China’s Startup Bubble Runs Aground – Bike-Share Companies, Among The Hottest Startups, Are Wiping Out Investors.

Wolf Richter wolfstreet.com, www.amazon.com/author/wolfrichter

“It now appears bike sharing is the stupidest business, but the smartest brains of China all tried to get in,” Wu Shenghua, founder of 3Vbike, one of the many collapsed bike-sharing companies in China, told Reuters. “It really now seems ridiculous.”

Afterwards, a lot of the ingenious must-not-question stuff that happened during a bubble is considered “ridiculous.”

Bike-sharing companies are just an example. With their capital-intensive, cash-burning, ride-subsidizing business model, they were, in their short lifespan, among the hottest startups in China. They’ve attracted $2 billion in venture funding in 18 months of frenzy leading into 2017. Over 40 platforms mushroomed out of the ground.

This now collapsed bike-sharing craze was based on the idea that you could survive and thrive by lending out bikes below cost, and even for free, as long as you could make it up with volume.

Mobike and Ofo kicked off the frenzy and at one point carved up 95% of the market. Their bikes are everywhere in China, and they expanded into international markets.

Mobike was acquired for over $2 billion in April by Meituan Dianping, a money-losing food-delivery startup, partially owned by China’s internet giant Tencent. Meituan went public in September in Hong Kong, in a hugely ballyhooed IPO that raised $4.2 billion. Tencent subsequently reported a $1.3-billion gain from the IPO. The buying public was not so fortunate: Meituan’s shares have since plunged 37%. But given how much money it has raised in the IPO, it has enough cash to burn for a while, and it gets to live another day.

This may not be the case with Ofo. It too had a “valuation” of $2 billion. At its peak, it had operations in 20 countries, including the US. But like other bike-share companies before it, Ofo is now in the process of collapsing.

It has already shut down its operations in a number of countries, including the US.

In a recent letter to employees, CEO Dai Wei admitted that Ofo was struggling to deal with a cash shortage, in part because millions of frustrated users were demanding refunds and in part because suppliers were demanding to get paid. He said Ofo was battling on amid “pain and hopelessness.”

Among the problems:

  • Suppliers have been left unpaid.
  • A court in Beijing has placed CEO Dai on a credit blacklist.
  • Ofo has tried to sell its assets, which are mostly beaten-up bikes but gets very little for them — as little as $2 per bike.
  • Bikes are left behind broken, useless, and worthless.
  • Over 12 million users have asked online to be refunded their up-front deposits and passes. Others are clamoring for refunds at its offices in Beijing.

One of the people standing in line to get a refund was Jiang Zhe, a university student in Beijing, who told Reuters that he usually bought a month pass, but added, “I haven’t used Ofo recently because I can’t find any working bikes.”

The spooked transportation ministry said it had asked Ofo to optimize its refund procedure. It also urged the public to be more “tolerant” to allow domestic innovation to thrive.

“It would be tough for the company to get back to its golden days,” a former Ofo executive who asked not to be named told Reuters. “I think most people are really just waiting for the final days.”

The blow-up of the barely nascent industry started over a year ago

In June 2017, the first bike-share outfit toppled: Wukong Bike, which had been founded only six months earlier, took user deposits and VC funds with it. The company operated 1,200 bikes in the city of Chongqing. Initially, it charged users a tiny fee, later all rides were free. Most of the bikes disappeared because they didn’t have a GPS tracking device.

In November 2017, Bluegogo, China’s third largest bike-share outfit, collapsed. It had raised $90 million in venture capital, including $58 million in February 2017. It expanded internationally. In January 2017, it set up operations in San Francisco but shut them down in March 2017. By November 2017, it had burned through its cash, and no new investors were willing to throw more cash at it. That was the end.

Also in November 2017, Mingbike, which had raised $15 million from VC firms and with operations in major Chinese cities, collapsed and user deposits to evaporated.

And that was the beginning of the end of the craze.

After the collapse of number 3, Bluegogo, there was talk that the two leaders Mobike and Ofo would benefit and come out on top. Their strategy too was very low fees and “ride-for-free” periods, while at the same time having to fund an expensive, capital intensive business.

Without an endless flow of new cash, these cash-burn machines collapse. The idea that these startups can make it by lending out bikes below cost and often for free as long as they can make it up by expanding and growing the number of bikes is just a symptom of a larger craze – invented in Silicon Valley and imitated in China.

But the craze has run aground on the rocks of reality. The Wall Street Journal:

Chinese startups received record sums of money in the first half, including the $14 billion funding round for Ant Financial, Alibaba’s finance affiliate. But investments started to slow in the third quarter, while venture capitalists, especially smaller ones, are finding it harder to raise money amid Beijing’s crackdown on debt. Venture-capital funds raised 56% less money in the first three quarters of 2018 compared with the same period of 2017, according to data provider Zero2IPO.

With the Chinese economy slowing in recent months, investors will likely get more cautious about where to put their money. When times are good, investors are willing to fund fast-growing, unprofitable startups. When the boom fades, companies without a sustainable business model will take a hit. Tech giants Alibaba and Tencent, which have sunk billions into startups in the past few years and could face write-downs, could become collateral damage.

Tencent is already infamous for its well-timed forays into the US tech scene, including its purchase in November 17 of 146 million shares of Snap, after Snap had plunged. On the day the purchase was announced (no purchase price was named), Snap traded at around $13 a share. Today, shares closed at $5.35. If Tencent paid $13 a share and still owns them, it has lost over $1.1 billion on this deal. And Tencent’s own shares, whose ADRs trade in the US, have plunged 35% from their peak in January.

China’s auto industry panics, overcapacity spreads, but government brushes off the wailing and gnashing of teeth, and looks to EVs. Read… China Auto Sales Plunge, Face First Annual Decline in 30 Years 

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