oBike’s failure shows flawed thinking of start-ups

When oBike exited Singapore, it cited difficulties in complying with the new bike-sharing regulations.

But The Business Times uncovered that financial pressures could have played just as big a part in its pull-out: The home-grown bike-sharing operator had cash flow woes, had run up a loss of more than $4 million last year and had been looking - in vain - for an acquirer.

oBike had been hoping to get lucky, as did its rival Mobike.

In April, Mobike got acquired for US$2.7 billion (S$3.7 billion) by Meituan-Dianping, one of China's largest providers of on-demand online services.

In many ways, oBike might just be a start-up founded with the goal of being acquired.

When it launched here in April last year, it did little to differentiate itself from the players quicker to burst on the scene: ofo and Mobike.

Notably, when asked by BT how it planned to compete with its more well-capitalised rivals, oBike cited "deep local knowledge" as an advantage.

But in its one year of operations, oBike did not appear to have used this knowledge to create hyper-local features that would have enabled it to win more users.

It also did not seem to have significantly monetised the data from its bike-sharing rides - data that could have gone into improving Singapore's transportation network or facilitated future town planning.

It also had not created technological capabilities in artificial intelligence or the Internet of Things that could be valuable and applicable to transport and even other industries.

Both data and new technological capabilities have been viewed as revenue-generating assets that bike-sharing operators can develop within their profit-challenged sector.

Clearly, oBike did not exhibit a clear path to profitability. It has been compared to Uber, which exited Singapore this year with huge financial losses.

The difference is that while Uber Singapore found a buyer in Grab, oBike has yet been able to find a white knight.

It must be noted that in the world of start-ups, unprofitable and indebted companies have managed to find buyers.

In November 2016, home-grown e-grocer RedMart was snagged by Lazada for reportedly US$30 million to US$40 million. Lazada itself was said to have nearly run out of money when Alibaba stepped in with a US$1 billion investment offer in April that year.

Why do unprofitable and indebted start-ups get bought out? The theory is that a start-up - because of all the promises of its ever-evolving technology and enviable userbase - is evaluated on its future.

If there is the remotest chance that a start-up can yield profits even in the distant future, it will have value today.

This thinking has led many start-ups to spend money for years on customer acquisition and research and development, in pursuit of growth and profits.

In turn, it has engendered a fervour among investors to continue to keep fast-growing start-ups afloat to conquer what they think is a winner-takes-all market. It is unsurprising today to see an ecosystem of start-ups worth billions - despite losing millions.

But oBike and Uber have proven this thinking is flawed. Their departures show that start-ups do not have free rein to be unprofitable for years.

They also demonstrate that investors have a breaking point and could cut back on their investments once the start-up's operations prove to be too costly and its ability to turn a profit starts to look shaky.

The good thing is that not all start-ups are building to sell.

Mr Darius Cheung, a local entrepreneur, believes about 20 per cent of start-ups do that.

On how he would identify such start-ups, he said: "I would ask them how they plan to get profitable. If they don't have an answer, they are either stupid or building to sell."

He added that if one is looking from the outside, the easiest way to distinguish a start-up that is building to sell is to see if it is an "opportunistic start-up" or "fast-follower".

The fast-follower is one that will get founded quickly the moment news of a US or China-based start-up raises a lot of money on a new model.

Examples of such start-ups are Singapore-based Beeconomic (modelled after Chicago-based deals marketplace Groupon), said Mr Cheung.

Ultimately, even in the start-up world, profitability matters.

Building a start-up to sell is not a bad thing - but it tends to ignore profitability, take a short-term view on innovation and be mostly unsustainable.

This article appeared in The Business Times last Friday.