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Opinion: Ofo faces a dilemma. Should it stay independent or surrender? – ANITH
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Opinion: Ofo faces a dilemma. Should it stay independent or surrender?

Opinion: Ofo faces a dilemma. Should it stay independent or surrender?

Photo credit: Ofo

This article is an adapted translation of the original story on Bufanbiz.

“To be or not to be,” uttered Hamlet as he considered two stark options: endure the hardships of living, or commit suicide.

Ofo faces a similar dilemma. Media reports are beating the drum on Ofo’s financial health. There are allegations that the company has embezzled US$1.6 billion in user deposits. The bike-sharing company has rebutted those claims.

Now, the company seems to find itself at a crossroads. It has four tough options to consider.

Choice one: seek further funding

The extension of financing will help Ofo maintain its status quo.

But how much money will it need to do that? The latest round of financing might offer some clues.

In March, Ofo announced that it had secured US$866 million in funding from a syndicate that included Alibaba and Ant Financial. Public data shows that Ofo’s value was estimated at US$15.1 million when it completed its series A round in June 2016. Its value shot up to US$1 billion almost a year later and reached US$3 billion by its series E round on July 2017.

Within a year, its value ballooned almost 200-fold. The momentum, however, puts enormous pressure on previous investors –  if the company’s value drops in the next round of financing.

The signs of financial strain have emerged. In March, Ofo secured US$200 million in loans from Alibaba after collateralizing its bikes. The move is risky because Ofo could lose its ownership of its key assets.

Ofo must show that there is still room for growth.

A leaked financial document showed that Ofo’s rival Mobike was losing US$75.5 million to US$90.6 million a month when it was acquired by Meituan Dianping. Mobike and Ofo have a similar market share, but Ofo has slightly more bikes which are also more prone to damage. A safe estimation is that the company will need at least US$90.6 million to stay afloat.

There are two possible reasons for its drastic move of pledging its bikes in exchange for cash: – either the company does not have enough capital, or the old way of raising funds from VCs has hit a snag.

Ryan Holmes, CEO of social media management platform Hootsuite, once said that tech companies must have enough backup funds, especially in the later financing rounds. The bigger the company, the more important a backup fund are. The appropriate amount should be the total sum of employee salaries for a number of months.

So in order to attract investors, Ofo not only has to tell its story well, it must provide them with its operational numbers to show that there is still room for growth.

Choice two: fall under the wing of Alibaba or Didi Chuxing

If there’s a saying to best describe the relationship between Didi Chuxing, Alibaba, and Ofo, it would be this: There are no permanent friends or enemies, only permanent interests.

It’s hard to get a read on their relationships. Didi Chuxing partnered with Ofo but later drifted further away from the bike-sharing company. Didi now has its own self-branded bikes. Alibaba turned its attention to another bike-sharing company shortly after lending to Ofo.

But despite the tumultuous relationships, Ofo’s founder Dai Wei might want to consider giving up control of the company.

According to public documents, Ofo has 30 investors who have put US$2.72 billion into the company. Among the Ofo board members, the management team took five spots, though Dai exercises the voting rights.

Of the remaining seats, two belong to Didi Chuxing, one belongs to Alibaba, and one is held by Matrix Partners China. Along with Dai, they all have veto rights.

If Ofo is unable to pay back its loans, Alibaba could acquire ownership of the bikes or sell them to a third party. According to media reports, Alibaba might also convert Didi’s debt into more equity ownership of the firm.

Bike-sharing overload. Photo credit: Mikey Chee.

But will Didi Chuxing and Alibaba make their move given that they each have their own branded bikes?

As of the end of April, around 1.9 million bikes operated by 10 companies are on the roads in Beijing, public data shows. Ofo and Mobike make up around 90 percent of the market share.

The huge increase in for-share bikes has led the Beijing municipal government to crack down on them. This followed public resentment over the spike in the number of bikes in an already traffic-choked city.

Some companies have looked elsewhere for growth. For example, Hellobike has shunned big cities and has instead made inroads into smaller towns like Ningbo and Xiamen.

Didi Chuxing’s bikes aren’t faring well. It is besieged by Hellobike, which is dominating second and third-tier cities, and Ofo, which controls the market in big cities.

So for Didi Chuxing and Alibaba, Ofo’s importance cannot be more obvious. Both companies are likely to take it over. But such a move would undercut Dai Wei and his team’s control over the bike-sharing company.

Choice three: acquisition by another company

Earlier this year, there was broad conjecture as to who could buy Mobike. Insiders speculated that the likely buyer would either be Didi Chuxing, Tencent, or Alibaba. Surprisingly, Mobike sold itself for US$2.7 billion to Meituan Dianping.

Ofo could follow in the footsteps of Mobike by selling itself to a seemingly unlikely buyer for a similar amount.

Bike-sharing has gained serious traction in China.

So apart from Didi Chuxing and Alibaba, who could fork out around US$3 million to buy Ofo? That remains to be seen. Whoever it might be, the nature of the acquisition might fall into two types.

The first kind is a horizontal purchase by a player seeking to enlarge its share of the bike-sharing market. Meituan Dianping is a possible buyer. By owning both Mobike and Ofo, it would thwart Alibaba’s plans to enter the bike-sharing markets in first-tier cities. Such an alliance also threatens Didi Chuxing’s bike-sharing business.

The second kind is a vertical integration that positions bike-sharing as an integral part of a long industrial supply chain.

It’s reported that Mobike, Meituan Dianping, and state-owned car manufacturer FAW Group are planning to invest in car sharing. Ofo can also be a part of a similar ecosystem.

According to consulting firm Bain & Company, shared biking is now China’s most popular way of traveling, followed by car-hailing.

Choice four: become profitable

According to the South China Morning Post, Ofo rejected a buyout offer from Didi Chuxing. Soon after, the company launched several initiatives to generate revenue, though no specifics were given.

Ofo’s core issue is profitability. It faces the daunting task of turning a profit even though it has claimed to have done so in many Chinese cities. But questions remain on how it will be able to sustain itself while the company ponders on new endeavors.

Earlier this month, Ofo was rumored to have massively laid off employees. The company issued a denial.

Shao Yi, a senior company executive, claimed all is well: “The B2B business of Ofo is going smoothly and has turned a profit of more than US$15.1 million. In the meantime, Ofo has turned a profit in a 100 or so Chinese cities.”

The B2B business Shao was referring to is a two-month-old endeavor where businesses can place ads on Ofo’s bikes and in its app.

This new revenue stream is generating an extra US$7.5 million, which is not much for a company with a monthly operational cost that’s at least 10 times that.

Ofo’s new commercial undertaking still has a long way to go.

Currency converted from Chinese yuan. Rate: US$1 = RMB 6.63.

This post Opinion: Ofo faces a dilemma. Should it stay independent or surrender? appeared first on Tech in Asia.

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Anith Gopal
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