Cash-strapped Chinese e-commerce startup Taojiji is slated to declare bankruptcy after failing to attract badly needed investment, the company announced Monday in a post on its official Weibo account.
Why it matters: Taojiji’s troubles highlight the risks of its business model—adopted by many Chinese tech firms—in which cash is burned at an unsustainable rate through consumer discounts in order to grab market share.
- Data from startup database ITjuzi shows China’s highly competitive e-commerce market has shed 38 companies this year, making it the second-ranked sector in terms of bankrupted companies after the finance industry, which has squeezed out 62 firms.
- China’s tech industry has lost a total of 327 companies this year, down from the annual figure of 458 in 2018, ITjuzi data showed.
Details: Following protests in September by sellers who hadn’t been paid and reportedly being rejected for investment by top tech firms including Alibaba and Meituan, the announcement is another signal of the company’s troubles.
- In the notice, Taojiji proposes two options to its debtors. One involves a debt-to-equity restructuring plan, in which the ownership of the company will be transferred to debtors of the company.
- Otherwise, the company would apply for bankruptcy, and the founding team will try to repay the debts.
- Company founder Zhang Zhengping detailed in the statement the failed funding deal, featuring two potential investors.
- Zhang said one investor, a conglomerate, withdrew from the deal for fear of negative backlash brought by debts owed. The other potential investor, the funding arm of a pre-IPO firm, signed an investment agreement with Taojiji, but didn’t transfer the funding as promised.
- Zhang also refuted reports that he had transferred money to overseas accounts.
Context: Taojiji, an e-commerce platform targeting lower-tier cities and rural consumers, was seen as an upstart with more than 130 million users at its peak. It gained moderate notoriety early this year through its use of steep discounts to attract buyers, similar to the model Pinduoduo uses.
- After funds from early investors dried up, Taojiji began raiding the pockets of its merchants, requiring them to wait at least a month for access to money earned by selling products on the platform.
- The company’s extensive subsidies lead to losses of RMB 1.2 billion ($170 million) as of October, according to Chinese media.
- Since September, hundreds of merchants have been gathering outside of the company’s Shanghai offices to protest unpaid debts and demand a repayment plan.
- In October 2018, Taojiji announced a $42 million Series A from investors including Tiger Global and DST Global.
Correction: an earlier version of this story incorrectly identified DST Global as based in Russia.