Once a favorite, the sharing economy is losing its charm with Chinese investors Part (2/5)

Copying the success of bike sharing

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Once a favorite, the sharing economy is losing its charm with Chinese investors Part (2/5)

Copying the success of bike sharing

On the morning of March 31, 2017, LI received a news push notification on his phone saying that Xiaodian had closed an angel round. He immediately forwarded it to a friend who was investing in a power bank rental service then and suggested that he make their financing deal public as soon as possible.

As it turned out, his friend, busy meeting the founder and shareholders, missed the best chance he had to get exposure for the company. On the same day, Ankerbox (街电), another operator of shared power banks, announced a nearly ¥100 million series A round.

In fact, momentum had been building up quietly in the power bank sharing sector for months: Several companies had signed term sheets and were wrapping up their deals, a financial adviser who offered suggestion on a power bank sharing project told 36Kr. “It’s just that none of us expected Xiaodian would move so fast.”

It may seem random that it was Xiaodian’s financing that eventually blew up the sector, but if you take a closer look, there were signs. Towards the end of 2016, ZHU Xiaohu, Managing Director of GSR Ventures, said on several private occasions that he and the angel investor WANG Gang had invested in another promising project, whose name he would not disclose till the next year. This led the curiosity over this mysterious company (Yes, Xiaodian it is) build up during the investment offseason before the Spring Festival.

WANG Gang’s and ZHU Xiaohu’s alliance dates back to their investment in Didi in 2012. The investment duo had since partaken in a number of small companies before running into Ofo in early 2016. Since then, ZHU Xiaohu has become a spokesman-like figure in Ofo’s ensuing fundraising activities and its fight with archrival Mobike. Apparently, his investment in Didi and Ofo had turned him into the most-watched venture capitalist of the year.

So, in the end, it was a combination of curiosity and the influence of a golden investment duo that blew up Xiaodian’s financing news. By April 2017, new power bank sharing projects were springing up at a pace of one or two per day and, as of mid-May, the number of announced charger rental startups had reached 22, backed by nearly 40 investment firms in total. One of the prominent cases is perhaps the acquisition of a 60% stake in Ankerbox by the e-commerce company JuMei.com (聚美优品) for ¥300 million in early May. Its CEO Leo Chen even said that he would oversee the company’s operation personally.

As new entrepreneurs rushed into the sector, existing projects were raising money at a record pace. Xiaodian, for one, raised its series A and B round from at least 13 investors, among them was Tencent, within 40 days of its angel round.

A venture capitalist described to 36Kr how he was turned down by the CEO of a power bank rental startup because it had already been courted by better-known investment firms. He was not even able to arrange a meeting with him.

Half a year ago, the same investment frenzy had swept the bike sharing sector. Between August 2016 and February 2017, Ofo and Mobike each completed five rounds of financing, attracting big-name investors including Tencent, Alibaba, Hillhouse Capital Group (高瓴), Warburg Pincus (华平) and DST.

Investment giants lead companies to success, while early-stage investors succeed by investing in future winners. “Early-stage funds are all about investing in the most promising firm in an emerging field. That means Didi in the O2O sector, Kuaishou in the short video sector and Mobike and Ofo in the bike sharing sector,” a PE investor told 36Kr. “Even without the financial returns, the investment would be worth it if you consider the publicity it could generate for your company.”

A case in point is the nascent investment firm Panda Capital (熊猫资本), which made a name with its investment in Mobike’s B round. According to the above PE investor, an industry analyst could be promoted to vice president and a vice president to partner simply for having pulled off a bike sharing deal.

The influence of ZHU Xiaohu is also largely derived from his investment in Ele.me (饿了么), Didi and Ofo, all winners in their respective fields.

In Q1 2017, both Ofo and Mobile announced that they had broken the 10 million threshold for daily orders. This was just incredible at a time when gaining user traffic had become extremely difficult for other companies offering mobile internet services, but the sad thing is that, by this time, the two bike sharing companies were already too “expensive” for most VC firms.

“They reached the C round in the blink of an eye,” a partner at an investment company said. For a long time, investors who hesitated over bike sharing projects and those who made the wrong call were under great pressure.

As far as Kathy Xu, founder of Capital Today (今日资本), is concerned, bike sharing may seem like a lucrative business, but given the complicated operating costs involved, turning profits would not be easy. The CEO of a fund company expressed the same concern during an internal meeting on the Mobike project, but when he saw out the window 10 shared bikes pass by in five minutes, he decided to chip in anyway.

Just as VCs were lamenting their failure to seize a golden opportunity, shared chargers took the stage. This time, lured by the promise of user traffic, reputation and exposure, and haunted by a fear that they may miss another hotspot, investors flocked in.

Power bank sharing seemed, in many ways, an incarnation of shared bikes. In an interview with 36Kr last August, WANG Gang said that shared power banks checked all their boxes: strong demand, high frequency, low cost per transaction and mass-market. “Turning profits is relatively easy too.” High hopes were placed, and for a while, power bank sharing projects were able to raise money at a pace five times that of the bike sharing services.

That meant investors must move even faster.

LI Yuanfeng was the first investor to meet the founder of a startup operating shared workout units. Although he was shown only a business plan, he decided to give it a shot after a 10-minute talk. No term sheets were signed, but LI asked his staff to transfer the money via WeChat right away. The founder was on his way back when he received 20% of the investment from Falcon Angel Investor.

Even though he acted so quickly this time, the deal still almost flopped. Two days after the two met, another investment firm approached the founder and pushed up the offer price by ¥5 million. “Had it not been for the fact that we already transferred the initial sum of investment and that the founder and I had won each other’s trust, the deal would have still fallen through,” said LI.

By the end of April 2017, the sharing economy scene, which had been heated up by shared power banks, was taking on a bizarre twist. The sharing economy concept became the target of widespread ridicule after the emergence of projects such as shared toilet paper and shared umbrellas. In a move to mock the rush to jump on the sharing economy bandwagon, someone joked that he would like to launch a business offering “shared telephone booths.”

The absurdity became so glaring at one point that ZHU Xiaohu posted the following content on WeChat Moments: “I was told that many entrepreneurs have tailored a series of sharing economy projects for me, among them shared umbrellas and shared basketballs, and that they are bringing them to my office. Don’t bother. I hardly go to the office.”

Written by: LIU Jing

Editor: HONG Hu


This is Part 2 of a 5-Part feature

Part 1: The dramatic rise and fall of startups

Part 3: An increasingly smaller pie

Part 4: The sharing economy: just a passing fad

Part 5: Ever shifting investment hotspots