Morning Markets: It turns out that no matter how much capital you raise, unit economics are still divine.
We may be in the final days of the Chinese bike-sharing boom. These closing pages should serve as a warning note to anyone caught up in the concept of “China scale,” the idea that traditional business rules apply less in the country due to its population scale, yet-expanding economy, and rising smartphone penetration; there’s so much growth in China, that you should raise even more than you would anywhere else, and spend it.
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The model could work out for rising China-based unicorns like Luckin Coffee, but among some of the country’s highest-flying startups, it has largely failed.
“Ofo, the Alibaba-backed bike-sharing service, has ‘immense’ cash flow problems and has considered applying for bankruptcy, according to the company’s founder.”
A startup running low on cash is not news. That happens daily. But for ofo, one of the best-funded startups in history, it’s shocking. Ofo has raised around $2.2 billion to date, including a string of nine-figure funding events. Here’s a sampling:
- $866 million Series F on March 13, 2018
- $700 million Series E on July 5, 2017
- $450 million Series D on Marcy 1, 2017
And so on. To have raised so much, and presumably to have spent nearly all of it, and now find itself in a cash crunch is reeling.
Ofo, and its flirtation with bankruptcy is not the first of its kind to struggle with viability despite voluminous funding. Domestic rival Mobike sold to one of its shareholders for a return on capital that was around three. How much of a win that exit was depends on how you want to score the inside sale. And bluegogo, another local competitor, imploded before a later sale. Throw in the ofo crisis and there’s not much to cheer from the sector.
The bike-sharing giants’ model was always a precarious wager: Raise lots, spend it on hardware, spread those units around cities, try to best competition through volume, and hope that low prices eventually shake out in unit-economics terms. If that feels analogous to today’s scooter wars, you’re not wrong. Only scooter technology is more complicated, and regulation seemingly more reactive, at least in the United States.
The final ofo chapter hasn’t been written yet, and may not be for some time. But the bike-sharing boom and eventual bust is a good warning that even in these heady times, cash flow, and cash itself, still reign.
Illustration: Li-Anne Dias