Li Xiaojia: Helping the Little Guy Is Helping Big Capital

By Muxin Xu

On September 26, Drip Capital held its Drip Star launch event in Macau, alongside a themed presentation on the Macau Exchange (MCEX).

Just four months earlier, Drip Capital was mired in layoff rumors, with investment front-office staff hit hardest. This sparked considerable outside skepticism at the time — questions about whether two years of aggressive investing had yielded poor returns, and even whether Drip Capital's model, a neither-equity-nor-debt RBF (Revenue-Based Financing) approach, was fundamentally viable.

Charles Li finally revealed the numbers: Over three years, Drip Capital invested 4.4 billion yuan. So far, it has recovered nearly 2.3 billion, with the remaining 2 billion-plus expected to come back over the next two to three years, reaching a "break-even" state. From a financial returns perspective, this is hardly an attractive investment. But viewed through the lens of market education — or "burning money" to pave the way — the full launch of the Drip Star market system seems to signal that Drip Capital has achieved its strategic objectives.

The Drip Star launch is what Li described in his earlier internal memo as the "second-stage rocket." He wrote that Drip Capital was embarking on its second stage, where the shift from "first stage" to "second stage" meant moving from using the company's own money to test the model's feasibility to "organizing the market's money, the market's power."

As the former CEO of Hong Kong Exchanges and Clearing, Li's experience and innovation in designing the MCEX architecture are evident.

Traditional stock markets rely on "three highs" to build their credit assurance systems: high valuations, high trading volumes, and high barriers to entry. Stock markets sell corporate equity, so valuations must be high — making it difficult for investors to rely on dividends for returns, forcing them to depend on selling for liquidity. The risks created by the first two factors demand that listed companies meet high thresholds.

These three characteristics make secondary markets incompatible with small and micro enterprises. MCEX's solution: high-frequency dividends, precise disclosure, and practical barriers to entry. The latter two are straightforward. The key challenge is achieving high-frequency dividends. At MCEX, SPVs are required to distribute nearly all income as dividends, with a minimum frequency of monthly. Dividends are executed directly and automatically by the MCEX system, enabling investors to gradually exit on a monthly basis. The system that enables this is the newly launched "Drip Star."

In short, MCEX is an exchange platform with lower risk, modest starting returns, but high-frequency dividends — and therefore it is open only to professional institutional investors.

In Li's view, while every platform will attract some "bad actors," MCEX's mechanism makes fraud uneconomical due to its high-frequency dividend requirements and the need to frequently forecast dividend income. Over time, this creates a "good money drives out bad" dynamic. "Market design shouldn't depend on you wielding a whip," Li said. "The market mechanism itself should ensure that the room for bad behavior is extremely limited."

The following is Li's speech at the launch event, compiled by An Yong Waves:

1. Drip Capital's past three years have been a process of prototyping and modeling. Over these three years, we invested 4.4 billion yuan. To date, we've recovered over 2 billion, with the remaining 2 billion or so coming back over the next two to three years. By financial return standards, this isn't a good investment, but we're satisfied because our goal was to build the entire market.

2. There were many lessons along the way. For instance, we focused on investing in individual stores — what we called "following the vine to find the melon," investing in small stores along the chain's vine. We later found that the melons grown this way were too small and unsightly. My lesson: don't invest in a small melon, because all melons grow dependent on the vine. So we made a change at MCEX: what lists here is the vine. We can see the revenue of hundreds of melons attached to it, but it's the vine that distributes dividends.

3. We require very high-frequency dividends from SPVs, with a minimum of monthly distributions — though you can do weekly or even daily — while also forecasting your future dividends. There will certainly be deviations, but we won't punish you for them, because you'll police your own deviation. Otherwise, quite simply, no one will invest. So this is a market where bad actors will struggle to survive, because even if you're inclined to fraud, the cost-benefit ratio is too low.

4. Market design shouldn't depend on you wielding a whip. The market mechanism itself should ensure that the room for bad behavior is extremely limited.

5. In recent years, Macau has radiated a desire to develop, to push forward — something rarely seen before, because the gaming industry let people make money lying down. While finance itself is Macau's weakness, it's precisely because it's a blank slate here that we don't have to carry heavy historical baggage. Without deep financial sediment, we face fewer constraints and entanglements, allowing us to explore boldly. Our very unique exchange was able to obtain a license in Macau because Macau could understand that its gaming industry, its government tax collection, is itself a form of daily revenue sharing — so they immediately grasped the concept. Macau's inherent attributes allow it to achieve leapfrog development in modern finance.

6. For investors, you don't have as much control here, nor do you pay as much, and the returns are predictable. This financing method isn't necessarily better than traditional finance, but traditional finance doesn't reach here.

7. We've also launched Drip Star, the overarching name for MCEX's digital market operations system. It comprises five core elements: RBO, the underlying base asset of MCEX, corresponding to shareholders' equity in traditional listed companies; SPV, the digital financing vehicle for enterprises, corresponding to the listed company itself; SPAC, the digital investment vehicle for fund managers, corresponding to traditional listed investment funds; ETF, the digital exchange-traded index investment vehicle, corresponding to traditional exchange-traded index funds; and RBU, the top-tier product target of MCEX, corresponding to listed company stock.

8. Helping small and micro enterprises isn't charity. Helping small and micro enterprises is itself helping investors under the Wall Street model, helping international investors. Because for investors, it's unacceptable to have a significant segment of economic activity in such a large economy that they cannot participate in. Today, helping the little guy is helping big capital.

9. MCEX is Drip Capital's second-stage rocket. The first-stage rocket was lit by ourselves; it returned with lessons learned. Today we launch the second-stage rocket — the foundational architecture of a market. You can't launch a second-stage rocket twice. This market will grow on its own, gradually.

10. We are a patient capital market here. As you all know, the chicken-and-egg cycle takes time to form — we can't rush it. Don't look at how Stock Connect and Shenzhen-Hong Kong Stock Connect are now like oxygen to the entire Hong Kong market — when they first started, we had to constantly remind ourselves: don't rush. People aren't familiar with your product; large institutions have their own internal procedures to follow. Getting people to invest in a new way takes time. I know they will become bridges connecting capital and enterprises in the future, but a great bridge won't have heavy traffic on day one.

Image source: IC Photo