Ofo went from a school project to a prospering business of one billion dollars, to now being on the brink of bankruptcy in less than four years. The difficult situation of the company highlights some of the risks associated with raising too much money too quickly. In an internal letter that circulated widely in the local media, Ofo’s founder and CEO, Dai Wei, admitted that the start-up was under immense cash pressure for a year and had even considered filing for bankruptcy.
Alibaba’s bike sharing service said it could not mobilize any outside financing, with Dai planning countless times to reduce all its operational expenses, so that Ofo could reimburse user deposits and reimburse suppliers, according to the letter. In the past year, Ofo have been under huge cash pressure, he reportedly said in the letter. It needs to return user deposits, pay back our suppliers and run the business. It must transform each yuan into three. Dai was recently blacklisted by a Beijing court for failing to honor his obligations. The decision stipulates that he must obtain the court’s approval before proceeding with what the authorities describe as excessive expenses, including the purchase of real estate and cars, the sending of his children to private schools and the purchase of certain types of insurance products or wealth management, among others.
Intense Competition – Reason for Ofo’s Problems
Ofo’s cash flow problems were caused largely by intense competition in a market that has not yet proven commercially successful, according to many industry experts. Competition has been a race to the bottom in terms of pricing, with charges falling to 1 yuan ($ 0.14) for each hour of use, sometimes even free. It also led businesses to flood the streets with bicycles, a tactic that fueled complaints and prompted the government to stop operating after many sidewalks and walkways became impassable. Despite all this, ofo still managed to reach a $ 2 billion valuation in a round of financing in 2017, and the company had already deployed more than 10 million bicycles worldwide and attracted 200 million users. The company’s cash-flow and high-valuation activities deterred potential investors, and when capital became scarce, the startup was no longer able to hedge its once-sprawling operations. Ofo has been embezzled by capital, according to Zhang Yi, founder of iiMedia Research. Investors want the company to be competitive, but the competition has become chaotic and irrational. Now, with its high valuation, no one wants to finance this business.
Ofo – Began as University Project
Founded in 2014 as university project, Ofo has managed to bring together a long list of powerful funders. In March, the group raised $ 866 million from investors led by Chinese online trading giant Alibaba, without disclosing an updated valuation. Earlier this year, it was also announced that a joint takeover bid for Ofo had been proposed by Ant Financial, affiliated with Alibaba, and Chinese carpool giant Didi Chuxing, who had already invested $ 350 million in the start-up. The company stated that at the time, it had never considered acquiring Ofo and would support its independent activities. But it remains to be seen how long the cash-strapped company will be able to support itself. Just this week, hundreds of angry users lined up in front of Ofo headquarters in Beijing to demand repayment of their deposits. Users were first asked to pay a deposit of 99 yuan ($ 14.3) before unlocking Ofo bikes, then the amount was increased to 199 yuan ($ 29). They can request a refund via the Ofo application, but this one stipulates a waiting period of 15 days. And some users complained on social networks that they could not get their money back even after the waiting time expired. With all these problems plaguing them, Ofo’s future seems pretty bleak, to say the least.