Yes, fail is a harsh word.
But it’s true. And it happens to lots of companies, especially in China.
The good news is failure in China is not final. There are always more opportunities. I’ve written a series of articles about “What To Do When You Fail in China” (here and here). And many failed companies later come back to great success. So it’s harsh but not necessarily fatalistic.
OK, first a couple of points about the Ofo situation:
- Let’s dispense with the argument that this is about the profitability of bike-sharing. Bike-sharing is popular and has tons of usage (in China). And it has ok but not awesome unit economics. Plus Mobike is doing fine. So is HelloBike. So is Didi Bikes. Ofo’s problems are about Ofo – and not bike sharing.
- Everyone should be rooting for Ofo right now. Having a business crater is awful. I’ve been there. You worry all the time. It’s hard to sleep. And it really wears you down over time. So let’s all be sympathetic to fellow entrepreneurs and investors. We should all be trying to help them if we can.
That said, I think Ofo failed for 5 reasons.
Reason #1: They underestimated how long money wars can last in China. And they didn’t preserve their capital.
Money wars are common in China. A new business is launched (Groupon, social media, online video, food delivery) and lots of venture-backed competitors jump in and fight for customers with capital. They subsidize services, pay for referrals and so on. Spending big usually gets you get more market share, which then lets you raise more money (and at a higher “valuation”). Whoever fundraises the most aggressively tends to pull ahead. A few market leaders emerge and the rest die off. Ofo did all this successfully and ended up a market leader, along with Mobike.
However, that was not the end.
Even after the leaders have captured the market, these money wars can keep going for a long time. For example, Meituan and Ele.me are still both running at operating losses in food delivery. Online payment services Alipay and Tencent Wallet are probably running at a loss or break-even. Online video is particularly unprofitable in China (although that has a lot to do with the economics of licensed content vs. ad revenue).
A favorite example is the +10 year fight between Ctrip vs. Elong (then owned by Expedia). Both became market leaders rapidly but the money war then lasted about a decade. After losing hundreds of millions of USD per year, Expedia finally sold their stake in Elong and exited. Ctrip quickly bought their stake in Elong.
Ofo did well in the initial phase of the money war for bike-sharing. But they then ran out of capital and could no longer compete with Didi, Mobike / Meituan and Hellobike / Alibaba (all of whom are still probably operating at a loss in this fight). They couldn’t match them in new bikes deployed. They couldn’t match them in ending the deposit requirement. And so on.
This was all about the competitive dynamic. There is nothing inherently unprofitable about bike-sharing. It’s not a cash machine but it can get to operational break-even fairly easily.
Reason #2: They went international before winning in China.
This is a minor point. But Ofo went international in 2017. That took time and money – and exacerbated Reason #1. And going international wasn’t really necessary.
Launching operations in the USA, Europe and other locations probably helped their “valuation”. But it also meant buying lots of bikes and placing them all over the world. And there wasn’t a strategic requirement for them to do this. Ofo’s success or failure was always going to be about their success or failure in China.
Going international is usually something China’s digital giants do after they win in China (like Didi and Alibaba). Or if they need to avoid larger domestic competitors (like Huawei in the 1990’s or OnePlus today).
Anyways, in retrospect it was a mistake. But not a huge one.
Reason #3: They stayed a stand-alone bike-sharing company, which is not competitive in China long-term.
Lots of great services are not great businesses. Sometimes the economics just aren’t strong enough to compete and grow. And sometimes the service makes more sense as part of a broader consumer offering. Lots of mobile apps have this problem right now (Meitu, Billibilli, etc.). Note: writing books and articles has the same problem.
It was clear early on that bike-sharing didn’t have the economic power to compete as a stand-alone company. Digital China is a rough sport and you need to get big. A successful bike-sharing business is a $2-3B mobility company. But a dominant ride-sharing business is a $50-100B mobility company. You’re too small of an animal in the jungle.
In China, this is even worse because you have 3-4 giants that dominate the consumer-facing markets (Alibaba, Baidu, Tencent, Bytedance, etc.). Digital China is mostly a team sport. And you really want to be on team Alibaba, Team Tencent, Team Didi or other.
In addition to size, it was also clear that bike-sharing was going to be part of a more comprehensive mobility service. That cars, taxis, metro, bus, bikes, scooters and such would all be one integrated “get me from here to there” super-mobility service.
So it was always pretty clear that Ofo was going to end up as a service in a larger business. And they had done deals with Didi and Alibaba / Ant Financial early on. So things looked fine.
But then something happened in these relationships (see Reason #4) and somehow Ofo ended up a stand-alone company. Plus, they made several statements about wanting to stay an independent company. I was never sure if that was negotiating language or if they actually meant it.
I don’t know what happened. But Didi ended up with Bluegogo plus their own Didi bike service. Alibaba partnered with HelloBike and Meituan got Mobike. The big dance partners were gone and Ofo ended up a stand-alone company. So even without the money war problems (Reason #1), Ofo ending up a stand-alone bike-sharing company was a huge problem. It was almost for sure not competitive.
Reason #4: They didn’t kiss the ring of Didi (and maybe Alibaba)
Now we’re getting to the bigger stuff. And this probably relates to #3.
Since mid-2017, I was hearing lots of rumors of discord between Didi and Ofo. I don’t know if they were true but I was hearing a lot of them.
And then in late 2017, Didi launched Didi Bikes. And then acquired BlueGogo a few months later. That was a bombshell. Something was definitely bad between Ofo and Didi. It was like your wife announcing she was going to date other guys.
Over the next year, I heard rumors and press reports about 3(?) rounds of negotiations between Ofo and Didi / Ant Financial – but that they all ended up falling apart. Again, I’m not sure what happened but the stories weren’t good.
And my point for #4 is it really doesn’t matter. Because if you are a bike-sharing company in China, you cannot have a conflict with Didi. Let alone with Didi and Alibaba. You have to avoid that at all costs. In fact, you should be doing everything you can to make sure they really, really like you and your company.
Didi is the mobility giant of China. And Alibaba is the consumer giant of China. Either can put you out of business if they want to. If the management at Didi was evenly mildly upset, Ofo should have gone and apologized. And they should have done everything possible to build a good relationship. That’s good business in general. But it was critical in this case.
I can’t imagine how or to what extent that partnership fell apart, especially after multiple rounds of investment. But keeping Didi and Alibaba really happy was a top priority for Ofo. And something went very wrong.
Reason #5: Ofo didn’t recognize and / or address management problems.
By mid-2017, Ofo had it won. They had a great service with massive consumer adoption. They were one of two market leaders. And they had partnered with Didi and Alibaba. Awesome.
And then somehow they grasped defeat from the jaws of victory. They ran out of money. They stayed stand-alone. They broke with Didi and Alibaba?
I don’t really know what happened. But I do know that it wasn’t the market or their competitors that took them down.
Ofo clearly had problems at the management and / or Board level. There’s nothing wrong with that. It’s common. Every team has weaknesses and gaps. You just have to identify them and fix them. Sometimes it’s at the CEO-level. For example, Facebook brought in Sheryl Sandberg to help Mark Zuckerberg. Eric Schmidt joined Google. Sometimes it’s with the CFO and fundraising. For example, Jack Ma hired PE-veteran Joe Tsai very early on to help with fundraising. It could be at the Board level. Or the mid-management.
But for some reason, the problems at the management and / or Board level didn’t get fixed, or maybe not in time. That’s my take as an outsider watching. But I wasn’t in the room.
One explanation I keep hearing is that certain veto rights were held by certain people on the Board. So changes couldn’t be made. Possible? Ofo’s investors are some of the best business people in China. So that would be consistent with that.
Anyways, I’m guessing on this last point. I suspect a Harvard Business Case is going to be written about Ofo at some point – and then maybe we’ll know the full story. But that’s my take.
To the folk at Ofo. Hang in there. You built an amazing service. We’re all rooting for you.
This piece was originally published by Jeffery Towson here.
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