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Do Oyo’s Transgressions Point to a New Normal Amongst Startups?

Kicking a man while he’s down is one of those things that you just aren’t supposed to do. Sure, the idea of “honorable” combat might itself be a bit outdated, but the taboo on striking an already vanquished enemy is at its core a noble one. The same, alas, is not true in business. 

Softbank is, of course, far from vanquished. But their recent frustrations with WeWork have left the company, once considered to be a champion amongst forward-thinking investors, in a less than envious spot. In addition to the financial challenges that WeWork’s failed IPO and subsequent wave of layoffs and divestments brought, these negative events also thrust Softbank into the limelight, this time as a perhaps misguided investor that pursued growth too hard in the face of poor profit. 

To be clear, Softbank isn’t the only investor that has taken this pursuit of growth above all. In a compelling New York Times article from October 2019, Erin Griffith wrote that “For the last decade, young tech companies were fueled by a wave of venture capital-funded excess, which encouraged fast growth above all else. But now some investors and start-ups are beginning to rethink that mantra and instead invoke turning a profit and generating “positive unit economics” as their new priorities.” 

That change may not be coming fast enough. A recent New York Times article illuminated some of the troubles facing Oyo, another Softbank portfolio company that has served as a beacon of success in the Indian startup scene. Oyo is a budget hotel company that offers rooms in other hotels and buildings. However, the company has faced some troubling allegations, such as boosting available room figures by including unavailable units (such as those from partners that stopped working with Oyo) or spaces like guesthouses, as well as levying additional fees or withholding payments from business partners.

What’s more, Oyo’s legally precarious position within India’s rental economy has led the company to various episodes of bribery directed at local law enforcement. All in all, this paints a very negative picture of the internal happenings at a major startup. It’s a familiar story. WeWork’s creative leasing strategy, renting out spaces owned by ex-CEO Adam Neumann, certainly raised investor eyebrows. Similar stories came from Uber as well, which was noted for its CEO’s toxic leadership style. And Uber’s employees are known to have made and canceled rides with competitor platforms in order to poach drivers.

Back in November, when the WeWork story was more in the spotlight, Softbank CEO Masayoshi Son said that “from my perspective, there is no change in our journey. No change in our vision. No strategic change. All we will do is to just keep going, keep moving forward.” Perhaps that is still the approach that Softbank, and tech investors in general, should maintain. Venture capital has always been about big wins that offset lots of little losses. If there’s a financial field that could be described as bolder, I am not sure what it would be. Either way, it will be interesting to see how that attitude continues or changes as more companies within the firm’s enormous $100 billion Vision Fund experience their own ups and downs. 

Perhaps some of these more alarming stories are just par for the course in a world of unicorns. Startups that relentlessly pursue growth may feel pressed to get “creative” with some of the practices they use over the day-to-day course of business. Morally dubious, sure, but perhaps this won’t be the seeming death knell we often imagine it is these days. Maybe the annual carousel of startup drama and somewhat underhanded tactics coming to public attention is just something we should get used to. If our most innovative companies are trying to show that 2020 isn’t just business as usual, maybe the way that business gets done isn’t, either.

Or perhaps these episodes just reaffirm something we already know: startups are inherently high-risk, even if they’re gargantuan in size. It’s fair to assume that smaller startups wing it in plenty of cases. The only difference here is that the startups in question are huge. They have all the same goals and objectives as their smaller brethren. In that case, perhaps Softbank would be right to double down on its investments. It’s not gambler’s fallacy to say that more investments mean more of a chance for success. 

Indeed, Softbank is on schedule to launch a new fund, Vision Fund 2.0, this year. Slightly decreasing the fund’s risk tolerance doesn’t mean that it will have insufficient investment prospects to hit it big. And hitting it big is, indeed, the VC dream. 

With that in mind, the Oyo drama isn’t so much a kick in the face of a downed Softbank as it is a growing pain, potentially one of many more to come in the future. If that’s the cost of a big win, perhaps Softbank is willing to pay the price. 

Associate Publisher, Propmodo Research

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