For a reboot, Stayzilla needs to rethink first

The online travel marketplace can survive only if it learns its lessons from this lean season of VC funding and not chase vanity metrics

Yogendra Vasupal always knew how to make money. He knew about shares and debentures at 10, from his economics professor father. When he was in class five, stickers that glowed in the dark were all the rage in his school. He would buy a bunch for ~25 and sell them loose in his school. It gave him 70 per cent return, weekly.

That worked for eight weeks until the shopkeeper, the only one in the vicinity that sold those stickers, realised what was happening and started selling the stickers loose, and shut down Vasupal’s little venture.

From then onwards, Vasupal has had an aversion for markets with limited supply. So when he started his online travel marketplace, Stayzilla, a decade ago — in those days it was called Inasara — he built the supply relentlessly. First, it was the budget hotels and guest houses in Tier-II and -III towns, then in Tier-I, and then homestays in 900 towns.

Yet, in a reprise of the glow sticker, Stayzilla ran out of breath in scampering for funds. Every investor it spoke to pointed to the intense competition in the sector. As it moved out of its comfort zone of small towns and into the big cities, Stayzilla came toe-to-toe with the Godzillas of online travel bookings: United States-based Airbnb and the MakeMyTripIbibo combine.

Stayzilla had big plans on the anvil, with a new advertising campaign unfolding in May. Vasupal was to finalise it with his marketing and branding teams around now. Instead, he is handing out severance packages and saying goodbyes to his team of 210. That includes wife Rupal and best friend Sachit Singhi, both of whom are also co-founders.

Naturally, you would expect Vasupal to be downcast, depressed even. Instead, he talks about video games.

“You know how it happens in video games,” he says. “You go through various levels, then maybe your game ends and you start over, and you go through the same levels again. But now the levels are much easier. That is how things are with me.”

Right, except that he is not playing a game. Stayzilla had raised $32 million, mostly from venture capital firms Matrix and Nexus, which have had to write it off on their books. Vasupal is trying to persuade his creditors to give him more time. And, he has to make the landlord of his Bengaluru office cough up the deposit — this has involved arguments and a police complaint.

But Vasupal says the going will be much easier for him as he tries to “reboot” Stayzilla. Reboot is a word gaining currency among start-ups, often alongside retrench, most audibly at Snapdeal that is laying off 600 as it tries to reinvent itself as an “entrepreneurial” company. Lessons ignored It appears to have happened to a whole lot of others, too. Reports say Craftsvilla, PayU India, Tolexo and Yepme are in the same boat as Snapdeal and Stayzilla. Online grocery delivery and food delivery start-ups have already sailed down this path, helped along by a sharp drop of nearly 30 per cent in start-up funding last year.

It is universally accepted that only one in 10 start-ups funded by VC money survives. Yet, the lessons are not learned. Saras Sarasvathy, professor at the Darden School of Business, University of Virginia, who has done years of research YOGENDRA VASUPAL, on the results of VC funding, invokes nails and coffins.

“The probability of you succeeding after getting VC money is low. And — the biggest nail in the coffin — suppose you get the VC money and you succeed, the probability that you will still be CEO is 50 per cent of that,” Sarasvathy said in an interview earlier this month to Tech in Asia.

Successful companies get their money from customers. Microsoft is a prime example. It is difficult to think of it as a start-up now, but Bill Gates built his company in the initial phase with money from IBM, which liked his software and was happy to pay for it. A good entrepreneur cares about customers and tries to solve their problems, which is how Uber and Amazon came up.

Vasupal yearns to go back to those ways, which he followed till five years ago, before investor money began to pour in. In those days, Stayzilla worked with a small and talented team. He says he had people who took salary cuts to join the company because they were driven by passion.

However, fattened on funding in the later years, Stayzilla succumbed to the same vanity metrics as the others, such as gross merchandise value (GMV). It is the total of all sales on MRP, not the revenue earned — commissions from sellers, in the case of marketplaces such as Snapdeal — by the company. In this age where no online company can get market share without giving deep discounts, the GMV has been accepted as meaningless.

The road ahead

Vasupal now wants to rebuild Stayzilla as a distributor of homestays. It is a segment in which he has invested time and money in the last two years, bringing 8,000 homestays on to its network, totalling 30,000 rooms. These are homeowners who have a room or two to let out, and do not know how. The big players, focused on hotels, have little time for homeowners. Stayzilla already has the network and the technology. It will connect the homeowners to sales channels, such as Airbnb, MakeMyTrip, Yatra, OYO, and others, and earn a commission.

“I see Stayzilla becoming a silent platform that will be in the business-to-business segment, and not deal with customers,” he says. He will want to do it with a small team, say of 20, who may be taken from the 210 that are going away now. The brand may or may not be Stayzilla. That will not be crucial for a silent platform – the important thing is to be profitable.

"It is simple," says Vasupal. "If you cannot be profitable on a small scale, you cannot be profitable on a large scale. You cannot use discounts to grow your market share in the hope that someday you will be profitable. Customers who come for discounts will go away the moment you start charging full price."

The promoter shareholding in Stayzilla is down to 26 per cent. It is so small it cannot even raise a small amount of money without letting the promoter holding become negligible. So there is need for a corporate reorganisation. As the investors write off their investments, they may have to also release shares to the promoters, in the hope that the reboot will raise the valuation of the company and in time make good their losses.

But Vasupal is taking valuations again. Are the lessons of the lean season being learned?