Why Chinese Investors are Willing to Take Bold Bet on the Money Burning Taxi App Business?

Why Chinese Investors are Willing to Take Bold Bet on the Money Burning Taxi App Business?

By Emma Lee on January 3, 2014

Taxi-booking apps experienced booming development in the past year. Investors are still bullish on the taxi app market and continue to invest heavily in the sector, despite the facts that the sprawling growth of the industry is highly dependent on capital injections and none of the leading companies generate any profit so far.Why Chinese investors are still willing to invest in this sector? Zhuang Minghao, investor and analyst at Matrix Partners China, discussed this question on Zhihu, a Quora-like site.

According to Zhuang, two crucial considerations for venture capitalists in determining whether to invest in a company are team (background, experience, execution, and complementarity) and direction (market potential, policy and competitors). The investment rounds of domestic taxi apps can be explained from these aspects.

Round 1 (2010-2012): Emergence of Uber Clones

Uber, an American online car booking service founded in 2009, ignited the craze for taxi-hailing apps. The company received $1.25 million of angel investment in 2010, $11 million of Series A financing in February 2011 and $37 million of Series B funding in December 2011, becoming the most popular startup of the year.

Yongche, the first Chinese Uber clone, launched service in September 2010 and secured angel investment from Xu Xiaoping, founder of ZhenFund. Gaining fundraising momentum led by Uber, Yongche booked Series A financing in August 2011, just half a year after Uber’s Round A financing. The company recently announced $60 million funding led by Ctrip and DCM.

A dozen of taxi apps emerged between late 2011 and early 2012, including Yaoyao Zhaoche, Dache Xiaomi (developed by Yongche), AnyimobEasy Taxi, and Didi Dache.

Nearly all of the taxi apps received first round of funding during the period, because the vertical field is popular in the U.S. Although there are still restrictions on taxi industry in local market, it does not prevent investors from dipping toes in an emerging market at angel round.

Round 2 (First Half of 2013): Shuffling Begins

In order to grab larger market share in a crowded market, taxi app companies are competing to pay hefty subsidies to users and taxi drivers, because high-quality product alone is not enough to attract them. For the sake of market share, none of the taxi apps is taking transaction-based commission or any other fees. The whole industry experienced more impacts when the governments step in to regulate the market in the first half of 2013.

Didi Dache, Kuaidi Dache and Dahuangfeng survived the pressures and stand out from rest of the rivals.

Didi Dache snapped up nearly the whole Beijing market with outstanding execution powers, which are reflected in public relation, ad promotion, and subsidy strategy. The company then received $15 million of capital injection from Tencent.

Kuaidi Dache, which raised several millions of US dollars from e-commerce giant Alibaba, grabbed Hangzhou market and expanded quickly to Shanghai.

Dahuangfeng gained presence in Shanghai market after receiving $3 million of angel investment from Morningside Ventures.

Backed by these funding, the three companies vying to distribute subsidies extravagantly and competed head-on for market shares in Shanghai.

Monthly net loss of Kuaidi Dache reached millions of yuan and they do not expect profits in future two years, according to COO of the company Zhao Dong (source in Chinese).

Round 3 (Second Half of 2013): Emergence of Oligarch

In the second half of 2013, few taxi apps can sustain the staggering money burning speed. Two bellwethers of the industry Didi Dache and Kuaidi Dache survived, while most of their rivals sunk into obviation. Didi Dache consolidated its foothold in Beijing and expanded into 30 second-tier cities. Kuaidi Dache acquired Dahuangfeng, the fourth largest taxi app.

Therefore, it is not surprising to hear that Didi Dache finished another $100 million maga-ivnestment in Series C round from Citic and Tencent, given clearer market scene, outstanding execution power of the team, and endorsement of Tencent. Didi Dache has been integrated in Tencent’s products like WeChat and the latest version of Tencent Maps.

In addition to mainstay markets in south China, Kuaidi Dache also made foray into Beijing market via cooperation with AliPay.

Round 4 (2014): ?

Kuaidi Dache will sure to fight back after Didi Dache secured new round of funding. This is not end of the battle and the war will escalate in 2014.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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