History repeats itself
The shutdown of Wukong Bike(悟空单车), a Chinese bicycle-sharing startup that closed just five months after launching, reminds me the battle of Groupon-like websites in 2010 China, similarly ruthless competition, aggressive money burning marketing campaigns, and struggling small players.
Back in 2010, with Groupon’s valuation shot up to $1.35 billion, the gold rush atmosphere drove more than 5,000 Groupon copycats mushroomed in the overheated battlefield.
Big players, such as Meituan, Lashou, rapidly emerged with the flood of venture capitals and claimed for over 90% market share and revenue in China. The original one-deal-of-the-day business model soon evolved into many-deals-of-the-day. A deal aggregate website, which lists deals from various websites, sparked a wave of more than 400 of imitators.
Even Groupon itself was unable to replicate its own success in China in the face of such stiff competition, ranking 12th at the end of 2012 with only 1.7% market share.
Attracted by the surging popularity and lucrative daily revenue of Groupon, I quickly co-founded one tech company with colleague classmates. We cloned the website and payment system and launched the website as quickly as possible to hit the market before big players step in. However, first mover advantage does not always work, especially in internet business.
After larger rivals expanded their business into my city, our user growth was sapped by intensifying competition while our marketing expense spurted. We had to adjust strategy, shifting away from the city, and targeting college students resided in university towns, which were clustered in rural areas. With a smaller user base, our business managed to break even but lost the battle in the winner-takes-all market. In the end, we sold out the website before thousands of small players went out of business.
During an interview after shutdown, the founder of Wukong Bike said: “I’ll think of it as a charity project”. Unfortunately, our business had no bicycles left to say that.
No venture capital to flow in, no value to get out.
The picture of sharing business is rosy at the first sight, strong cash flows, especially prepaid deposit, low human resource cost, and first mover advantage in the particular area. Geographical barrier helps at the early stage. Moreover, as bicycle- sharing business has exploded seemingly overnight, venture capitals are eager to bet their chances and try to peddle as fast as they can. Many small players get funded and then go on a spending spree, deploying more bicycles on the already crowded streets and offering free riding to acquire new customers.
Unfortunately, small players did not enjoy the luck long. Since 2016, around 18.436 billion RMB in total has been poured in bike-sharing companies. However, 89.7% of fund flood into two dominant players- Ofo and Mobike.
Mobike and Ofo use credit score to screen potential users and allow eligible users to ride without paying deposit, small players have no choice but to follow suit, giving up collecting the deposit from new users.
As market share became settled in tier-1 cities and capital burgeoned, big players soon expanded their empire to tier-2 and tier-3 cities, where numerous of small players had already started their business. In this case, first mover advantage is not strong enough to build the economic moat that they needed to survive and thrive. Customers soon turned to big players, which offer cheaper and more convenient sharing experience.
Besides, as the marginal cost for big players to expand business in new cities was so low, there is even no value for big players to acquire local small players. Without new venture capitals and no hope to exit the market, small players run out of options and have to shut down business.
Worried users scrambled to withdraw their deposits, but deposit has been used by the company to expand business and hence only a few get refunded.
In the battle of money burning, better user experience vs free riding
In terms of bicycle design, Ofo and Mobike are not the best at the beginning. Ofo users have complained that the GPS is inaccurate and bikes are often found broken. Mobike goes for different product design strategy. To reduce maintenance cost and to prolong lifespan, mobike tires are designed without an inner tube. As a result, users have complained that the bikes are too heavy to ride.
Bluegogo, the third-largest bike-sharing start-up founded in 2016, was acclaimed as the most well-built bikes offering best riding experience. The startup entered the fray after refreshing the record for the most highly-funded bike on Kickstarter’s crowdfunding website.
Unlike its peers, Bluegogo spent heavily on bike design at the very beginning. Like other fads, Bluegogo has seen rapid expansion fuelled by venture capital money, winning market share with loss-making prices. However, as two big players grew into even more formidable rivals, user acquisition cost kept increasing, and venture capital became more conscious, Bluegogo was killed off following a funding collapse.
Now, Ofo and Mobike are the two dominant players in the sector, both raised almost $2bn in total in 2017 alone, according to CB Insights. In a fast-evolving market, winner-takes-all can basically applied to almost all internet companies. When talking about the huge potential of Chinese market, it’s often believed that its large population network will help companies to gain an upper hand.
However, to survive in a fierce competition in China, there is no easy way to win without support from sugar daddy — BAT(Baidu, Alibaba, Tencent). With the user network and capital, getting funded by BAT almost means holding the gold pass. it is heartbreaking to see how small players struggled out, but they have learned it the hardest way that young David needs to put more efforts to find out Goliath’ weakness before stepping in the battleground.
By the way, Mobike and Ofo are backed by Tencent and Alibaba, respectively.
The article was first drafted in June,when Wukong Bike announced bankruptcy. Six month after, lots of small players followed the fate and closed their business, what’s more, there is even a rumor that Ofo and Mobike are seeking partnership.
