An increasingly smaller pie
While everyone is on the hunt for “the next Mobike or Ofo”, ZHU Xiaohu is searching for “the next Didi”.
The year of 2012 was a turning point for ZHU’s career. That was when the attention of the investment sector was occupied by group buying. GSR Ventures betted big on Lashou.com (拉手网), the rival of Meituan, contributing to all three rounds of the company’s financing. Yet in October 2011, when faced with major obstacles and a groundswell of suspicion, Lashou.com withdrew its IPO application. This turned out to be the most devastating moment in ZHU’s investment career.
Luckily for him, ZHU managed to pull off a dramatic turnaround through his hugely successful investment in Didi and Ele.me. Didi carries special significance because it fits perfectly into ZHU’s “3S pattern”: significant (market size), scalable and sustainable. It was also the Didi case that tied his investment career to the sharing economy.
While Didi and Xiaozhu (小猪短租) introduced the sharing economy model to China, the emergence of bike sharing services in 2016 turned “sharing economy” into a household term.
“It was no coincidence that the sharing economy model was first applied to the housing and automobile sectors, ” LI Rui, a partner of Shunwei Capital (顺为资本), told 36Kr. “Sharing sounds particularly appealing when the price or acquisition cost of a commodity is high and the right to use can be easily transferred from one to another.”
The year of 2016 saw bike sharing explode in China. According to James Liang, a partner at MSA Capital (和玉资本), the bike sharing business went viral because of qualities like high frequency, multiple use cases and extensive brand exposure.
Although the use of the word “sharing” has been widely accepted by ordinary users, it was constantly questioned by pundits, who argued that the so called “bike sharing” is in fact bike rental, pointing out that rental falls under the category of B2C while sharing should be C2C.
Such semantic debates hardly made any difference though. Most investors have reached the consensus that the essence of “sharing” is the obtaining of a temporary right to use something by someone who does not own it. “As to whether it’s B2C or C2C, it’s simply a matter of how entrepreneurs choose to build their supply chains and does not concern consumers,” said YU Yue, an investor at China Growth Capital (华创资本).
It’s worth noting though that commercially viable C2C projects are very rare. In China, except Didi and Xiaozhu, most of the sharing economy companies that emerged later on fall into the B2C category.
LIANG Weihong is a Mobike investor and a partner at Panda Capital. He has invested in Atzuche (凹凸租车), a typical C2C startup that allows individuals to rent out their idle vehicles. When he realized that a C2C business would always be haunted by problems such as low level of standardization and limited control, he began to play up the company’s role, for example, by increasing human interference and making its operation more data-enabled.
“As you can see, it doesn’t really matter which business model you choose. What matters is the nature of your business,” said LIANG.
Charger sharing services have three sources of revenue: rent, traffic monetization and advertising. As far as some investors are concerned, rent alone makes shared chargers a promising business.
SHI Zhuojie, an investment director at Innoangel (英诺天使), has conducted a research on self-service products and found that shared chargers and bikes rank among the top three in terms of both cost efficiency and value created per unit traffic. What’s more, because power banks cost less than bikes, when utilization rates reach a certain level, an operator of shared chargers may recoup its investment much faster than a bike sharing company.
That said, while the DAU of a bike sharing service can reach 10 million, a shared charger company probably can only reach a few million. In fact, there may actually be demand for shared toilet paper, umbrellas and basketballs, except that their market size would be way smaller.
What VCs want, however, are projects with broad target markets and the potential to grow exponentially. In other words, shared basketballs or umbrellas may make a viable business model, but in the eyes of investors, they are small businesses, not the “big deals” they are looking for.
Another problem with shared basketball and toilet paper projects, some of which actually raised financing, is that they are nothing but old wine in a new bottle. The role played by the internet is almost negligible except that payment is made by scanning QR codes instead of being collected manually or by coin counters. That’s perhaps why people teased the ideas by proposing shared computers (net cafes) and shared telephones (telephone booths).
The thing is, “VCs won’t be interested unless a business model involves empowering and transforming a traditional industry with new technology,” said James Liang.
Written by: LIU Jing
Editor: HONG Hu
This is Part 3 of a 5-Part feature
Part 1: The dramatic rise and fall of startups
Part 2: Copying the success of bike sharing