Luckin Coffee, China’s delivery-focused Starbucks rival that opened around 2,000 stores over the past year and a half, is a hell of a dream—a rapidly-growing chain fueled by ambitious venture capital and buy-one-gift-one offers. A little over 15 months from launch, Luckin is preparing for a US IPO with a valuation of around $3 billion.
But it’s time to wake up and smell the coffee. Look closer, and you’ll see a complicated web of related parties, venture capital, and blitzscaling. Over three articles, I’m going to take you deep down the rabbit hole. We’ll look at where Luckin’s funding has come from and what blitzscaling physical industries means beyond a fistfight with Starbucks.
In this first article, we’ll look at the people and cash behind Luckin.
Worst kept secret
English-language reports rarely touch on who’s running and backing Luckin. That’s a shame. Had we been a little less concerned with keeping up with Luckin’s “move fast and break things” approach and a little more concerned about where Luckin’s rapid-fire valuations came from, we’d be asking smarter questions.
Fortunately, as soon as Luckin was founded in 2017, Chinese-language reports started putting some of the threads together. Their conclusion? Most of Luckin’s key figures are connected through a company called China Auto Rental Holdings (CAR Inc)—and this makes things a little more complicated than a tussle over hot caffeinated beverages.
CAR Inc is a mobility company listed on the Hong Kong Stock Exchange. It provides short-term rentals, long-term rentals, leasing, and chauffeured car services through car-hailing operator UCAR. UCAR’s CEO and Chairman, Lu Zhengyao, is also Chair of CAR Inc. Luckin’s CEO and CMO, Qian Zhiya and Yang Fei, are CAR Inc’s former COO and CMO.
Luckin isn’t Qian and Yang’s first rodeo. While at CAR Inc, Qian Zhiya and Yang Fei helped incubate UCAR and take it to list on China’s National Equities Exchange. Critically, they took UCAR from incubation to listing in a little over 18 months. During that period, they raised an undisclosed amount for a $5.5 billion valuation at IPO. UCAR suspended share trading on June 14, 2018, as part of a rumored plan to seek a listing on China’s A-share market.
Qian and Yang are a dynamic duo with a track record in taking propositions from zero to IPO, and they’re on track to do it again. A cursory glance at Luckin and UCAR’s go-to-market strategies reveals some striking similarities. Luckin’s celebrity endorsements, buy-one-gift-one deals, and public challenges to the industry incumbent are all battle-tested tactics from the pair’s UCAR days. Yang even wrote a book (Chinese link) about this approach.
Related parties, related capital
A web of CAR Inc and UCAR personnel, resources and investors have supported Luckin’s expansion.
Lu Zhenyao, CAR Inc’s chairman, gave Luckin its initial capital injection. He would later become Luckin’s chairman. He also gave Luckin office space (Chinese link) in Xiamen, a city in the eastern province of Fujian, alongside UCAR. Luckin’s $200 million Series-A was stumped up by four investors: Legend Capital, Joy Capital, GIC and Centurium Capital. Each of Legend Capital, Joy Capital, and Centurium Capital have different levels of involvement with CAR Inc.
Legend Capital was once one of CAR Inc’s largest shareholders. Joy Capital, which participated in Luckin’s Series A and Series B, previously invested in UCAR. Li Hui, who heads up Centurium Capital, is reported to have (Chinese link) once worked alongside Qian Zhiya and Yangfei at Car Inc and UCAR, where he was responsible for investments. He and Luckin CEO Qian Zhiya are reported to still hold positions on UCAR’s Strategic Advisory Committee (Chinese link).
Largely funded and operated by a network of associates, Luckin has probably not been seriously vetted. One’s forced to ask—is the plan to build a business, or is the goal just to get Lu and his friends a big payday from an IPO?
Enter a Reuters report about Lu’s recent approach to blue-chip banks about Luckin’s IPO. Reuters reports that Lu sought a personal loan of at least $200 million from banks including Goldman Sachs and Morgan Stanley under a deal that would award them mandates in the IPO. Its sources comment that “it is not uncommon for Chinese companies to raise loans from banks hoping for a mandate on an IPO, [but] it is rare for executives or shareholders to request such personal financing.”
The report also noted a blue-chip bank declined to take part in the IPO, due to “a lack of clarity on Lu’s plans for the proceeds.”
This is heavy stuff. If true, Lu’s direct involvement in financing arrangements shouldn’t be taken lightly. It could be that Lu may be trying to accelerate IPO proceedings and get out fast before the company’s unicorn hype wears off. As an early investor in Luckin, he could stand to profit handsomely from its IPO. Legend Capital, Joy Capital, and Centurium Capital could also make tidy sums from IPO proceeds. With cash in hand, Lu and his VC pals would have room to think about their next move after cars and coffee.
In our first step down the rabbit hole, there are signs that Luckin might be a special type of blend.