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

Ever shifting investment hotspots

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

Ever shifting investment hotspots

The development of the sharing economy follows the likes of O2O: They all extend from scenarios featuring high frequency of use gradually to scenarios featuring low frequency of use. O2O, for instance, was first captured in the daily scenarios, such as takeout orders delivering and ride hailing. And it was only until later that it spilled over into scenarios such as manicuring and car washing. The feasibility of the latter business models, though, was widely questioned.

The sharing economy, as an investment buzz, was short lived. 600 days, starting from the summer of 2016 when bike sharing edged into the spotlight to the time when Mobike was taken over by Meituan. Whereas, the investment buzz around unmanned shelves, which just emerged last year, only lasted for 200 days. Some have jokingly dubbed it as the most short-lived investment hotspot.

“There was a time when sharing business models were keenly discussed by VCs in the United States. It was probably around 2013 or so when the internet companies, such as Airbnb, thrived,” recalls YU Yue. Interestingly though, “the VCs and entrepreneurs in the United States did nothing more than discuss about it. Understandably, no one would jump onto it when it was rated low in both feasibility and profitability. In China, however, people will flock to any business model even if it is just a concept,” says YU. Last year, when the sharing economy was all the rage, YU was bombarded with “identical” business proposals.

The reality is the VCs in China are generally deep-pocketed and hungry for profitable assets, so they will basically dash to any emerging business model that is potentially lucrative. That said, the investment buzz around an area though, as LIANG Weihong puts it, can benefit the area in several ways. It, for example, can create efficient communication for all participants as well as attract more capital and talents.

However, it can also backfire. According to SHI Zhuojie, sharing bikes and shared power banks, actually, can be “profitable in their most stripped down models”. Unfortunately, the overpowering interest from the VCs steered them on a path of overusing incentive plans and overexpansion, eventually bending their business models out of shape and lengthening the time needed to break even. “Clearly, the overexpansion has smashed their original profitable models into pieces,” said SHI.

“There’s an unmanned shelf startup based in Hangzhou. It could have turned out different if it had been left undisturbed by VCs, because it was already profitable by then. Soon afterwards, the unmanned shelf business was cast into spotlight by VCs. What came with it were the many incentive plans from other newly funded unmanned shelves startups. Eventually, the company was taken over and has remained increasingly under the radar ever since.

The waning craze over unmanned shelves is “absolutely a boon” for DIAN (小电), said TANG Yongbo, founder and CEO of DIAN, in an interview with 36Kr. “Too much capital and new entrants will only fuel a cash-burning expansion, hence disrupt the company’s development. Last year, several employees in our business development department were poached by an unmanned shelf startup for salary twice as much. This is an obvious side effect that comes with the investment buzz,” added TANG.

In his view, the fundraising slowdown in the shared-charger space is not a telling sign that the shared-charger business model has been proved infeasible. More likely, it is that longer-term data is needed to justify the fundraising as shared-charger startups develop. “The fact that the VCs are now shifting their focus to areas such as unmanned shelves and blockchain, actually, gives DIAN a chance to expand its market share and refine its internal management,” added TANG.

“Capital alone can’t make a successful company. It is only fuel. And the success of a company eventually boils down to its operation,” said HU Weiwei, founder of Mobike, in an interview before the Spring Festival 2017.

Granted, the VC-funded incentive race can’t last long. This partly explains why it was universally expected that Mobike and ofo would eventually enter into a merger to end the furious race, like Didi and Kuaidi, and 58.com and Ganji.com. Yet, things sometimes wouldn’t pan out as expected. In such case, the VCs would choose, instead, to actively intervene after dishing out money generously in the first few rounds. The investors of Mobike and ofo, for example, had been striving to talk them into a merger since the second half of 2017. And ZHU, who once claimed that “ofo would crash Mobike in three months”, also changed his tone, saying that “the founders of both sides should see the bigger picture above the consuming competition”.

Yet, even with a merger, there will still be competition. When Didi and Kuaidi entered into a merger, Uber came into play in the Chinese market. Then, it was fundraising, cash-burning expansion, incentive race and merger all over again.

As of now, Mobike has been taken over and ofo’s fate is still up in the air. The show put on by bike sharing, having lasted for 600 days, has largely come to an end. Surprisingly though, the late starter Hellobike had emerged as a strong competitor in the bike-sharing space while Mobike and ofo duked it out.

The game changer is a new deposit scheme. In an attempt to deliver a distinctive experience and “lure users” from the leading bike-sharing companies, Hellobike rolled out a Zhima Credit-based “no deposit” scheme. This, clearly, has helped set it apart from those earlier bike-sharing companies that require a deposit. According to the data published by China Internet Network Information Center, the bike-sharing companies had, until last August, already collected more than ¥10 billion of deposit, and some bike-sharing companies, struggling to cover their high expansion cost, even misappropriated the deposit. As a matter of fact, ofo, in its early days, also experimented with the Zhima Credit-based “no deposit” scheme, but the scheme was later forsaken due to its inability to bear the high cost.

Hellobike doesn’t charge deposit for “guarantee”. So, it has instead focused more on operations to trim cost. Additionally, Hellobike also took a different path for market expansion. Instead of entering the market in the fiercely competed first-tier cities, Hellobike started off by rolling out its bikes in second and third-tier cities. Eventually, it rose above in the same way Pinduoduo and Qutoutiao did, while skirting the heavily denounced deposit issue.

Earlier this June, Hellobike was reported to have garnered a valuation of $2 billion, just slightly under the $2.7 billion valuation at which Meituan acquired Mobike.

Mobike and ofo could have developed in a steadier fashion were it not for the excessive attention from the VCs, a partner at a US Dollar fund told 36Kr. Hellobike didn’t ride on the investment buzz, yet it succeeded. In his words, “it is good luck”.

Well, the thing is you can’t always count on luck.

Market is never rational, even in theory. VCs are naturally fearful of missing out. As long as this mentality continues to dominate their decision-making, the “sharing economy” phenomenon will keep cruising back.

Written by: LIU Jing

Editor: HONG Hu


This is Part 5 of a 5-Part feature

Part 1: The dramatic rise and fall of startups

Part 2: Copying the success of bike sharing

Part 3: An increasingly smaller pie

Part 4: The sharing economy: just a passing fad