The Incredible Rise and Fall of China’s Bike Firm Ofo

Ofo’s rapid rise—and its even faster fall—serve as a cautionary tale for entrepreneurs and investors, not only in China but also in Silicon Valley, where today’s electric scooter craze bears the hallmarks of China’s bike-sharing frenzy.

The Information spoke to more than two dozen people, including former Ofo managers, investors and competitors, to prepare this previously untold account of Ofo’s decline.

The 5-year-old company, once hailed by China’s state media as a symbol of the country’s tech innovation, was devastated by bad business decisions, a failed merger and disagreements among its investors—notably tech giants Alibaba and Didi.

Buoyed by five funding rounds in two years, Ofo founder Dai Wei never made a serious attempt to build a profitable business—a situation a growing number of startups have found themselves in.

“Long-term sustainability of the business is often not even an issue. That’s really tragic for a lot of Chinese companies,” said Teng Bingshen, a management professor at Cheung Kong Graduate School of Business.

Investors wanted Ofo to gain market share no matter the cost, because they assumed the startup would eventually merge with its main rival, Tencent-backed Mobike, or be acquired by a bigger company. It was a playbook that had been followed many times in China’s tech industry. But in this case, conflicts between Mr. Dai, an idealistic entrepreneur who is still in his late 20s, and his investors prevented a deal from being struck and left Ofo struggling for survival.

Mr. Dai told The Information last week via a text message that he still believed bike-sharing to be a “very good business.” But he didn’t reply to questions about Ofo’s challenges. Alibaba, Didi and Coatue declined to comment. DST didn’t respond to a request for comment.

It’s hard to say what happens next. Some investors say a sale of Ofo no longer is an option, given its debts and how its business has virtually dried up.

University Start

The story of Ofo began in 2014, when Mr. Dai, then an economics graduate student at prestigious Peking University, started exploring business ideas with his friends. After several unsuccessful projects such as bike tours for tourists and a trading site for used bikes, the team launched a bike-rental service for college campuses in 2015. It proved a hit. Mr. Dai soon expanded it beyond universities.

Ofo pioneered a new kind of bike-rental service without sidewalk docking stations. Users spot the bikes and unlock them with Ofo’s mobile app. They can drop off the bikes anywhere after rides. To make sure people became regular users, Ofo collected a security deposit when they started using its app. Beijing, where Ofo first launched its service in 2015, is among the most congested cities in the world. The startup promised to solve a real problem for commuters who didn’t live or work near subway stations.  

“There was no good solution for short-distance travel, so potential demand for Ofo was huge,” said Arthur Zhang, managing director of ZhenFund, which invested in Ofo’s Series A round in 2016.

In October 2016, Ofo raised $130 million in a funding round led by car-hailing giant Didi Chuxing, which became the biggest outside shareholder. DST and Coatue also participated in the round. Bike-sharing apps were among China’s fastest-growing startups, and there was already a land grab among investors who didn’t want to miss the next Didi or Uber.

Flush with cash, Mr. Dai started spending. At the company’s annual party in January 2017, Mr. Dai gave one of his longest-serving staff a Jeep Wrangler, a car the employee had always wanted, according to people who attended. When another employee at the after party accurately recited a Chinese poem from memory, Mr. Dai spontaneously decided to award him $1,500.

By then, it was clear that Ofo’s biggest rival was Mobike. While dozens of other look-alike rivals had sprung up since Ofo launched, the deep-pocketed backers behind Ofo and Mobike made them the two leading contenders. The two hot startups attracted a lot of talent from bigger tech companies like search provider Baidu. Many former employees of Uber China, which was acquired by Didi in 2016, also went to work for Ofo and Mobike.

By the first half of 2017, Ofo had already spent nearly $500 million to buy five million bikes. The cost of each Ofo bike was nearly $100, roughly half that of a Mobike bike. Even though Ofo bikes broke more easily than Mobike bikes, their lower production cost meant that the same budget would allow Ofo to roll out more bikes than Mobike. At that time, Ofo saw this as an advantage.

In an interview with The Information in May 2017, Mr. Dai said Ofo was on track to becoming profitable in 2018. His logic was that each Ofo bike would handle enough trips over its two-year life-span to more than cover the original cost. To maximize the number of trips per bike, Ofo would gauge demand at each location and move abandoned bikes to areas with more potential users.

Buying Spree

But the reality of how Ofo worked was the opposite, according to former managers.

“Our work performance was measured by the number of trips. The easiest way to meet performance goals was to keep buying new bikes,” said a former Ofo manager who was in charge of a major city. “We didn’t have to worry about the cost.” The more time-consuming work of allocating existing bikes to locations with the most potential users was not a top priority. Former employees said Ofo’s technology for tracking bikes didn’t work well, making it harder to recover used bikes.

Investors were willing to foot the bill. In March 2017, Ofo raised $450 million from Didi, DST and other investors. Then just four months later, it raised another $700 million in a round that included tech giant Alibaba.

Didi, one of China’s most valuable tech startups, wanted to offer its customers more than taxis and cars. To provide Ofo with more direct support, Didi sent some of its managers to Ofo. Those managers played key roles in Ofo’s war with Mobike, helping design discount campaigns to attract users. Didi managers had a lot to offer because they had recently won a similar battle against Uber.  

Alibaba invested in response to Tencent’s alliance with Mobike. Tencent was using bike-sharing to expand its mobile payment system WeChat Pay, the biggest competitor to Alibaba affiliate Alipay.

Like Ofo, Mobike kept raising money, announcing a $600 million funding round in June 2017.

Ofo and Mobike offered ever-deeper discounts to keep usage growing. In the summer of 2017, Ofo made its bike trips almost free by offering an all-you-can-ride deal for just 1 yuan (15 cents) a month, responding to a similar move by Mobike. Around the same time, Ofo and Mobike also launched a game-like campaign where users could win cash prizes by finding and riding bikes that came with virtual gift envelopes.

In October 2017, Ofo said the number of its daily bike trips set a new record of 32 million. The company also said it had about 200 million registered users.

Satellite Selfies

Ofo also spent lavishly on other things. In May 2017, Ofo announced a plan to launch a civilian entertainment satellite in collaboration with a space startup. Ofo spent about $3 million on the project, according to Chinese media reports. The satellite would enable riders of Ofo bikes to take “space selfies,” state media China Daily said at the time. In 2017, Ofo also paid about $1.5 million to hire Chinese pop star Lu Han just to be an “ambassador” endorsing the brand.

Meanwhile, one thing Ofo didn’t do was to try to lower costs by prioritizing repair of broken bikes. Broken bikes were supposed to be getting fixed in warehouses. But a former Ofo manager remembers a trip in late 2017 to a suburb of Hefei, one of Central China’s largest cities. This manager, who was new to Ofo at the time, visited a warehouse where about a thousand broken Ofo bikes were on the floor gathering dust. There were few workers to repair them.

“I thought bikes were Ofo’s most important assets. I was disappointed,” the manager said. At the time, Ofo said it had more than 10 million bikes in circulation. But former Ofo managers estimated that roughly half of them were likely unusable because they were broken or missing. Some bikes got stolen. Thieves destroyed the locks and spray-painted Ofo’s yellow bikes in other colors.

“A lot of people underestimated the cost of operating bike-sharing services. As you scale up and bikes age, you start having all sorts of problems that add to the complexity,” said Jixun Foo, managing partner of GGV Capital, which invested in Ofo competitor Hellobike.

“A lot of people underestimated the cost of operating bike-sharing services. As you scale up and bikes age, you start having all sorts of problems that add to the complexity.”

Merger Efforts

While Ofo and Mobike continued their battle, their investors were determined to combine the two rivals, in hopes of creating a dominant player with a higher valuation that wouldn’t need to discount so heavily. By the second half of 2017, investors were seriously discussing merger plans. For many investors, this looked like a familiar scenario. Didi had become a powerhouse after two major deals, including its acquisition of Uber China. On-demand services app Meituan Dianping was also created by a merger between two rival startups.

Amid the discussions, Japan’s SoftBank, a major investor in Alibaba and Didi, suggested it was willing to invest in a new company formed by an Ofo-Mobike merger. In one scenario, a merger and a subsequent fundraising deal would have given the combined company a $10 billion valuation, according to people familiar with the talks at the time. In terms of market share, Ofo and Mobike were thought to have roughly the same size, although precise data isn’t available.

But Mr. Dai, who had a veto right on any major strategic decision, opposed such a deal. Many investors including Didi, Ofo’s biggest shareholder, wanted the combined company to have a new management team after the proposed merger, while Mr. Dai wanted his own team to stay in power and continue running the business.

Some long-term Ofo employees who were loyal to Mr. Dai praised his attitude, describing it as an indication of the founder’s strong will. But other former Ofo managers said they thought Mr. Dai was making a mistake by not accepting the merger scenario proposed by Didi.

“Ofo is his baby. If he keeps the baby, the baby could die. If the baby finds another parent, it could survive and grow,” a former Ofo executive said.

While merger discussions continued, disagreements between Mr. Dai and Didi escalated. And that affected former Didi managers who had joined Ofo earlier. In November, Ofo blocked some of those executives’ access to its financial data, email and other internal information, according to employees familiar with the matter. Shortly after that incident, dozens of former Didi managers who were working at Ofo left and moved back to Didi.

By the end of 2017, it was clear that a merger with Mobike was no longer an option.

“In this market, only a monopoly can make money. You have to dominate the market, so you can control the price and control the output of bikes,” said ZhenFund’s Mr. Zhang. “It’s quite a pity that the merger didn’t happen.”

Uptown Funk

Despite the failure of the merger talks, many Ofo employees remained optimistic. In January 2018, the company held its annual party at a hotel in Beijing. More than 3,000 employees attended, including those who flew in from other parts of China or overseas offices. Mr. Dai and other co-founders danced on stage to “Uptown Funk,” the hit song by Mark Ronson and Bruno Mars.

In a speech, Mr. Dai said Ofo had the most bikes, the most users and the best team among all the bike-sharing companies in the world. A short video shown on stage featured a line from the movie “Top Gun” in English: “You are the top one percent of all naval aviators.”

But financial pressures were increasing, both internally and externally. Some Ofo managers in charge of city operations said they were told for the first time in early 2018 that they needed to cut their expenses. In January, Didi turned hostile, launching its own bike-sharing platform within its popular car-hailing app. Didi started this service by buying up bikes owned by a smaller bike-rental firm, Bluegogo, which had shut down.

Further complicating the situation was that Ofo’s two big shareholders had opposing agendas, one Ofo investor said. As Ofo’s biggest outside investor, Didi had a veto right over Ofo’s financing decisions. Alibaba, meanwhile, didn’t have the same right but was closely aligned with another Ofo investor who did. “If Didi proposed a plan, Alibaba could reject it. If Alibaba proposed a plan, Didi could reject it,” the Ofo investor said.

In March, Ofo said that it had raised $866 million in a new funding round led by Alibaba, calling it “the highest funding record in the bike-sharing industry.” The round included loans from Alibaba that took Ofo’s bikes as collateral. But a former Ofo executive said that the actual money Ofo raised was much smaller than $866 million, because other investors who had considered participating in that round never did.

Meanwhile, Mobike found a refuge. In April, its backers struck a deal to sell the firm for $2.7 billion to Meituan Dianping, a tech giant whose app offers food delivery, movie ticketing, travel bookings and many other services. While the deal provided Mobike’s early investors with exits, the venture capitalists who had bet on Ofo were now even more frustrated.

In April, Allen Zhu, managing director of GSR Ventures, one of Ofo’s early investors, told Chinese media that his firm had sold its entire stake in Ofo. Mr. Zhu didn’t respond to The Information’s text message.

Ofo was struggling to find new investors. It was falling behind on payments to manufacturers for the bikes they had delivered. Manufacturers stopped accepting orders from the company. When Ofo could no longer roll out new bikes, the company had to rely on its existing bikes, even though only about half of them were in usable condition. Ofo’s growth strategy, relying on low-cost bikes, was beginning to fall apart.

Meanwhile, Ofo faced new challenges from another bike-sharing app called Hellobike, which raised $700 million from Alibaba affiliate Ant Financial and other investors in early 2018. Hellobike was expanding rapidly in smaller cities across China. To focus on surviving the domestic battle, Ofo began to scale back its overseas expansion plans.

Darkest Hour

In May, Mr. Dai gave a speech to employees at Ofo’s Beijing headquarters. He likened Ofo to Winston Churchill’s Britain fighting against Nazi Germany, as portrayed in the movie “Darkest Hour.” He also insisted that Ofo would stay independent, a comment that some employees saw as a reference to Didi’s talks to buy Ofo, which never resulted in a deal.

Mr. Dai also unveiled Ofo’s “victory plan,” which was aimed at turning the business profitable within 100 days. In order to do so, Ofo would seek to generate revenue not only from rides but also from advertising, he said.

As part of Mr. Dai’s plan, Ofo started looking for advertisers who would pay to place ads on the bodies of Ofo bikes. But given the difficulty of tracking bikes, replacing old ads with new ones often required too much manpower. Ofo also started putting digital ads in its mobile app, but that also was challenging, former Ofo employees said.

“To build a strong advertising business, you need a strong ad sales team. We didn’t have such a team,” one former employee who worked on the project said. Some potential advertisers were concerned about Ofo’s financial outlook, as they didn’t want to place ads on an unstable platform.

The bulk of Ofo’s employees left in the second half of 2018. Some were laid off, but others jumped from what they thought was a sinking ship. In November, Ofo shut down one of its two Beijing offices. The company also pulled out of all the overseas markets it had expanded into, including Singapore, the U.K., the U.S and Australia.

In December, as Ofo struggled to repay its debts to suppliers and customers, Mr. Dai was placed on the Chinese government’s blacklist for failing to fulfill his payment obligations. In a letter to employees, Mr. Dai admitted that Ofo had been struggling after failing to raise new funds earlier in 2018. He said he had even considered shutting down the business and filing for bankruptcy.

Millions of users who had paid deposits to use Ofo’s app demanded immediate refunds. In the lobby of the company’s Beijing office building, angry users formed a long line. Remaining Ofo employees were recently told that their salary payments would be delayed.

Ofo’s yellow bikes, once ubiquitous in all major cities, have largely vanished. The app still exists, but the company no longer has workers looking after its bikes.  

This week, in the southern industrial metropolis of Kunming, there were hundreds of bikes parked on sidewalks in a busy downtown area. There were blue and white bikes from Hellobike, orange bikes from Mobike and green bikes from Didi. Then there was one broken Ofo bike, its frame bent right where the company’s logo was.