Cash and Deposits
At first, nearly all bike-sharing startups take deposits, usually ranging from ¥99 to ¥299.
The deposits are hard cash for startups; they are like life-time membership fees if the companies survive and users keep using the apps.
To put it another way, deposits are indefinite free borrowings.
Deposits and investors’ money are fundamentally different (in accounting), but both are actually (viewed as) cash sitting in the bank for startups.
Some may compare this model with gym memberships. When users pay upfront, gyms use the cash in expansion and operation.
Just invest (or borrow) and open one gym first, then one can use the membership fees collected to subsidize the opening of the second gym.. bike-sharing companies can use the deposits collected in one city to subsidize the expansion into the next city, to pay back any loans, to pay employees’ salaries…
Then comes the problems… for those startups that are not well-funded.
Closures in 2017
In June 2017, the first startup, Wukong Bicycle 悟空单车, announced to stop its operation.
Started in Chongqing, Wukong Bicycle has another layer of to collect operation cash – “operation partners” who would pay Wukong Bicycle an upfront fee to claim profits for a certain number of shared bikes. To be honest, “operation partners” are not treated as partners as Wukong can profit from selling bikes to them and management fees. Its “alternative fund raising” was a little concerning.
By the summer of 2017, more reports about the closure of bike-sharing companies ignited the concerns from users. When users were asking their deposits back, the real cash crunch came/intensified.
In November of 2017, it was reported that most of the bike-sharing startups have problems with their deposits. [60多家共享单车停运用户押金之痛难解 – 证券日报]
The largest of them (in 2017) was bluegogo 小蓝单车, which had raised ¥400 million. It started as a supplier for bike-sharing companies but then decided to enter the race. It had achieved a No.3 position in the space but things (financing) went south in June 2017.
As mentioned previously, it was acquired by Didi at the beginning of 2018.
Read more on 还原短命小蓝单车的365天 – 36氪 小蓝单车生死故事 – 36氪
Not a coincidence, an even broader problem in China emerged in 2017: P2P financing.
Meanwhile, the top-tier companies seemed to live well with millions of dollars raised on the capital markets.
Many required 0 deposits to entice users (and accelerated the failures of smaller players that reply on deposits).
to be continued..