What is the significance of JD equity crowdfunding platform?
JD China’s second-biggest ecommerce company, announced it is launching an equity crowdfunding platform on March 31th. It is introduced that the purpose of JD equity crowdfunding is not only to solve the financing difficulty of startup companies, but also help more people to get incomes from risk investment under a legal environment. What is the significance of such equity crowdfunding?
Lending cannot solve the financing difficulty of SMEs
Small and medium-sized enterprises (SMEs) are facing financing difficulty and high financing cost, which has aroused widespread concern from the government to the industry. There are many methods to solve such problem. Some people support to increase money supply to reduce the interest rate, and the People's Bank of China (PBoC) also introduced the pledged supplementary lending (PSL) to encourage financial institutions to lend to SMEs. But such method does not solve the financing difficulty of for SMEs at present.
Why are bank and other financial institutions reluctant to offer loans to SMEs? Most SMEs do not have assets for mortgage, and banks can only get an interest of a little more than 10% of the loans to SMEs, but have to bear high risks. The capital gains do not match the risks, so banks do not want offer loans to SMEs.
With the rise of Internet finance, some people hope to solve such financing difficulty via the Internet finance, as Internet companies believe that they have enough data to judge relevant risks of SMEs, and provide corresponding price. It is also based on this, Internet companies led by Alibaba and Tencent got the banking license issued by relevant financial regulator in the past year, trying to make financing of SMEs easier via their data.
Is Internet finance can solve financial difficulties of SMEs? It is doubtful. P2P, which was very popular in China, did not solve such difficulty. On the contrary, it produced a series of new risks.
Although we cannot simply conclude that P2P does not have a good future due to its problems, we still cannot hold out much hope. Why? Because from all over the world, the benchmarking enterprise in this industry also cannot solve such difficulty – On December 12, 2014, Lending Club listed on New York Stock Exchange (NYSE). According to the information submitted to the U.S. Stock Exchange Commission, Lending Club issued more than 200,000 loans between 2012 and 2014 with an average lending rate of about 13%. Is the lending rate of 13% lower? According to the latest lending rate of PBoC, the benchmark one-year lending rate is 6.00%, while the loan cost of SMEs goes up 20% based on the benchmark lending rate. In other words, if the loan to SMEs is made through Lending Club, the cost is higher than that of bank at present.
High lending rate of Lending Club cannot explain such platform is not efficient. On the contrary, it reveals a fact that: trying to solve financing difficulty of SMEs through Internet finance may mislead us. Since the capital price must reflect the risk, certain lending rate must be met so as to ensure that lenders have basic incomes. In accordance with Lending Club's data, its default rate was 5% between 2012 and 2014, plus the platform fee of 1%, the predicted average return of most investors was 7%, which fell within the investment income range of Lending Club's investors (5% -9%) in the past years.
From this point of view, issuing loans cannot solve the financing difficulty of SMEs. In fact, this phenomenon is not unique to China, but a common problem worldwide. About 100 years ago, Louis Brandeis, a U.S. Supreme Court justice made serious complaints against banks in “Other People's Money”: banks were reluctant to provide capitals for technological innovation. There were many important inventions affecting the world from the early 19th century to the 20th century, including steamship, telegraph etc., but none of them got support from banks.
Equity financing is a solution
Then what kind of financing mode solves the financing difficulty of outstanding SMEs since banks do not provide capital support to those inventions changing the world? The answer is very simple - equity financing. No matter Microsoft, Yahoo and Google overseas or Tencent, Alibaba and Baidu in China, all of them got company start-up capitals via equity financing, instead of bank loans. They obtained angel funding and VC funding in the early development of companies, based on which they grew gradually. At the same time, relevant investors also got gained huge returns with the growth of companies: Alibaba listed on the NYSE in 2014, and SBCVC who invested in Alibaba gained a return of more than 2800 times of investment capitals from 2000.
In the pre-Internet age, not so much people can get equity financing, because most innovators have no relation with the rich, and cannot raise enough capitals required for complete development of their new ideas. At the same time, the rich may not be aware of these innovators, thus it is very difficult to make a match between the rich and creative people.
However, the emergence of the Internet makes match between them much easier, so does the equity crowdfunding platform. Entrepreneurs introduce their projects on the platform, and potential investors make investment according to their project introduction. More importantly, due to asymmetric information, past investments in SMEs are conducted by those professional investors, but through the equity crowdfunding platform, many ordinary people having idle money also can invest in enterprises, which undoubtedly not only finds an outlet for the huge private idle money, but also provides funds to start-up enterprises in urgent need.
From this perspective, JD equity crowdfunding platform obtains funding in another manner different from Alibaba and Tencent, which is more favorable growing enterprises.
Published in Southern Metropolis Daily | 2015-4-3
