As billionaire investor Warren Buffett once said, “It’s only when the tide goes out that you know who’s been swimming naked.”
China’s overly heated venture capital market has spawned numerous startups in 2015, but as dramatic funding slowdown hit the country in 2016, Chinese startups are facing a bleak funding prospect and even once-hot companies are struggling to survive the chilly market. Here are a few high-profile failures that in 2016 and the lessons you can learn from them.
Metao – Never try to outspend a giant
Founded in 2014 by Xie Wenbin, Metao was one of the companies that come up during China’s cross-border e-commerce boom since 2014. The company recorded their first wave of growth as a C2C daigou platform (代购, people or organizations that buy products abroad and ship directly to the end consumer in China).
Because of problems with the C2C daigou model, such as low margins and long delivery periods due to lack of homegrown warehouses, the Beijing-based startup pivoted into a B2C e-commerce platform in mid-2014 to focus on Korean products. However, the shift brought it into direct competition with heavy hitters like JD.com and Tmall.
Metao recorded a short-term growth spurt after pouring money into advertising and offering major sales to attract customers. But a price war with heavy-loaded e-commerce giants could never work.
They finalized their series B round in late 2014, but never made it to series C and eventually closed their doors in mid-2016. The company’s founder was convinced that even with a billion-dollar round, Metao wouldn’t be able to keep up with the e-commerce giants in the war to burn cash.
In addition to the initial angel round, the company raised a combined 35 million USD in two rounds of financing from well-regarded VC firms, including Matrix Partners, Morningside Ventures, and Greenwoods Investment.
Shenqibuy – Just because they’re cool doesn’t mean they know how to run a business
It could have been one of those legendary stories about how China’s rising post-90s and high-school drop-out entrepreneurs can actually realize their startup dreams. Unfortunately, it turned out to be yet another flash-in-the-pan startup.
Founded in September 2015, Shenqi was an e-commerce platform targeting at the “post-95s”, offering snacks, stationery, backpacks, anime-related toys and other things teenagers would find appealing. The company got massive public attention after its teenage founder Wang Kaixin pitched the project to well-known investors on 我是独角兽 (I am a Unicorn in English) a TV show for startup demos.
After the show, the startup landed a 20 million RMB (3 million USD) funding led by Matrix Partners China with participation from ZhenFund and Inno Valley.
Local media reported in May last year the CEO was guilty of data fabrication and spending the financing to lead an extravagant personal life. Wang defended herself in a recent interview against these accusations, but she acknowledged that management issue is one of the main reasons that led to the sale of the company to Shenzhen Big Bang Tech Co Ltd, her exit, and the shutdown of the website.
Dakele – Don’t build your business around a played out strategy
Launch in June 2012, Dakele (大可乐 or Big Coke in English) was among a series of China’s smartphone brands that aimed to emulate Xiaomi. All their products were budget phones retailing less than 1000 RMB (153 USD), featuring big screens and Kele UI, the company’s proprietary OS.
Dakele’s selling point, like most Chinese smartphones, was their low price and decent specs. Although the same strategy may have boosted Xiaomi above the pack, the method has already lost its charm in a now more competitive market.
The smartphone maker failed to adapt to the changing market and suspended its business in March last year.
Pengpai Car – Make sure you can actually make money
China’s O2O craze has invaded almost every vertical imaginable from food delivery to manicure. The auto industry is no exception.
Pengpai Car was an online platform where users can order car wash and maintenance services. The firm followed a development path popular with many O2O companies, grabbing customers by providing subsidies and monetizing the user base with paid services. With an entry-level car wash service priced as low as 9.9 RMB, the company was successful in acquiring users very quickly. Operating in 22 cities, it once claimed to control 75% of China’s after-sales car service industry.
However, the startup never managed to fully commercialize its user base; its customer conversion rate to value-added businesses like maintenance, insurance, and road rescue services was only in the single digits. The company shut down its services with a WeChat announcement in April 2016.
Pengpai Car raised 10 million RMB in 2014. An 18 million USD series B round was finalized in 2015 from JD at a valuation of 600 million USD.
Li Xiang, founder of auto vertical portal Autohome and co-founder electric car maker NextEV, once said about the O2O car maintenance industry:
Neither on-demand car washing service nor on-demand car maintenance business make sense. It’s crazy to bet on high-value services while losing money on a basic car wash business. The basic rules about people seeking the most efficient services can’t be broken. Most after-sales services in the automobile industry are by nature low frequency. It’s difficult to acquire uses and offer services in this sector.
Image credits: Metao, Dakele, Shenqibuy, Pengpai Car