RedDoorz: The unlikely David to OYO’s Goliath in Southeast Asia

If you were looking for the antithesis to OYO, the controversial $10 billion giant, then RedDoorz would be it. Both are budget hotel aggregators with India-born CEOs—Ritesh Agarwal and Amit Saberwal, respectively.

The similarities, however, end there.

While OYO has aggressively expanded across the globe with the backing of VC giant SoftBank’s bottomless pockets, RedDoorz has taken a more measured approach. Founded in 2015, it raised just $25 million across the first four years of its existence, preferring to hone its business model instead. That, too, largely in its home country of Indonesia.

In fact, it wasn’t until earlier this year that RedDoorz truly made a splash, announcing a $45-million Series B round in July. One month later, it followed up with a $70-million Series C. That spree added big name investors like Japanese e-commerce giant Rakuten—which profited handsomely from an investment in ride-hailing major Lyft—newly-minted PE firm Asia Partners and Qiming, a Chinese VC that manages $4 billion across 12 funds and has over 20 unicorns in its portfolio.

Bolstered by this cash infusion, RedDoorz now stands ready to stake its claim to Southeast Asia’s budget hotel market. But while its learnings in Indonesia—the region’s largest economy and the world’s fourth-most populated country—have given the company confidence, it now has an almighty task ahead of it.

As it seeks to expand to build its budget hotel network into a bonafide brand among Southeast Asia’s 600 million-plus populace, it stands smack-dab in the path of OYO, India’s second-highest-valued tech startup. With its seemingly insatiable appetite, OYO views Southeast Asia as a key expansion market. Already, it claims to have over 1,500 hotels on its platform in the region, the same figure that RedDoorz publicises.

The battle between a deep-pocketed and ambitious overseas entrant and a wily local harkens back to the duel between US ride-hailing pioneer Uber and Singapore-based Grab. That story ended in triumph for the home team. Grab took over Uber’s transportation and food businesses, adding the US firm as a shareholder—CEO Dara Khosrowshahi sits on Grab’s board. While Uber has retrenched itself from a market far, far from its home in California, Grab has assumed a virtual ride-hailing monopoly.

Here too, RedDoorz is betting that—like Grab—it can better negotiate the complexities of Southeast Asia’s six largest markets, with their different cultures, languages and laws. By the end of 2020, it’s hoping to have increased its current inventory threefold. Already, claims Saberwal, the company’s numbers are doubling every six months.

However, with the sustainability of OYO’s business model under-fire, the viability of the budget hotel concept itself is under question. It remains unclear whether anyone can build a profitable business, let alone a challenger in a nascent market. There’s also the challenge of maintaining company culture and values as the underdog RedDoorz attempts to scale.

While the battle may not centre around taxis, the budget hotel opportunity is no less impressive. Still in its infancy, revenue from online hotel bookings in Southeast Asia is tipped to grow to $38 billion per year by 2025, according to a report jointly produced by Google, Singapore sovereign fund Temasek and Bain & Company. This is up from an estimated $13.6 billion in 2019. RedDoorz wants to ride this wave to every founder’s ultimate dream—an initial public offering (IPO).

Starting up

Saberwal is nearly old enough to be 25-year-old Agarwal’s father—his undergraduate daughter is just a few years younger than the OYO CEO. In fact, when OYO was officially founded in 2013 (a pivot from Agarwal’s original startup, Oravel), Saberwal was still employed by online travel platform MakeMyTrip (MMT), which had gone public that January.

Based out of Singapore, Saberwal headed the company’s Southeast Asia operations, successfully building out the supply side of MMT’s business in the region. Saberwal, though, couldn’t shake the urge to build something new in a region that he believed had vast potential.

At the end of 2013, on a business trip to Phuket, Saberwal bit the bullet and ended his nine-year stint at MMT. “I’m a builder by nature, MakeMyTrip was a great story and I loved every minute,” Saberwal told The Ken in an interview. “I enjoyed being at a public limited company and expat life for the first year or two, but then began to feel I wasn’t doing enough with my time.”

Saberwal’s next move was to call his friend and former colleague Kunwar Asheesh Saxena, who had left MMT nearly a year earlier. Alongside Saxena, now the CTO of RedDoorz, he brainstormed ideas in the travel sector. Seven months later, the duo launched Commeasure in July 2014. A business-to-business service, the company allowed hotels to take online bookings in July 2014. But while the business raised a $1 million seed round led by Singapore’s Jungle Ventures and grew to 450 hotels, Saberwal felt the growth “wasn’t exciting”.

More fundamentally, there was a lot of hand-holding required. Hotels simply weren’t comfortable using the system despite its considerable benefits. This sowed the seeds of what would eventually become RedDoorz, a business that goes well beyond aggregating bookings to offer standardised features and a common brand for smaller hotels. A la its Indian rival OYO.

Battlelines drawn

Unlike its Indian rival, however, it took a more conservative approach to growth, focused instead on understanding the space. “Our investor Jungle had done studies on Southeast Asia, showing it was better to focus on city-by-city rather than a six-country focus. So, we went hotel by hotel in [Indonesia’s capital] Jakarta, and built our technology around the problems,” Saberwal recalls.

He did have his doubts over this conservative approach though. Especially in 2016, when competition peaked with players like Rocket Internet-backed Zen Rooms and OYO prowling the region. “I was thinking something was wrong,” he said. “We hadn’t figured out how to do business in Jakarta, let alone the rest of Indonesia or Southeast Asia.”

Still, RedDoorz stayed true to its ethos, refining its business model. Today its business is comprised of a combination of revenue-share models to suit different types of hotel owners and operators. That is typically full-lease, with revenue-share options including a split of gross revenue, or specific sharing of revenue once it passes a minimum threshold.

Saberwal said he keeps just 70% of the business model “set” because flexibility of the remainder is “what makes the difference.”

“The market isn’t a one-size fits all, that’s what makes it defensible and sticky,” he said. “Owners are different, owner psyche is different and customers are different. I can’t make a business on the dead bodies of my suppliers.”

With this degree of optionality baked into its model, the company began expanding to Singapore, Vietnam and the Philippines.

Today, RedDoorz is up there with the market leaders. The company claims to have more than 1,500 hotels on its platform, ahead of rival Singapore and Philippines-based Zen Rooms—which claims “over 1,000”—and on par with OYO, which also says it has over 1,500.

RedDoorz has focused on Indonesia, which has been its primary market since its inception. The country is the most attractive in Southeast Asia for internet companies, which are drawn by its 260-million population, and that makes for plenty of competition.

Just weeks after RedDoorz announced its Series C funding round, OYO one-upped it by stating that it would invest $100 million into the country. That’s part of a wider strategy to deploy $200 million in Southeast Asia over the next two years, another hostile announcement.

The ‘my number is bigger than yours’ tactic is increasingly common for SoftBank-backed companies. This year has seen Grab and Gojek embark on a game of one-upmanship waged through press releases announcing funding rounds and new investors. This peaked with SoftBank increasing Grab’s Series H round to $6.5 billion by pumping in an additional $2 billion. There have also been country-specific pledges. SoftBank has promised to invest $2 billion into infrastructure in Indonesia via Grab, while Grab itself announced that it will deploy $500 million to bolster its business in Vietnam.

But OYO isn’t the only competitor to worry about. Zen Rooms, also founded in 2015, is another. Zen Rooms ran into financial trouble last year after a funding round from an undisclosed Chinese investor fell through at the last minute, a source with knowledge of events told The Ken. Consequently, the company downsized its business in Thailand—having already exited several markets outside Southeast Asia. It eventually found a saviour in Yanolja, a South Korean hospitality company valued at $1 billion.

Initially, Yanolja invested $15 million into Zen Rooms in July 2018 in exchange for an undisclosed “strategic non-controlling stake” with the option to buy 100% of the business. Just this month—October 2019—it followed up with a second undisclosed investment. There’s no word on when or whether a full buyout will happen. Zen Rooms said Yanolja is now its largest shareholder.

Yanolja—which recently raised $180 million from Singapore’s GIC and Booking Holdings in June—is betting that Zen Rooms can help it tap both the growing market of Southeast Asia and the strong appetite to travel to the region among its Korean users.

With its Korean benefactor driving it forward, Zen Rooms has gone from struggling to a position of strength with a focus on the Philippines rather than more hotly-contested Indonesia.

“Yanolja has decided to double down by reinvesting exactly one year after their initial investment,” Zen Rooms co-founder and managing director Nathan Boublil told The Ken via email.

He claims the company has quadrupled its revenues since Yanolja’s first investment. The next phase will see Zen Rooms tap the Korean firm and Booking Holdings, which operates Booking.com, Agoda and others, for technology and distribution opportunities.

Aiming high

Flush with cash from its two recently-concluded funding rounds, Saberwal is finally getting to the serious building stage. But this doesn’t mean an OYO style blitzkrieg though—RedDoorz is eyeing sustainable growth.

The next step for the company is an expansion into Thailand, which will become its fifth Southeast Asian market after Indonesia, Singapore, Philippines and Vietnam. The company is in the process of hiring a lead to handle expansion into the country.

RedDoorz has increased its headcount to 1,200—including tech teams in the north Indian city of Noida and (soon) Saigon in Vietnam. By the end of 2020, RedDoorz is looking to triple its inventory—from the present 1,500 properties to 4,500. Complemented, of course, by significant growth on the customer side.

“Our numbers are doubling every six months,” he said. “If we can grow at 2.5X in 2020, don’t do anything stupid, and just focus on the busines and raise capital at right time, there’s a chance to do 2.5-3 million occupied nights per month by December 2020.” That forecast represents a major boost from the one million milestone that he projects will happen in December 2019. If it achieves this, the company has forecast annualised sales of $500 million by the end of 2020. This $500 million, though, is total revenue across the platform as a whole, not take-home money for RedDoorz.

“By any metric, we can be a billion-dollar company,” Saberwal says. “It’s not pie in the sky now as far as I’m concerned.”

The competitive landscape is unclear on that front. While OYO is spreading through the region, it is unclear how well it has executed. In Indonesia, the company owes unpaid fees to a multitude of third-party service providers, two sources with knowledge of the situation told The Ken. There’s little doubt that the company can afford to pay these vendors back—aside from the aforementioned regional investment pledges, OYO is in talks to raise $1.5 billion, which would take its total funds raised past $3 billion.

With its expansion in the region hitting hurdles, OYO announced in August that Mandar Vaidya, a 15-year veteran of McKinsey, would head its Southeast Asia and Middle East operations. The firm is keen to dismiss any suggestion that there could be a repeat of China, where OYO is reported to have made layoffs due to “unethical practices” despite initial claims of rapid success. OYO has denied the allegations of layoffs in China.

While OYO’s issues in the region are cause for hope for RedDoorz, investors are still treading with caution. “We thought they were the best performing in that sector, particularly in terms of reducing dependence on OTAs (online travel agencies) for customers. But there was still a lot of noise and competition in the region, most notably from OYO,” a prominent investor who passed on investing in RedDoorz told The Ken on condition of anonymity.

According to one VC professional, uncertainty around the viability of RedDoorz business model put their firm off a potential deal. Despite that, the person said that RedDoorz now “has a good window of opportunity” given OYO’s broad focus on global markets.

But there’s also a wider concern around the more fundamentals elements of the business.

“By combining single hotels under one brand and using one technology stack, the budget hotel network definitely creates synergies of scale. These are hotels that would no way have mobile solution or new types of POS individually,” said Bart Bellers, CEO of Singapore-based travel, tourism and hospitality fund Xpdite Capital Partners.

“But basically they are building their own hotel, and ultimately they are stuck with long term leases. What if there is a downturn in the tourism industry? That’s a big big risk.

“Sometimes it has me wondering if this has similar high risks as the WeWork model,” Bellers said in an interview. “Scalable? Yes. Sustainable? To be seen.”

An IPO for RedDoorz

Those concerns didn’t weigh down Asia Partners, a new growth stage fund that announced a $70 million first close of its maiden fund in June. The firm led the RedDoorz Series C deal in what was the first public investment for its fund, which is believed to be targeting a final close of up to $300 million.

Growth funds are a new trend in Southeast Asia venture capital, and this new kid on the block has serious credibility. Asia Partners is founded by ex-Sea President Nick Nash, the man widely credited for taking the Singapore-based gaming and e-commerce company public in 2017, and Oliver Rippel, whose past includes leading Nasper’s business-to-consumer and online services businesses. Rippel also served as Nasper’s representative on the board of Indian e-commerce Flipkart before it was sold to Walmart in an historic $17 billion deal.

It is early days for the firm, but its involvement–which includes a seat on the board—could give RedDoorz some crucial experience as it moves towards a potential IPO, which Saberwal said could happen as soon as 2022.

Those three letters weren’t commonly uttered alongside startups in Southeast Asia. Sea’s listing on the New York Stock Exchange—under Nash’s leadership—is very much the exception to the rule. Today, though, the region’s other billion-dollar companies like Indonesian duo Gojek (ride-hailing) and Tokopedia (e-commerce) are also eyeing public listings.

It may seem premature for RedDoorz to harbour such lofty goals, but Saberwal is typically matter-of-fact with his response. “I’m not here to build a $100 billion business,” he said. “I want to build a $2-3 billion company with decent returns for our investors that’s known across its region and is the biggest in Southeast Asia.

“We 49-year-olds make companies with good returns, but maybe we won’t change the world,” he added with a laugh.

It’s tough to predict startups reaching the IPO stage—just ask SoftBank, which has bet billions on WeWork and other similarly controversial companies. RedDoorz and others in Southeast Asia, however, have prevailing winds in their favour.

“For the first time, companies in Southeast Asia are able to focus on everything the region can offer,” Asia Partners’ Rippel told The Ken. “A decade ago, it was ‘This company is interesting but it is only the market leader in, for example, the Philippines or Thailand.’”

“Founders also didn’t have the ambition or perhaps skills to go regional. But that playbook has been written and now we see more entrepreneurs executing this playbook,” Rippel added. “Today, it’s common to see a company successfully penetrate at least 3-4 countries across the region. That’s exactly what RedDoorz has done.”

The RedDoorz-OYO clash might be a notable parallel to the Uber-Grab battle.

Uber’s retreat from Southeast Asia is widely acknowledged to be down to cutting losses ahead of its IPO this year, while Grab had just one focus—Southeast Asia.

OYO, meanwhile, has many distractions. Not only is it going after expansion in every continent bar Africa (at least for now) but its core vision of budget hotels is being stretched to cover businesses as diverse as cloud kitchens, coffee chains, event management, co-working and more. RedDoorz, however, is laser-focused on cracking Southeast Asia. According to Saberwal, Qiming, which has seen OYO’s entry and alleged stumbles in the Chinese market up close, is confident that OYO isn’t something to worry about.

And, just like Grab had SoftBank in its corner, RedDoorz has strong backers like Asia Partners and Qiming on its side. None of this, of course, guarantees that RedDoorz will manage a Grab-like victory. What it does guarantee, though, is a proper fight.

Unlike the ride-hailing war, all three of the key fighters agree the budget hotel war is not necessarily a winner-takes-all battle. So the outcome of their battle may decide the pecking order of this hotelier sweepstakes but, if the model is proven to be sustainable, then the Southeast Asian market may yet prove to be big enough for RedDoorz, OYO and Zen Rooms each to thrive.

Clarification: This article has been updated to reflect that RedDoorz is targeting 2.5-3 million occupied nights per month, not cumulatively to date. We regret the error.

Headline image via Pexels/Pixabay