For a while, startup founder Zhang Yi’s live-streaming video app appeared to be riding the wave of China’s booming mobile broadcasting market. The bookish history professor-turned-entrepreneur thought he was on the cusp of internet millions. But Mr. Zhang’s fortunes quickly sank as his company struggled to keep up with deep-pocketed rivals, ran out of cash and was rejected by investors. It closed its doors earlier this year.

A bubble in Chinese live-streaming apps is beginning to burst. Beijing-based Guangquan, Mr. Zhang’s startup that went kaput, was part of an estimated 300 Chinese apps that distribute live videos of amateur performers singing, dancing, eating and even sleeping. Viewers on such services spend real money to send virtual gifts like roses and diamond rings to performers they like, while the apps take a cut.