Unveiling the Investment Secrets of Thriving Startups

This article emphasizes the importance of prioritizing customers over investors to achieve business success.

Chase the Customers, not the Investors

The key to success in any business is to focus on the customers, not the investors. Take the example of OYO, a well-known hospitality startup that has gained a lot of attention and funding from prominent investors such as SoftBank Group, LightSpeed Ventures, Sequoia Capital, and many others. However, what most people fail to realize is that OYO's success did not come from its huge investments but from its relentless focus on its customers.

OYO started as a small startup with a simple idea of providing affordable and comfortable accommodation to travelers in India. The company's founder, Ritesh Agarwal, recognized the importance of understanding his customers' needs and preferences and worked hard to create a unique value proposition that met those needs. By listening to his customers and continuously improving his product, Ritesh was able to build a loyal customer base that helped him attract more investors.

The lesson here is that entrepreneurs should prioritize their customers over investors. Instead of chasing after funding, entrepreneurs should focus on delivering value to their customers and building a solid customer base. When you have happy customers, investors will naturally be attracted to your business. As the saying goes, "Capital chases those who don't need it," meaning that investors are more likely to invest in businesses that already have a proven track record of success and a strong customer base. So, if you want to attract investors, focus on your customers first.

Increasing Occupancy 

The story of how OYO made an entry into the hotel business is quite interesting. When they started their first hotel, they implemented a strategy that led to a significant increase in their occupancy rate in a very short period of time. As a result, they earned a commission, also known as earned gross fees, which was quite attractive to many other hotel owners. This led to a huge demand for collaboration with OYO, and consequently, investors started showing a lot of interest in discussing possible investments with the company.

Prior to this success, OYO had spoken to several investors, but none of them had shown any interest in investing in the company. However, as soon as the first OYO hotel started raking in big profits, investors suddenly started seeing a lot of value in investing in the company and began reaching out to them.

To give an analogy, if you were starting a cloud kitchen business, you might be faced with the decision of whether to pay rent, invest in equipment, or hire some chefs. In this case, it is recommended that you don't invest when you're starting your cloud kitchen. This is because when an investor decides to invest in your business, they do so because they have a lot of faith in you. Similarly, when you open your cloud kitchen, your first landlord and your first chef are also considered your investors.

Think out-of-the-box with Profit Sharing

Are you looking for unique ways to generate profits? Consider thinking out-of-the-box with profit sharing. This approach can be particularly useful if you have limited financial resources or want to minimize your investment risks. Let's explore two examples:

Firstly, you can approach businesses that already have a lot of value, such as a restaurant, building, or mall owner. If you notice their space is not being fully utilized, you can convince them to share their profits with you. Alternatively, you could propose a revenue or profit-sharing arrangement, which would essentially make you a co-owner of their asset.

Secondly, if you're planning to open a cloud kitchen but lack the necessary culinary skills, you can still leverage this opportunity. By hiring a chef and making them your co-founder or partner, you can share your profits with them. This approach requires more than just financial investment - it requires your confidence and a solid business plan.

You may be concerned about finding a chef to join you, but the current COVID-19 pandemic has left many chefs without jobs. In fact, many of them are now aspiring to start their own restaurant business or cloud kitchen. By collaborating with these chefs, you can create value and start your own business without needing a significant financial investment.

If you're able to make a profit of $50,000 with your first restaurant, you can use this success to gain the confidence of potential investors. With their support, you could invest $300,000 in your next business venture. As you continue to create more successful restaurants, your investors' initial investment will multiply many times over. 

In conclusion, profit sharing can be an innovative way to generate profits without needing to invest a lot of money upfront. By partnering with other businesses or individuals, you can minimize your financial risks and create successful businesses that benefit everyone involved.

OYO’s First Hotel

The story of OYO's first hotel is an inspiring one. When the founder of OYO started his first hotel, the occupancy rate was a mere 19%. However, he was not deterred by this and set out to make significant improvements. He made the quality of the rooms and photography much better, changed the white light into warm white or yellowish light, and provided Wi-Fi to the customers. He even went a step further and provided free breakfast to his guests.

By providing all these facilities to customers, his hotel's listing on websites like cleartrip.com and similar websites got better. This was a significant achievement as these hotels that were at the bottom of the listings came on the top 1 or 2. Due to this, the income of these hotels, which was barely $40 to 50,000 a month, suddenly increased to $3 to 3.5 k every month.

To make his business profitable and sustainable, OYO made agreements with his partners that out of earnings of $30,000, 30% ($90,000) will go to the OYO brand as commission. His expenses or overhead costs at this time were $30,000 to $40,000. The marketing costs were about $10,000 to $15,000. This means that he made a profitable and sustainable business.

The investors were excited after seeing this and calculated that if one hotel of OYO's can make so much profit, then many more hotels can fetch bigger profits and give more value to their investments. Due to this, if there is a short-term loss (because of hiring employees and giving them salaries), that is acceptable because the long-term profits are much higher. This story is a testament to the fact that setting up a business model with a focus on unit economics can lead to significant growth investments.

Investors for OYO

OYO, the Indian hospitality company, has had an interesting journey in securing investors for its business. The company's first investment firm was LightSpeed Venture Partners, a leading investment firm that has previously invested in companies such as Snapchat. LightSpeed's biggest attraction to OYO was that it was catering to the common man as customers and wanted to become partners with thousands of small hotel owners in the country.

Before securing LightSpeed as an investment partner, the founder of OYO had spoken to Sequoia Investments, who had found the business idea interesting but wanted to wait a bit to observe the growth of the business. However, after successfully scaling OYO's hotels to about eight hotels in about four months, Sequoia and other investors started competing with each other to invest in the OYO brand.

Eventually, the founder of OYO chose Sequoia to be their investing partner. This goes to show that if you start your business and scale it well, investors will start approaching you and wanting to invest in your brand. It's a great example of how successful businesses attract investors, rather than having to chase them.

Learnings

When seeking investments for your business, it can be a more advantageous strategy to make the investors come to you instead of the other way around. This can be achieved by developing a successful prototype of your business idea that is convincing enough to attract the attention of potential investors. By doing so, you will create a situation where multiple investors will compete with each other to invest in your business, thereby increasing your chances of securing funding. 

It's also important to collaborate with the right investors and establish a mutually beneficial partnership. This can involve sharing benefits such as profits, resources, and valuable business connections. By working closely with investors who share your vision and goals, you can not only secure the funding you need but also benefit from the knowledge and experience of seasoned professionals in your industry.

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