O2Overload: the past, present, and future of China’s on-demand explosion

China’s startup scene is on fire – everybody agrees on that. In just the past couple of weeks, for example, Baidu CEO Robin Li said investors are so desperate to throw money at Chinese startups that they’re camping outside Baidu headquarters to tempt Baidu employees into founding a startup. JD CEO Liu Qiangdong told attendees at a Harvard China forum that startups are so hot that “right now all you need is an idea to get US$30 million in funding.”

But China has seen this kind of startup craze before. Does all this heat mean that investors are about to get burned?

A brief history of the group buying craze

In 2010, China’s internet sector was awash with a new trend: group buying sites. Although Groupon had existed in the United States since 2008, China’s interest in the idea wasn’t another example of east-copies-west: it arose organically from BBS forums, where thrifty users would band together to buy items in bulk for the discount. Seeing that the model could work on a larger scale, a few Chinese entrepreneurs founded daily deals companies.

They took off fast, and by 2011, China’s early group buying startups were beginning to bring in serious funding. Lashou, one of the industry’s early leaders, was founded in March of 2010 and by April of 2011 it had raised more than US$170 million across three rounds of funding. Thousands of would-be entrepreneurs saw big money flowing, and jumped at the chance to get on the gravy train. By September of 2011, China had more than 5,000 group buying startups, although very few of them were making money.

Du Yinan (right) discussing 24quan’s impending profitability at Techcrunch Disrupt. A month later his company suffered sudden, widespread layoffs.

But what goes up must come down, and China’s group buying industry came down hard. Smaller startups began to shut down, bigger startups like Lashou, 55tuan, 24quan, and Tuanbao were forced into massive layoffs to offset losses.

By November, nearly 1,500 group buying startups had shut down. By the beginning of 2012, that number had shot up to more than 2,000, and by August an additional 3,000 group buying sites had closed. A few local winners had emerged, and everybody else either got assimilated into one of the big players or shut down.

O2Overload

China is experiencing a boom in almost every sector of tech startups. But there’s no denying that O2O startups are popping up – and nabbing investor cash – with incredible frequency these days. In just the past month, we’ve seen funding come in for Chinese startups doing O2O auto repair, more O2O auto repair, O2O massage, O2O movie tickets, O2O food, more O2O food, even more O2O food, and O2O education.

That’s just a partial list, of course, and it’s a tiny fraction of the O2O startups out there. The O2O startup craze has been bubbling just under the surface of China’s tech industry for a couple of years, and now it’s rising to the surface thanks to all of the high-profile investment coming in. That increased profile is only attracting more entrepreneurs to the sector.

“Just in the past 48 hours I got pitched an ‘eyebrow staining and shaping’ O2O service and a ‘get a nurse to go to the hospital with you’ O2O service,” 500 Startups partner and China investor Rui Ma told Tech in Asia with a laugh. Other investors said the same thing: O2O pitches are coming in thick and fast.

China’s O2O craze is as hot, if not hotter, than its group buying craze was back in 2010 and 2011. If the O2O sector mirrors what happened with group buying, it would seem to be fast approaching the fall of 2011, where things took a sharp turn and thousands of startups shut down in just a few months.

History repeats itself? Not likely