Cash-burning e-commerce platform Taojiji offers a debt-for-stake swap plan to pacify thousands of merchants

The old cash-burning gamble does not always pay off.

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Shanghai-based grocery e-commerce platform Taojiji has persuaded representatives of merchants to swap the debts it owes them to stakes in the company, one day after its founder, Zhang Weiping, confirmed in an open letter that the company is facing serious cash strain and is unable to repay merchants for their sales, reported China Business Network on Wednesday.

Under this plan, each merchant’s money will be changed into an equivalent stake in Taojiji, which is currently valued at USD 550 million. Zhang will keep the stakes for these merchants for the time being as Chinese law does not allow a company with limited liability to have more than 50 sharesholders.

The company will also change its platform type from “a marketplace hosting lots of merchants” to “a marketplace self-owned-and-operated by its shareholders and partners.”

The debt-stake swap proposal, details of which are still unknown, came after Zhang revealed on Tuesday that the company has succeeded in grabbing an undisclosed buyer for its stakes, asking merchants to accept a proposal involving their debts rather than suing his company in a court. Then, he promised that all the new funds will be used to repay 20% of the debts, while the remaining parts will be repaid with his and other executives’ left stake in the new company when it will reach a value above USD 2 billion, or will go public.

Taojiji closed its Series A round, collecting USD 42 million from investors including Tiger Fund and DST, after which the company was valued at USD 242 million.

Zhang said in the open letter that the company started its USD 200 million Series B round fundraising in June, which would value the company at USD 800 million.

However, the company failed to cement a deal in September, when its cash flow was worsening and merchants crowded into its offices to claim back money.

A merchant in Wenzhou, Zhejiang province, told China Business Network that initially, Taojiji used to pay back merchants 7 days after receiving money from buyers on the platform. Later on, the time span got longer and longer, reaching delays of one or two months. Eventually, said the merchant, Taojiji stopped giving any money back since July.

Ma Kaiyue, another retailer based in Wenzhou, told China Business Network that in the city alone, more than 2,000 merchants had been affected, failing to get back money at even more than RMB 1 million (USD 140,000).

The tensions lasted for more than twenty days before this debt-for-stake plan was proposed. Seven representatives of merchants based in Guangdong, Fujian, Zhejiang, Hubei, Anhui, and Hebei provinces have reportedly agreed on this plan with Taojiji.

An unidentified employee with Taojiji told the Chinese media that potential investors wanted to see faster user growth, and therefore, Zhang took a “bold” move by using merchants’ money to attract new users. The company gave cash as an incentive to register on its platform, a similar measure used by a slew of companies such as Qutoutiao, a content aggregator listed on Nasdaq, but Zhang’s bet failed to pay off.

Taojiji has attracted a total of 130 million registered users with its aggressive cash-giving strategy. About 55% of Taojiji users are also users of rival Pinduoduo, China’s second-largest e-commerce platform by the number of annual users, said China Business Network, citing big data solutions platform Nasdaq-listed Aurora Mobile Limited.

A silver lining in the cloud is that Taojiji has been paying employees’ salaries on time so that the 700 staff are well in position, preparing for the upcoming Singles’ Day promotion scheduled around Nov 11.

Taojiji’s cash-burning sad story can be easily compared with the tragedy of China’s bike-sharing startup Ofo.

Ofo’s young founders, still in their twenties, squandered investors’ money and also deposits from its users to attract new users, so that it could be able to compete with its main rival, Mobike, for a larger market share in the bike-sharing sector. After quickly encountering financial problems, thousands of Ofo users lined up in late 2018 to get their deposits back, but most of them failed. About 16 million users are still waiting online to claim back their money.

Taojiji’s future is yet to be seen. Zhang did not name which firm will be the rescuer, but added that Taojiji would be merged into this company.