China’s Bike-Share Startup Frenzy Turns into Money-Suck

Fresh startups with millions of dollars in funding run out of cash and collapse.

Bike-sharing companies – with their capital-intensive, cash-burning, ride-subsidizing business model – were among the hottest startups in China. They’ve attracted $2 billion in venture funding over the 18 months of the frenzy. They now count over 40 platforms, though the industry is dominated by huge piles of mutilated, stolen, and abandoned bicycles and by two unicorns (valued over $1 billion), Mobike and Ofo, that kicked off the frenzy and carve up 95% of the market.

But this is how quickly a frenzy can deflate.

On Thursday, Chinese media reported that Mingbike, with operations in major cities, had laid off 99% of its staff, after consumers had complained that they’d been unable to get their deposits of 199 yuan (about $30) back. Some of the laid-off employees “posted complaints on social media saying their salary had been withheld for several months,” according to the South China Morning Post:

Calls by the South China Morning Post to Mingbike’s main phone line were not answered. The last post on the company’s Weibo account was in earlier October and its WeChat account has not been updated since November 10.

In response to the latest closure and growing risk of deposit refunds, Chinese authorities have stepped in, with Ministry of Transport spokesman Wu Chungeng saying on Thursday that local governments would play a major role in ensuring protection of consumer rights. He added that regulations for the industry were being drawn up by authorities.

Mingbike was founded in 2016 and had raised 100 million yuan ($15 million) from venture capital firms.

The bike-share cash-suck works like this: Users download the app to their smartphones and pay a deposit. The ride costs a tiny fee of usually 1 yuan or less ($0.15 or less) per hour – unless the ride is free, which it often is, on the time-honored principle that the company would make it up with volume. Users unlock a bike with their smartphones. At their destination, they’re supposed to park the bike on a sidewalk or public space.

But Minkbike’s collapse was just the latest. Earlier this month, Bluegogo, the third largest bike-share outfit, collapsed. It had claimed 20 million registered users at its peak and operated 600,000 bikes. It has raised $90 million from VCs, including aptly named Black Hole Capital, based in Beijing, which led the last funding round, $58 million, in February this year. It only took eight months to burn through this money.

The Bluegogo hype in February was this, according to the China Money Network: “It plans to expand its business to Beijing in February, as well as further expanding into overseas cities following its January launch in San Francisco.”

That January launch in San Francisco, I assume, will fall through the cracks.

The SCMP cited “an emotional open letter released to the media” by Bluegogo’s founder and CEO Li Gang, which revealed that the company had run out of cash.

“In a cutthroat market like bike sharing I am too naive and so far no progress has been made on fundraising,” Li wrote in the letter, the authenticity of which was confirmed to the South China Morning Post by a venture capitalist close to the Li family.

In his letter, Li said the company “looked like it was cursed since June,” with plenty of investors praising it but not a single commitment for new funding since June.

Bluegogo’s users saw their 199 yuan deposits go up in smoke. These worries about losing their deposits has the effect that these millions of users asked for their deposits back, and the truth where their money has gone – namely, up in smoke – emerges.

The SCMP also points out other side effects of the bike-share frenzy:

The rapid proliferation of dockless bicycle rentals has caused headaches for city authorities, not just in China but globally, as users park them indiscriminately, blocking the way for pedestrians and traffic. Bicycles have been found dumped in rivers, abandoned on open land, and hanging in trees, to name a few examples.

In June, the first bike-share outfit toppled: Wukong Bike – though it had been founded only six months earlier. It took user deposits and VC funds with it, citing a “strategic company restructuring.” The company operated 1,200 bikes in the southwestern city of Chongqing. The business model: Initially, Wukong was charging users a tiny fee, but later all rides were free. Most of the bikes disappeared because they didn’t have a GPS tracking device. Caixin:

By the time the company decided the devices were necessary, it had run out of money and failed to raise more, Wukong founder Lei Houyi said in an interview with online publication The Founder.

A further problem emerged, apparently, when users found out that Chongqing is hilly, and that cycling up these hills is hard. Caixin:

Lei argued that launching shared bikes in such a hilly city would make headlines. He previously ran a mini-loan business in Chongqing targeting the consumer market – which also shut down due to lack of investment.

The two largest bike-share companies, Mobike and Ofo, follow a similar strategy of very low fees, “ride for free” periods, and other inducements, in this capital-intensive industry where real revenues are hard to come by. But they have the cash for now to burn in large amounts. According to Caixin:

Mobike is backed by at least $1 billion in investments, including from Tencent and Bertelsmann, while Ofo enjoys a comparable capital pool, with investments from Ant Financial Group, Coatue Management, and others.

The first bike-share company already went public in August: Changzhou Youon Public Bicycle System raised 644 million yuan ($96 million). Its shares soared for the first four days and closed at 100.30 yuan on August 31, nearly quadrupling its IPO price of 26.85 yuan. But in less than three months since then, the share price has plunged 44%, to a new post peak low of 56.45 yuan.

Canadians, fasten your seat-belt. Here are the charts. Read… Whose Private-Sector Debt Will Implode Next: China, US, Canada, Eurozone, Japan?

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  33 comments for “China’s Bike-Share Startup Frenzy Turns into Money-Suck

  1. scott says:

    When I fist saw these bikes in Shanghai, I thought, what a great example of investors money hard at work, as riders peddled by.

    Now that metaphor has inverted; a total waste of investors money, as bikes are pulled off the street and piled high, making scrap mountains on the outskirts of city centers.

    OFO and MOBIKE refuse to merge so the “battle to the death” continues.

    Lets hope the bike supply chain, and related vendors in the ecosystem are making money and tightening their payment terms.

  2. walter map says:

    So they pissed away a few million on a failed experiment to do something for the general population. At least the hyperrich didn’t turn it into a multi-billion-dollar face-sucking private enterprise and generate a grossly overpriced IPO out of it, ending up a in a useless and hugely expensive bailout where billions end up mysteriously disappearing.

    So count your blessings. Show some appreciation and try to get past zero.

    I’m sure somebody’s going to want to come up with some tax breaks in there somewhere.

    • intosh says:

      My thinking as well. It’s a just a tiny teardrop in an ocean of trillions of free money.

  3. KM Tang says:

    posted a comment on this businesd model some months ago.
    This report verifies the stupidity of thode in it. Cannot understand why so many states and governments allow the bicycles to be left all over. In bus stops, pedestrain crossings, traffic lights, parks and parking lots, in void decks of condos etc

    • MC01 says:

      It is the so-called cost of enforcement: not only you need to send around a man with a truck and a bolt cutter or angle grinder to take away the abandoned bicycles, but how do you charge offenders? How do you make sure they pay a fine?
      With motor vehicles it’s easy: even if they are abandoned with no license plate, you can always get to owner by using the VIN. Apart a frankly laughable attempt by Italian Fascists (obviously to slap a tax on them), there have never been attempts to make a bicycle easily traceable.
      Same thing as with abandoning thrash at the side of the road: unless you are caught in the act, you run no risk whatsoever.

      • KM Tang says:

        Bicycles are all company stamped. The color scheme the designed and there is even a laminated plastic notice on each bicycle giving some basic rules and information with the company indicated on it. Enforcers can easy check and immediately knows who the owner ie the co. of the bic. Just a picture using the hp camera is good enough evidence on the abandon bic. Owner must be made responsible otherwise stacks of bicycles are hazardous to others. Abandon bicycles are just litter.

  4. Rates says:

    2 weeks ago I signed up for MoviePass. If you don’t know what that is, it’s basically you pay 10 dollars a month and you can watch as many movies as you want in theaters. A couple of gotchas include you can only watch one movie every 24 hours, you can only buy same day tickets and the Android app is buggy.

    But seriously, how the hell is this company supposed to ever make money?

    Either way, nowadays the game in town is to sign up with as many of these investor money sucking companies as possible and get the equivalent of a free ride before the whole thing tumbles.

    And going back to China. Here’s one man’s take on Alibaba: https://deep-throat-ipo.blogspot.bg/2017/11/the-blob.html?m=1

    Hopefully the game is almost up. Although I have to admit, I regret not investing in Baidu and Tencent. Those are real businesses.

    • chip Javert says:

      Rates

      I’m guessing movie theaters have unused capacity…you could literally give tickets away and theaters would make money of the extravagantly priced Coke & popcorn.

      You’re left with the slight problem with how Hollywood gets paid. It may be hard to find a good movie, but there is no such thing as bad movie popcorn.

      • Rates says:

        I wasn’t asking how movie theaters will make money. I was asking how MoviePass as a company will make money.

        It’s really strange, nowhere in my comment did I mention movie theaters except as a place to watch movies.

        • Wolf Richter says:

          Rates,

          I have an email from a VC about a presentation he gave. He says that VCs are looking for “the scale and velocity of growth” in a startup. Startups don’t have to make money, and they don’t have to be “sustainable.”

          He says that VCs “care less about whether or not your startup is profitable because that’s sometimes irrelevant to the size of the future outcome….”

          The game is to get big fast and create the next Facebook. If it doesn’t work, and the startup fails, no biggie for the VC. The idea is to lose 9 win 1 BIG.

          This is the pattern being played out with so many VC-funded startups from Uber on down. I think your move ticket experience shows how common this funding model has become.

  5. AC says:

    Any concern not recognizing the reality of human behavior is going to have a hard time.

    The Millennials are going to get a bat to the face a few times – as they learn the hard way that what they were taught in SJW Fantasy 101 at university, does not translate well into business survival. The mental break downs promise to be entertaining.

    Maybe there is an opportunity in selling them portable organic non-GMO inflatable safespaces, or something?

  6. William Smith says:

    What ever happened to quietly testing with a small amount of seed capital to see if the “business model” can actually break even? Then reinvest the revenue as capital to grow the business. Once it is sustainable and *proven* to work, then one can look to further growth funding. Maybe I am naive? Isn’t this the way the “golden arches” started? (organic growth) Perhaps these days of loosey goosey (read: “free”) money means that the imperative to actually make money in a business is passe: it is really about fleecing the suckers… err.. I mean “investors”. Did I hear “haircut” whispered somewhere?

  7. ian says:

    I saw these silver and orange Mobikes in Italy while on holiday. Wondered wtf they were. Now I know, yet another bright idea.

  8. alex in san jose AKA digital Detroit says:

    Soooo BitBike’s not working … frankly it sounds really cheap to rent those bikes, even for China. A really poor person is going to scrounge up parts and build their own bike (I’ve known people like this, no not thieves, they get parts thrown out by bike shops etc.) and anyone with a smart phone is doing really well, not poor.

  9. R Davis says:

    This business venture was so dumb at it’s inception.
    & it failed ?
    It is most likely that a substantial sum of monies raised were utilized to private pockets.

    Have you watched –
    Megacities: Urban Future The Emerging Complexity – A Pentagon Video.

    This video gives us a very clear picture of where they see us tomorrow, when the oil reserves run out.
    Renewable energy will power the inner sanctum – you may be allocated a living space there – ask your self – are your dues to the establishment payed up. If not pucker up man.
    As if any nation is going to start from scratch & build a whole new world ……. for us – we the people – the common man.

    • Julian says:

      Lol. The oil is never going to run out.

      You’re living in fantasy land if you think that will ever happen – it will get displaced by cheaper and more effective technologies at some point but it will never run out.

      Haven’t you noticed the tremendous oil glut we’ve had for the past 4-5 years that looks certain to only get more and more pronounced in the coming years and decades??

      We have oil coming out our wahoos at the moment for godsake!!

  10. roddy6667 says:

    I was in Beijing twice in one week earlier this year, and I was able to see the bike-renting debacle up close. The bicycles are supposed to cut down on car traffic and make driving easier while cleaning up the air. I noticed that almost 100% of the people riding the rental bikes are not the people who own cars. I saw teenagers and college age people, twenty-somethings, and poor people. These people don’t own cars, so they will not be reducing car traffic. Most of the bigger streets have a bike lane which is about 2/3 of a car/bus lane in width. The sidewalks in China are very wide, often 30 feet wide on bigger streets. If the bike lane were enlarged by taking a slice of the sidewalk, they would gain an entire lane that could be better used by a few more buses.
    In my home city I notice the rental bikes parked everywhere, but I seldom see any being used. When I see somebody on a bike it is almost always a person riding his own. Younger people like the mountain bike style or racing bikes. Then you have old people riding a bike they have had since Mao was in charge.
    Before the rental bike craze, bicycles were almost extinct here, replaced by electric bicycles and scooters and mopeds.
    I think the whole thing is a fad that is now in the collapse phase.
    I do see a huge increase in electric car sharing companies. You rent a car for a couple hours or a day using an app on your phone. I don’t think this is a fad.

  11. Kasadour says:

    I’ve asked this before and I’ll ask it again, where does the money go? And that goes for Tesla, Uber et al. These enormous burn rates. I don’t understand it. Where is the money going?

    • Nick Kelly says:

      In the case of Tesla, largely into building cars. If you don’t make money selling them, you could consume all the money in the US and still need more.
      In the case of a budget car like the 3, I think break even for the majors (where your profit covers development) is over 200, 000 units per year.

      But at the rate Tesla is building the 3, that is a mirage.

    • roddy6667 says:

      A lot of the money goes into the extravagant lifestyle of the company officers and their staff. For example, at Uber, instead of using videoconferencing, they all flew to Bali.

  12. So they put up a one time deposit of $30, rode free or almost free for a period of time and now the depositors are complaining? What they need is Amtrak.

  13. Nick Kelly says:

    I’m a little puzzled by this biz. Can Chinese not afford to buy bikes or is it the convenient parking of same that is the attraction? Do you take the bus and then the bike?

  14. Mike Earussi says:

    Modern business model:

    1. come up with a great sounding idea for a business you know will never work in the real world.

    2. find a lot of stupid/naive investors desperate for any investment that will yield a return greater than the virtually useless low rates offered by the bond market.

    3. have a good PR flack write up a nice sounding IPO for those same investors

    4. pay yourself and friends high salaries

    5. when the company invariably goes bankrupt laugh all the way to the bank and then start up another one.

    • Enrique says:

      *nods in agreement with every point here*

      Might want to add: “develop silly one-letter-off misspelled name” for your app/company name and “call yourself a “tech company” (regardless of whatever space you may be in.)

      May not even need the “IPO” part either. I think most of these ventures are largely just an exercise in stealing- er, raising VC funds.

  15. JB says:

    hmm , seems that fiat money is more flammable

  16. Boiled Coffee says:

    I have to say, out of all of the ways for investors to lose money, this seems rather benign compared to vast majority of what comes out of the “new economy”. The major downside to these companies to me is not necessarily the waste, but the precedent that it is acceptable to appropriate the commons for private use. If the bike companies actually paid (or even obtained “free” permits) for use of public infrastructure/sidewalks to promote their services I would personally have zero problems with this adventure in capitalism. However, as it is we are quickly approaching the end state of capitalism where the commons is allowed to be privately appropriated without even a public debate or democratic process, because “something, something innovation”. While in the end the bikes may be mostly benign, the next company to try and similarly exploit the commons may not be and that is the true problem.

  17. chris Hauser says:

    i am a bitcoin millionaire in bike rides down a hill to where i stop the bike and leave whether it falls over and rusts in place gathering leaves and trash makes no difference to me because it’s not my bike……

    or , better yet, a haiku

    bicycle riding
    get on and go somewhere nice
    and just get another

  18. Kevin W says:

    Looks like I’ll be a voice in the wilderness on this one. I am an enthusiastic customer of both Ofo and Mobike in Shanghai, and use them about twice a day. I would use the others, too, but they’ve made registration very difficult for consumers who lack a Chinese ID card; Ofo and Mobile allow you to sign up just with a photo of you holding up your passport, and a 100 RMB deposit.

    The free rides are really only on offer on weekends, when ridership is way down for obvious reasons. I’ve seen the piles of unused bikes cluttering sidewalks and vacant lots, just like there are millions of electric scooters everywhere. The shared bikes obviously serve a giant market–just look outside. Good luck getting to a metro station in the morning after 8:45 on your way to work and hoping to find a shared bike there–you won’t find one. Good luck also getting a taxi–they’re all full.

    1RMB for a 20 minute ride? Sure, that’s low. But how many rides per bike per day? The bikes themselves cannot be that expensive; they’re manufactured in China, after all. Call it 100 RMB (16 bucks) to build a bike on a mass-produced basis. How many other businesses can recoup their equipment cost in under 30 days?

    I’m unsurprised that if a company gives its services away, it can’t make money. I’m unsurprised that if a company doesn’t put GPS on their bikes and they get stolen or cannot be found using the app, it can’t make money. I’m unsurprised that if a company enters a crowded market like Shanghai or Beijing instead of going to an underserved Tier-2 or -3 city instead, it can’t make money.

    What is a surprise is the idea that because some of these companies have blown up, then we can only conclude that it’s a doomed industry and a stupid idea. It’s neither. While you’re waiting for a taxi that will never come, that’s me, riding by. Be sure to wave.

  19. dany says:

    bike sharing could be huge what implications will it have on mobility will be important especially in cities.

    the next bike sharing battle in europe in the core countries like britain france and germany will define the winner.
    Bike sharing or free floating is ecological there could be less traffic and pollution in cities.

    The market is Split in different companies but the winners will be ofo and mobike the 2 companies with the most valuations and backing.Then those 2 companies should merge together.Then they should ipo to create a Company with a huge valuation and rename it ofo.

    In other words create a company that controls the full network and market to become a highly profitable company

    • scott says:

      Agree. stop the waist, merge and dominate.. its a great service and like another person said, fine them if they leave their bike in an unauthorized place; easy asy they have GPS.

    • Kevin W says:

      Well said, and a great idea to merge. They’ve already thought of it though, and have leaked plans to do so. They are only in the consideration phase, but sent messages to customers that their credit balances would be unaffected by anything the companies do. Just in case we were wondering if it would be like when two airlines merge and all the frequent flier miles for the acquired company go POOF.

  20. raxadian says:

    I knew we would see a few Unicorns more die before 2018. Some of these are such evident scams *cough* Juicero *cough* that makes one wonder how they get investors in the first place. Since cheap credit started to end in 2015 a lot more companies are going to bite the dust.

    Is just gonna take time.

    Zombie Unicorns
    Pretending to be stars
    Scaming people money all around the world

    Zombie Unicorns

    Preying in the night
    The money is gone forever
    Wasted around the world…

    And you get the idea.

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