Chinese Internet Firms Turn To Crowd-funding

Chinese Internet company Renren (NASDAQ: RENN) recently invested in the Washington based startup, Fundrise. This was a part of the $31 million financing that Fundrise raised. Fundrise is into crowd-funding real estate development. Crowd-funding helps retail investors make small investments in projects of their choice, such as real-estate development and movie making. These are pooled together to actually fund the venture. Thus, small-time investors get exposure to investment opportunities that would otherwise be available only to large investment funds or high-net-worth individuals. Crowd-funding has recently caught the fancy of other Chinese Internet companies as well. In this article we take stock of their experiments with this business model.

How Fundrise Raised Funds From Renren

Renren had earlier invested in Social Finance(SoFi), a venture that seeks to eliminate banks and other intermediaries from student loans. SoFi connects students in need of loans with individuals wiling to lend to them, such as alumni of the same university. Pooling of funds occurs with respect to each school/university. So this is considered peer-to-peer financing as there is virtually no intermediary involved. Renren founder and CEO Joseph Chen was enthused about investing in ventures that extend similar models to other sectors. One such sector with considerable intermediary presence is real-estate.

See our complete analysis of Renren here

Fundrise is the pioneer in crowd-funding real estate projects in the U.S. Since its founding three years ago, this sector has seen many such companies start-up. The investment in Fundrise gives the Renren founder and CEO a seat on its board. Fundrise claims it is also benefiting from Renren’s expertise in online marketing, social networking and programming.

With this support, Fundrise is looking to expand its operations in the top 10 metros of the U.S., which they claim represents 80% of the large real estate project market. The capital raised from retail investors will be channeled to two types of construction projects. On the one hand there will be well-established developers with a proven track record. On the other hand will be developers at the other end of the spectrum, who are relatively new and involved in smaller projects (less than $10 million). ^[1]

Alibaba Looks To Crowd-fund Movies

In March, Alibaba (NYSE: BABA) announced that it would crowd-fund movies in China. It launched a company called Yu Le Bao, Chinese for Entertainment Treasure. It helps retail investors make investments in a movie of their choice for as small a sum as $16. The company said it would take feedback from investors regarding the plot and casting of these movies as well. Investors have been told by the company to expect returns as high as 7% from such investments.

See our complete analysis for Alibaba

Alibaba is seeking to raise ~$12 million for a first batch of four projects. The money will, however, initially be invested in the wealth management products offered by Shanghai based Guohua Life Insurance. They will later be channeled into the intended ventures. Unlike crowd-funding in the west, this particular scheme will not reward investors with goods or services associated with the projects. This is said to be on account of Government Regulations discouraging such features in China. ^[2]

Baidu Follows Alibaba’s Lead

Baidu (NASDAQ: BIDU) has made its own foray into crowd-funding movies. It launched a website called Baifa Youxi, in association with Taiwan’s Central Picture Corporation, Citic Bank and DeHeng law firm in Hong Kong. Baidu has suggested that returns from such investments could be as high as 16% for the retail investors, higher than that estimated by Alibaba for its scheme.  The return to the investors will be linked with the box-office performance of the movies they invest in. One such movie, titled Golden Age, has raised $29.3 million from about 3,300 followers. This is 20% more than the estimated budget of the movie, which stars two of China’s leading actors. Movie industry analysts in China believe crowd-funding will help gauge consumer interests better, since the investors are also drawn from the larger audience. ^[3] Internet companies also have the added advantage of having competency in online marketing and social networking to promote these movies. Such ventures also help continue the diversification away from their core areas that Chinese Internet firms are increasingly seeking.

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1. Fundrise: Poised To Alter Real Estate Finance [↩]
2. Alibaba To Make Movies With Crowd-funding Idea [↩]
3. Baidu Launches Kick-Starter Style Film Service [↩]