AVCJ Awards 2017: Deal of the Year - Late Stage Technology: Ofo

Bike-sharing has emerged as one of the hottest investment themes in China, with start-ups in the space attracting more than $2.5 billion in funding over the past two years. It is estimated that nearly 40 companies offer bike-sharing services nationwide, but the industry is dominated by two behemoths, Mobike and Ofo. They account for a 95% market share as well as receiving most of the PE funding.

Ofo was launched on the campus of Peking University in 2015 as a student project. CEO Wei Dai and his four co-founders pooled their savings and borrowed cash wherever they could to provide the RMB150,000 ($21,800) required to get the business off the ground. The company, which claims to be the world's first dock-less bike-sharing platform, now connects 6.5 million bikes with 100 million users in 150 cities across four countries. It is valued at more than $2 billion.

"Ofo started on campus by college graduates who have pure motivations as to why they want to do the business. They thought through every problem that would confront the company in the early days, including the theft and misplacement of bikes. Ofo is the pioneer in bike-sharing and they will be successful," says Kelly Poon, a Greater China partner at Atomico.

The company has closed two funding rounds in the past 12 months. Atomico participated in the first, a $450 million Series D round in March led by DST Global. CITIC Private Equity, ride-hailing platform Didi Chuxing, Matrix Partners China and Coatue Management also committed capital. Then in July Ofo raised $700 million led by Alibaba Group. This is the largest round the bike-sharing industry has seen to date. Mobike – which sports orange bikes to Ofo's yellow – received $600 million a month earlier from investors including Tencent Holdings.

Capital game

Ofo and Mobike disrupted the traditional urban bike-sharing model by allowing users to park their machines anywhere, rather than in fixed docks. A deposit is required to join the platform and then users simply locate and unlock bikes through a mobile app. They pay RMB0.50-RMB1.00 for every 30 minutes spent on the bike. The cost is lower and the convenience level higher than public programs, resulting in a surge in popularity among students and commuters who are tired of inching their way through congested streets in cars.

"The explosive growth of bike-sharing in China is because of business model innovation – users can pick up and park bikes anywhere at any time. It's much more convenient and very profitable," the 26-year-old Dai told AVCJ earlier this year.

Bike-sharing is fundamentally an asset leasing business run according to a simple unit economics model. "Ofo can control the cost of running the bicycles, and generate revenue from customer usage. If you can reach the right usage per bike, you will make money. But this depends on a set of assumptions that need to be rigorously studied and tested – the lifespan of a bike, usage frequency per bike, manufacturing and maintenance costs," Jingyang Wu, a managing director at CITIC Private Equity, said in April.

As such, in the early days, the key differentiator between Ofo and Mobike was cost per bike: RMB300 for the former versus RMB3,000 for the latter. Ofo minimized cost by using mechanical locks. A user scans the QR code on a bike and receives a password that is entered manually into the lock. Mobike users can unlock bikes by scanning the QR code and its machines have GPS tracking systems – but a bike had to be cycled at least one hour a day to charge up the battery that powers these high-tech functions.

According to Ofo investors, an Ofo bike returned the capital invested in it within 2-3 months compared to 2-3 years for Mobike. "Bike-sharing comes down to the volume of the bikes – a company should place as many as possible on the streets. It's different to the ride-hailing app model, which is about utilizing existing vehicles more efficiently through GPS. When the number of bikes reaches a critical mass, demand for using GPS systems will fall because users can find bikes easily on the street, says Poon.

Earlier this year, Mobike launched a lighter version following complaints from users that the battery made the original model too heavy. The company has also introduced batteries with a 1-2 year lifespan and reduced manufacturing costs to RMB700 per bike. Meanwhile, Ofo added a GSM tracking system, which is slightly less accurate than GPS. Each Ofo bike now costs RMB500 to produce. 

Merger of equals

Capital is key to achieving critical mass in this bike-sharing war. While Ofo and Mobike have prospered, smaller players have been forced out. Bluegogo, a distant third in terms of market share but with 20 million registered users and 700,000 bikes at its peak, shut down a few weeks ago. The company received $90 million from VCs including Black Hole Capital. Mingbike has also laid off most of its staff, with customers complaining that they can't get their RMB199 deposits back.

Ofo and Mobike are not profitable and the expectation is that they will ultimately merge. In doing so, they would follow a pattern set in other areas of China's internet economy where competition escalated to the point that capital raised from investors was fueling unsustainable battles for market share. This led to the formation of Didi Chuxing in ride-hailing, for example.

Some investors would welcome a similar outcome in bike-sharing. "People expect that a merger would allow the companies to reduce spending on making new bikes and to generate more revenue," says Yiran Liu, a partner at Vision Plus Capital, which backed Ofo's Series C round.

Ofo and Mobike hold about RMB6 billion in deposits collected from users, but they are not permitted to use this cash for other purposes. As such, they can only turn profitable once they hike the fees. The two companies are also going overseas, with a view to charging higher fees, particularly in more developed markets. Ofo has a year-end target of expansion into 20 countries, including Japan, France, Spain, Germany and the Philippines.

"Branding is very important for a Chinese company when it expands overseas. A few weeks ago, we helped set up a keynote speech for Ofo at a leading technology industry conference in London, with over 2,000 attendees. Those kind of activities can raise the company's brand awareness and help put a face to the company name, as the government and other industry players are just starting to get to know the name Ofo,"Atomico's Poon says. 

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• Topics
• Greater China
• Expansion
• Technology
• China
• Venture
• Transportation
• Growth capital
• AVCJ Awards
• Citic Private Equity
• DST Advisors
• Matrix Partners
• Vision Plus Capital
• Atomico