Crowdfunding in China

BEFORE the publication of his new book, Chinese photographer Wei Yao decided to launch a crowdfunding project on zhongchou.cn together with his publisher. For one month, the publishing house will be able to probe the book’s sales prospects via this site. The move will also serve to market the book and attract more potential buyers.

Currently, an increasing number of Chinese publishers are trying to promote their publications by crowdfunding, especially for projects targeted at the youth.

Entering China

Zhongchou.cn is currently the most important crowdfunding site in China. It has more than 2,000 projects online appealing for investment, ranging from technology products, public benefit activities, entertainment and art projects, agricultural products, as well as publishing projects. The person requesting funding can upload an article, photos or video to show the content, features, investment form and return on investment of the project. Based on their personal judgment and preferences, potential investors can decide to put their money into a project.

Just like the group buying phenomena that took off a few years ago, crowdfunding is a Western idea. It appeared for the first time in the U.S. in April 2009 with the launch of the website Kickstarter. By the end of 2013, the site had recorded US $9.53 billion of investment for over 55,000 projects from 5.5 million investors. This mode of investment is currently booming in China.

Crowdfunding sites in China mushroomed in 2014 and have become a trend among Chinese e-finance services. In fact, this type of financing entered China in July 2011, when demohour.com, one of the first crowdfunding sites in China, went online. Zhongchou.cn was established in February 2013. Around the same time, He Chengyao, a Chinese performance artist in Beijing, first heard of crowdfunding, and decided to have a try.

From February to March 2013, He sold 100 hours of her creativity via the website. She painted one point per second on a blank canvas for a couple of hours, sometimes longer, to create a painting, which would be presented to investors as a return for their funding, as required by the crowdfunding website. She regarded it as a creative outlet for meditation. In all, 54 people funded the project, including art collectors, artists, and museum curators. He Chengyao and her son also invested in the project.

“Every hour cost RMB 2,000. I collected RMB 200,000 in total. As the price was cheap, the painting sold very quickly,” He explained. For an artist of her caliber, it really was a steal.

According to He, the creative process was not easy. Some picky investors wanted her to work in specific conditions. For example, one investor asked her to paint on a fresh and sunny morning with a green brush. As Beijing’s climate can be temperamental in spring, she waited almost 20 days to meet this special request.

He acknowledges that she knows little about how the market works, so does not excel at promoting her works and dealing with business matters. Since the modern art market is not mature in China, crowdfunding has become a good marketing channel. The site is responsible for market promotion and financial management, leaving artists to focus on their creations. According to He, this kind of interaction is a part of art; she felt satisfied by this type of creative process and will launch other artistic projects via crowdfunding.

Pitfall or Prospect

Like all new initiatives, crowdfunding did not take off immediately in China. Some people equated it with illegal fundraising. In the late 1990s, Chinese people were suspicious about appeals for funds. Investors were lured with promises of high returns only to be faced with high risks and deception. But crowdfunding is not just a fundraiser. Investors are not interested only in returns; they also participate in the projects. In addition, the crowdfunding platform also has a monitoring role and determines concrete requirements on projects, business processes, and results.

While most people perceived crowdfunding as something fraudulent, some saw it as a business opportunity. Feng Lun, chairman of Vantone Group, invested RMB 40,000 in an online agricultural project called “roof garden” on zhongchou.cn in summer 2014. In fact, the project was launched by a subsidiary of his group. Zhang Xun, head of the project, and her team started it in August with the full support of Feng Lun, who regarded it as part of the Vantone development trend. Since 2009, Feng had been promoting the “three-dimensional city” concept, which Zhang’s project fitted perfectly.

The project was to grow vegetables on the roofs of buildings by selling land per square meter. Eventually, the project received RMB 210,000 and investors became “urban farmers.” Feng Lun bought four square meters of roof area, and invited his family and friends to plant and harvest vegetables and flowers there. The purchased plot also serves as an outdoor space for gatherings.

In December 2014, Zhang Xun and her team started another project: the presale of “a home-grown culture system.” This time, the idea is to teach people how to grow vegetables at home or at work. If this crowdfunding project is successful, the team will ask factories to manufacture shelves with LEDs for growing vegetables. They will also provide investors with organic fertilizers and seedlings, and teach them to use these “indoor vegetable patches” with light and humidification developed by the company.

Crowdfunding is opening a wider space for innovation and pioneering work.

More than a Presale Platform

Supplying a finished product to investors is the current rule of crowdfunding in China. Once the supervision slackens, the risks of illegal fundraising will rise. Therefore, the Chinese government is monitoring the trend very carefully. Crowdfunding sites also pay more attention to products and specific projects, and skirt projects related to equity-based crowdfunding.

In early 2014, demohour.com announced its transformation into a presale platform for intelligent hardware. “Compared to foreign investors, Chinese investors focus more on real income and a tangible return on investments. Besides, different investors have different understandings of crowdfunding,” Zhang You, CEO of the site, explained.

However, crowdfunding has its advantages, such as low thresholds, extensive applicability, and simple operation. It can help to create a startup, and support small and micro enterprises. As a result, a number of crowdfunding sites obviously do not want to miss out on the huge Chinese market.

With a dream of building China’s most famous brand of frozen yogurt, Liu Tao has opened three stores in Hohhot, Inner Mongolia. But to open a store in a metropolis like Beijing required a large sum of startup capital. Fortunately, he discovered crowdfunding. In September 2014, he launched the “UGO Shop” project on renrentou.com, his plan to collect RMB 600,000 in investments. He invested RMB 120,000 himself and within half a month, 28 investors pledged the remainder. They created a discussion group on QQ (the most used IM service in China) to discuss the particulars of their future store. At the end of December of the same year, Liu Tao opened the first shop in Beijing. The 12-square-meter shop is located in the commercial district of Wudaokou. The walls are adorned with photos of his 28 investors as a tribute to them.

The Chinese government is working on matters related to participatory financing. On December 18, 2014, the Securities Association of China promulgated a provisional regulation on participatory financing and private equity. According to this regulation, the investor must have more than RMB 3 million in financial assets or have realized an annual revenue of more than RMB 500,000 in the past three years. This means that most of Liu Tao’s shop investors actually had no right to invest. But on December 26, 2014, Zhang Xiaojun, spokesman of the China Securities Regulatory Commission, announced at a press conference that the rules for public equity-based crowdfunding were being deliberated. It is expected that the government and the association will launch specific rules to promote the sustainable development of crowdfunding platforms.

According to data from 01caijing.cn, by the end of August 2014, China had about 80 commodity crowdfunding websites, nine of which were posted in August alone. These data show that in China, the story of crowdfunding, the most dynamic form of Internet finance, has only just begun.