Backpacker hostels in expansion mode scout for funding opportunities

When Rishabh Gupta and his friend Aadil Muscatwala decided to go backpacking in Australia, sharing rooms with strangers in several hostels across the continent sparked the idea of a similar concept in India.

In 2011 with a seed capital of Rs 50 lakhs from their savings, they launched the first set of 'Vedanta Wake Up’ hostels in Kerala after quitting their high paying jobs from places such as Merrill Lynch and Deloitte Consulting.

Having launched six hostels and nursing hopes of becoming a pan-India player, the duo are today scouting for VC funds to the tune of $5-7 million (between Rs 30 to Rs 50 crore).

Another hostel chain, Zostel, also has ambitious plans and wants to go global. It is getting ready for its second round of funding from a VC player, having raised Rs 5 crore from a Malaysia-based angel investor last year.

While the hospitality industry may be struggling to break even across formats, such technology startups claim to have turned profitable with their first few hostels, where the ticket size of a single bed is as low as Rs 500.

``The net realisation per room with six beds at Rs 500 is higher in a hostel format compared to a budget hotel room at Rs 3,000 a night. We want to be like a Café Coffee Day in the hostel segment, offering rooms in the lower segment between Rs 500 to Rs 1,500, where no one operates currently,’’ says Rishabh Gupta, Director, Blanket Hospitality Ventures, which owns Vedanta Wake Up.

With a capex of Rs 45 lakh for every hostel (with an average of 20 -30 rooms), Vedanta Wake Up operates on an asset light model where it does not own the property but invests in technology and housekeeping facilities.

``The bugs in the system for running hostels, such as operating procedures and brand standards have been removed. Now we have hit the market for VC funding which will close in the next 2-3 months, since we need to have 100 hostels in the next three years. We are investing $100,000 behind technology entrepreneurs for deep-rooted solutions in the hostelling industry,’’ added Gupta.

Zostel, which came in later, about a year back, is also planning 30 new hostels and wants to take the concept to neighbouring countries such as Nepal, Bhutan and Sri Lanka. ``We have valued our business at Rs 100 crore and are now looking forward to a second round of funding. The potential size of hostels is almost $10 billion in India. We need to be an aggregator backed with technology as it is an asset light business,’’ says Paavan Nanda, Co-Founder, Zostel.

However, roping in investors and entrepreneurs may not be that easy.

``We have started the Zostel Entrepreneurship Development Programme where our business data has been made public with detailed case studies of our properties, including capex, profitability, and payback figures for entrepreneurs to help them make an informed choice about investing in a backpacker hostel,’’ added Nanda.

Zostel claims its hostels have operating margins between 35 to 55 per cent with a payback period between 8-15 months.

``Hostels are at the bottom of the hospitality pyramid and funding may be difficult as it is not a tried and tested model in India,’’ observes Achin Khanna, MD, HVS, a hospitality consulting company.

Meanwhile, there is speculation that Cox & Kings may introduce its acquired Berlin-based Meininger group of hostels in India soon.

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