Taoyingzhou, Beijing - If a year ago you could still find worthwhile deals on group-buying websites, it can be said that since May this year, I have almost not made any purchases on any group-buying website. Zhang Nan, who used to be a group-buying enthusiast, told the reporter that there was nothing particularly interesting to him anymore. As one of many group-buying consumers, Zhang Nan joined the group-buying craze as soon as these websites started gaining popularity in 2009. However, by now, all the novel experiences have been tried and all the lessons have been learned. Once bitten, consumers cannot be expected to keep falling for the same tricks.
Perhaps, this also accurately describes the dire situation of group-buying websites in 2011. Nowadays, numerous group-buying websites including Groupon China, Kaixintuan, and Halituan have almost unanimously started laying off employees. Just recently, Groupon China, which was aggressively advertising on various websites, let go of over 20 employees in a single day. Rumors about their withdrawal from the Chinese market within the year have been circulating nonstop.
A management insider from another nationally renowned group-buying website privately admitted to the reporter: Group-buying websites only appear to be a great business model. Despite never having had any issues exposed to the public, they actually started delaying salary payments from July onwards. Moreover, the boss has already begun looking for a suitable buyer.
In response, Ni Zhengdong, founder and chairman of Zero2IPO Group, stated in an interview with The Huaxia Times that the life-and-death battle for group-buying websites has just begun. Within no more than 12 months, 90% of group-buying websites will go out of business—because the initial capital from PE and VC investments has run out.
Broken Capital Chain?
Many people are undoubtedly familiar with the omnipresent group-buying advertisements. Lashou.com, F-tuan, Meituan—these well-known group-buying websites frequently appear on television, online platforms, and even vehicle advertisements in a bombardment-like frequency.
"If a group-buying website suddenly starts large-scale advertising, you know they've raised funds," an investment manager named Zhang Ming, who was at the Zero2IPO Mobile Internet Investment and Financing Summit seeking appropriate investment projects, told the reporter.
In his view, group-buying websites differ from other internet industries mainly through word-of-mouth and brand recognition. To capture as much market share as possible and lay the groundwork for future financing, many group-buying websites spare no expense in advertising wars. "However, this industry is not highly profitable. With thousands of competing group-buying websites, most are operating at a loss," Zhang Ming remarked.
It is understood that the profit model for many domestic group-buying websites relies on revenue sharing with merchants, but the sharing ratio is quite low, approximately 1:9, making the profit margin far from covering advertising costs. More severely, companies initially channeled venture capital into advertising, but due to lax supervision, it also provided opportunities for internal personnel to undermine the company. The aforementioned individual frankly admitted that after securing funding, most of the money flowed into various advertisements, yet the effects were minimal. After a month of advertising, even the company's own employees hadn't seen the ads, and 3.8 million yuan was directly deducted. Such an operational team would make any amount of money a bottomless pit. More importantly, companies that seem good on the surface have actually started secretly laying off employees. Many marketing department projects have been announced as suspended. As the old saying goes, money comes fast and goes fast. The boss has already started looking for a suitable buyer to take over.
Feng Xinghua, director of research at Zero2IPO Group, told the reporter that under normal circumstances, venture capitalists conduct corresponding financial audits when investing in enterprises and hold corresponding seats on the board of directors to monitor the company's operational status. However, it cannot be ruled out that excessive trust in some entrepreneurial teams leads to internal problems.
The secret operation of Groupon China's Weibo lottery is a typical example. It was reported that Groupon China hosted a white iPhone4 lottery event on different Weibo platforms. After announcing the winning list, netizens discovered that the winning lists from different Weibo platforms were identical, and further investigation revealed that these accounts belonged to Groupon China's internal employees. Some market analysts pointed out: Whether you believe it or not, group-buying websites have reached their end.
Are PE Investments the Biggest Losers in the Burnout?
In fact, for all investors paying attention to the internet sector, group-buying websites came into their sights starting in the second half of 2009.
At a project roadshow dinner at the time, several partners and investment managers of newly established RMB funds privately expressed interest in large group-buying websites like Lashou.com, finding them intriguing because despite being relatively new, many people around them had become users. However, when asked if they would invest, several investors unanimously replied: No. A person from Taishan Angel Investors frankly stated that their model was too simple and too easy to imitate.
But less than half a year later, Lashou.com publicly announced that it would co-invest 100 million RMB with Taishan Angel to establish an entrepreneurial investment fund, actively supporting local group-buying websites and vertical group-buying websites. Clearly, despite initially not favoring group-buying websites, Taishan Angel still chose to enter the market.
There are countless investors like them. In the second half of 2010, group-buying websites became the darling that many venture capital institutions vied to enter. IDG Capital invested in Dida Tuan, CDH Investments entered Qi Jia Wang, KPCB invested in Manzuo Wang, Mitsui Venture Capital entered F-tuan, Mengdongli Capital invested in Ayao Tuan, and the most favored Lashou.com received two rounds of financing totaling 55 million USD within half a year.
Clearly, being able to secure PE and VC funds means that these group-buying websites would have no problem in the subsequent capital competition. Zhang Ming pointed out that current group-buying websites attract users through the most primitive method—large-scale advertisement placements, inevitably leading to increased costs. When companies receiving venture capital start feeling the pressure brought by rising costs, smaller group-buying websites are likely to have already shut down.
More voices pointed out that the reason why the group-buying industry began reshuffling so quickly is very simple: everyone was burning money, and once the money runs out, so does the company. Although the founders might not walk away empty-handed, for the PE and VC investors, this gamble is a complete failure.
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