Zhuang Chenchao: How Startups Compete, How They Lose Money (Long-Form Highlights)

In December 2014, Source Code Capital held its inaugural "Ma Hui" — the "Source Code Capital Upper and Underclassmen Gathering" — at the Commune by the Great Wall. A dozen or so of the fund's LPs and all portfolio company CEOs came together to exchange ideas and support one another. During the event, several LP speeches were packed with wisdom and actionable insights, which we'll be presenting one by one.

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Zhuang Chenchao: How Should Startups Compete? How Should They Lose Money?

These past few years, Qunar has been fighting nonstop. From day one to today, we've been at it for ten years — and successfully drove the entire industry into the red. Even Ctrip, a company that's been public for 11 years, is now losing money. Today I want to talk about how companies should compete: the mistakes a market leader is prone to make, where opportunities lie for a relative laggard, and how to think about price wars.

1. Growth Strategy

First off, since Qunar went public, we've actually been bleeding cash pretty badly — roughly 200–300 million RMB in cash burn per quarter, 500–600 million in accounting losses. Yet the stock price has remained fairly stable. A lot of people ask me, "CC, how do you pull this off? Why does the public market accept this?" Everyone assumes going public means you need to be profitable. That's not actually the case. Look at history: when Amazon went public, it was losing massive amounts of money — at its peak, cash burn hit 75% in a single quarter. We've basically kept our cash burn rate below Amazon's ceiling.

Why does the market tolerate losses? If you're not yet #1 in your market, or even if you are, as long as your business and revenue growth can stay above 60% — and you can sustain losses for a meaningful stretch of time — the market will accept it. Do the math: at 60%+ growth, you roughly 2.5x your business in two years, and 6–7x in four years. This proves that if your business scale is growing rapidly, your spending is highly effective. And the market space, the addressable market, is very, very large.

Then people will say, "What about 100% growth?" — and that's where addressable market comes in. How long can you sustain 100% growth? Every startup needs to think hard about this, especially once you hit Series C. You need to start defining your addressable market with real clarity. Early on, you're definitely doing single-point breakthroughs — you launch with a specific feature to crack open the market. But once you enter high-growth mode, you need to know: where does this growth end? At least under your current product and strategy, where's the ceiling? Growth doesn't go on forever.

Take the flight ticket business today — both Qunar and Ctrip are profitable there. Together we account for nearly half of China's flight ticket market. Ctrip is at 40% share, Qunar at 60% growth. What does that mean? This growth rate can last one more year at most. Because if it lasted a second year, our combined share would exceed 100% — that's mathematically impossible. So if your growth rate is already destined to fall below 60% because of addressable market constraints, then waging a price war is utterly pointless.

This brings us to the question of leader versus laggard strategy. Why was Qunar, founded six years after Ctrip, still able to pose a threat to them? The single biggest reason is that Ctrip fundamentally miscalculated its addressable market — a mistake many online companies make today. Here's the specific problem: when Ctrip entered the market, it kept saying "online travel" was its addressable market. But has anyone considered that online travel was a market growing 40–50% annually? When you already own 50% of a market growing that fast, even if you're growing quickly yourself at 40–50%, the space being freed up by the market's own expansion is enormous. And if this market acceleration is driven by the shift from online to mobile, causing online travel to suddenly speed up — during that acceleration, defining your addressable market precisely becomes critical.

For instance, if you define the entire travel market as your addressable market, this market has resource constraints: there's only so many hotels — you can't build them overnight at 40–50% annual growth; airline seats and shipping capacity are fixed, they can't grow 40–50% per year; restaurants might grow faster, but China only has so many people, and you can eat at most three meals a day — and you're probably not eating breakfast out. This addressable market is relatively constant.

So I think many companies, once they enter high-growth phase, when sizing up competitors, need to define the overall market as a constant market, a relatively stable one — not a rapidly shifting one. In a rapidly shifting market, being #1 sounds great, but it actually carries huge risk. Because if the market itself suddenly accelerates, your business strategy and model could fundamentally change. Another bad scenario: a new business model emerges from a completely different angle — it's not the same path as yours, but it addresses the same underlying need.

Take meetings, for example. The original form was conferences and exhibitions — there used to be many public companies in the exhibition business. Then they were largely replaced by video conferencing companies. Now you can safely satisfy meeting needs instantly through IM. So when you define your addressable market, you need to keep abstracting upward: what fundamental human need does it ultimately solve? You don't need to do this daily, but I suggest that once a company crosses $100 million in valuation, with revenue at scale and business on a high-growth trajectory, every six months you should ask yourself: one level up, what business am I actually in? Another level up, what business am I in? And to meet needs at that level, what are the alternative solutions?

Take dining: eating at a restaurant is one level, group buying might be another. Same with lodging: staying at a hotel is one level. One level up from that: I need accommodation when I travel — maybe I have lodging needs even when consuming locally. Another level up: Airbnb introduced the concept that you don't need to stay at hotels at all. The fundamental human need is "staying out," and there are many ways to fundamentally solve for "staying out."

I suggest you keep asking: do you have a more fundamental, more abstract level that could open up different space? Essentially, ask yourself: does your current business have the opportunity to maintain 100% growth, or at least 60%+ growth, for the next three years? If you see that your current business model has entered its endgame in the market, your strategy will be completely different.

For example, if you see your market approaching 50% market share, then you need to look at profitability — cost compression and cost control need to be prepared in advance. If you still want to maintain high growth, you need to consider: for the same fundamental problem, are there alternative solutions? Are there adjacent markets with expansion potential that address the same basic need? Only when you've thought through these questions clearly will you adopt a different strategy.

2. How to Wage a Price War

Everyone talks about waging price wars — price wars can win market share, there's also subsidies. Why do you subsidize? Many companies die from this: they treat price wars and heavy spending as their sole objective in pursuing market share. My view is that pursuing market share is always a tactical goal. The real issue is: you need to think through your endgame when you address this market. If you capture 70–80% of this market, you need to ask: what are the most critical resources in this market? Which resources lack scalability and possess high exclusivity? Once you dominate this market, others may be locked out.

In travel, the classic examples are seat inventory and hotel inventory — hotels can't expand rapidly, they're an exclusive resource. In some content businesses, copyright is an exclusive resource. If you're playing an endgame, you definitely need to secure some key exclusive resources to ensure your business model's long-term sustainability.

If you need exclusive resources, then you need to stage things out. At 5% market share, you might have access to exclusive resources or certain resources — at least you can use them. At 25%, you might have some control over certain exclusive resources. At 50%, you might have full control over some exclusive resources — possibly exclusive access. Every market structure is different, but the key is: for your addressable market, you need to think clearly about which resources are exclusive, and what market share you need to move from quantitative to qualitative change on those resources. Map out these inflection points. Then whether it's price wars or heavy spending, your entire push has very clear staged objectives. 49% might be meaningless, 52% might be wasteful — 50% is just right. If you plan this out very clearly, when you accelerate, don't do drip tactics. Many companies appear to be trading losses for growth, but it's completely meaningless.

When you have a very clear goal — say I'm at 5% market share today, and I believe at 15% I need to achieve a qualitative shift in this resource, usage rights, or my accessibility — with a very clear plan, the battle plan you should design is: in the shortest time possible, pour money in all at once, hit 15% in one shot, immediately drive the pile and lock down this resource. So the speed of losing money shouldn't be linear growth — stepwise, stair-step is the better approach. When you start losing money, lose as much as possible, as fast as possible, because then competitors can't defend against it. When you hit the target, stop immediately — because you've reached the goal. 50% is just right, 51% is fine, then drive the pile and occupy the resource.

Once you've occupied it, you can wait on others trying to grab share. Why? When you control 20% of the market, others might still have access — you can't prevent that. If going from 20% to 50% exceeds your current financial resources, surrounding ecosystem, and human capacity, you just have to let others come up too. But you control the rhythm of this game. So don't let price wars drag you along — getting dragged into a price war is very easy to get dragged into a ditch. Because you don't know what their strategic objectives are. If you counterattack the moment they strike, that's no good. All price wars must be initiated proactively — never reactively.

But before initiating, think very clearly: first, what's your strategic objective, what's your staged market share target, at what volume can you lock resources, and how do you lock resources once you hit that point; second, what's the time friction — if you invest 100 million in the short term, do you occupy the position immediately, or is this inherently a slow process? Given time tolerance, capture your target market share as fast as possible, then stop immediately. This is a very important element of waging price wars — this is how you stay in control; third, figure out where your return ticket is. You plan everything out, prepare to invest 100 million, launch it — then you see competitors, if they're smart too, also waging price wars, and you might not hit that market share. At this point, everyone needs to think clearly: you need an exit plan. For example, my plan is to wage it for one quarter, push market share up ten points, then lock down resources. When I look two weeks in and progress is far below expectations, withdraw immediately. So before you begin, including competitor responses, industry responses — plan everything out in detail.

The price war itself isn't the objective. Even market share isn't the objective. What it really is: it's a stepwise function. When you hit a certain share, you step up and occupy. Then you wait and watch how other situations develop. When your company is larger, you might have different business lines that all need to rapidly acquire resources at certain moments — headquarters may need to coordinate, and at every link there may be more resource and time consumption than expected. This is what I think is extremely important for everyone in expansion phase.

Many companies die in expansion phase because they focus only on market share, not on locking resources — they have no exit strategy. Even if they hit 60% market share, the moment they stop, they immediately drop from 60% to 30% — that's meaningless. So what level should a real price war reach? When you're fighting hard, maybe you go from 10% to 13%. The moment you stop, you immediately hold above 10% — that's enough. Not a single bit of waste is allowed.

If you're already a market leader in growth phase, pay special attention to whether your business is still growing rapidly. My view is: if you're market #1 and your business can still maintain at least 60%+ growth, profitability doesn't matter at all. If your losses reach 100%, you should lose 100%. There's only one situation where you can be profitable: you're already at 100% growth and genuinely don't know how to spend money — however you spend, you're profitable. Like Tencent and Baidu — in that situation, you can be profitable. Otherwise, I believe profitability is criminal. You're massively ceding opportunity cost to others. When you dominate a competitor, maintaining a 3x relationship, keep hitting them and knock them out. But if you encounter a capable competitor, the moment you become slightly profitable, you give them an opportunity — if they fight you to 50%, you may never shake them off.

Many companies can be destroyed going from profit to loss overnight. A company that's always losing money is actually harder to destroy. Why? Once a company has been profitable for a period, your internal controls and management undergo many changes — you start controlling costs. After one to two years of profitability, especially post-IPO, your entire mindset shifts to profit-driven. When you're protecting profitability, your finance people's voice in business decisions grows louder. Over time, the more aggressive people in your company leave; relatively cautious, balanced people stay. The company's DNA changes. So not everyone can lose money well — losing money is also a skill.