Only less than 18 months after its founding, Luckin Coffee, which many dubs as Starbucks challenger in China, completes its IPO.
And on its first day, its share price surged more than 50%, before settling at an increase of 20%.
Parallel with Ofo
Ever since Luckin was founded, in January 2018, many have drawn parallel to bike sharing company Ofo:
- Quick succession of fundraising and valuation growth (Luckin became unicorn only 7 months after its founding)
- huge cash burn on assets, marketing and consumer subsidies
- Creating big debates in the investment and business circle, which is divided into believers and non-believers
However, with all these similarities, the results (at least of now) are very different: Luckin became a public company, while Ofo is in tatters, with its founder on the government’s creditworthiness blacklist.
No, they are different
What is causing this? Are the differences between the two companies fundamental?
Well – they are, in the following ways.
First, both are running fast with the quick succession of capital infusion. A key difference here is: Luckin’s Cap Table is filled with investors who try to make money, while that of Ofo contains many strategic investors with different agendas.
Dai Wei, the founder of Ofo, is a real entrepreneur who built the company from scratch, enduring a long tough period before the business model becomes hot with capital.
In comparison, Qian Zhiya, Founder and CEO of Luckin, is more of an operator. She was previously COO of Ucar Inc, a listed company in China that spans across car leasing, rental, ride-hailing as well as car financing.
The real boss behind Luckin is Lu Zhengyao (pictured in the feature image), Chairman of Ucar. Lu is the single biggest shareholder of Luckin, as well as its non-executive chairman. Most of the earlier investors of Luckin are his personal friends (who made hundreds of millions with him in the previous ventures).
With this combination – Luckin’s shareholder interests are much more aligned, allowing it to move almost unhindered.
It is also worth noting that MoBike, Ofo’s main competitor, has a somehow similar story, with Li Bin, a billionaire who had a few successful companies under him, pulling all the strings while Weiwei Hu was the face of the company and Davis Wang running the operations.
In addition to that, as far as the business model is concerned, Luckin should be on the more solid ground compared to Ofo:
The coffee chain is in a market-proven elsewhere but under-tapped in China, with much larger per order amount and obvious economies of scale;
The bike sharing company, however, runs fast depreciating assets with very limited room to up-sell to consumers. In addition, the cost of maintenance actually increases with scale.
How does the future look like for Luckin? Only time will tell, but we guess the time will be quick.
Meanwhile, there are also a lot of commentators who believe Luckin will eventually fail because “its coffee doesn’t taste nice.”
Alas, who cares? In a market where most people barely drink any coffee, the taste is to be groomed.
A critical point of criticising any business model is NOT TO assume yourself as the average customer when you are not.
Thanks for reading The Low Down (TLD), the blog by the team at Momentum Works. Got a different perspective or have a burning opinion to share? Let us know at [email protected]