Lambert here: It seems that Chinese stupid money isn’t quite as stupid as ours?
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street
Bike-sharing companies – with their capital-intensive, cash-burning, ride-subsidizing business model – were among the hottest startups in China. They’ve attracted $2 billion in venture funding over the 18 months of the frenzy. They now count over 40 platforms, though the industry is dominated by huge piles of mutilated, stolen, and abandoned bicycles and by two unicorns (valued over $1 billion), Mobike and Ofo, that kicked off the frenzy and carve up 95% of the market.
But this is how quickly a frenzy can deflate.
On Thursday, Chinese media reported that Mingbike, with operations in major cities, had laid off 99% of its staff, after consumers had complained that they’d been unable to get their deposits of 199 yuan (about $30) back. Some of the laid-off employees “posted complaints on social media saying their salary had been withheld for several months,” according to the South China Morning Post:
Calls by the South China Morning Post to Mingbike’s main phone line were not answered. The last post on the company’s Weibo account was in earlier October and its WeChat account has not been updated since November 10.
In response to the latest closure and growing risk of deposit refunds, Chinese authorities have stepped in, with Ministry of Transport spokesman Wu Chungeng saying on Thursday that local governments would play a major role in ensuring protection of consumer rights. He added that regulations for the industry were being drawn up by authorities.
Mingbike was founded in 2016 and had raised 100 million yuan ($15 million) from venture capital firms.
The bike-share cash-suck works like this: Users download the app to their smartphones and pay a deposit. The ride costs a tiny fee of usually 1 yuan or less ($0.15 or less) per hour – unless the ride is free, which it often is, on the time-honored principle that the company would make it up with volume. Users unlock a bike with their smartphones. At their destination, they’re supposed to park the bike on a sidewalk or public space.
But Minkbike’s collapse was just the latest. Earlier this month, Bluegogo, the third largest bike-share outfit, collapsed. It had claimed 20 million registered users at its peak and operated 600,000 bikes. It has raised $90 million from VCs, including aptly named Black Hole Capital, based in Beijing, which led the last funding round, $58 million, in February this year. It only took eight months to burn through this money.
The Bluegogo hype in February was this, according to the China Money Network: “It plans to expand its business to Beijing in February, as well as further expanding into overseas cities following its January launch in San Francisco.”
That January launch in San Francisco, I assume, will fall through the cracks.
The SCMP cited “an emotional open letter released to the media” by Bluegogo’s founder and CEO Li Gang, which revealed that the company had run out of cash.
“In a cutthroat market like bike sharing I am too naive and so far no progress has been made on fundraising,” Li wrote in the letter, the authenticity of which was confirmed to the South China Morning Post by a venture capitalist close to the Li family.
In his letter, Li said the company “looked like it was cursed since June,” with plenty of investors praising it but not a single commitment for new funding since June.
Bluegogo’s users saw their 199 yuan deposits go up in smoke. These worries about losing their deposits has the effect that these millions of users asked for their deposits back, and the truth where their money has gone – namely, up in smoke – emerges.
The SCMP also points out other side effects of the bike-share frenzy:
The rapid proliferation of dockless bicycle rentals has caused headaches for city authorities, not just in China but globally, as users park them indiscriminately, blocking the way for pedestrians and traffic. Bicycles have been found dumped in rivers, abandoned on open land, and hanging in trees, to name a few examples.
In June, the first bike-share outfit toppled: Wukong Bike – though it had been founded only six months earlier. It took user deposits and VC funds with it, citing a “strategic company restructuring.” The company operated 1,200 bikes in the southwestern city of Chongqing. The business model: Initially, Wukong was charging users a tiny fee, but later all rides were free. Most of the bikes disappeared because they didn’t have a GPS tracking device. Caixin:
By the time the company decided the devices were necessary, it had run out of money and failed to raise more, Wukong founder Lei Houyi said in an interview with online publication The Founder.
A further problem emerged, apparently, when users found out that Chongqing is hilly, and that cycling up these hills is hard. Caixin:
Lei argued that launching shared bikes in such a hilly city would make headlines. He previously ran a mini-loan business in Chongqing targeting the consumer market – which also shut down due to lack of investment.
The two largest bike-share companies, Mobike and Ofo, follow a similar strategy of very low fees, “ride for free” periods, and other inducements, in this capital-intensive industry where real revenues are hard to come by. But they have the cash for now to burn in large amounts. According to Caixin:
Mobike is backed by at least $1 billion in investments, including from Tencent and Bertelsmann, while Ofo enjoys a comparable capital pool, with investments from Ant Financial Group, Coatue Management, and others.
The first bike-share company already went public in August: Changzhou Youon Public Bicycle System raised 644 million yuan ($96 million). Its shares soared for the first four days and closed at 100.30 yuan on August 31, nearly quadrupling its IPO price of 26.85 yuan. But in less than three months since then, the share price has plunged 44%, to a new post peak low of 56.45 yuan.
Canadians, fasten your seat-belt. Here are the charts. Read… Whose Private-Sector Debt Will Implode Next: China, US, Canada, Eurozone, Japan?