With 2 billion dollars, you could send the Falcon Heavy to space 13 times, buy 10 state-of-the-art Boeing 787s, provide clean water and food to millions in Africa…. or you could w̶a̶s̶t̶e̶ ̶i̶t̶ ̶o̶n̶ invest it in Ofo, the bike-sharing startup that set off to revolutionize transportation in China. It was adored by investors, consumers, and the government…. *spoiler alert! Ofo is basically dead now.*
On its surface, Ofo is one of the fastest-growing startups, acquiring new users at a speed that’s never heard before. But in reality, all Ofo has done is stockpiling a f**k on of shitty bicycles that end up in landfills. * More like a huge oof than Ofo* In a way, it sounds like my uncle, who got into one of those multi-level marketing schemes and packed his garage full with off-brand protein powders.
Ofo was started by Wei Dai and his friends at Peking University, where they were able to achieve 4,000 uses/day within 2 months and received its seed funding of $1.5 million (9 million Chinese Yen). Soon after that, Ofo reached 200,000 users/day and went through 5 rounds of funding, totalling $200 million. VCs were literally fighting each other to get a chance to invest in Ofo. Even Alibaba invested in Ofo, it was INSANE.
Ofo’s bike was actually quite innovative in terms of its technology. It beautifully combined the power of mobile payment solutions, such as Alipay and Wechat Pay and affordable wireless network access in China. Each bicycle has a QR code that can be scanned with Ofo’s app to unlock the bike. The bikes are also equipped with a GPS that tracks and displays where the bike is. This means you can leave the bike anywhere you want and start to ride any bike on the street you want. Hop on, hop off, anytime, anywhere. It was game-changing.
On the other hand, it seems like shared bikes are profitable. When Ofo first started, it charged a 200RMB ( ¥200) deposit to start. Each bike costs roughly ¥650 to put on the market and ¥0.6/day in operating costs. Ofo was bringing over 10 new users for each new bicycle Ofo puts out.
So if we maintain the same growth rate, and put out 1 million bicycles, Ofo will make:
Deposit: ¥200 * 10 users/bike * 1,000,000 bikes = ¥ 2,000,000,000
Cost: 1,000,000 bikes * ¥650/bike +1,000,000 bikes * ¥0.6/ day * 365 days = ¥ 869,000,000
The Chinese Prime Interest Rate is 4.68%, meaning you are making at least ¥2,000,000,000 * 4.68% = ¥93,600,000 a year on the deposit.
Ofo also charges for usages — roughly ¥1 for half an hour and Ofo bikes on average are used 3.5 hours/day, and 300 days/year. So, each bike also brings in ¥7/day.
That’s ¥7/day * 1,000,000 bikes * 300 days= ¥2,100,000,000/year!
In theory, Ofo would bring in over 1.3 Billion RMB Per Year! WTF?!
Ofo has the technology, the capital, and a great business model, but how did Ofo go from 🦄 to 💩?
Driven Mad By Capital
Prior to Ofo and the sharing economy boom, China has seen a steady consolidation of its tech industry. A lot of investors got richer, but new investment opportunities became scarcer. There simply wasn’t much to invest in. Then, Ofo showed up pulling impressive numbers only seen from the likes of Facebook and Uber. The investors went full bananas….
While Ofo was the first to popularize the idea of a dock-less bike-sharing platform, it is far from being the only player on the market. Mobike, an almost carbon copy of Ofo, was founded shortly after Ofo by a group of former c-suite executives in the automobile and tech industries. These two companies quickly established a duopoly and controlled 90% of the bike-sharing market. *Too bad for those who love third-wheeling*
But VCs want only one winner in the market, so they pushed both Mobike and Ofo to aggressively scale and focus on driving (cough, cough, or cycling) the other one out of business. Yeah, who needs a business model if you can get yourself a monopoly?
Both Ofo and Mobike engaged each other in a fierce price war and scale war. *Yeah! Chinese biker gangs, with VCs and Tech!* For them, whoever can put out more bikes wins. Ofo waived the 200RMB deposit and pushed its price to as low as 1 RMB per month ($0.15/month) for unlimited rides. And Between 2016–2017, Ofo and Mobike put out over 40 million shared bikes all across China, that’s roughly 45 Amsterdams worth of bicycles. Wait, so we are essentially giving out bicycles for free…..
It only gets worse from here. Let’s do some math. Ofo’s bikes cost around $100 and “designed” to have a 2-year useful life. But the reality is that Ofo bikes are so poorly designed and manufactured, they last less than 2 months. In other words, mathematically, Ofo will lose $100/24 months *22 months lost = $91.7 for every bike it puts on the market. Yeah….. not great….
On the other hand, Mobike’s design was a lot more robust and it does last a lot longer (8–12 months). BUUUUUT, for some reason, Mobike’s CEO disclosed that their bikes cost over $1000 to produce…. That claim was later dropped to a more reasonable $300, but that’s still three times more expensive than Ofo’s…
Oh, remember the 1.3 billion/year profit figure? That’s a lie.
There was no way that Ofo and Mobike can maintain the same level of utilization rate and user acquisition rate as their initial phases. There are only so many people who need bicycles and so many cities that have a transit problem. Eventually, the growth rate for bike-sharing will flat out, and the tires run flatter
Let’s adjust the rates to something more reasonable and account for the price war. ¥0 deposit, and still a ¥650/bike fixed cost and ¥0.6/day operating cost, then each bike only brings in 5 new users (which is still a lot), and each user only pays a ¥1/month subscription.
For every 1 million bikes:
Cost: 1,000,000 bikes * ¥650/bike +1,000,000 bikes * ¥0.6/ day * 365 days = ¥869,000,000
Revenue: ¥1/month * 12 months * 5 new users/bike * 1,000,000 bikes = ¥ 60,000,000
So Ofo will lose ¥869 million-¥60 million = ¥809 million for every 1 million bikes, and Ofo put out 20 million bicycles by themselves…. So they burnt 16 billion RMB in a year….. on bikes that barely last a season….. That’s almost as fast of a burn rate as Uber…. but on bicycles…
Do you think that’s all? NOOOOOO. It wouldn’t be Chinese enough if it just ends here. Ofo should have roughly ¥4 billion in security deposits sitting in a bank making interests, but surprise! That’s gone too! Ofo decided to use those security deposits to buy more bikes. You see, every bike you buy will bring in more riders, and they bring in more deposits. It is like a pyramid that keeps growing…..
On that note, I will end this week’s Wacky Business Review here. Ofo had amazing potential and a great mission, but it was, in a way, murdered by greed and impatience. You could also say that Ofo bikes are better at being recycled than being cycled。。( ͡° ͜ʖ ͡°)