The Online to Offline Fallacy

Some of the most spectacular disappointments in the VC world have been online to offline companies. Most famously, there’s WeWork, whose rise and fall was so spectacular that it inspired its own Apple-funded docuseries. Post IPO, both Grab and Gojek went through periods where they were valued at less than the total amount of capital that had gone into the companies. In the Asian hospitality sector, OYO’s valuation peaked at $10 billion in 2019—but was valued most recently at $2.4–3.8bn, marginally above its liquidation preference stack.

Go Big Or Go Home

The traditional Online-to-Offline (“O2O”) startup story goes like this:

1. You discover an old-school, inefficient, expensive market with a ton of frustrated unmet demand.
2. You build a technology platform that unlocks latent supply - say, private cars or empty bedrooms - and watch (/ growthhack your way into watching) demand rush in.
3. You tweak and iterate with your software engineers and product managers and UI/UX designers, and let real world market participants figure out the rest for themselves.

This is how Uber built a global transportation company without owning any cars or (depending on whom you ask) employing any drivers, and how Airbnb built a global hospitality company without operating any hotels or employing any housekeepers. On the flip side, you might have to burn billions of dollars on your way to scale, in order to muscle out your competitors or to achieve the defensibility that comes with network effects. It’s go big or go home.

Halfway House

Once that niche is filled, value-added players emerge that offer consumers quality and reliability on top of a neutral marketplace, while aiming to sidestep real world operational headaches by outsourcing day-to-day operations so that it can scale faster. But this halfway house approach can be a tricky line to walk. You can end up dealing with real-world inconveniences like mismatched long-term lease obligations (WeWork) or badly maintained properties or unhappy franchisees (OYO)—and still burn through billions of dollars chasing “scale” like you’re a software company.

But there is real value in bringing technology, scale, and modern operating principles to old-school industries. In the O2O world, investment returns have typically disappointed when companies were mispriced at entry like they were pure technology platforms, and then allowed to burn through massive amounts of capital in pursuit of growth, on the mistaken assumption that they were playing the “go big or go home” game. But even WeWork - Adam Neumann-esque issues in the rearview mirror - now has 550,000 mostly happy members today; OYO serves tens of millions of happy guests each year and has a credible argument for being India’s most profitable startup in FY 2025. The point is, O2O companies are not bad companies - just sometimes mis-priced, mis-capitalized and mis-budgeted ones.

The Tech-Enabled Operator

The third type of company is one that addresses the market gap by being a better, more efficient version of incumbents. They use technology to make operations more efficient, but also recognize that they are, at heart, fundamentally different from companies that build pure software. The trade off, naturally, is that these companies see much slower initial growth.

This is the bucket that Kozystay, today Indonesia’s largest short-term rental management group, belongs to. When Covid hit in 2020, Kozystay was a little more than one year into its journey. From the start, Kozystay had to learn to live off what it could earn—and growth was slow. It took the company two years to sign their first 25 units. But this also meant that the company learned the hard way how to make more of the revenue earned from each new unit hit the bottom line.

Unlike franchise style models, Kozystay gets involved in every aspect of hospitality management. Technology is a cornerstone of Kozystay’s operations—powering more dynamic pricing models, a smoother check-in experience, and more powerful customer relationship management. Still, at the heart of Kozystay’s business is a messy physical reality: managing housekeeping schedules, keeping bed linens in stock, literally putting out fires (a Kozystay-managed apartment once had its boiler unit catch on fire minutes before a guest was due to check in). But the assumption going in is that those are problems that the company will have to deal with on a daily basis. The difference lies in how Kozystay sees itself: as a hospitality-first company enabled by technology, not a technology-first company bringing efficiency to hospitality.

Back in 2018, founders Dane Putranto and Frans Winarto saw several interesting dynamics in Indonesia’s real estate and hospitality markets:

1. Startups like Reddoorz and OYO were targeting the budget end of the market, using an asset-light franchise model where existing hotels adopt standardized branding, tech systems and SOPs, but where the original owner/operator continues to manage day to day operations, in order to scale quickly.
2. Nothing as yet catered to entry-level white-collar professionals looking for affordable, mid-range options.
3. The Indonesian propensity to funnel savings and investment into the property market had created a large and growing glut of vacant apartment units in cities like Jakarta and Surabaya - and a pool of property owners who were willing to turn to other sources of revenue for their underperforming investments.

So Kozystay stepped into the gap to serve the mid-market traveler, and, more importantly, to provide a turnkey solution for property owners. Where Reddoorz and OYO focused on modernising existing hotels, Kozystay focused on bringing new supply online by converting underutilized apartment units. Few individual property owners have the resources or capacity to field guest inquiries, price dynamically, provide late night check-ins, or keep irritated long-term neighbors happy—which is how Kozystay adds value. It’s hard yards—but the willingness to get their hands dirty is also a key reason why six years in, with a little over $10m raised, Kozystay has become Indonesia’s largest short-term rental management group, manages more than 1,000 properties, and has crossed the EBITDA breakeven threshold.

True to the finance training of the founders, the company also realized early on the importance of aligned incentives. Where WeWork (and flexible stay operators like Sonder and Stay Alfred) took out long-term leases on the properties they managed—and got caught out by sudden dips in demand like during the pandemic - Kozystay and apartment owners each took a share of property-level profit. That means Kozystay doesn’t have to worry about making rental payments during slump periods - but it is highly incentivized to make each property perform cost-efficiently, because it doesn’t make any money otherwise.

But if it’s operationally more complex and slower to grow, where are returns coming from?

First, it’s simple market growth. Compared to hotels, flexible stay apartments offer a compelling value proposition. There’s more space for the same price. Kitchen and laundry facilities means travelers can avoid nosebleed prices on room service and hotel laundry. The advent of on-demand platforms like Grab, Deliveroo, Classpass and Google Maps means digitally savvy travelers no longer need to sacrifice the conveniences of a traditional hotel for the benefits of apartment stays. Without the need to maintain a front desk presence or an onsite kitchen, Kozystay can invest in the other aspects of their services and still offer travelers far better value for money. Today, the flexible stay segment is growing 5x faster globally than traditional hotels, and Indonesia penetration is just 3%, vs. 32% in France and 17% in the US.

Additionally, if you’re willing to put in the work, valuation dynamics also begin to work for you. Our investment into Kozystay went in part to fund its first bolt-on acquisition - Bali villa management company Bali Super Host. Inorganic growth, in large part, will be how a company like Kozystay supercharges scale. Southeast Asia’s hospitality market has a multitude of niches, each often having their own market leaders with stellar reputations and loyal customer bases who nevertheless lack the resources and capacity to invest in technology, enhance management capabilities or expand beyond their local markets - factors that constrain their potential exit opportunities and valuations.

And scale does bring significant advantages. The seconds you shave off in cleaning a room can multiply when you apply the savings across thousands of rooms. In the 1980s, American Airlines famously found $40,000 a year in savings ($120,000 today, inflation adjusted) by removing one olive from each salad served in first class. For cofounders who understand the market, have a strong operational background, know how to be efficient with capital, and, most importantly, know how to structure, finance and execute on acquisitions, Southeast Asia’s hospitality market is ripe for consolidation and full of opportunity. That’s where Dane and Frans come in. Dane has spent the last six years learning the ropes of the hospitality market, aided by a team with backgrounds from the likes of Marriott, The Langham, and KLL, and Frans comes from the world of private equity, where he helped to engineer the rollup of another highly fragmented industry (corporate secretarial services).

So we’re all good then?

The strategy, of course, is not without pitfalls. There’s a reason why merger integration is considered its own category of risks in many investors’ minds: valuation risk (did we overpay?), integration risk (can we actually merge operations smoothly?), shareholder risk (how much of the target’s success depended on the involvement of the prior owners?), synergy risk (can we actually achieve the anticipated cost savings?), etc. Outside of proper due diligence and having a strong team at the helm, there is only so much you can do to mitigate this. One point to note in its favor is that this is how the biggest and most successful hospitality groups have grown, which is how brands like Marriott, Ritz-Carlton, and Aloft are all under the same umbrella.

In Conclusion

We’ve talked a lot about the differences between a tech-first and an operations-first approach, but this is not meant to imply that hospitality is not an innovation-rich sector. Hospitality innovation runs deep. The Waldorf-Astoria introduced room service in the 1930s. In 1963, the Hong Kong Hilton became the city's first five-star hotel and pioneered the split between property ownership and hotel management. In 1974, it also introduced the minibar, increasing revenue by 5%.

The point, though, is that once invented, these innovations did not stay exclusive for long. Competitors quickly copy and iterate, and lasting advantage depends not on protecting intellectual property but on strong execution and operational prowess. In other words, on good service, good value and strong delivery - the things that Kozystay set out to compete on.