By JING GAO
Ele.me, a leading Chinese food delivery app, has found itself in the eye of a storm, as news has leaked it may have faked its recent fundraising announcement. Ele.me announced only recently that it had raised USD 630 million in a Series F funding round, putting its valuation at USD three billion.
An exposè by VentureBeat however has pointed out Ele.me has actually received less than USD 400 million, and is valued at no more than USD 1.5 billion, citing an anonymous source with inside knowledge.
Ele.me rejected the allegation on Sunday, saying their information and figures are truthful, and that their Series F funding round has not closed as yet. Ele.me claims to have ample cash reserves to further expand its transaction platform, set up a distribution network and improve its user experience, according to the Beijing Times.
Apparently Ele.me is not alone in its apparent dishonesty; because privately-owned companies are not legally obliged to disclose their financials and earnings, it is difficult to accurately verify the veracity of any such statements. At least 80% of Chinese entrepreneurs are estimated to have falsified their financials, reported Tencent Tech.
“Fundraising amounts are rarely true, even VCs know that,” Wang Pu, director of Ce Yuan Ventures told Tencent. Wang said rampant bluffing in the tech industry is all about bamboozling users, dazzling potential investors, and scaring away competitors.
An anonymous venture capitalist told Tencent that the common practice for Chinese startups is to raise funds in Chinese yuan and then convert them into U.S. dollars, with final amounts being inflated by as much three to five or even ten times.
“If your competitor declares he has raised more than USD 10 million, and you let people know you’ve only raised five million, you will have a hard time even hiring people,” an entrepreneur told Tencent on condition of anonymity.
Venture capital is also to be blamed for causing the startup fundraising frenzy. Because venture capital firms have a vested interest in embellishing and touting their portfolio companies, they wink at even the most blatant of lies.
A VC firm gets extra attention and becomes more famous if their portfolio company looks like an investment darling, and will profit greatly in the future when more investors buy into the lies and jump aboard.
“This is a pretty screwed-up industry,” Jia Xiaoming, deputy editor-in-chief of 21st Century Business Herald said, “VCs have to launch thorough probes into startups and beware of fraudulent information, and yet later they collude with startups in the fraud.”
But private enterprises cannot get away with bluffing forever. Misstatement will be exposed under audit scrutiny when a company decides to go public. A number of high-profile Chinese companies, including JD.com and Momo, were found in the past to have inflated their financial performance.
Even if they decide to stay private, systematic overstating of valuation and fundraising does not aid in making a company profitable. All of the top three food delivery apps in China – Ele.me, Meituan Waimai and Baidu Waimai – claim to have raised hundreds of millions of dollars, but none is turning a profit.
An industry insider told the Beijing Youth Daily that for each order placed on these platforms, on average, companies are losing about seven yuan, or a little more than one US dollar.
Recent turbulences in the Chinese stock market caused by a slowdown in the economy may however, make investors more cautious, affecting cash-hungry enterprises.
“There is no winter for profitable businesses, but a batch of startups may die,” Wang Heran, COO of Sinldo, a medical solution startup said to 21st Century Business Herald, “Starting a new round of fundraising is merely an attempt at hoarding for the upcoming winter.”