Dissertation-To what extent do SMEs in China rely on informally financial sources to finance growth?
Tujia is an online platform where clients and members can use it to discover vacation rentals within tourist destinations. Tujia.com forms our case study of informal funding partnership that is based on informal financing sources that continue to shape the industry and economy across the world. It was founded by Melissa Yang and Luo Jun and has a total equity of about $455 million having had done one acquisition. The online platform was founded n 2011 and is owned by the Tujia Online Information and Technology Company of Limited Liability in Beijing. The company depends on the international decentralized hotel management as well as business criteria. The company also integrates offline real estate stocking in tourist destinations, online bookings and customer care center services for vocation apartment rentals. The online platform offers provides tourists with premium holiday experiences as well as flexible value-added services for any prospective idle assets. The company continues to expand from private investors’ funding positioning itself in a place to compete with Airbnb.com that is valued more than $24 billion as compared $1 billion valued Tujia.com as of 2016.
The recent funding of Tujia.com introduced it to the top most valuable start-ups in China to watch. The company has expanded to overseas countries despite several clones supported by Airbnb.com that continues to challenge Tujia.com. The company, Tujia.com, has focused on quality, extensive selections of places as well as higher-end properties that are favorites for holiday by tourists. Home-Away, a US-based real estate firm provides overseas listings and is a major investor in the company. Ctrip is also an investor with Tujia.com and has invested over $100 million during series C funding (Millward, 2014). Ctrip is an online travel booking site and therefore boosts the company’s presence forming a synergy in their operations. It is these partnerships and informal funding that has led to Tujia.com becoming a force to reckon among the Chinese start-ups as well as tourists online bookings.
Tujia.com has had four rounds of financing from 10 investors. The first series A investments led to raising of $15 million in May 2012 with the leading partner being the Light-Speed China Partners where there were three partners in total (Emily, 2007). The three partners were form of the initial funding that led to Tujia.com establishing its operations and making a major entry into the online bookings of vacation rentals (Cheung, 2014). Luo Jun, the CEO and also the co-founder of Tujia.com insisted that the funding was meant for exploiting China market including R&D, product development, and marketing (Tech, 2012).
Series B funding was conducted in February 2013 where the company raised $40 million for expansion. The leading partner in funding was GGV Capital with other five investors. This informal funding enabled the online platform to expand its operations further becoming a major threat to Airbnb.com that is based in United States (China Renaissance, 2013).
Series C funding, also informal, was conducted in June 2014 with a more funding target where it raised $100 million with GGV Capital as the leading partner among other four partners. This funding was instrumental as it facilitated further expansion and growth with more potential funders ready to join despite its informal preference for funding (Cheung, 2014). The proceeds from this round of funding were partly to expand the sales and marketing section including signing up new properties for rentals. The company generates its clients from the top-tier cities in China including Shanghai, Beijing and Guangzhou. There is also higher proportion of middle-class clients who have higher amounts of disposal cash to travel and have leisure activities. Investors flock start-ups that are promising to fund them and get part of ownership. Mr. Cao, the managing director at Light-Speed China, one of the major stakeholders indicated that China is in its infantry in vacation rentals and thus more efforts were needed to boost the sector.
The last and recent informal funding was conducted in August 2015 under Series D funding where over $300 million was raised (Carew, 2015). This funding was supported by All-Stars Investment group as the main partner along with other four investors. This is an indication that the company is gaining ground and solidifying its Chinese base including global presence.
Venture capital investment has been the major drive for Tujia.com where investors understand the risk in funding the expansion of the business. Venture capital is explained as a private equity that is directed towards small, emerging, and early-stage forms with high potential for growth through indicators like annual revenues and the number of employees. Venture capitals used in Tujia.com have been used to gain equity, that is, ownership stake in the company. China has seen several companies focused on technology, social media and biotechnology that have become major competitors in the world (Xiang & Teng, 2008). The four rounds of Tujia.com financing were venture capital forms where the ten investors acquired stake over a period of six years. The rounds of venture capital are defined by the word ‘series” and thus Tujia.com has had four events of private and informal funding reaching its base of US $1 billion mark (Cheung, 2014).
Tujia.com has had four series of financing. Most of them are informal investors and angel investors. The company has seen raising of finances up to the current $455 million as of August 2015 (Kapoor, 2012). The list of known informal investors in Tujia.com includes;
- All-Stars Investment that was a lead investor in Series D funding
- CBC Capital that participated in Series B funding
- CDH Investments that participated in Series A, B, and C funding
- Ctrip that participated in Series C and D informal funding
- GGV Capital that was the lead partner in Series B and C funding
- Home-Away investment engaged in Series A and C informal funding (Doug, 2013)
- Light-Speed China Partners participating in Series A and B fund sourcing
- Magic Stone Alternative that was critical in Series D funding,
- Qiming Ventures Partners, and
- The Ascott China investments who were involved in the recent series D funding (Ascott Limited, 2015&Express Hospitality, 2016).
Tujia.com also acquired Mayi.com in June 2016 for an undisclosed amount (Osawa, 2016). In acquiring Mayi.com, it was reducing competition at home while positioning itself to handle its international competitor, Airbnb.com that got two venture capital firms funding in Shanghai. Majority of the new start-ups have sought help of informal funding which is somehow risky but dependable for their expansion missions (Lytton-Dickie, 2016). This has created apathy for the formal funding through bank loans that attract high interest rates and discourage starters and SMEs that have weak financial muscles (Li, 2015). Despite the big difference in valuation between Airbnb.com ($25 billion) and Tujia.com ($1 billion), the two firms have almost competing ground thanks to informal financials who have increased the presence of the company in the world platform (Oukes, & Raesfeld, 2016).
According to the result of an in-depth investigation done by a research group from Central University of Finance and Economics in the early years, about 28.9% of the total amount of enterprises’ financing is from the sources of informal financing judging from the national average level. It could be observed in their investigation that, the average dependence severity of informal financing of the investigated enterprises distributing in the 27 provinces and regions reached up to 42.4%. It should be noted that the dependence severity of enterprises’ informal financing in Chinese eastern regions is lower than that of in central and western regions. Dependence severity of enterprises’ informal financing in eastern regions was 39.9%, dependence severity of enterprises’ informal financing in central regions was 45.3%, dependence severity of enterprises’ informal financing in western regions was 44.2%.
According to the judging results of relevant government departments, it could observed that the total amount of enterprises’ informal financing accounted for 42.7% of the total amount of formal financing, the average dependence severity of informal financing of the investigated enterprises distributing in the 27 provinces and regions reached up to 33.12%, dependence severity of enterprises’ informal financing in eastern regions was 32.9%, dependence severity of enterprises’ informal financing in central regions was 33.6%, dependence severity of enterprises’ informal financing in western regions was 32.9%.
It should be specially mentioned that the enterprises that the research group investigated are not merely referring to middle and small-sized enterprises, the total dependence severity of SMEs’ informal financing must be higher than these values for the reasons that have already been analyzed in the previous section. Although the data applied in this part has years’ history, they could still indicate some facts of the current informal financing of SMEs, since in recent years, it appears more and more private financial institutions in Chinese financial market which foreshadows the enormous social demand, and the enormous social demand is mainly derived from SMEs.
To conclude, the dependence severity of SMEs’ informal financing in China is considerably high for many reasons that have already analyzed in the previous chapter. It could be predicted that with the vigorous development of SMEs, the efficiency of capital allocation in free financial market would be higher and higher. The high efficient capital allocation will probably play a vital role in adjusting the total amount of formal financing and informal financing. And Over the next few years, it is certain that the dependence severity of SMEs’ informal financing will be higher as long as the existing financing pattern is not reformed. The prosperous informal financing alleviates the financing problem of many SMEs, however to a certain degree. It also leaves some potential problems for the future. On the one hand, due to lack of corresponding certified credit guarantee, additionally, the legitimacy of the transaction could not be fully guaranteed, so it is risky for the lenders to reclaim the loans. On the other hand, since the loan rate of informal financing or private financing is much higher than that of formal financing, which will surely increase the repayment cost of SMEs, thus it will also increase the operational risk for SMEs that rely on informal financing. Moreover, the wholesale informal financing will also increase the operational risk of formal financial institutions such as commercial banks. Because of the existence of the latent factors, it is time for SMEs to adjust their sources of financing.
 Data sources: 葛美连. 非正规金融视角下的中小企业融资问题探析
 The informal financing here includes private usury, internal fund collection or some other ways such as obtaining loans from regular financial institutions through commercial bribe.