The sharing economy is one of the hottest sectors in China, with $250m of seed and Series A capital invested April-May '17, without accounting for the $1 billion+ poured into bike-sharing start ups Mobike and Ofo. While some of these start ups have the potential to create significant businesses (e.g. car hailing and bike sharing), the verdict is still out on others that are peddling shared umbrellas or even basketballs. A more sustainable opportunity in this sector is in co-working space, which is fueled not only by the latest sharing economy craze, but rather built on the solid foundation of continuous growth in start ups and a tangible need for office space.
Today we sit down with Randy Wan, CEO of Woo Space, one of the top 5 co-working spaces in China in direct competition with well known unicorns such as WeWork. We'll review the sharing economy more broadly to understand what types of business models actually work and how do they make money. We'll examine why high growth Chinese start-ups are so diversified, and how this applies to the very VCs that back them.
China’s Sharing Economy
Adam: When we try to look at the China market, co-working space is clearly a hot area and large opportunity. Can you talk more about the broader sharing economy. Can you speak to other types of products that have been shared?
Randy: Sharing economy is probably the hottest sector in all of China right now. The entire VC community is throwing cash at this area. Before we discuss the sharing economy, I’ll talk about how the VCs are having a herd effect within China whenever a concept becomes hot.
In China the past was O2O (Online to Offline) and then it was internet finance where VCs just threw money at it. Shared economy is one of the latest waves. Co-working space is one of these and went really big last year and recently this year it is about the shared bikes. That really brought about his huge amount of money funding this sector. Some VCs in China have the view that if there is not this amount of money backing these companies, they would not succeed. Some VC friend told me that there is a critical threshold of capital for these sharing economy companies to get before they can become a real player in play. If they can get this amount of capital, they can become a huge company. That’s what we see behind the concept of Mobike and of Ofo.
The downside to something like this is that everyone is trying to do something shared. For example, shared bikes and car sharing makes sense. Another big one involves shared power banks which is very big right now. Yet there are other ones popping up like shared umbrellas which I think is really weird, and most of those companies are doing poorly right now and having difficulty securing new rounds of funding. Recently, there is this shared massage chair that came out a few months ago, and the shared sleep capsules which I think could be interesting. They charge by the minute. The latest one I heard that just got angel funding is shared treadmills. They are going to put treadmills in a box on the street. There are also the shared karaoke machines. Anything you can imagine shared, someone is doing it right now and most of them are receiving huge amount to money because VCs feel like this is the hot sector right now.
Adam: I have been seeing a lot of that. In fact last weekend, I was playing basketball last weekend and there were shared basketballs, which I didn’t partake in. So you mentioned that there is a capital requirement that will push you past a threshold. Can you talk about that a bit more. What is that threshold and what is the amount that allows you to be successful?
Randy: In the views of a lot of VCs (and my own views), the shared economy is really a platform play. The key is for you to have a lot of scale, a lot of users on your platform so you can make money off of media later or you sell ads or anything like that. For example Mobike, everyone feels that they don’t make money off of bikes. But the one ad in their app right now is charged at $1 million USD per day. They can sell that for 365 days, which is at least $365 million right there and their price is going up. When you see things like that, VCs view it and ask can this get you a lot of users up to the hundreds of millions level because there are a lot of people in China. It’s not like the States where there are only 300 million people. You become a huge platform if you have 20 or 30 million users. It’s not like that. In China, you would need to reach hundreds of millions of users to have critical scale. That’s why VCs feel are willing to give these companies so much capital so they can get enough users, then there might be commercial value.
Adam: That’s a really internist point for sharing. I think even in China the user's preferences are a little bit different than in the US. For example, I’ve opened up a Mobike/Ofo app before to see the ad, and think it’s rather annoying. I suppose most people in China are okay with it. The ads are appearing everywhere and can generate tremendous profits for the companies.
Randy: Yes. This is actually the difference between us, since I have been here for 5 years now. I actually don’t feel that Mobile has this amount of Ads.
Adam: Really? Okay.
Randy: Yes. For me, I think they don’t have that many ads. I think they have a very cute way of doing ads. When you scan it, they have secret badges but the badges are all sponsored by different companies so people just get used to these ads.
Cross Vertical Expansion
Adam: OK a change in topic. Some tech companies in China expand into multiple areas. For example, Didi, clearly a car-sharing business, essentially won out against Uber. They also expanded and invested in Ofo. So I have been hearing a lot about this type of play where a start-up that has a core area of focus and is doing very well will very quickly enter a few other fields as well. In the US, you don’t see that as often. Do you have any views on why that is?
Randy: I actually had a very deep discussion on something similar to this topic with a friend from Uber. He was the number one employee in Uber China. We were discussing why Uber globally doesn’t have these many business lines. Globally you see their core business is just car hailing. You just use normal cars and the drivers who are normal people can become car drivers. Globally, that’s just what they do. They did a global expansion after this model worked in the US.
Whereas for Didi, even before they invested in OFO, the bike sharing. They actually tried a lot of horizontal expansion. First it was a taxi hailing app and then they did what Uber did with the Didi ZhuanChe (professional cars) where you can get normal cars on Didi. Then, they did the bus service. I know they are actually exploring private jets that you can hail from Didi, which is very interesting. And now they are the largest shareholder of Ofo, the bike sharing App.
Why did they do this? One reason we came over is because in US, you actually don’t have that many people so even if you think of a huge app in US like Facebook, their U.S. userbase is about 150-200 million, which is about 60%-70% of the US population. But at the same time, it’s just not that many people in China. For example, Tencent has 900 million users, and 80% of that is within China. When you have this many people, this much scale, you don’t have to go global, you can expand to other services.
This is similar to Didi. Didi has 400-500 million users right now. The average users use the App 2-3 times a day. When they have this many people using this App, they want to expand more so they extend horizontally. Another reason for this is partially because Chinese companies are fast followers and Chinese companies don’t have much overseas experiences versus mature US companies because in U.S. there is a lot more talent. And where do they usually first expand? Well they expand to Europe, where most people know English so you don’t have the language barrier. When you are a fast follower and you see your global competitors are already in over 100 countries and they are used to it. It’s very difficult for you to do a global expansion. But from a capital market standpoint, you need to keep justifying why your valuation keeps going up if your core business is already at its peak then your need other ways to justify your valuation or increase your valuation so you need to expand into more services.
Adam: Right. That makes a lot of sense. In China, we see some examples of success here and also a few flops. For example we also have Xiaomi. I think a lot of people know Xiaomi at this point sells smartphones, and not just that, but rather an ecosystem of products that you can buy for your household: smart TVs, air purifiers… They basically invest into a number of different (but product aligned) companies that they bring to their ecosystem, help them with design, strategic management, supply-chain management and ultimately sell them through their massive eCommerce channel. It has been very successful, and Xiaomi takes a big cut of revenue from all these companies. A lot of millennials love these products because they are high quality overall, relatively cheap and just look and feel good. I think that’s definitely something to look at.
I can also say that this phenomenon is not just about start-ups and tech companies in China, but holds true for investors as well. At Shunwei Capital, for example, we cover a lot of different areas and we do really early stage investment through series A, B, and rarely series C and beyond but still it’s pretty wide coverage. In the US it’s more targeted and focused. In my view, based on what I’ve seen over the past half year. On one hand, it’s still a relatively immature market. Things move quickly but there’s room for opportunity. Secondly, a lot of these tech companies, as Randy mentioned, they expand and move beyond their original business, so as the VC investors when they are managing these companies, it really helps to have that broad coverage to understand what the new opportunities might be. And they might get in on those later rounds as well.
China is very fascinating to observe now. Perhaps in the long term it will become more similar to the U.S., become more mature and more focused. For now, there’s a lot of opportunity and things are very fast paced.
Randy: Yes, I agree. It’s a land of opportunity.
Adam: Randy, one more question for you. You mentioned that you were born in China and moved to the U.S. when you are young. Do you have any suggestions for any expat founders who want to come out here to start companies?
Randy: My biggest tip is know your market. I think Uber is probably the expat company that knows most about China. Travis K. travelled here multiple times and he actually speaks a little bit of Chinese and what he did was create a completely Chinese team. At first, there were a lot of bankers and consultants based in Hong Kong or based in China. But it eventually became more and more Chinese as time went on. I think that’s the better model, as opposed to bringing people from the US and expecting them to learn about China very quickly, because the local team is hugely important. Please don’t think of China as one market. Think of China as probably 50 markets because every city in China, every region in China has their own characteristics.
Adam: That’s good to know and I think Uber has a pretty good exit from China, I mean, getting $7 billion dollars and 20% share from essentially a monopoly in China (Didi). That’s very successful. Well, okay. Randy, thank you so much for your time. It was a very interesting conversation.
Randy: Thanks so much Adam. It’s my pleasure.