What was StayZilla?
StayZilla was an Indian homestay network, dubbed as the Airbnb of India.
Yogendra Vasupal, one of StayZilla’s founders, was not very interested in academics. In fact, he dropped out of college twice.
But, he absolutely loved to travel. During his trips, he realised two major issues in the travel industry:
- Undersupply of hotel rooms in India
- Booking a room without agents, especially in tier 2 and 3 cities was very complex
On a mission to make accommodations easier for avid travellers like himself, Vasupal, along with his wife and childhood friend, founded an online travel agency called Inasra in 2005.
Lesson → To find a startup idea, stop thinking of potential ideas and start observing problems around you.
How did StayZilla function? What was its business & revenue model?
Initially, Inasra started out as a simple online travel agency for hotel booking.
They listed both high-end and low-end hotels along with alternative stays like homestays, bed & breakfasts, hostels, etc on the website.
But in 2010, they realized that the “alternative stay” vertical was the fastest-growing business. So, the team decided to make a BIG pivot.
They started their own homestay network by renting hotels for a fixed period. Instead of paying the rental amount, they took care of the hotels’ operational and marketing duties.
The goal was to reach even the smallest Zillas in the country. So, they rebranded Inasra to StayZilla!
How was StayZilla received in India?
For the first 5-6 years, as Inasra, they were running solely on the savings of the two founders. Although it was small, it made decent profits with the available investments.
But, in 2012, Stayzilla raised seed funding of INR 2.5 crores from a bunch of Angel investors . The sudden chase towards raising funds was solely to buildd up their homestay business and sustain their pivot.
The initial funding pushed StayZilla into hyper-growth mode.
- It listed 4000 hotels across 600 cities.
- Within a year, they doubled the number of cities they covered.
- They continued their funding efforts to raise $34 million from 2013-2016.
- By 2014, it listed 15000 stays and covered 11000 cities in India.
In another two years, by 2016, StayZilla expanded its reach by partnering with tourism departments of different states in India.
So, what happened to StayZilla?
StayZilla started out with the intention to solve a very common problem for travellers. And, on paper, the idea sounds completely fine.
- The online booking space was rapidly growing. Plus, more and more people were using Internet in India. So, it was a great time for a new player to grab a sizeable piece of the online booking and homestay market.
- Only 15% of all gross hotel bookings in India happened online. So, having a homestay side business with better margins of 10-15% made total sense.
And, with millions of funding dollars backing them, the vision seemed achievable. But, it’s easier said than done.
Things didn’t go smoothly for StayZilla. What followed the initial growth was an EPIC downfall that included layoffs, last-minute cost cuts, desperate investor meetings and in a twist, Yogi Vasupal in jail!
But, before we get into why StayZilla failed, let’s quickly look at their numbers  to get some context.
- FY15 — INR 4.2 Cr
- FY 16 — INR 13.8 Cr ⇒ ~3.3x increase
- FY15 — INR 19.6 Cr
- FY 16 — INR 94.5 Cr ⇒ ~4.8x increase
- Marketing Spend
- FY15 — INR 11.2 Cr
- FY 16 — INR 56 Cr ⇒ ~5x increase
So, essentially, they were burning 4 crores on marketing for every crore they made!
So, why did StayZilla fail?
StayZilla’s lack of foresight and long-term thinking set them up for failure. A company that survived for 12 years, came to a crashing shutdown in a matter of months.
But, StayZilla had already raised $30+ million in funds, so where exactly did that money go? Well, let’s find out.
1. StayZilla’s massive marketing spend!
In order to sustain its pivot and compete with giants like MakeMyTrip & Goibibo, StayZilla offered huge discounts. With only 10-15% margins, the company gave 30-50% discounts, paid out of their pockets.
There are 2 specific experiments that show why this marketing spend failed so tragically :
A) 2-week discount offer
StayZilla introduced a 2-week discount period on all listed properties on their website. This caused an increase in their bookings by 80 to 90%!
But, 60% of those bookings were made from the same IP address by the hotels themselves. This practice is not uncommon and it’s called Round Tripping.
Let me give you an example to explain this:
- Suppose, a room in Hotel X is priced at INR 1000.
- A customer arrives at the hotel physically and books the room on the spot. So, there is no involvement of an online booking platform in this transaction.
- But, instead of registering this booking as “offline”, the hotel owner goes to StayZilla and books the room.
- Now, StayZilla offers a 30% discount on the booking. So, the hotel owner has to pay StayZilla only INR 700 for the booking. The hotel, however, gets the entire amount of INR 1000 from StayZilla.
- As a result, the hotel make an additional INR 300 in the process!
So, instead of attracting new users, StayZilla is unknowingly putting more money into the hotelier’s pockets.
B) Referral Scheme
StayZilla also introduced a Referral scheme, where both parties get cash back. This was another hit. But, the scheme grew too quickly which put a real dent in their marketing budget. They had to spend 20% of their INR 1 crore marketing budget in just those 5 days of the Referral scheme!
2. Not Focusing on Retention
Now, discount wars are very common among online booking platforms. So massive discounts alone didn’t cause StayZilla’s demise.
But, focusing on just giving discounts while sacrificing your unit economics in hopes of good “growth numbers” is problematic. While discounts will attract users to your platform, they don’t make your users stay.
To solve for retention, StayZilla would have to do more than just throw money at the problem.
- EaseMyTrip introduced its “no-concession fee” feature to retain users and become the only profitable OTA in India with a negligible marketing budget.
- MakeMyTrip, the largest online booking platform improved its UI, and introduced features like “Assured Hotels” and “lock current prices”, etc to retain customers.
3. Bungled Finances
Till late 2016, StayZilla’s balance sheet looked like a mess with massive yearly spending.
They also realised that the $13.5 million they raised in May 2016 will soon run out.
With 5 months of runway left, the team desperately started their attempts to raise another round. The goal was to get $20 million. After many meetings and equally many rejections, Yogi realised that with their current finances, no investor would put money in their company.
They went on a mission to cut down their costs by half by:
- Cutting down marketing spend — they switched from Google and Facebook ads to listings on Ixigo where people are much closer to booking
- Cutting down employee cost — they laid off 210 long-term employees and new hires.
- Cutting down rent — they closed down many of their branches in different cities.
But, in spite of all this, they failed to raise any money.
4. Vasupal goes to jail!
The company was in free fall and Vasupal was desperately finding ways to save it. But, when things are going bad, more often than not, they get worse.
In the final act, one of StayZilla’s clients’, Jigsaw, filed a case against Yogi for fraud of INR 1.69 crores! The company had essentially defaulted on the borrowed amount.
Vasupal was put in Jail where he spent almost a month. He later came out after spending INR 40 lakhs for his bail.
So, what do we learn from StayZilla?
StayZilla’s downfall reads like an EPIC movie.
Yogendra Vasupal received a lot of support during the whole jailing debacle, most notably from Paytm founder Vijay Shekhar Sharma. But, why?
Well, you see, the whole problem was clearly a civil dispute case which is usually settled outside courts. But, Vasupal was prosecuted like the whole thing were a criminal offence, which was wrong.
Lesson → You either die a startup or live long enough for India’s system to eat you alive.
But, in spite of this unfortunate situation, StayZilla was barely breathing. Vasupal had made the grave mistake of entering the discount arena with NO PLAN for the future. Discount wars are always won by startups with deep pockets, so StayZilla had no chance there.
The major problem was their online booking business which came with huge baggage that held the homestay business back. Investors were willing to fund the homestay business at a lower valuation but not the entire business as a whole.
In fact, in a later interview, Yogi agreed that he should have offloaded the online booking business and focused on homestays.
StayZilla was completely shut down in 2017. And, while people were expecting a comeback, Yogi had no longer the desire or motivation to keep fighting for the company.
- On survival — The first revenue goal of your startup is not a million dollars - but to earn enough to keep things running.
- On perseverance — Startup battles are regularly won by people who can run longer than those who can run faster.
- On discounts — Startups not only require you to learn, but ALSO un-learn all the lies popular media has told you about building it.