Mumbai: FabHotels, a tech-enabled hospitality start-up formed by former Rocket Internet executives, has raised $8 million (approx Rs.54 crore) in a series A round of funding from Accel Partners and RB Investments, co-founder Vaibhav Aggarwal said. Mohandas Pai’s Aarin Capital and Qualcomm Ventures also participated in the funding round, Aggarwal said.
FabHotels is essentially a branded budget hotel aggregator, but one which claims to be going beyond aggregation and delivering a wholesome hospitality experience to hotel guests.
The business, typically, works on an asset-light model wherein it partners with smaller hotels with the aim of providing standardized services to budget travellers.
FabHotels was started in 2014 by Vaibhav Aggarwal and Adarsh Manpuria. Aggarwal had previously worked for coupon website GroupOn and helped set up online furniture retailer FabFurnish for German Internet giant Rocket Internet. Manpuria was also previously at Rocket Internet as a venture development associate.
In July 2015, the start-up raised a seed round of $2.25 million from Accel Partners and Qualcomm Ventures.
The budget hotels space is a market dominated by SoftBank Corp.-backed OYO Rooms. The company has so far raised $125 million in three rounds of funding. In August 2015, OYO Rooms raised $100 million in a funding round led by SoftBank. OYO’s other backers include Sequoia Capital, Lightspeed Venture Partners and Greenoaks Capital.
Vaibhav Aggarwal claims its model is different from OYO’s.
“What we are building is a pure tech-driven franchise model for budget hotels. Our model is not about taking partial inventory in a hotel and branding that as FabHotels,” said Aggarwal.
The agreements that FabHotels enters into are proper franchisee pacts where the start-up gets involved in the operations of the hotel and also gets the exclusive distribution rights for the entire inventory, he said.
According to Aggarwal, FabHotels’ franchisee model gives it better control over two critical parameters—customer satisfaction and RevPAR (revenue per available room) than what OYO’s partial inventory model does.
“Each of these corresponds to two stakeholders—the customer and the hotel operator. To be able to build a successful business, you need to build both these legs. You need to have a highly consistent experience for the consumer and you have to have a very high RevPAR in the industry,” said Aggarwal.
In the absence of effective control over the operations of a property, it is difficult to deliver on the promise of customer satisfaction, Aggarwal added.
“Even on the RevPAR side, you do not command much respect of the hotelier because you are essentially selling rooms at a discount. The guy who was selling rooms at Rs.1,500 per night, his expectation was that when a brand comes in, his selling rates will go up; but with discounting, that is not happening,” he said, adding that one cannot build a brand in the hotel industry by discounting.
Aggarwal said the value addition FabHotels brings to budget hotels is in the form of increased occupancy and more optimized RevPAR, through superior online and offline demand generation.
“Today, our portfolio-level occupancy is 83%. So, within 3-4 months of coming in, we are able to increase occupa-ncy from 50% to 85-90%,” he said.
FabHotels is following the Chinese examples of Homeinns and China Lodging, which have built billion-dollar budget hotel chains. “Homeinns, the largest player in China, has around 300,000 rooms under management, while China Lodging has about 270,000 rooms under management,” said Aggarwal.
The market opportunity in the budget hotel segment in India, too, is huge, said Aggarwal.
“On the conservative side, a million rooms are available in supply,” he said.
Branded budget hotels and online penetration, too, are significantly lower in India. “In the US, the share of brands in the total hotel segment is about 70% and online penetration is about 55-56%. In China, this number is about 25-30%, and online penetration around 30-35%. However, in India, online penetration is roughly around 12% and share of brands is less than 10%,” said Aggarwal.
Online penetration is expected to grow to about 35-40% in the next three years, he added.
The start-up plans to use the funds raised for brand building and to expand its network.
FabHotels currently has about 65 hotels in its portfolio, spread across 15 plus cities, which translates to around 1,500 rooms.
The budget hotel brand is looking to reach 100 hotels by September or about 2,500 rooms. Its hotels usually have a capacity of 25-30 rooms.
The start-up is currently seeing a revenue run-rate of $1 million a month, said Aggarwal. FabHotels charges hotel owners a franchisee fee of around 20% of the monthly revenue. The average daily rate of FabHotels’ rooms tends to be around Rs.1,800-2,000 per night.
FabHotels, however, is not the only tech-focused start-up that is trying to build a budget hotel chain on the lines of China Lodging and Homeinns.
Treebo Hotels, founded by Rahul Chaudhary and Sidharth Gupta, former executives at fashion website Myntra, is also creating a similar model. Treebo, which has a portfolio of over 50 hotels is currently in the market to raise around $30-40 million, Mint reported in April.
In its last round of fund-raising in June 2015, Treebo raised $6 million from Matrix Partners and SAIF Partners.