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The Tragic Death of Luoo When entrepreneurs get too emotional, they end up hurting fans, users, investors, and the entire industry.

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admin 2018-02-25 Collect

 

As we settle into 2018, Hu Jianguo hasn’t been posting much about Luoo. On the 6th day of Chinese New Year, he traveled with his friends in Yunnan to a distant escape, Lujiang. While he was there, he seemed quite happy, even though just five days ago, he wrote a post to bid 2017 farewell in a sad fashion.

No matter how calm he seems, Hu knew that he wasn’t going to able to spend a great new year. Last December, news broke that he owed his staff members’ salaries. Early this year, over thirty of Luoo’s board members sued Hu and the platform, and the court is now processing the case.

We have previously talked about Luoo’s downfall. Its actual management and operation problems aside, what the board was questioning was whether or not the company properly used the company’s public fund, and if the company has done its duty outlined in the contract.

According to an income statement provided by Huxiu.com, since Luoo’s physical store opening in May of 2015, its gross revenue has been ¥1,514,846.5 RMB, and its total expense at ¥1,523,218.01 RMB, resulting in a net loss of ¥8,371.51 RMB. However, compared to its funding through stock options, these numbers don’t add up. Huxiu says that Luoo’s Beijing store received over ¥1.47 RMB in stock option funding, which means that the store has spent more than the initial funding throughout its operational lifespan.

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The problem is, this is drastically different from what was promised to shareholders at the time of their investment. Luoo cleared stated that every ¥60,000 RMB of investment equals to 1% of shares in the Beijing store, meaning that with the grand total of ¥1.47 million RMB, the shareholders would have 24.5% of the shares. According to the contract, this part of the shares will be managed by Luoo’s Beijing branch, and the remaining 75.5% would be funded by Luoo themselves.

It is evident now that with the total expenses of ¥1.52 million RMB, the company itself failed to fully fund their Beijing location, if at all, and as a result, shifted all the burden and liabilities onto the joint shareholders.

Sidebar:

Per the Annual Report of the Crowdfunding Industry, since there are usually multiple investors in a crowdfunding scenario, in order to simplify the shareholding structure, and to avoid laws limiting the number of shareholders a company can have, there are usually two ways companies in China deal with crowdfunding.

The first is through entrusted shareholding. The investors will designate an individual to hold all the aggregated shares, who also becomes the nominee shareholder of the company, with the rest of the investors being listed as dormant shareholders. The second option is to form a limited partnership. The lead investor becomes the general partner, whereas the other investors will be limited partners, together establishing a limited partnership. This partnership would then hold shares in the desired company or project.

End of Sidebar

We were able to take a look at the original investment agreement of Luoo’s Beijing space, in which it was clearly stated that if Party A (Luoo) fails to comply with or fulfill any of the following promises and duties, leading to any form of loss for Party B (Investors), Party B has rights to demand compensation from Party A.

That specific line became the main evidence that the plaintiffs are using against Luoo.

On the defendant’s side also stands the crowdfunding platform, Duocaitou. The plaintiffs believe that the platform failed to provide a proper valuation of the Beijing store project.

But is the platform actually responsible for this situation?

Generally, it will have to depend on the situation. In 2009, crowdfunding started to catch on with the rise of Kickstarter, who later entered China in 2011. In 2013, the first Chinese crowdfunding case came to fruition–Meiwei media sold shares of its company through Taobao. This method, also called equity crowdfunding, basically allows regular investors to obtain certain shares that are set aside by the company for this specific purpose. Many have called this trend to be the “internet-ification of traditional private funding.”

Currently, the entrepreneurship landscape in China is still in its infancy, with many entrepreneurs having no clue as to how they can find means of funding, as well as how they can connect and integrate resources through funding. At the same time, there are many investors with huge amounts of cash, without the appropriate channels to invest in startup projects. This is where crowdfunding shines.

Looking at the development of crowdfunding culture in China, its clear that between 2014-2015 was when it became a mainstream phenomenon. On one hand, established companies in certain industries have turned to the internet to acquire preliminary funding through product pre-orders, often not only fulfilling financial needs but also creating “hype” around said product and therefore the company. On the other hand, crowdfunding was also catching on in the real estate industry, overturning the notoriety that there are “only a few insanely rich” investors in real estate. It’s also worth mentioning that the government is trying to guide and facilitate the development of crowdfunding.

Crowdfunding projects are usually either with or without guarantees. Unguaranteed crowdfunding means that there will not be a third party to monitor and assure the investors’ returns and rights. For guaranteed crowdfunding, it is the exact opposite.

Most of the crowdfunding websites in China are unguaranteed, including Duocaitou. In fact, in its “Investor Handbook,” the first section explicitly states that “We do not take any responsibility for any investor’s loss or damage through investments on our platform. We do not guarantee success rate, initial investment or returns in any way.”

The platform through which Luoo funded its Guangzhou store, Kaishiba, also mentioned in its platform disclaimer, that “our platform doesn’t guarantee your investment or a lowest return, and we do not take any responsibility for loss or damages caused through your investment(s). We also do not provide a valuation for any companies/projects on our platform.”

Knowing this, it is easy to see that the real culprit of this whole fiasco is Luoo themselves.

Unfortunately, Luoo’s Beijing store failure also inevitably damaged both Kaishiba’s and Duocaitou’s reputations, which could mean huge losses for both platforms.

Let’s look at the risks of crowdfunding.

On public crowdfunding platforms, most users/investors are inexperienced individual investors. Their means of information gathering usually don’t exceed a couple of simple internet searches, as most are usually on the platform for its accessibility and the notion of being able to make some decent returns on their investments. Unfortunately, this has allowed many low-quality projects to flood these platforms. Also, most users only invest limited funds into their trusted projects, so even if they go awry later down the road, the users are rarely inclined to go after the companies in any serious manner. Plus, due to the lack of regulations on these platforms, it is usually quite time-consuming and expensive to pursue any legal actions.

There are currently very limited regulations regarding the appropriation of funding on these crowdfunding platforms, so most of them are really only acting as a payment processor. Most of them are operating purely based on mutual trust and “act of good will,” which can get quite dangerous should any of the platforms becomes corrupt and starts manipulating information on their website for their own benefits.

To win over investors’ trust, each platform is working hard to perfect their operating models and information transparency, in turn increasing the competitive edge over others.

The two platforms we just mentioned above represent two major types of crowdfunding platforms in China. Kaishiba mainly focuses on commodity funding, whereas Duocaitou brands itself as “China’s first crowdfunding platform that specializes in ‘Spaces’.”

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Above: Duocaitou’s investment flow chart.

In Duocaitou’s official investment flow chart, it mentions explicitly that it would “monitor projects and provide the investors with operation data on a regular basis.” According to data on the platform, there have been over 10,000 people that have invested in spaces through Duocaitou; to them, the main attraction of the platform is the high return potential due to the possibilities of physical spaces. This is especially enticing to middle-class investors.

Compared to Duocaitou, Kaishiba has a much wider selection of projects. If you search for “music” on the former platform, there is only one related project, and that is Luoo’s failed Beijing store. But on Kaishiba, there many more music-related projects, including “Banbu Live” in Lijiang and Jiangjinjiu’s new location in Beijing, and the platform only supports regular funding as opposed to funding through shares.

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Pictured above: Luoo’s founder, Hu Jianguo.

Luoo had so much potential. In 2003, a young man that was passionate about music created a niche music sharing website, and as similar websites have disappeared over the years, Luoo made it all the way to the present. In September of 2013, Luoo officially registered as a company, as it starts to build a team to regularize its daily operations. At that time, its specialization in indie music has also received considerable support from music lovers all over the country. In 2015, Luoo successfully completed angel funding of ¥4 million RMB through selling shares of the company, with all the investors being Luoo users that were willing to spend ¥500,000 RMB or more. This also created a somewhat Utopian appeal for the company.

What happened in the following two years was nothing short of spectacular. After receiving funding, Luoo’s development went into full throttle with the opening of its two physical spaces: the Luoo Spaces located in Guangzhou and Beijing opened in June of 2016 and May of 2017, respectively. Aside from the physical presence, Luoo has also been trying to extend its business into other areas, including selling physical records, providing background music services for its stores, publishing paid subscription magazines, physical merchandise such as T-shirts, totes, and headphones. Unfortunately, when Luoo was ready to take its business to the next step by accepting paid advertisements on its website, they had to cease all operations immediately.

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In a way, the attention that Luoo has drawn has way exceeded what it actually was. The reason why its journey has garnered so much attention is not only that people are naturally attracted to massive failures (no offense), but also that many are using it to evaluate and question the value of “emotional attachment.” People had had so many high expectations for Luoo, so when it failed, many were especially emotional and vocal about the matter. “When something beautiful turns bad, it is somehow more repulsive than something that is already bad,” says a former Luoo user.

Duocaitou’s founder Zhao Gengqian once said during an interview that “the products on our platform are mainly in the ‘lifestyle’ category, which is why a lot of people think that the emotional factor is more important than money. However, when it comes to paying dividends, most of them (investors) end up valuing the money more than emotions.”

Running a successful startup is difficult, especially in the music industry, which just started to take off in China. It takes a lot of courage to seemingly make something appear out of a void, so to speak. One of the main reasons why Luoo failed was that it put so much focus on the emotional factor that it ignored many actual, practical problems in its operations. For example, when it comes to the location selection of the two stores, it was largely determined based on Hu’s blind belief in the concept of “if you build it, they will come.” “Based on our customer loyalty and their understanding of paying for content, we think we can explore our options in the cultural and entertainment industry,” said Hu to us during a previous interview. But now it seems that the cold, hard truth isn’t working too well with his ambition.

Furthermore, from analyzing Luoo’s current business model, we have found that although the company has many interesting services and products offered in various areas, it still hasn’t developed a main product that can bring in the company a steady cash flow.

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Above: Luoo’s ad campaign in conjunction with Tencent.

In fact, Luoo has tried to crowdfund through shares once more in November of last year, one month before it discontinued support for its app. The goal of the funding was to “find viable partners the Luoo’s pre-existing platform,” and investors were limited to a minimum investment of ¥500,000 RMB. It is now fairly obvious that the move was to simply mitigate its lack of cash at the moment, but this was nowhere to be found in the description of the crowdfunding project. Instead, the company said that “due to the increasing amount of users on the platform, we are a bit short on server power and personnel,” which now also raises the concern of the trustworthiness of the company.

“We’ve decided to do something big, so it’s not just a money issue; it may very well be an industry problem.” This is what Hu told us before, but reality proved that he and his Luoo wasn’t ready to overcome that problem.

As important as emotions are in the music industry, this factor really isn’t unique to just this field. In fact, you need a bit of emotion in every industry: dining, architecture, and even internet startups; it’s an essential characteristic that any industry enthusiast needs. When there are thousands of entrepreneurs launching new projects every day, it is important to put the emotional aspect aside, and use a rational brain to think of music as a real business in order to achieve commercial viability and success. The founder of the famous Chinese fast food chain Yonghe King, Lin You’ao successfully entered the music industry as an outsider, because he was able to run it like a business, even though he is also passionate about music. In November of 2017, Lin and musician Chen Yaochuan started a music dining experience crowdfunding project on Kaishiba, and the project ended up being 2460% funded with ¥4.92 million RMB in total funding.

Why is this “emotional connection” so frequently mentioned among music startups? Why do we care so much about the emotional factor and the success (or failure) of a company? For one, emotions should never serve as a veil to mask the problems of a company. Trust and responsibility are words that will take a business to success, and it is especially true in the music business world.

Translated by Kane Ge

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