Drip Capital Under Scrutiny: Is This a True-or-False Question, or a Multiple Choice?

By Muxin Xu

MicroConnect is back in the spotlight. On October 23, Song Xiangqian, founding partner of Harvest Capital, posted lengthy critiques on both his WeChat Moments and Weibo, raising three main challenges to MicroConnect's model:

1. The "neither equity nor debt" structure that MicroConnect claims does not exist in reality — its essence is lending.
2. To cover losses from other projects, MicroConnect's interest income must be no less than 20%, which approaches the threshold for usury at 24%. Thus MicroConnect resembles predatory lending, an upgraded version of P2P.
3. MicroConnect has designed a cross-border three-jurisdiction structure — originating loans to mainland stores, raising capital in Hong Kong and overseas, and securitizing assets through the Macau exchange — whose essence is regulatory arbitrage.

In Song's view: "Many VCs are now looking to do something like MicroConnect, and everyone tacitly understands the lending nature of this business." Faced with such fierce criticism, MicroConnect's official Weibo account responded hours later with a terse reply: "Thank you Mr. Song for your attention to MicroConnect. We welcome you to reach out to us for communication at any time."

This is hardly the first time MicroConnect has faced skepticism. In fact, criticism has trailed the company since its inception. Charles Li Xiaojia addressed some of these doubts in a 36Kr exclusive interview ("Exclusive Conversation with Charles Li: For Anyone Who Needs Money to Open a Shop, MicroConnect Offers 'the Best Money'"). In Li's framing, MicroConnect's target universe spans virtually all physical retail. It discounts a shop's future cash flows over a set period, taking a daily percentage of revenue through a joint venture arrangement until full recovery, with equity gradually released back — what he calls "stage-decreasing equity." It is not debt, because it requires no collateral from the shop (the main point Song challenges from legal and practical angles). Nor is it equity, because MicroConnect ends up owning zero shares. Beyond moral concerns, MicroConnect has faced more questions around risk control. After all, it invests in micro and small businesses — mom-and-pop shops scattered across streets and alleys, whose proprietors, accustomed to neighborhood trade, can easily receive income through channels outside MicroConnect's integrated cash flow system. Moreover, MicroConnect has already invested in roughly 600 brands across 10,000+ stores, with total deployed capital around 2.5 billion RMB. At this scale, even a 1% annual dispute rate would be overwhelming. On this, Li believes MicroConnect can absorb certain bad debt risks, focusing mainly on preventing systemic fraud. Each brand's risk exposure in the startup phase is roughly 7-8%, with a target of controlling it below 2% going forward.

Eight hours after Song's post, the other side of this war finally appeared — not Li Xiaojia, but Liu Zizheng, founder of Yongchuan Asset. He rebutted each of Song's three points:

1. Neither-equity-nor-debt products have existed since ancient times — they're called mezzanine. One can understand that older-generation professionals who switched careers mid-stream, without finance backgrounds, and for whom equity seemed like everything over the past decade.
2. RBF involves no collateral or guarantee — it is investment, not debt. So citing LPR or 24% represents serious conceptual confusion.
3. Don't stand on moral high ground to criticize MicroConnect and RBF. Investing 1 billion in a pre-IPO round when a chain has 300 stores can hardly be called "supporting micro and small businesses."

Here we must explain what RBF is, and why Liu repeatedly linked it to MicroConnect in his response. MicroConnect can be understood as one mode of RBF. RBF stands for Revenue-Based Financing, characterized by three features: first, it shares revenue rather than profit; second, it does not share returns in perpetuity, but rather enjoys priority distributions and exits upon maturity; third, use of funds is restricted to operating activities that generate cash flow. Under RBF sits a variant called RSO. One of the most obvious differences from MicroConnect: while MicroConnect invests in small shops, mom-and-pop stores, and new locations of chain brands, RSO is best suited for individual locations of chain brands — say, investing only in the Beijing store rather than the Shanghai store. (For detailed explanation of these models' characteristics and differences, see the An Yong ("Entering the Game") article in Anyong Waves: "Beyond Equity Investment, a Niche Path in the Primary Market.")

Regardless of whether RBF's essence is indeed the creditor-debtor relationship that Song criticizes, it is far removed from equity. And this is precisely the question hanging over the entire primary market: what challenges is equity facing?

Investors are also flowing toward MicroConnect. An early-stage VC investor remarked that they've heard of three or four primary market investors joining MicroConnect this year. Some eagerly inquire about MicroConnect's compensation packages; others who turned down offers feel that working as an investor at MicroConnect is no better than being a leasing manager at a commercial management company.

Some of this stems from MicroConnect itself. In August this year, MicroConnect announced a $458 million Series C, entering the unicorn club at a $1 billion+ valuation. Looking through its funding history, MicroConnect has raised "ABC rounds in prosperity" — with top-tier VCs like Hongshan among its investors, as well as Li Ka-shing's family office Horizons Ventures.

But there is also the "lack of confidence" problem in the equity world. Equity investment is essentially a game of hot potato — the potato must pass from one hand to the next. If one player exits, the game can continue; but if all subsequent players exit, the game ends. A fundamental flaw in equity's core becomes visible: the means of profit actually comes from excellent capital relay.

But can jumping to MicroConnect keep one's "hot potato" game going? As noted above, this represents a shift from equity to DRO (Daily Revenue Obligation), with target selection changing from "projects that can IPO" to "projects that cannot IPO but have decent future cash flows." No wonder some middle- and back-office professionals told Anyong Waves that they are in fact better suited for MicroConnect, given that their previous work involved cash flow modeling.

In any case, the move from equity investment to MicroConnect signals the changing context of the times. The two men standing on opposite sides of this debate share only one point of agreement: "The equity boom was a phenomenon of the past decade."

Image source | Visual China

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