Dozens of online travel startups in China have failed or are inching towards collapse, sending blows to venture capitalists who have bet half a billion U.S. dollars in the online travel sector.
Venture capitalists have invested around USD 500 million in the Chinese travel sector during the past two years, according to data tracker IT Juzi. In 2014, there were a total of 129 investment deals in the online travel segment, with 66 deals in the seed and angel round.
But investors didn't foresee the degree to which Ctrip was able to consolidate the whole sector. Last year, the online travel giant acquired a large stake in eLong, announced a Ctrip-Qunar tie-up, and invested in many smaller competitors including Tujia and Tongcheng Network. Last month, an entity potentially acting in consort with Ctrip proposed to buy out Qunar and take it private.
As a result, Ctrip is now the absolute monopolistic force in online travel in China. One anonymous analyst jokingly describes it as holding a 100% market share, as the company does not disclose its market position for fear of attracting regulatory attention.
Numbers from its annual report are telling evidence of its dominance, however. For the first quarter of 2016, Ctrip reported total revenues of RMB 4.4 billion (USD 682 million), an 80% increase year-on-year primarily due to the Qunar deal.
Ctrip's scale makes it almost impossible for any start-up to compete, no matter where the battle ground lies.
Aside from bad timing, Chinese travel start-ups believe their failure may be partially attributable to a speculative mindset, or the so-called 2VC model.
The term means founders started companies with the sole purpose of raising venture capital money, which is used to acquire users and then to raise more money, without a solid business model or innovative technology.
To be sure, the 2VC model is prevalent among Chinese start-ups across all sectors. The only difference is that travel start-ups have woken up earlier than others to the problems of not having a sustainable business plan.
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