.
“Oyo has put an emphasis on increasing the number of salespeople in Japan, believing that as long as they can secure a face-to-face meeting [with potential partners] they will be able to sign contracts,” the official said. “But it’s not that simple.”
Oyo, founded in 2013 by Indian entrepreneur Ritesh Agarwal, then 19 years old – just the age group that Masa Son appears be utterly fascinated with – operates a franchise model by providing technology, brand and operational know-how to hotel owners. The company claimed earlier this month to be the world’s second-largest hotel operator, with a portfolio of 1.2 million rooms, including homes, in more than 80 countries.
However, its Japan plans have stumbled. At the same time, investors have begun to question its soaring valuation and lack of profits, just like WeWork… and soon SoftBank.
With SoftBank’s mobile phone unit and SoftBank Vision Fund as its joint-venture partners in Japan, Oyo originally aimed to surpass local hotel chain Toyoko Inn, which has around 62,000 rooms, within a year. However, as Japan has enjoyed a surge in room bookings ahead of the 2020 Olympics, Oyo has been unable to attract many hotels to its platform, as they already have high occupancy levels. Oyo has also struggled to convey the benefits of its technology-driven operation to hotel owners in regional areas outside major city centers.
In emailed comments, an Oyo spokesperson said: “In Japan, we have in a short span of 6 months already opened over 100 hotels across 50+ cities, a testament to how our business is growing in the country.”
Oyo went on a hiring spree that saw 500 employees join the venture in just six months. Many of these employees, who signed up for full-time employment with Oyo, actually began under contract to a headhunting company, with the understanding they would be permanently employed by Oyo afterward, representatives of a labor union formed to address staff grievances told Nikkei. But Oyo later told some of those workers they might not be hired on a permanent basis after all, while others were offered direct employment only if they agreed to have their pay reduced by 30% to 40%.
Ironically, the avalanche at Oyo was also started by Adam Neumann: the cutbacks came as senior management was asked to keep a sharper focus on Oyo’s bottom line, given WeWork’s floundering plans to go public and growing investor unease about tech startup profitability generally.
“Oyo was told repeatedly by the director of human resources and by the headhunting company that sudden changes of contracts are illegitimate,” and the company finally relented after SoftBank stepped in and warned against the pay cuts, one labor representative said.
As of Thursday, Oyo had made 200 of the 500 workers direct employees.
Asked for comment, Oyo said: “There have been no salary deductions. In fact, we have made several merit-based salary increases.” Oyo added that “while there were early cases where the intention of certain agreements were misinterpreted, any outstanding ambiguities have now been resolved.”
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The development is the latest in a string of bad news that has clouded Oyo’s prospects as it continues to follow an aggressive global expansion strategy, fueled by capital from SoftBank and its $100 billion Vision Fund.
Incidentally, if these disastrous, foundering “ventures” didn’t have virtually infinite capital to persist as zombies just so billionaire Son could feel good about his investing genius, the world would be a far more efficient place, and would certainly not be going through the bursting of the venture capital-to-public equity bubble.
Like in Japan, so in China, where Oyo claims to be the second-largest hotel chain after launching just two years ago, local media have reported that the company is planning large-scale layoffs. Oyo has said the reports are inconsistent, and that it has hired over 10,000 employees in China.
Some hotel owners in India, its home market, have meanwhile complained of hidden fees that were only discovered when they received their monthly income statements. A group representing hotel operators in Bengaluru has called for a criminal probe into Oyo, Reuters reported this month. Oyo has denied the allegations.
Of course, this being a SoftBank company which can only exist if its valuation keeps rising no matter the circumstances, despite these problems, Agarwal and SoftBank have continued to double down on their expansion plans.
Which of course means more good money after bad: earlier this month, Oyo said it was raising $1.5 billion in a financing round, with $700 million coming from Agarwal – reportedly supported by a consortium of Japanese banks and financial partners. The remainder will be provided by existing investors, including SoftBank.
By now the endgame should be clear: once the current liquidity bubble – the biggest of all time – pops, all of WeWork’s portfolio companies will follow in the footsteps of WeWork, and now Oyo, into the abyss of forgotten, overvalued unicorns, leaving countless workers unemployed. And since the ultimate casualties here are millions of Japanese pensioners and retirees whose money funded the biggest bubble of all – that of Masa Son’s hubris – the only thing that is not clear is when will the BOJ step in to bailout SoftBank.