In Chinas internet warzone, theres a road map for success: find a rich backer, get lots of money, burn it to buy market share.
The latest chapter of that playbook is being written by two young entrepreneurs each offering an update on a former icon of Chinas communist party the bicycle.
In one corner is Dai Wei, 25, whose Beijing Bikelock Technology Co. cycle-sharing startup, known as Ofo, won about $100 million backing in September from investors including the venture fund backed by Xiaomi Corp. founderLei Jun and Didi Chuxing, the ride-hailing giant that just beat Uber Technologies Inc. out of China. The funding is said to have valued the startup at $500 million.
In the other is Hu Weiwei, who received similar funding days later for herBeijing Mobike Technology Co. from a group including Tencent Holdings Ltd., the nations biggest internet company and, ironically, a long-term backer of Didi.
This is the trial by fire of Chinas internet landscape, where alliances change in days and startups bleed billions of dollars offering freebies to get customers, only to merge months later so they can take on the next upcoming competitor.
Tencent and Didi each picking a different winner makes the competition much more unpredictable and interesting, said Cao Yang, Beijing-based analyst at internet consultant IResearch. It really comes down to which founder can adapt faster and leverage resources better.
Bike-sharing is hardly new. There are about 600 such operations globally, with a market that could grow by 20 percent a year to generate as much as $5.8 billion in revenue by 2020, according to consultancy Roland Berger.
Most, like Pariss Velib or Londons so-called Boris Bikes are run or set up by the local government, often with corporate sponsors, and bikes are available from racks at set locations. What differentiates Ofo and Mobike is that users find and pay for bicycles via a smartphone app and then leave the vehicle wherever they want.
Each company is targeting a different market. Mobike has gone for high-end branding with bikes that cost as much as 3,000 yuan ($440) to build and have snazzy orange wheels, solid-core tires and satellite navigation. Ofo is targeting students with bright yellow two-wheelers costing only about 250 yuan that dont have GPS and rent for just 1 yuan per hour, typically half that of Mobike. Beijings public bikes are free for the first hour and then 1 yuan per subsequent hour.
Mobike locates its vehicles via an integrated GPS. Ofo so-named because the word looks like a bicycle does so by tracking the smartphones of its riders and sending a code to unlock the bike.
These guys all think they can be Amazon, hoping to burn money first and then make money later, said Rawen Huang, Hong Kong-based founder of Petrel Capital, which invests in Chinas internet space. Will we look back in five years time and say Oh my, I cant believe they got funding at that valuation? Probably.
In the capitals electronics heartland of Zhongguancun, where high-tech heavyweights like Lenovo Group Ltd. rub shoulders with startups and malls crammed with gadgets, two of Ofos yellow bikes stand in the hallway outside an apartment, which Dai has converted to a makeshift office.
In the early stages of a company, expanding is more important than defending, says Dai, echoing the insights imparted by his mentor Cheng Wei, founder of Didi. The faster you use your money, the more efficient, the more money you raise, the stronger you become. Then you control the market.
Its a strategy that helped Didi beat off more than 30 rivals. At the height of its battle with Uber, both companies were burning through $1 billion a year, mostly to subsidize fares. Didi now handles more than 11 million rides a day across about 400 cities. While Didi has yet to become profitable, Dai said Ofo is already making money.
Bespectacled and soft spoken, Dai gained the support of Didis early investors Wang Gang and GSR Ventures Allen Zhu. The Peking University PhD dropout founded Ofo with four other students, ditching their original project on cycling tourism to focus on bike-sharing.
Wang was instrumental in helping Ofo find a big tree to lean on, securing not only financial backing from Didi, but also potential access to its 300 million users.
A 30-minute bike ride away, in a technology incubator called 768 Creativity Shejiyuan, Hu Weiwei landed an even more powerful ally. Tencents WeChat instant messaging app has more than 800 million users and already integrates things like Didis car-hailing service and JD.com Inc.s shopping function.
The 34-year-old former journalist said the two companies are starting to coordinate on certain technology aspects.
In a second-floor office down a dark passageway, next to a communal toilet, Hu speaks in a low octave, punctuating her key message: The fact that Tencent is investing in us shows that we share the same philosophy about products and technology.
The investment from Tencent, along with Hillhouse Capital and Sequoia Capital, couldnt have been more timely. Following Didis announcement it would back Ofo, users like Shanghai-based Mike Huang began unsubscribing from Mobike to get back their 299 yuan deposits on concern the company would shut down.
It just shows you how important the big companies are for the survival of startups in China, said Huang, an entrepreneur who has a womens health app. He resubscribed after hearing about the Tencent investment. Chinese internet companies are still in that phase of burning cash to win market share and the brutality of competition is even worse than Silicon Valley.
Ofo and Mobike will need more than discounts to win users, they need bikes.
Mobike said it has about 30,000 bicycles spread across the major cities of Beijing, Shanghai, Guangzhou, and Shenzhen, which have an estimated combined urban population of more than 74 million. It aims to stock at least 100,000 bikes for each city by year-end and expand to other cities.
Compare that with the more than 66,500 public bikes offered by the public transport corporation of Hangzhou, a city of about 8 million.
Ofo says it has more than 85,000 bikes, mostly on university campuses, and expects to take its service to other places in China. Both rivals are eyeing markets in Europe.
The ride-sharers are trying to reverse a decline in cycling in China, which spent the past two decades promoting cars. China had 670 million bikes in 1995. By 2013 it had 370 million.
For some Beijingers, the billion-dollar fight between Ofo and Mobike comes down to which happens to be more convenient.
I dont care whose bike it is, Ill use one if I spot one and feel too lazy to walk, said Guang Geng, who works in the Zhongguancun area. Honestly I just tell them apart by color.
With assistance by Tom Mackenzie, Yuan Gao, Brad Stone, and Lulu Chen
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This article originally published at Bloomberg here