OYO’s IPO Plans Gain Momentum As Ritesh Agarwal’s $383 Million Debt Repayment Date Looms. Are Startups Using IPOs To Conveniently Offload Their Burdens On Retail Investors?
It looks like another startup is racing to go public, not to fuel innovation, but to clear debt. Oyo Hotels, often dubbed as India’s answer to Airbnb, is speeding up its IPO plans as Ritesh Agarwal stares down an urgent year-end debt repayment deadline.
Back in 2019, Agarwal, then just 26, took a $2.2 billion loan with SoftBank’s Masayoshi Son acting as the guarantor to increase his stake in Oyo. The bet being gain more strategic control. That loan was restructured in 2022, and the first repayment is still pending. Now, creditors, including Mizuho Financial Group, want their money—$383 million, to be exact.
Lenders are willing to be flexible, but on one condition – Oyo must go public this year. If the IPO doesn’t happen, the repayment is not getting pushed to 2027. Given the timeline, it’s no surprise that discussions with bankers for a stock-market debut are suddenly in full swing, with a rumored valuation of $5 billion.
SoftBank, holding a 40%+ stake, remains the biggest shareholder, while Agarwal himself controls over 30% of the company. The same Agarwal whose grand IPO dreams have been shattered once before.
Oyo’s leadership claims that whenever the IPO happens, it will be based on “strong net profits” for FY24 and projected growth in FY25 but isn’t that what every IPO-bound startup claims?
And then comes the million-dollar question – Is it fair to pass on losses to retail investors?
Startups are considered as signs of economic progress, symbols of disruption, innovation, and an ambitious vision to change the world. But as many of these firms take the IPO route in India, a troubling trend has emerged – IPOs are less about funding future growth. The promise of innovation has given way to financial engineering, where retail investors often bear the brunt of losses, while early backers walk away with significant returns.
A String of Disappointing Startup IPOs
The Indian stock market has witnessed an influx of startup IPOs in recent years, but many of them have failed to live up to their initial hype. Several big names have seen their stock prices tumble post-listing, leaving retail investors frustrated and disillusioned.
Paytm Was A Grand Disaster
Once considered India’s biggest fintech success story, Paytm’s IPO in 2021 was the largest in Indian history, raising ₹18,300 crore. However, it quickly became evident that the company was grossly overvalued. Within a few months of listing, Paytm’s stock lost over 70% of its value, erasing billions in investor wealth. The primary beneficiaries of this IPO were SoftBank, Alibaba, and other early investors who cashed out handsomely, while retail investors were left holding the bag.
Mobikwik
Mobikwik, another fintech startup, aimed to ride the digital payments wave but faced skepticism from investors. The IPO failed to generate excitement, leading to a postponement. The company eventually opted for a lower valuation, a clear signal that investor sentiment was lukewarm.
Other Startups Struggling Post-IPO
According to a recent report, out of the last 15 startup IPOs since Paytm, eight are currently trading below their issue prices. Investors who bought into the promise of these ventures have been left with losses, raising serious concerns about the startup IPO model.
The Real Purpose of Startup IPOs Is Exit Strategy for VCs and Early Investors
Traditionally, companies go public to raise funds for expansion, product development, or geographic growth. However, in the case of many Indian startups, IPOs have largely been used as an exit strategy for VCs and early investors. Instead of channeling funds toward innovation or scaling operations, a significant portion of the IPO proceeds is earmarked for –
Debt Repayment: Startups often take on high-interest debt to fuel rapid expansion. When the burden becomes unsustainable, IPO funds are used to settle dues instead of fostering business growth.
Providing Liquidity to Early Investors: Venture capitalists enter at early stages, invest heavily, and expect outsized returns. IPOs provide them with an opportunity to offload their stakes at high valuations, leaving retail investors to deal with any potential downturns.
General Corporate Purposes: A vague and overused term in IPO prospectuses, “general corporate purposes” is often a way to mask financial restructuring rather than concrete plans for expansion.
Simply put, many startups use IPOs not as a vehicle for growth, but as a bailout mechanism for existing investors.
Unjustified Executive Compensation
Startup founders and top executives often justify their massive pay packages by citing “industry standards.” However, unlike traditional companies that reward executives based on profits, many loss-making startups still offer extravagant salaries and perks to their leadership teams.
This raises important questions that must be asked –
—If the company is struggling to turn a profit, why is the leadership team receiving excessive compensation?
—Shouldn’t startup founders be more accountable to shareholders, especially after listing?
—Why are employees often subjected to layoffs and salary cuts while executives enjoy cushy paychecks?
This phenomenon is not limited to Indian startups. Globally, we’ve seen similar trends where loss-making firms continue to pay their founders handsomely while pushing aggressive cost-cutting measures elsewhere.
Ritesh Agarwal And OYO Is A Case Study in Startup Leadership
Ritesh Agarwal, the founder of OYO, is a prime example of the highs and lows of the Indian startup ecosystem.
At just 19 years old, Agarwal launched OYO with the promise of revolutionizing budget hospitality. However, the company’s aggressive expansion strategy led to mounting debts, conflicts with hotel partners, and a series of legal battles.
Allegations of unethical business practices, including withholding payments from hotel partners. Inflated booking numbers and exaggerated claims about OYO’s growth. Layoffs and cost-cutting measures that affected employees, while leadership continued to earn hefty salaries.
The Profitability Struggle
Despite its rapid expansion, OYO struggled with profitability for years. While the company reported a net profit of ₹229 crore in FY 2023-24, many argue that sustained profitability remains uncertain. Given OYO’s past reliance on heavy discounting and aggressive marketing, many wonder whether these profits are sustainable or merely a temporary boost before an IPO push.
Is It Fair to Pass Startup Losses to Retail Investors?
The current model of startup IPOs raises several ethical and financial questions –
—Who Truly Benefits? – If an IPO primarily benefits early investors and VCs, should retail investors even participate?
—Are These IPOs Overvalued? – Many startups enter the market at sky-high valuations, only to see their stocks crash later. Should stricter valuation norms be imposed?
—Accountability of Startup Founders – Should there be regulations around executive compensation, especially in loss-making firms?
The Last Bit
The enthusiasm around startup IPOs is beginning to wear off, and for good reason. While the Indian startup ecosystem has produced some genuine success stories, the growing trend of IPOs being used as cash-out mechanisms is a cause for concern.
Retail investors need to be more cautious, regulators need to impose stricter norms, and startup founders must be held accountable for how they manage public funds.
Startups are meant to be an example of innovation, not vehicles for financial maneuvering. If the IPO market continues in its current form, it could erode trust in the broader startup ecosystem, something that India, with its ambition of becoming a global startup hub, simply cannot afford.
