Chinese firms should focus on capital efficiency: GGV Capital

By Jill Shen
3 min read

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Chinese innovation investment has continued to shrink as investor fundraising has cooled further this year. Only 271 private equity and venture capital firms in the country raised funds in the first half, down by over half compared with a year ago.

Still, given that a number of VCs raised money in 2018, Jixun Foo, managing partner at GGV Capital, believes the problem is not a lack of money, but where money goes. “There needs to be new innovations that drive new capital deployment,” Foo said at the recent RISE conference in Hong Kong.

Foo honed in on China’s mobility sector, in which GGV has solid experience as an early backer of major player Hellobike.

In the space of just a few years, China’s bike-sharing sector has boomed. The industry still exhibits great growth potential with demand remaining strong among the country’s 1.4 billion people. Mobility players are now also focused on a new race to provide rental services for electric two-wheelers. Hellobike is one of the early movers, having rolled out shared e-scooters back in September 2017 when ofo and Mobike were still battling it out in the shared-bike market.

The Alibaba-backed company took another step forward in June this year, inking a RMB 1 billion ($145 million) deal with Ant Financial and CATL, the country’s largest battery manufacturer, to install battery-swapping stations nationwide for e-scooters. Ride-hailing giant Didi quickly followed suit, forming a two-wheeler business group the same month as it vies for market share.

“We believe China’s bike market goes very deep and is still growing,” (our translation) Fischer Chen, Hellobike’s chief financial officer, said at RISE. With about 250 million two-wheeler motorists nationwide, there are 700 million e-bike rides happening each day in the country, triple that of shared bikes, the company estimated.

China’s bike-sharing bubble has burst with dozens of players going bankrupt over the past years as funding dried up. The market cooled as authorities banned operators from putting additional cycles into circulation on the streets of key cities in late 2017. National technical standards on electric bikes followed and took effect in April this year.

In an interview with TechNode at RISE, Foo maintains that Hellobike could actually benefit from government regulation in terms of its technology and product capabilities.

Unlike ride-hailing, which is a serviced dependent on human drivers, bike-sharing is a business that basically relies on hardware, Foo said. This means it is more suitable for management using technology and rules. Some typical examples include locating bikes more accurately using IoT and educating users more effectively with regulations. One of the key issues is the efficient operation of the bikes, he added.

The Chinese short ride market, populated by shared bikes and e-scooter players, has undergone some key reshuffling. Ofo, once a pioneer in the bike-sharing boom, is now on verge of bankruptcy amid mounting debts and massive layoffs. Mobike has also scaled back expansions since Meituan took over. The city services giant posted an RMB 4.55 billion loss last year after the acquisition. Chen claims that Hellobike has snared more than 60% share of the bike-rental market and for the e-bikes, the share is even higher at around 80%.

Return to rationality

In an interview with Chinese media earlier this year, Foo said as investors have returned to a more rational approach and the Chinese investment market is expected to see a higher capital efficiency over the next couple of years.

Efficiency is a constant area of focus throughout GGV’s investment portfolio. Hellobike has broken even in more than 100 domestic cities, CEO Yang Lei announced last October. The average operation cost for each blue and white bike is only RMB 0.3, while other players spend over RMB 1 to keep them in action.

Another GGV-invested company Xpeng Motors claimed a “much higher capital efficiency” compared with rivals, as the NEV startup focuses more on the mid-range market rather than luxury models. The recent nosedive in Nio’s stock price “is a good lesson for the rest of us… to try to be more efficient and more sustainable,” said Xpeng President Brian Gu at RISE. The company, a top seller among China’s EV players, claims it probably only needs to use a quarter of its capital to hit the same shipment numbers as Nio.

Looking forward

Foo maintains that the next wave of innovation is also on the way with the mass adoption of artificial intelligence and 5G across industries like logistics, automobiles, and healthcare.

“Last year we saw a number of IPOs and some of them didn’t do well, but things always go in cycles,” Foo said. “We see short-form videos from 3G to 4G, what will come next with 5G?” The venture capital firm is betting on mobility, electric vehicles, and smart cities going forward. It will invest more than one-third of its $1.88 billion of funding secured last year in the sectors.

With contributions from Wei Sheng.