BEIJING: An epidemic of entrepreneurial fervour in China has led to venture capitalists pumping money into unproved, marginal ideas that has created a boom-and-bust cycle playing out in the country’s sharing economy.
A South China Morning Post article chronicled a Cyzone tech analyst, Zhao Ziming’s experience of hearing his cousin’s pitch for a new start-up that would create an app to share toilet paper for one yuan a roll. “My cousin said he always cannot find toilet paper in the restrooms in most office buildings in China,” Zhao explained.
“I told him that was a really stupid idea and brought him to some restrooms in Beijing to prove that his idea can’t work, that there’s no demand for sharing toilet paper.”
The fever for investment to follow such marginal ideas in the sharing economy suggests a similar problem to that of the 1990’s dotcom boom in which any company that appended its name with a ‘.com’ could guarantee investors interest.
While some sharing companies have become monstrously successful, the potential for companies to actually turn a profit is often more difficult to judge. Witness, for instance, Uber’s continued reliance on investor capital as it fails to turn a profit.
As a result of the interest in this new model of business, China’s sharing economy scene has thrown up ideas ranging from the practical (though flawed) bike sharing systems to the wackier end of what can be temporarily hired through a smartphone (life-size companion dolls? There’s an app for that).
However, the Post contended, the stream of money is slowing, as the quantity raised by China-based companies was found in Q3 2017 to amount to just around half (US$8.8 bn) of the amount raised in the same period two years prior (US$ 16.8 bn), according to Dow Jones data referenced.
One of the most attractive destinations for investments has been the bike-sharing sector, also the source of some of the sharing economy’s greatest casualties. Bluegogo shut abruptly in December, failing to return many users’ deposits. Out of what became a 100-company feeding frenzy, just three behemoths remain contenders to survive any price wars: Ofo, Mobike, and Hellobike.
For many of those failures, the inability to create a profit-making model before investors’ funds ran out is instructive.
“Chinese entrepreneurs are very keen on expanding market share to gain leading position,” a founder of an education startup told the Post; “if revenue cannot keep up with the aggressive expansion,” however, it can easily lead to bankruptcy.
Zhao, the analyst, believes the tide is turning. “The golden time of attracting investments only by ideas has passed”. Instead capital is moving towards AI and machine learning.
Sourced from South China Morning Post, Financial Times; additional content by WARC staff