Startups Losing Tens of Millions a Year Is Nothing New. So Where Does the Money Go?

Cheap food delivery, manicures, car rides... in the end, someone pays the bill.

In the first week after the 2016 Spring Festival, Duodu Manicure was acquired by 58 Daojia.

Founded in June 2014, the company had once called itself "number one in at-home manicures," and in its short life of a year and a half it raised two rounds of funding totaling more than 10 million US dollars.

Yet it reportedly sold for only 2 million RMB. The buyer says the real price was far higher, but won't say what it was.

Either way, Duodu Manicure must have burned through tens of millions of RMB in little more than a year.

And among the internet startups now in fashion, a number like that no longer sounds alarming.

"We are profitable in the United States, but in China we lost 1 billion US dollars in a year," Uber CEO Travis Kalanick said at an event last week.

After so many stories of tens of millions, hundreds of millions, even billions vanishing within a year or two, most people have grown used to sums they may never earn in a lifetime.

But how, exactly, does the money get burned?

Most of Duodu's money turned into discounts

Xiaolu is a manicurist in Chengdu. Before she started taking orders on Duodu in December 2014, she ran her own nail salon.

"Running a nail salon is exhausting. My family thought it was too hard and didn't really want me to keep going. They wanted me to move to Xinjiang so my husband and I could stop living apart," Xiaolu told QDaily.

Duodu wasn't actually her first choice. But a friend who worked in Duodu's office recommended it, and Xiaolu, who had been about to move to Xinjiang, decided to stay in Chengdu.

"The New Year was only a few months away. I figured that if I went to Xinjiang I'd soon be heading back to Sichuan for Spring Festival anyway, so I might as well work at Duodu for a few months first." Looking back on those first months on the platform, what Xiaolu remembers most is the money.

"In the first two or three months after the company launched, I could make more than 2,000 yuan on a good day. There were bonuses for finishing 3 orders or 5 orders in a day, and on my best day I did more than 20. I left home around seven or eight every morning and didn't even have time to eat. I only got some water and something to eat after I got home at eleven or twelve at night."

The cheapest service on Duodu was 80 yuan an order, and even basic hand care took half an hour to forty minutes. More elaborate nail designs cost more.

Manicurists like Xiaolu could take as much work as they wanted because of the discounts Duodu offered users:

A 100-yuan coupon for reposting a Weibo post; a first order for new users at just 39 yuan; a coupon for a basic manicure at 1 yuan; a French manicure listed at 119 yuan available for 19...

Whether the user paid 39 yuan or 1 yuan, the platform paid the craftsperson the difference between that and the list price.

In her best month, Xiaolu took home more than 40,000 yuan. At the time, Chengdu alone had two to three hundred Duodu manicurists.

But the good times didn't last. As the discounts shrank, users quickly left.

"Later the subsidies and bonuses got smaller, cut a little every two or three months. By the time I left last June there was almost nothing left, and there were only a few dozen manicurists (in Chengdu)," Xiaolu said. Half a year later, Duodu was sold to 58 Daojia.

Most craftspeople who work for internet at-home service platforms tell similar stories. Zhou, a masseur on the at-home massage platform Yisheng Daojia, told QDaily that in the summer of 2015, when subsidies peaked, he could earn more than 20,000 yuan a month.

Yisheng Daojia once offered new users a first session for 9.9 yuan. Zhou said he got 8 or 9 orders a day back then. Now that the promotion has ended, he gets about 5.

Most services are listed at over 100 yuan, and Yisheng pays the technicians the difference.

After the platform's commission, Zhou can make more than 700 yuan a day. In the seven years before that, working in a shop, he earned only eight or nine thousand yuan a month.

At other companies, the subsidies burn where users can't see them

At every mealtime you see more and more delivery riders rushing between office towers, residential compounds and restaurants.

Delivery is not cheap. On a weekday in Beijing, delivering a single order costs at least 7 or 8 yuan and as much as 30. At mealtimes, riders on electric bikes take orders on their phones from platforms such as Meituan Crowdsourcing and Dada Delivery.

One rider, who asked not to be named, told us he works for several crowdsourced delivery platforms at once. "At most I can make 15,000 a month. It's just pretty tiring."

Few people would pay an extra twenty or thirty yuan for a meal every day just to save themselves a few steps. So platforms such as Meituan, Ele.me and Baidu Waimai bear most of that cost.

Order from a restaurant through a delivery platform and the meal may cost a few yuan less than eating in. There is no magic technology behind this. Someone is simply picking up your bill.

Uber is quietly paying for you, too. Apart from first-time users, it gives out almost no coupons.

But to let passengers hail cheap rides, Uber pays drivers far more than passengers pay Uber.

In 2015, when Uber's subsidies were at their heaviest, a Beijing driver who completed 70 trips in a week was guaranteed 7,000 yuan, however much the fares actually came to. This guarantee lasted about three months.

A driver surnamed Zhou told QDaily that he began driving for People's Uber in May 2015 after a friend introduced him, and made more than 20,000 yuan a month. And he only drove part time. Several of his coworkers quit their jobs and bought cars to drive People's Uber full time.

On top of the guarantee, Uber paid extra subsidies of up to 3 times the fare at peak hours to get more drivers on the road, and that did not count the surge fees passengers paid.

The platform also gave extra bonuses to drivers who took many orders. Complete 105 trips, for example, and you got another 1,400 yuan in trip subsidies.

So how much have startups burned?

Most companies, unlike Uber, don't disclose how fast they burn cash. But their funding announcements give us a glimpse.

Startups don't actually like to raise money often unless they are short of it. Raising money means giving up equity, which weakens the founding team's control of the company and cuts what the founders get when it goes public or is acquired.

We can assume that in local services, where competition is fierce, most of the money each company raised before its latest round has been burned.

By that measure, Ele.me has spent at least 1.2 billion US dollars in its five years.

Ele.me funding history

(Data: IT Juzi)

2011.3

Series A, several million US dollars

2013.1

Series B, several million US dollars

2013.11

Series C, 25 million US dollars

2014.5

Series D, 80 million US dollars

2015.1

Series E, 350 million US dollars

2015.8

Series F, 630 million US dollars

2015.11

Strategic investment from Didi, amount undisclosed

2015.12

Series F, Alibaba invests 1.25 billion US dollars for a 27.7% stake

The biggest sum belongs to Uber's rival Didi. Before its latest round, Didi, together with Didi Dache and Kuaidi Dache before their merger, had raised a total of 4.7 billion US dollars.

Didi funding history

(Data: IT Juzi)

2012.7

Didi Dache angel round, several million RMB

2012.12

Kuaidi Dache angel round, several million RMB

2012.12

Didi Dache Series A, 3 million US dollars

2013.4

Kuaidi Dache Series A, 4 million US dollars; Didi Dache Series B, 15 million US dollars

2013.10

Kuaidi Dache Series A extension, 4 million US dollars

2014.1

Didi Dache Series C, 100 million US dollars

2014.4

Kuaidi Dache Series B, tens of millions of US dollars

2014.10

Kuaidi Dache Series C, more than 100 million US dollars

2014.12

Didi Dache Series D, 700 million US dollars

2015.1

Kuaidi Dache Series D, 600 million US dollars

2015.2

Didi and Kuaidi merge

2015.5

Didi Kuaidi Series E, 142 million US dollars

2015.7

Didi Kuaidi Series F, 3 billion US dollars

2016.2

Didi Kuaidi, renamed Didi, Series F, 1 billion US dollars

The two companies that have been burning money the longest are Meituan and Dianping, which merged last year into "New Meituan-Dianping." Before their latest round, the two had already spent 2.9 billion US dollars.

Meituan and Dianping funding history

(Data: IT Juzi)

January 2006

Dianping Series A, 2 million US dollars

May 2007

Dianping Series B, 25 million US dollars

September 2010

Meituan Series A, 12 million US dollars

April 2011

Dianping Series C, 100 million US dollars

July 2011

Meituan Series B, 50 million US dollars

August 2012

Dianping Series D, 64 million US dollars

February 2014

Dianping Series E, more than 100 million US dollars from Tencent

May 2014

Meituan Series C, 300 million US dollars

December 2014

Meituan Series D, 700 million US dollars

April 2015

Dianping Series F, 850 million US dollars

January 2016

First round after the Meituan-Dianping merger, 3.3 billion US dollars

Subsidies to users and service providers are not all these startups spend. Advertising and app promotion also eat up a large share of the money.

From September to November 2015, Guazi Used Cars, owned by Ganji.com, said it spent 200 million yuan on advertising in first- and second-tier cities across China. Another used-car company, Youxin, paid 30 million yuan for 60 seconds of advertising during the finale of The Voice of China, then paid 180 million yuan for the title sponsorship of iQiyi's exclusive online broadcast of Keep Running Season 3. To catch users' eyes, Renren Che paid a large sum to sign the actor Huang Bo as its spokesperson.

Meanwhile, app-store promotion slots have soared in price. In 2014 the large banner on the first screen of Meizu's app center cost 6,000 yuan a day. Today the same slot costs 55,000 yuan a day, more than nine times as much.

The 360 app store is much the same: the quoted price for the same slot has risen from 14,000 yuan per working day in 2014 to 55,000 yuan a day now.

The burning ends in monopoly

Whether it's coupons like Duodu's or driver subsidies like Uber's, the idea is the same: win users with lower prices and win craftspeople with higher pay.

A company that wants to make money can do only one of the two. But to grab market share, the top few companies in ride-hailing, food delivery, group buying and similar businesses can only pay out of their own pockets to satisfy both sides.

What the companies burning money want is simple: if their rivals can't hold out, they get the market to themselves. Then profit becomes possible.

In the US, Uber has got there. It, too, once won the market with low-price subsidies, though never on China's scale. Once it had left its rivals behind, Uber began taking a bigger cut from drivers. Today Uber makes money in the US.

How Uber's low-price ride service UberX changed in San Francisco

July 2012

UberX launches (similar to People's Uber); Uber takes a 20% commission

January 2014

UberX fares cut by 20%; Uber's commission cut to 5%

July 2014

UberX fares cut by 25%; Uber subsidizes drivers out of its own pocket

September 2015

UberX commission raised to 25%; by now Uber is far ahead of its rivals

But even when it leads to monopoly, burning money has a cost: the more a company burns, the less its founders and investors get after it goes public.

And for some businesses, such as food delivery, it's an open question whether so many people would still be willing to wait an hour and pay for delivery themselves once the subsidies stop.

When the burning shows no sign of ending, companies and investors look for another way out: mergers. Once the number one and number two in an industry become one company, there's no reason to keep burning money against each other. The smaller players can hardly compete with the new giant, and the market is theirs.

Many of last year's mergers followed exactly this logic: Didi and Kuaidi, Meituan and Dianping, 58 and Ganji, Trip.com Group and Qunar, Mogujie and Meilishuo...

But the burning won't stop

In principle, merging and then following Uber's path in the US might have given these startups the outcome they wanted.

But the mergers of 2015 did not end the competition, because Baidu and Uber arrived.

After Meituan and Dianping merged, Baidu spokesman Kaiser Kuo said: "The merger only shows that Meituan and Dianping see Baidu Nuomi as a serious threat. Will subsidies be cut or end because of it? They have to beat Baidu first."

At the launch of Baidu Nuomi's "Membership+" O2O strategy in mid-2015, Robin Li announced on stage: "I checked yesterday, and Baidu still has more than 50 billion yuan in cash on its books. Let's take 20 billion of it and make Nuomi work."

Robin Li has indeed spent a lot. According to Baidu's 2015 annual results, released a few days ago, its transaction services business (mainly Baidu Nuomi and Baidu Waimai) lost about 16.662 billion yuan in a single year.

Besides Baidu's own money, they will also raise outside funding to pay for subsidies. Its subsidiary Baidu Waimai raised 250 million US dollars in 2015, and less than half a year later was seeking another 500 million.

Didi's main rival, Uber China, closed a Series B round in January totaling 2 billion US dollars.

The burning won't end any time soon.

Every day you might take an 8-yuan car ride to the office in the morning, eat a 15-yuan lunch delivered to your desk at noon, and get a 39-yuan manicure at home on the weekend.

But what made these prices, unthinkable a few years ago, real was no magical technological breakthrough. In the end, someone always pays the bill: the venture capitalists behind the startups that fail, or the stock-market investors who overrate a company after it goes public.

Cover image from icbas