Why Ofo failed

Yes, fail is a harsh word. But it’s true. It happens to a lot of companies, especially in China.

The good news is that in China, failure is not final. There are always more opportunities, and many companies that falter are able to bounce back to great success later.

So failure is harsh, but not necessarily fatal.

Here are a couple of points about the Ofo situation:

• Let’s dispense with the argument that this is about the profitability of bike-sharing. Bike-sharing is popular and has tons of usage, especially in China. It has OK-but-not-awesome unit economics. Also, Mobike is doing fine, so are Hellobike and Didi. Ofo’s problems are about Ofo, and not bike-sharing.
• Everyone should be rooting for Ofo right now. Having a business crater is awful. I’ve been there: you worry all the time, it’s hard to sleep, and it really wears you down over time. So let’s all be sympathetic to fellow entrepreneurs and investors. We should all be trying to help them if we can.

That said, I think Ofo failed because of five reasons.

1. They underestimated how long money wars can last in China – and they didn’t preserve their capital.

Money wars are common in China. After a new business (Groupon, social media, online video, food delivery) is launched, lots of venture-backed competitors jump in and fight for customers. They subsidize services, pay for referrals, and so on.

Spending big usually gets you more market share, which in turn lets you raise more money (at a higher “valuation”). Whoever fundraises the most aggressively tends to pull ahead. A few market leaders emerge and the rest die off.

Ofo did all this successfully and ended up a market leader, along with Mobike.

However, that was not the end.

Even after the leaders have captured the market, these money wars can go on for a long time. For example, Meituan and Ele.me are still both running at operating losses in food delivery. Online payment services Alipay and QQ Wallet are probably running at a loss or break even. Online video is particularly unprofitable in China, although it has a lot to do with the economics of licensed content versus ad revenue.

A favorite example is the protracted fight between travel-booking sites Ctrip and eLong, which counted US-based Expedia as a majority shareholder. Both became market leaders rapidly, but the money war lasted for about a decade. After losing hundreds of millions of dollars per year, Expedia made its exit by selling its stake in eLong to Ctrip and other investors.