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How the Bike Sharing Company Became the Next Hedge Fund

by James Tang (3190 views)
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Estimated reading time: 1.5 minutes

In recent times, you may have noticed an increase in the number of bikes found around Singapore as bike sharing giants Obike, Ofo and Mobike have started their expansion plans aggressively. Notwithstanding the laws that Singapore has started actively implementing, including geo-fencing technology, educational campaigns, faulty bicycle removals and public liability insurance, bike sharing companies are essentially taking the world by storm. But have you ever wondered how bike sharing companies ever earn a profit, with their fees placed so lowly while having to provide a seemingly growing number of bicycles on the streets? What about the cost incurred from misuse and maintenance of existing bicycles? The problems seem to be insurmountable, yet these bike sharing giants only seem to be growing in size as time goes by. What truly is their secret?

 

Taking a look at some examples from bike sharing giants Mobike and Ofo, let us see how the numbers add up. For one, Mobike has around 7 million bikes on the streets while charging barely even anything per ride for users. But what they do have however, is a deposit fee from their customers. Each customer is being charged around $61 SGD in cash just to tap into the bike sharing network. The risk of the customers requesting for a refund is simply too low due to the fact that they continuously utilise the bicycles in their daily travel. On top of that, the very fact that the refund process is a cumbersome job that takes a processing time of up to 2 weeks, leaves customers less than weary of trying the process. WIth that, the amount of funds readily available to a bike sharing company like Mobike reaches up to USD$4.5 billion in cash, and this amount does not even include the initial funding from their five rounds of fundraising from venture investors.

 

To truly understand how bike sharing companies are thus able to make money from all their existing cash available, we have to first understand how hedge funds work. Hedge funds are companies that utilise cash from multiple of their clients to earn active returns through strategies in the domestic and international markets. Otherwise known as private investors, hedge funds are illiquid as the amount placed with the company cannot be withdrawn as and when the investor wants.

 

Bike sharing companies are thus able to employ the strategies of hedge funds in order to return a huge amount of returns in the long run. The very fact that customers do not often or ever at all, withdraw their deposits only seek to solidify the business plan of these bike sharing companies, ultimately allowing them to reap substantial profits in the long run. In a sense, these bike sharing companies will be able to continue their business plan until a time when a huge base of customers choose to withdraw their deposits, and only then will they have to worry about repaying this collective “debt”.