Does the LeEco crisis herald the closure of the Internet boom?

There are two things that have been hot these days, both of which are related to Internet car manufacturing. One is that the NIO car founded by Li Xiang and Li Bin has achieved good results in the Nürburgring, and the other is that Faraday Future, founded by LeTV CEO Jia, has stopped production in the United States and has even been criticized as a Ponzi scheme.

LeEco has been in crisis for a while. It was only a few days from when Jia Zheng, the CEO, convened a media meeting in the United States to when suppliers put up banners in front of the building to demand payment. Then many media outlets broke the news about LeEco's funding chain, and some media have compared LeEco to the Delong Group.

During this period, Jia has done his best to mobilize his classmates to raise $600 million in investment, but LeEco's crisis is far from over. And LeEco's crisis may mean the closure of the Internet boom that has been blowing strongly in China in the past few years.

1. Let’s start with the LeEco crisis

It is difficult to trace the starting year of this round of capital and entrepreneurship boom. After all, the current giants of China's Internet companies were also founded by venture capital investment.

However, the transition from rational to irrational investment should be a matter of recent years. LeEco was originally a company that bought a lot of copyrights at low prices and had a good life. Its expansion came with Lei Jun's Xiaomi.

Lei Jun's Xiaomi launched the Xiaomi mobile phone in 2011, sweeping the market with its high-end, low-price and high cost-performance ratio. Although Lei Jun said that hardware does not make money, but software and services do, the growth of Xiaomi's valuation in rounds of financing has allowed latecomers to see the magic of capital operation.

Xiaomi's hardware profits have been very meager until now, and its software and services have not seen much profit either. However, Xiaomi's early investors have received rich returns in the past few years. Xiaomi's valuation once reached as high as US$45 billion. If the early investors had exited at the right time, they could have received thousands of times the high returns.

Jia's LeTV has already gone public, but Jia is not slow to follow suit. Xiaomi just launched the Xiaomi TV, and LeTV's unprofitable TV came out. It is also a story of hardware not making money, but services and content making money. Xiaomi is just a valuation, while LeTV is the actual stock price. Along with LeTV's story, LeTV's stock price has been rising all the way, and LeTV has also obtained a lot of real money through additional issuance and pledge.

Then, LeTV used the money it had earned to continue dreaming. Televisions were not enough, so LeTV made mobile phones that did not make money or even lost money, but they gained a considerable market share in a very short period of time. Later, LeTV's cars were even more ambitious, and things that required investments of hundreds of billions of yuan were initially borne independently by President Jia.

A huge ecosystem requires huge capital operations. LeTV’s appetite for financing is growing, but the capital market can no longer withstand it.

Although the A-share market has a very high price-earnings ratio and a huge bubble, it is not a place where you can raise funds unlimitedly and make unlimited profits. If LeTV's share price falls, pledge financing and additional issuance financing will be restricted.

However, all the businesses LeEco has already set up require money. For TV and mobile phones, it needs to pay the supply chain, and for cars, it needs to build infrastructure. Once financing cannot continue to expand, LeEco will face a crisis.

The funds were tight and the supply chain was slow to pay back, so the suppliers stopped working first. Putting up banners to ask for money and stopping supply became the first step in pushing the dominoes.

What was even more damaging was that once this kind of news broke, LeEco quickly became the focus of the media. LeEco's business had already been subject to many Ponzi schemes and bubble rounds, and the negative news this time confirmed that LeEco was short of money.

LeEco's operation is largely based on credit, and various loans and financing support LeEco. LeEco is short of money, and news of the bubble bursting has come out. If LeEco borrows more money, it will be difficult for it to raise funds again.

The bad news is that LeEco is a listed company, and bad news is directly reflected in the stock price. If the stock price falls, the pledged stocks will face big problems. Then the media will continue to follow up and report on the new crisis.

This vicious cycle fermented in a short period of time. Mr. Jia was extremely anxious and had to use all the methods, such as borrowing money from Hong Kong at high interest rates and using his classmates' investment methods.

Theoretically, LeTV's early operations have tied too many people together. LeTV is too big to fail so easily. Those who have already boarded the ship will work hard to protect their early investments and keep LeTV supported.

However, Mr. Jia's business is too big, and it is still uncertain whether those who have already entered the market can actually be saved.

It remains to be seen how LeEco's crisis will end, but signs of the closure of the Internet boom have already emerged.

2. The Internet boom is actually a capital boom

The reason why Mr. Jia was able to make LeEco so big in the early stage was because of the capital boom. In the past few years, investors were optimistic about the capital market, thinking that they could invest in some unprofitable companies and exit the capital market to make a profit.

LeEco is still a listed company, and many unlisted companies are counting on IPOs to get rich overnight. The US stock market is relatively relaxed, and it has been a slow bull market in the past few years. In addition, the Chinese government has always been planning for the A-share strategic emerging board.

It is the dream of Internet companies and investors to set up an unprofitable Internet company in China, take advantage of the relaxed listing system in the United States to go public through an IPO, cash out, and finally pull it back to China's A-shares to obtain a high price-to-earnings ratio.

In this context, we can see all kinds of reliable and unreliable projects springing up like mushrooms after rain, and global capital subsidizes the food, clothing, housing and transportation of Chinese people. Employees of Internet companies receive salaries that are astonishing in other industries. It is not impossible for college students, high school students, and elementary school students to start their own businesses in the future.

Of course, the capital is not stupid. They certainly know that most of the so-called entrepreneurship is nonsense like the Great Leap Forward. However, as long as there is follow-up capital to pay for it, they can withdraw completely and make huge profits.

Therefore, the Internet boom in the previous period was actually a capital boom.

3. Closing of the Internet trend

The closure of this round of capital flow should be marked by the cancellation of the A-share strategic emerging board, which means that the United States will relax IPOs and the window for cashing out A-shares will be closed. Although there are still companies preparing to use shell companies, they will soon be restricted.

To go public, you need to queue up for an IPO, and there are still requirements for A-share IPOs, and not just any random person can get in. This means that there is only one small exit left for the last round of profiteering.

If the last round of cashing out is difficult, then the F round of investment will be considered, and then transmitted to the E round, D round, and C round. As a result, many startups die in the C round.

Companies that have real potential and have expanded to a certain level will stop burning money and start to seriously consider making profits. Those with problematic business models that cannot make profits will be eliminated. Those that can make profits will cancel subsidies and raise prices.

Internet car-hailing was originally a hot topic, and in the early days, it burned money quickly to gain a market share of billions. However, with the capital window, car-hailing companies began to merge rapidly, and subsidies returned to rationality. Applications like Didi Taxi do have demand and a commercial profit model. Now that the trend has passed, it must reduce subsidies, obtain profits, and give investors an explanation.

Takeaway O2O also emerged from the Internet boom, and there is indeed a demand for takeaway. During the capital boom, financing was easy, and takeaway platforms, whether Ele.me, Meituan, or Baidu, subsidized everyone to eat. When the capital boom closed, the takeaway prices of these platforms began to rise, and many takeaway prices were even higher than dine-in meals.

Internet phones were the earliest Internet trend. Xiaomi made a small profit, while LeEco and Meizu, which entered later, lost money to gain publicity. LeEco suffered a loss of billions of dollars just from hardware, and Meizu lost 1 billion in 2015. Now they have all proposed to shrink and make profits. Xiaomi is still holding on, but it has also tried to raise prices. Xiaomi Note failed to break even at 3,000 yuan, and Xiaomi Note2 and Xiaomi MIX are going to break into the higher-priced market, paving the way for future high-priced products.

This round of Internet boom closed along with the closure of capital boom. The original nonsense has come to the point of revealing its true colors, and the valuable ones have come to the point of returning to their commercial essence and making real profits.

The wool we like comes from the dogs, and capital from all over the world subsidizes our food, clothing, housing and transportation. We have to wait until the next capital boom to appear.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.