Exclusive | Drip Capital Responds to Everything

By Jing Liu, Muxin Xu

AnYong Waves has learned that in response to recent rumors, Micro Connect sent an internal email on the evening of May 13 addressing some of these concerns.

In this letter signed by Charles Li and Kelvin Zhang, they describe Micro Connect's current phase as the "launch of the second-stage rocket." The difference between the "second stage" and the "first stage" is this: in the earlier phase, Micro Connect used its own money to test whether the model could work; in the second phase, it will "mobilize the market's money and the market's force."

This reveals a strategic shift at Micro Connect: over the past period, the company's strategic focus has gradually moved from "investor" to "exchange." In fact, Micro Connect announced earlier this year that it would fully concentrate on exchange operations, acting more as a "referee" and "service provider," and less as a "player."

It is precisely for this reason that Micro Connect has launched initiatives such as the "Lead Goat Program" and the "Central Exchange Trading Facility (ETF)." Among these, the Lead Goat Program has been the most controversial. Micro Connect's explanation is that the company has decided to select a group of outstanding core employees, divide them into several teams, provide funding from the company with some co-investment from the teams themselves, and form a batch of specialized investment institutions with different focuses to independently explore investment strategies in different sectors.

Micro Connect acknowledges that this will bring adjustments to the company's organizational structure, and therefore some positions will have to be eliminated or restructured.

Regarding this response, Micro Connect stated that its original plan was to announce these changes in June, but given media coverage, it decided to move up the timeline.

Put simply, the response aims to show that what is currently happening at Micro Connect is an active strategic shift by the company, not a sign that the existing system is unsustainable.

Not everyone may buy this explanation, but AnYong Waves is inclined to believe that for a novel financial species like Micro Connect — which must both digitize China's small and micro retail stores and operate an exchange — encountering difficulties beyond what was anticipated is almost inevitable.

"The company will do its best to minimize the impact of this transition on our colleagues," Micro Connect also wrote in the internal letter.

The full text of the internal letter follows:

To all Micro Connect colleagues,

Since we announced the Micro Connect Macau Exchange Universal Standard (MAP) earlier this year, we have fully launched Micro Connect's second development phase.

In recent weeks, we have begun internally describing this new strategic development phase as the "launch of the second-stage rocket." We had originally planned to announce the main contents of this "second-stage rocket launch" in June, along with the changes and impacts it would bring to the company's business development strategy, organizational structure, team division of labor, and work priorities. Given some media reports that have emerged in the past two days, we have decided to move up the timeline and share our thoughts and plans with you now.

As the name suggests, a "second-stage rocket" must follow the completion of the "first-stage rocket's" mission. What is the most important difference between these two stages? In the "first-stage rocket" phase, Micro Connect used its own money and its own strength to test the feasibility of the Micro Connect model — facing the historic challenge of investing in small and micro retail stores, leveraging the success of China's digital revolution to blaze a new trail and create a model for the world. In the "second-stage rocket" phase, building on the achievements of the earlier phase and having completed the foundation for building the Micro Connect Macau Exchange market, Micro Connect will begin to mobilize the market's money and the market's force to truly tackle this global historic challenge of investing in small and micro retail stores.

Your second question may be: why launch a "second-stage rocket"? Was the "first-stage rocket" unsuccessful? Is Micro Connect running out of money? Were the early investment results poor? The answer is clear: no! What we are exploring is a new field for the entire world. Without our courage and, frankly, our ignorance, no one would undertake this endeavor of investing large sums in small shops. What we are creating is an entirely new trading venue, where neither ready sellers nor ready buyers exist in the market. What is a DRC? No one had heard of it. Who would be willing to use DRCs for financing? Who would be willing to invest in DRCs? Everything was unknown. What could we do? We had to role-play and create a model for the market. Acting as both investor and exchange — "both referee and player" — we had to start doing it ourselves.

In the first phase of exploration, we not only created a series of revenue-sharing products, but also built the ARM system and exchange system to support product operations, as well as supporting full-process systems, algorithmic models, risk control frameworks, and more. We invested in over 13,000 stores, with cumulative investment exceeding RMB 4 billion. The quality of our assets has been recognized by credit rating agencies and major international banks. Practice has proven that the Micro Connect revenue-sharing model is feasible.

However, the "first-stage rocket" was never Micro Connect's ultimate pursuit. Micro Connect was founded with the original intention of building an exchange platform — specifically, a new revenue-sharing investment and financing exchange. With the "first-stage rocket" having completed its mission, how do we attract full market participation? How do we provide stores with a steady stream of capital? How do we provide investors with adequate protection? Based on this understanding and original intention, we announced earlier this year that Micro Connect has fully focused on exchange operations, acting more as a "referee" and "service provider" and less as a "player," allowing more market forces to jointly tackle the difficult problem of small and micro financing.

The third question, and the most important one: what exactly is the "second-stage rocket" relative to the "first-stage rocket"?

The "second-stage rocket" has three core components: the "navigation system," the "propulsion system," and the "escort system." They are respectively:

• Navigation system — our internal name for it is the "Lead Goat Program"
• Propulsion system — our internal name for it is the "Central Exchange Trading Facility (ETF)"
• Escort system — encompassing four new functions: information disclosure, valuation, risk control, and post-investment asset management

The Lead Goat Program is the navigation system of the "second-stage rocket."

In the second phase, to fully develop the market, we need to attract different investors using different strategies, focusing on different industries or regions, to invest through the exchange. Although there are many professional investors familiar with the consumer sector in the market, how to invest using revenue-sharing remains an unfamiliar field. These investors expect someone who can convince them and provide one-stop services, such as: scheme design, revenue control, capital allocation, valuation, trading, and so on. The market needs leaders, lead investors for different regions and industries.

Who is most familiar with the revenue-sharing investment approach? The dozens of frontline business colleagues from Micro Connect's investment and expansion team that we have cultivated over the past few years. To help these business colleagues rapidly grow into lead investors, the company has decided to launch the "Lead Goat" Program, carefully selecting a group of outstanding core employees, dividing them into several teams, providing funding from the company with some co-investment from the teams themselves, and forming a batch of specialized investment institutions with different focuses to independently explore investment strategies in different sectors. In the first phase, there was only one market leader: the Lead Investment Fund. In the second phase, the market needs more leaders. The "Lead Goat" Program is the critical first step, the rocket nose cone of the second-stage rocket, bearing the key tasks of leading and breaking through. We look forward to each "lead goat" eventually leading a flock of goats.

As a startup, we must achieve a transition between old and new drivers of growth, and the pain and challenges this brings to management are unavoidable. With the launch of the "second-stage rocket," the organizational structure of relevant company departments also needs to adjust accordingly. Consequently, the company will have to eliminate or adjust some positions. Nevertheless, the company will do its best to minimize the impact of this transition on our colleagues.

The Micro Connect Macau Exchange Central Exchange Trading Facility (ETF — Microconnect Central Exchange Trading Facility) is the propulsion system of the "second-stage rocket."

Once this system is built, it will serve as the central counterparty for all market participants on the Macau Exchange. All market participants can use this central trading system to generate DRO/DRP assets, sell DRO/DRP assets, and participate in the DRO/DRP market by purchasing exchange-tradable shares — all according to their familiar behavioral logic, simply and conveniently.

For various consumer funds, professional investors, and commercial property operators who have industry expertise, they earn money from "insight" (Alpha), and investing through revenue-sharing is a brand new option. For global investors who want to participate in this daily revenue-sharing market but cannot make effective, in-depth judgments on individual store assets, they earn money from "market exposure" (Beta), and this central trading system also serves them. This central trading system is established based on a series of pre-set capital structure and revenue distribution rules.

Building on the upgraded support systems of the first-stage rocket, the "second-stage rocket's" escort system is equipped with four new functions.

Since the opening of the Micro Connect Macau Exchange last year, we have been actively preparing these four functions. They are all upgraded from the ARM system, exchange system, and various tools and algorithmic models accumulated during the first-stage rocket phase. They include:

• Information disclosure system. This is the MAP we announced to the public earlier this year. Leveraging the dividends of the digital age, we pursue highly transparent asset information disclosure with granular detail down to the individual store level and at a daily frequency.

• Valuation engine. A transparent and publicly available contract design and valuation engine, to be launched in June.

• Risk rating. Based on the daily performance of our more than 10,000 stores from the earlier phase, we use large models to comprehensively synthesize and characterize store risk. This is beginning to be implemented, and rating results will also be shared with the entire market in June.

• Post-investment asset management. A post-investment service system to assist investors in daily monitoring and management of assets.

We believe the "second-stage rocket" will bring a completely new phase to the Macau Exchange. The specific designs are largely finalized, and the next step requires full consultation with relevant parties including regulatory authorities. Our goal is to gradually roll this out to the market in the second half of this year.

In summary, during the first-stage rocket period, Micro Connect used its own money and strength to blaze trails, clear paths, and create models; in the second-stage rocket phase, Micro Connect will mobilize market forces to embark on the journey of bringing large capital into small shops.

Charles Li, Kelvin Zhang

Image source | IC photo