A Grey Zone

Despite grey regulation, investors bet on social e-commerce

Beidian, one of China’s big three social e-commerce sites, has attracted Hillhouse Capital as a new investor.

The new business model that has been dubbed “social e-commerce” is having its moment in the limelight.

Beidian said on Wednesday that it had raised Rmb860 million ($127 million) from investors that include Hillhouse Capital, Sequoia Capital, Xiang He Capital, Sinovation Ventures, IDG Capital, Gaorong Capital, and Capital Today.

The most recent fundraising was Beidian’s $70 million Series B round which was led by Hillhouse, according to a document seen by FinanceAsia. Beidian completed another round of funding earlier this year and the two together total $127 million, according to a source familiar with the matter.

As an e-commerce site, Beidian asks every customer to pay a membership fee and promises a commission for every new member that they recruit. Customers can also get a commission from every product that they sell via the site to other members. Because new customers are often recruited by their friends via the social media platform, this has been called “social e-commerce” in China.

Beidian has completed two rounds of fundraising in an extremely short amount of time. It is also the second social e-commerce site to grab the headlines this month. On May 3, Yunji, one of the first social e-commerce platforms in China, listed on Nasdaq with a valuation of $3 billion.

The business model of both Beidian and Yunji has often been accused of having a similar character to pyramid schemes. For this very reason, Yunji was fined by regulators in 2017 and it has started to rectify its business model since then. By the time of its IPO, the company said that it was switching to a membership system - to become the Costco of China.

Any kind of distribution system with more than two tiers is defined as a pyramid scheme in China. Yunji was fined for having a three-tier distribution system. It now claims to be only a one-tier system.

The regulators are not letting up on the secor. Huasheng Riji, another similar platform, was fined Rmb74 million, the highest amount to date, in March.

Beidian has not been penalised so far, but it does have more than one tier in its recruiting channel. “The company is just trying to become as large as possible before it is hit with a penalty by the regulators,” a source said. “If regulators intervene, they will just fix their business model.”

It seems that all of the social e-commerce sites are racing against time, to grow as much as possible before the regulators catch them.

Beidian has said that proceeds will be used to upgrade its supply chain. Founded in 2017, Beidian claimed 44 million members last year, already higher than Yunji. And Beidian’s monthly active users are growing at 30% a month.

Investors are funding this business model as it has an incredibly high growth rate. “Yunji’s IPO is a successful example for early investors to exit,” said one private equity investor. “Clearly other social e-commerce platforms want to rush towards an IPO too.”

But there is always at least one voice of dissent. “Most of these social e-commerce sites make their profits from one-time purchases and increased membership,” said another private equity investor. “They don’t get to the heart of what 'social' really means.”

 

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