The Investor Behind Didi & Ofo: This Is How I View The Sharing Economy (Part 2)

“I have never dwelled much on what we should call these emerging businesses. In fact, I don’t think it matters.” China’s unicorn hunter points out 3 common characteristics that successful compan

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The Investor Behind Didi & Ofo: This Is How I View The Sharing Economy (Part 2)

Editor’s note:

The article was written by Zhu Xiaohu and first appeared on the WeChat official account GSR Ventures. It’s published by KrASIA.com with the writers’ consent.

Zhu Xiaohu is a unicorn hunter who had the foresight to invest in the now hugely successful DiDi Chuxing and Ofo.

According to Zhu, dwelling on how to name an emerging business model is not what entrepreneurs should spend their time on. Instead, Zhu gives several tips for entrepreneurs:

1.Take care of your costs and the initial targeted market.

2.Multi-scenario-based business model is more viable.

3.Fast expansion and standardization always contribute to the success.

This is the Part 2 of a 2-Part Series.

Link to the Part 1.


The importance of cost advantage

The cost advantage is critical for companies operating in China.

Photo by Aidan Bartos on Unsplash

China is a vast market. A company must throw in as much money and resources as it can to quickly establish a foothold. To that end, the company must, in turn, have a cost advantage, both in procurement and maintenance.

The ongoing fight between China’s top two bike-sharing companies is reminiscent of the comparison between the German Tiger tank and the Soviet T-34 during World War II.

Tiger tank was the best of its kind, with unparalleled armor and firepower, yet it made little difference because it’s too costly to build. By the end of the war, only a small number were produced. The tank also fared poorly in mobility, and maintenance was expensive and time-consuming.

In contrast, although the Soviet T-34 is no match for Tiger tank regarding firepower and range, it’s relatively cheap and easy to fix, allowing it to be produced in more massive quantities and win by volume.

Likewise, Ofo’s bikes feature low cost. They are standardized and can be fixed on-site, but the bikes of its rival must be sent back to factories for repair.

Carrying bikes to and from factories alone may cost some 300 yuan, enough to buy a new Ofo bike, and I don’t think a three-year maintenance-free period is attainable in China. As you can see, different product design can result in different operating costs.

Mobility and riding experience are important too, because more often than not, they are what users value most when choosing between different products.

Starting small, then going big

Photo by Sawyer Bengtson on Unsplash

Start with an area that encourages easy future expansion. This, we think, is also of particular importance in addition to cost control.

This pattern, i.e. starting with an initial focus and then branching out into more areas, can be captured from basically all the internet firms in China that have managed to grow big.

Both Meituan and DiDi follow the development pattern mentioned above. Meituan started off with its group buying business, based on which Meituan had introduced services including coupons, membership rewards points, seat booking and reservation.

DiDi, at the very beginning, also focused solely on pairing taxi drivers with passengers. But, it expanded later to include such services as DiDi Select, DiDi Express, Designated Driving and DiDi Minibus.

The same pattern can also be observed in Tencent’s development path. By leveraging its powerful social platforms QQ and WeChat, Tencent morphed into an internet empire that encompasses the branches including games, literature, music, film and television.

That being said, but please be reminded that reckless expansion often puts a business in jeopardy. So a business had better not carry on with any expansion before cementing its core business. The case of beleaguered LeTV should provide a sobering lesson for that mistake.

A good start matters. So, make sure that you come up with a project that encourages easy future expansion before jumping on the sharing economy trend. The investors are often more willing to bet on businesses with good expansion prospect. For example, while it is easy to extend from clothes sharing into purse or accessories sharing, it is difficult the other way around.

Multi-application scenarios

Photo by Štefan Štefančík on Unsplash.

While expandability is crucial, choosing a business model that sustains is also of equal importance.

There are some sharing business models on the market, like basketball sharing and umbrella sharing, that, we think, are simply too impractical. They are reliant on specific application scenarios and this nature has decided that they are going to collapse sooner or later.

Velo, a company that focused on distributing discount coupons, is a typical case that had stumbled in that pitfall. Its business mushroomed very quickly when it was launched years ago. At that time, many young people would turn to Velo vending machines for available coupons while going out for shopping.

Quite soon, Velo’s vending machines had found their way into nearly 10 cities. The business owners that used its vending machines also jumped to over 30,000.

Velo’s business was soaring. The discount coupons that distributed by Velo’s vending machines then had reached over 20 million every year, helping Velo amass over 100 million yuan in revenue each year.

But, Velo’s business was too reliant on subway exit for user traffic, so its business was soon thrown into jeopardy when the subway company started to elevate the rent each year. Shanghai Metro Group even thought about terminating the rent and venturing into the business itself. It approached us for investment once.

Building a business reliant on specific application scenarios is like dancing on a swing. It’s too dangerous. Umbrella sharing and basketball sharing are both of this kind.

Who would need umbrellas when there’s no rain? In the meantime, what do I need a basketball for when there’s no basketball field?

For fast growth, standardization is the key

Photo by Marvin Ronsdorf on Unsplash

The fast-paced internet era tolerates no slow motion. You’re more likely to win the race if you are always one step ahead.

Alibaba took eight years to grow into a company worth over $10 billion. Facebook took five years to scale up its business. So did Meituan. DiDi took three years to expand its business. But, it only took Ofo and Mobike two years to amass several billion dollars.

Once an internet startup has secured a safe lead in its field, the competitors close behind then won’t be able to pose much threat to its status.

In October 2015, we invested in live streaming app Inke, which had soon managed to secure its predominance in its field. Three months later, many investors or startups swarmed into the live streaming business. Yet, not one of them had managed to take away Yinke’s predominance.

Those giants, of course, see no shortage of user traffic. But, they also have a myriad of products to tend to.

It’s unlikely that the giants will splurge much investment on a new product, unless the product has something that really fascinates them. Therefore, the startups shouldn’t dread too much about the competition from those giants.

When it comes to building businesses in the internet world, standardization is the key. That’s also the reason why DiDi took off. Its products are standardized.

The customers frequently won’t care much about the condition of the car itself as long as it can transport them from location A to location B. So whether the car is a new one or an old one doesn’t make much difference to them.

For non-standardized products, however, the internet doesn’t seem to be of much help.