Hong Kong (CNN Business) Not so long ago, Chinese bike-sharing firm Ofo was flush with cash and hailed as a game-changing tech startup. Today, it's struggling to stay afloat.

Backed by billions of dollars from high-profile investors like Alibaba ( BABA ), Ofo helped pioneer the dockless bike-sharing phenomenon that swept across Chinese cities in recent years. The bikes can be locked and unlocked anywhere via a smartphone app, which means users don't have to return them to designated stations.

Ofo fended off dozens of copycat rivals, but it now risks becoming the latest casualty of a cut-throat industry. Hordes of angry customers gathered outside its headquarters in Beijing this week to demand refunds. The company and its founder have been put on a government black list for failing to pay debts.

"They snapped defeat from the jaws of victory," said Jeffrey Towson, a private equity investor and professor at Peking University.

So what went wrong?

Ofo users lined up outside the bike sharing company's headquarters this week, demanding refunds.

Struggling to keep up

Bike-sharing startups in China burned through cash as they rushed to launch services in cities throughout the country and overseas. The chaotic expansion resulted in a string of bankruptcies and huge piles of impounded bikes.

Ofo survived that shakeout, but has struggled to keep up with its rivals since.

Dockless bike sharing was a great standalone service when it launched in 2015, but it now makes more sense for companies like Ofo to team up with other transportation platforms, analysts say.

These days, people want to use one app where "you can hail a scooter or a bike or a car," said Tu Le, founder of consulting firm Sino Auto Insights. "That's where the sweet spot's going to be."

Ofo's rivals have already adapted to the shifting landscape.

Mobike was acquired in April by a bigger tech startup, Meituan Dianping, while Hellobike joined forces with digital payments giant Ant Financial. Both Meituan and Ant offer a wide range of services though their apps, which are used by hundreds of millions of people in China.

The partnerships gave Ofo's rivals access to more users and also allowed them to offer their users a greater variety of services, such as ride-hailing and food delivery.

Thousands of Ofo and Mobike's bikes were impounded in Shanghai last year. Authorities said they breached parking restrictions.

All alone

Industry watchers expected Ofo to be acquired by its big ride-hailing backer, Didi Chuxing, the company that drove Uber out of China. But that never happened.

Instead, Didi snapped up another bike-sharing company, Bluegogo.

"When Didi suddenly bought Bluegogo and launched their own bike-sharing service, that was a red flag," Towson said. "That's like when your wife tells you she's starting to date again."

Ofo suffered another big blow in July when Mobike said users no longer need to pay deposits for its services. Hellobike soon followed suit.

Without a deep-pocketed partner, Ofo couldn't afford to take the same step. Investor enthusiasm had waned, cash was low because of its costly global expansion and suppliers were beginning to demand payment.

The startup also struggled to repair damaged bikes, according to Xue Yu, an analyst at research firm IDC. That made it harder for its customers to find available bikes, prompting them to switch to its competitors.

Ofo is now "suffering the most serious consumer crisis of trust," Xue said.

Ofo bikes waiting for repair in Beijing last year.

Founder talks of bankruptcy

Its founder Dai Wei said in a letter to employees Wednesday that because of the startup's financial crisis, he had "even thought about dissolving the company and filing for bankruptcy so that you don't have to continue to bear such pressures."

"Recently, the pressure from cash flow and the media has made us feel powerless," Dai wrote in the letter, which was shared on Chinese social media and translated by Tech In Asia . An Ofo spokeswoman confirmed the authenticity of the letter and the accuracy of the translation but declined to comment further.

Being on the government blacklist means Ofo and Dai face restrictions including not being allowed to buy plane tickets or rent space in high-end office buildings.

Ofo said it will refund deposits and is asking users to be patient. More than 12.3 million people were waiting for refunds on Friday, according to its app.

Some disgruntled users have lined up outside Ofo's Beijing headquarters this week, demanding a refund of their deposits, which range from 99 to 199 yuan ($14 to $28). Some of them became emotional on Friday, yelling at security guards and police officers who were keeping watch over the crowd.

Many Ofo users have also sounded off on social media, saying they doubt they'll ever get a refund.

'Just a fad'

The public outcry has prompted a response from government officials.

Ministry of Transportation spokesperson Wu Chungen on Friday urged Ofo to reduce spending to ensure it can pay back users and also to speed up the refund process.

But it also called on people to be more supportive of Ofo.

"Let's be more tolerant and leave room for trials and errors for new things," Wu said. "This way we can help create a big environment that encourages innovation and development."

Zhang Xinyuan, a 37-year-old Ofo customer was standing outside the company's headquarters on Friday hoping to get her deposit back.

If that doesn't happen, Zhang said she will still feel she got her money's worth riding the "little yellow bikes," referring to the company's Chinese nickname.

"I kind of saw it coming," she said of Ofo's troubles. "I thought the little yellow bike was just a fad."