One Startup Builds $1 Billion Business Out of 15-Cent Bike RidesBy
Bike-sharing service Ofo raises $450 million in a giant round
Bicycles of every hue now a common sight on China’s streets
Walk around the streets of Beijing these days and the sidewalks are thronged with yellow and orange bicycles. These are the weapons of choice in one of the strangest, most colorful battles in the technology world.
Ofo, the company behind the yellow two-wheelers, just raised $450 million at a valuation of more than $1 billion. Orange-hued Mobike raised $300 million a month earlier. And they’re not the only two: Bluegogo and green-favoring Forever have also sprouted up over the past year to offer bicycle sharing amid the controlled chaos that is Chinese urban traffic.
The competition has grown so ferocious that the Uber-like services are foregoing an already minuscule 1-yuan (15 cents) charge many days of the week and letting people use their bikes for free. The bicycles themselves tend to be easy targets for thieves and vandals, or user-hogs who cunningly hide them to ensure availability. How all this adds up to a sustainable business model requires a vivid imagination.
“It’s like a trophy to own a big sharing internet company in China,” said Mark Tanner, founder of China Skinny, a Shanghai-based consultancy. “From a business point of view it makes no sense.”
For now, profit remains elusive. Despite the uncertainty around the bottom line, all are spending heavily on promotions and discounts in a race to build scale. And things may soon get crazier.
Ofo raised money from influential backers including Russia’s DST and local car-hailing giant Didi Chuxing, famed for running Uber Technologies Inc. out of the country. The company said that its Series D round -- which also roped in big names Citic Private Equity, Matrix Partners and Coatue Management -- conferred upon the barely two-year-old startup a unicorn valuation of more than $1 billion. Ofo, whose no-frills bicycles boast a loyal following on college campuses, will use the cash to vie with Beijing-based rival Mobike both at home and abroad.
Ofo got its start as a student project at Beijing’s prestigious Peking University in 2014. Eventual PhD dropout Dai Wei and four other students explored cycle tourism before landing on bike-sharing. His Mobike arch-rival is Hu Weiwei, a former journalist who started her own outfit around the same time.
Once emblematic of China’s socialist working class, bicycles remain popular among students and urban commuters despite rapidly growing car ownership. The industry has drawn more than a billion dollars from investors betting that bikes offer a more traditional alternative to the car-hailing that prevails in urban centers.
Its advocates argue there’s enormous value just waiting to be unlocked. The mostly youthful demographic that bike-sharing services cater to are coveted marketing targets who can offer up precious data and be sold on other products eventually. A government campaign to untangle the traffic gridlock now plaguing most major cities also encourages the proliferation of bike- and car-sharing.
“If you view these companies not just as transportation vehicles but as platforms for data about users and also gateways for other services, there’s a lot of value to explore,” said Zhou Xin, an internet industry consultant at Beijing-based Trust Data. “There’s also significant demand for bikes in first and second tier cities, as the government limits the amount of cars to ease traffic jams.”
Mobike and Ofo are among the two largest of a growing crop of private bike-sharing operators. Unlike similar services operated by local governments around the world, their users find and pay for bicycles via a smartphone app and then leave them wherever they want.
Ofo alone has brokered more than 300 million rides and has more than 20 million users with operations in nearly 40 cities in China, the U.S., Singapore and the U.K., the company said Wednesday in a statement. As for Beijing Mobike Technology Co., the startup operates in at least nine cities across the country, with more than 100,000 bikes on the streets of Shanghai. It’s said it aims to stock at least 100,000 bikes in each urban center.
Both are eyeing markets in Europe. There are about 600 bike-sharing operations globally, with a market that could grow by 20 percent a year to generate as much as $5.8 billion in revenue by 2020, according to consultancy Roland Berger. Mobike, known for its GPS-equipped two-wheelers, intends to launch in Singapore this year, joining Ofo in the wealthy island state.
Uber’s debilitating battle with Didi, as well as escalating discounting in every arena from online movie ticketing to food delivery, exemplify the dangers of waging a war of subsidies to gain scale. Uber eventually called it quits, while other sectors are littered with also-rans who simply couldn’t keep up their pace of spending.
But investors may simply be eyeing the opportunities presented by a fast-growing platform shared by millions of young, mobile and -- by definition -- active people. What those opportunities entail specifically remains to be seen.
“It’s positioning itself as a platform for many other opportunities,” Tanner said. “It also reflects a lack of alternative investment opportunities in China.”