Lambert here: It seems that Chinese stupid money isn’t quite as stupid as ours?
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street
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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The same thing is happening in India with startups in the local deliveries/logistics space. Most are going up in flames, which is not surprising when one considers that what passes for strategy with most of them is based on the flawed assumption by their founders – that their particular startup will be the last one standing after the inevitable sector shake-up leaves the landscape littered with the carcasses of their competitors – after which they’ll refocus their attention on where it should have been from day one, finding a path to sustainable profitability. Below cost pricing and free rides as inducements do not a sustainable business make, and buying into the “focus on user acquisition first and worry about profits later” mantra, as most of these startups do, is akin to buying a one way ticket to the startup graveyard. But as long as the startup scene is flush with dumb money, expect nothing less than what we are seeing in China and India.
Lambert. If you are implying that Amazon “investors” are stupider than Chinese bike sharing “investors”, I concur.
Amazon: price to dividend – to infinity and beyond. The Uber of retail.
Amazon is cashflow positive (and IIRC, was cashflow positive pretty much from the start). It could start paying dividends anytime it choose, really – but Bezos splurges money on investment and “investment”.
The other advantage of generating very small (if any) nominal profit is not having to pay taxes too…
So given this tendency to artificially deflate what appears to be a healthy cashflow conversion rate, the only way for amazon shareholders to get some real cash back is to sell the shares (as Bezos does annually to the tune of a $1bn to fund his space exploration company).
No , being cash flow positive and making profit are two separate things. Only profit making companies can pay dividend not CF positive.
Futher, even if a company does invests all of its profits in business, its financial statements will still show profit , if it has made any profit . So, argument that “we are not making any profit because we are investing all the profit in business ” is a myth propagated to confuse people who does not have accounting knowledge.
Bike sharing is a great idea – the existing schemes around the world (based on fixed stands where the bikes must be returned) are generally very successful – spectacularly so in some cases. Using apps and remote locking is a very obvious improvement.
The problem – of course – is that ideology refuses to acknowledge that there is a role for central public control. Just as services such as public transport and waste collection has been privatised and put out to ‘competition’ for no obvious beneft (and frequently obvious disbenefit), a service like having cheap hire bikes should be as logical a service as roads, bike lanes, and parking bays. But its not even mentioned by any writers on the topic.
The one good thing is that the bike share fiasco may well result in some local governments taking over the remnants of one or more of these companies and operating them on no-profit basis as a public good.
My thoughts as well. What I worry about, however, is that these ridiculous flops end up serving to discredit the idea generally, and make doing the same thing in a sensible manner harder to accomplish, since you’ve first got to convince people that just because Bluegogo failed doesn’t mean bike-sharing can’t work.
I run into this all the time in talking to people about worker co-ops and intentional communities. “Oh, I was involved in one of those and it didn’t work, which proves that they can’t work.” So I ask what didn’t work and get a tale of obviously incompetent organizing, naive idealism, and the like. To which I want to scream, “Well duh, not like that it doesn’t work!” Fortunately I’ve become familiar with many, many examples of co-ops and communities that have been around longer than I have and do function, often at a rather high level, so I don’t have to shout my exasperation :-)
Bad execution of great ideas dogs the tech startup world more than insiders admit. And unfortunately, once a few high profile startups backed by “top tier” VCs go belly up, everyone avoids those ideas like the plague.
I’d love it if a co-op would take on bike sharing – there are lots of examples of successful small scale bike co-ops. Unfortunately, the upfront investment required is probably too much.
Maybe, in general, the so-called “sharing economy” is trying to be co-ops, instead of rent-seeking monopolies seeking to operate “at scale.”
The problem is going to be coming up with a reasonable business plan. I imagine the workers would be doing mainly maintenance on the bikes, along with a little admin and maybe some coding stuff if you’ve got an app attached. If you make renting a bike cheap (which you’d probably have to), you’ll need a lot of volume to make it work. And that means your initial capital investment is going to be large, even if you save money by using salvaged bike frames and the like. Plus, in order to create enough accountability on the part of users to keep them from destroying the bikes, you’d want to have some kind of deposit, and/or a way to keep track of which person is using which bike…
Sounds like way too much work to me… But, if you wanted to try, you’d probably want to organize any such effort as a multi-stakeholder co-op, so that you could raise capital via member fees from as many people as possible.
Yes, going by the experience of existing bike share schemes they are only viable on a large scale – both in terms of purchasing the bikes; in providing enough turnover to employ a permanent staff; and in terms of covering a city with enough bikes that everyone will want to use them (small scale schemes never seem to work for the latter reason). The ones in Europe are often financed through adverts – on the bikes, and fixed street adverts on public property as part of the quid quo pro for providing bikes.
There is unfortunately in Europe an issue with EU competition directives which can make it awkward (not impossible, but difficult) for Councils to set up their own schemes with local co-ops – there is an obligation to put all public schemes out to tender. Ideally, you could tie it into local currencies if the city authority has its own tax raising powers.
I’ve had a few ‘chat over a few pints’ with friends involved in bike co-op schemes on this – the alcohol fueled conclusion is that it would be possible and viable, but even a modest scheme would require very significant amounts of money to succeed, and ironically the biggest objector would be existing citybike schemes.
“There is unfortunately in Europe an issue with EU competition directives which can make it awkward (not impossible, but difficult) for Councils to set up their own schemes with local co-ops – there is an obligation to put all public schemes out to tender.”
So this part of the privatizing rentier neoliberal oversoul is actually written right into EU law? I recall one part of the pitch for EU was to reduce the horrors of Big National Wars. Anyone done the sums or studies on how much immiseration can be laid at the altar of NeolibNeoconism, as compared to other excrescences of “capitalism” like WW’s I and II, and stuff? And how can any “socialism” survive in this context, over the long haul? Speaking of how to boil a frog…
I should add by the way that there is a model that can be followed – that used by Councils for GoCars/ZipCars or similar type car share schemes – there is a lot of interest in these worldwide. But these schemes tend to have big money backers, so its easier for City Councils to facilitate them without putting much cash up front.
I can’t see how it’s a great idea – there seems to be a private property issue here, i.e. the same problem communism had with collective agriculture, more or less – lack of a reason to take care of the bike. Pride of ownership, maintenance, those are some basic issues. Plus sweaty seats. . . Bike rentals (which is all it really is) are for tourists. Add in the prevalence of bike theft in major cities, the ease of disabling GPS and bike locks, random vandalism – maybe it would work in Singapore, but not many other places.
I heard from a guy (who knows about this investment stuff) that the next big thing is TULIPS! Get in on the ground floor TODAY! Spring is just around the corner! No way to gain, unless you are exposed to the market risk, he tells me!
And I bet once the population of a place (pick your favorite scalar) reaches a certain size, and native human behavior quirks and defects do what they always seem to do, it is dam-all impossible for “government,” that mostly wholly-owned subsidiary of the Rentier class, to provide what we hopeful mopes consider to be wise public services and manage utilities and build and maintain that ‘infrastructure’ stuff, and catalyze moves toward survival and sustainability, and suchlike fripperies
Anybody know if any, or how much of, those 199-yuan (not quite 200, like gas is $2.49.9 a gallon, not $2.50) were disappeared into the pockets of those “employees” in lieu of the pay they weren’t getting, or into the well-greased machinery of international money-disappearing sewers? Anybody got any spare “concern capacity” to even care about this relative nit, any more?
San Francisco is a perfect city for bicycling, those guys sure are visionary!
I live near the western edge of San Francisco, and I occasionally think about a bike. But 1) I really have no need to ride one for transportation (and jousting with the stupid traffic isn’t my idea of recreation) and 2) the ground is only relatively flat going north and south. If I go west I’m at the beach in a few blocks. Going east is all uphill.
I see some of the Euro utility bikes in use in the neighborhood, some that are extended with a box over the rear wheel and another that has about a 3-4′ long cargo box between the front wheel and the rider.
I think Davis CA (near Sacramento) has a lot of bike trails and is very friendly to bikes, but that is pretty flat terrain, unlike where I live.
Hence, pedal-assisted ebikes with a tiny electric motor that helps get you up the hills.
I hope they have power brakes for getting down too… There are some streets where the sidewalks are carved into steps.
Like everything “tech,” electric bikes are evolving in every directiON. Regenerative motor braking, higher power-to-weight and endurance, higher top speeds, IoT connections, all that stuff. https://www.electricbike.com/ Not just “pedal assist” any more.
Around here, which is very, very flat, and only 10-20 feet above mean sea level, electric bikes are how people who lose their licenses to serial DUIs or other “offences,” like defaulting on student loans, are getting around — Low, low down payment! Then only $100 a month! For the rest of your life! No licence required (so far — the rentiers have not caught up to this workaround yet.)
Steps are no problem for real cyclists (youtube link)
Tour de Chine?
Maybe he can get funding for his next venture, a bike race, to compete with Tour de France.
Hm regarding that January plan of BlueGogo’s? I wonder if they are now working with the city of San Francisco this time? Earlier this year, they had dumped a bunch of bikes on the sidewalks of SF without talking to the city and had to quickly backtrack when the city threatened to impound the bikes.
ofo recently launched in my city in Australia as a pilot scheme. I’ve downloaded the app but not yet tried it (I have my own bicycle which I use regularly). They have designated a small, central area of the city in which to use the bikes, although I have seem them beyond this range.
The app and its tech seem well integrated – scanning a QR code from the app unlocks the bike. I recently tried to register for the DB bike scheme when visiting Berlin earlier this year (having lived there previously) and it was hopelessly user-unfriendly and convoluted for tourists/visitors. They could take a leaf out of ofo’s book here.
There is an existing free bike system here but it is not really fit for purpose – bikes have to be collected from a limited selection of retail outlets and can only be used during daylight hours. In my experience, people who rent bikes, especially locals but also sometimes tourists, want more flexibility than that. It’s also not a great long term solution and this is a city with a large foreign student population. DB/Boris bikes have that (almost) anywhere/anytime flexibility and pricing plans that are good value for short-term residents.
A dock system is great but it can only go ahead with proper support from local government. Local government here drags its heels. This can also be seen in the poor cycling infrastructure (poor road quality, bike lanes too close to drivers), which can make some cyclists feel unsafe. There is a local project at the moment to develop major north/south and east/west cycleways and I hope they do it properly.
There was also a weird controversy here where ofo said they’d got local gov’t approval to operate but then the local city council, or at least some of its members, disputed that. The bikes remain, nevertheless.
I’ve only seen a few cases of mistreated bikes here but, in Melbourne, it’s become a bit of a meme.
It’s kind of interesting because honestly, the way most people lock their bikes here is so inept that I’m pretty sure I could steal some of them with a pair of scissors. It’s fascinating how cavalier people will get with someone else’s bike when it has some kind of untethered locking system. If only these people knew they could be making money hand over fist with some good, honest bike theft!
I also recently downloaded an app that lets you rent bikes from private renters on a per hour/day/week basis. I have an old MTB that is too short for me but is still usable, and my parents have some tragically unridden bikes. It’s not a very well known service in Australia at this point but I’d be interested to try it out both as renter and lessee. There are also some lovely, fun looking bikes available from the small number in my city, including some electric models, which is a bit more appealing than the typically available city bike rentals.
What will happen to all those bikes? Will they be sold, repaired?
I assume there are still poor people who could use them.