Only one year after its foundation, Chinese bike sharing start-up Bluegogo (小蓝单车) has collapsed. Having raised US$58 million in venture funding and with a valuation of US$140 million, it was considered a fairly solid company with a strong business plan and bright future ahead. On the contrary, its founder has suddenly disappeared together with up to US$150 million worth of user deposits.

According to local media, Bluegogo’s founder Li Gang has been in an unspecified foreign country for quite some time now. Beijing-based start-up has been having liquidity problems in the last few months, and it is unable to repay user deposits. One insider at the start-up says the business has US$30 million in debts.

This episode shows how dangerous investing in Chinese start-ups might be, as well as the massive social impact of a sharing economy business, based on a deposit-taking system. Having 20 million cumulative users, if only half of them paid a US$15 deposit, it would mean that the company has collected around US$150 million.

In the last few days, around 70 vendors to Bluegogo were gathering at its Beijing office which, as the picture shows, is empty, since the company was unable to pay the staff for some time. These vendors claim to have around US$30 million in total outstanding payables owned by Bluegogo.

The biggest loss is suffered by Bluegogo’s major venture backers: one new investment firm and a Shenzhen healthcare company. Last February, Bluegogo raised RMB400 million from Beijing-based Black Hole Capital, a venture firm part of Chinese giant R&F Properties, and Smart Xintong, a Shenzhen-based healthcare equipment developer.

Bluegogo is not the only one falling apart. Coolqi (骑乐无比), the bike rental company that became famous with gold bicycles, has its head office surrounded by users unable to withdraw deposits from their mobile phone app. The company’s WeChat payments have been frozen, and it is seeking help and support from the government, while its CEO is discussing a potential RMB1 billion acquisition by another company. Coolqi, with 1.5 million registered users and RMB900 million in investment, has not determined yet the specific deadline for refunds.

One major concern about “sharing economy” start-ups, including bike sharing firms, was the safety of user deposits that most of these companies charge. There are currently no legal guidelines on how companies should manage user deposits. Despite repeated assurances that user deposits will be returned, many Bluegogo and Coolqi users say they are unable to get their money back. The Beijing Municipal Bureau of Financial Work is considering tighter regulations over the management of deposits collected by bike sharing economies. In particular, there should be a clear division between the users’ and the enterprise’s own funds, and the company should set up a special account for users’ funds and employees risk management. China’s booming bike sharing companies have accumulated US$872 million in user deposits, and this money cannot be used for loans or investments. Tighter regulations over deposit could pose financial risks to some bike rental companies, as many of them rely on user deposits to just stay in business.

Bluegogo’s collapse may accelerate the process of drafting formal regulations over deposit management by sharing economy companies.