Double-Sided Qudian: Luo Min’s original sin and the support of investment institutions

Luo Min, the founder of Qudian, registered his Weibo account on December 15, 2014. To date, there is only one Weibo post notifying his birthday on February 17, 2017. Other than that, his Weibo account is blank, showing his seemingly low-key personality. However, recently, after Qudian went public, the public comments of many participants, including Qudian's investors and founders, pushed Qudian to the peak of public opinion.

At 9:30 p.m. Beijing time on October 18, Qudian was officially listed on the New York Stock Exchange with the stock trading code "QD". The issue price was US$24 per American Depositary Share (ADS), which is higher than the US$19-22 pricing range in the recently updated prospectus.

Subsequently, Qudian opened at $34.35, up 43.13% from the issue price, with a market value of $11.331 billion. As of the close of October 18, Qudian closed at $29.18, up 21.58% from the issue price, with a market value of $9.625 billion.

However, at 4 a.m. on October 24, when the U.S. stock market closed, Qudian plummeted 19.64%, the biggest drop since its listing about a week ago, closing at US$26.52 per share, close to the issue price of US$24.

The trigger for the rise and fall came from the fact that Qudian’s founder Luo Min publicly responded to several public doubts about Qudian, and compiled them into an article "Qudian's Luo Min Responds to Everything". It was also this article that exposed more loopholes and fallacies of Qudian, pushing the negative aspects of Qudian to a higher level, which was directly reflected in the sharp drop in US stocks.

In March 2014, Qudian’s predecessor, Qufenqi, was officially launched. In April, Qufenqi fully opened its Beijing station. One of its branches was located in a house of about 110 square meters in a residential campus within the Third Ring Road.

The newly established Qufenqi was short of manpower and material resources, and in the first few months it was even maintained by only three people - Peng Xiaofeng, who was in charge of Beijing business at the time, generally "respectfully called" Brother Peng, and two other operational colleagues.

The Qufenqi office was almost empty during the day, until around ten o'clock at night, when more and more people came into the office. Even then, there were only about ten people, and most of them were college students, around 23 years old.

Startups have different businesses but similar rhythms - check in at 9am and finish work at midnight, with no weekends or holidays. There are two or three team-building opportunities every month, and the location is fixed at a hot pot restaurant near the North Third Ring Road.

In September 2014, Qufenqi Beijing was officially divided into three regions, and its businesses gradually matured. Luo Min established the Qufenqi Heroes Conference in Beijing to motivate employees and boost morale.

Luo Min said at the first conference, "We will definitely succeed. Pigs will take off in this trend."

In the eyes of Qudian's investors and former employees, Luo Min is a person who fights very hard but is also eager for success. A former Qudian employee told Leifeng.com (official account: Leifeng.com) that Luo Min sometimes pursues speed and growth too much without considering the feelings of others, and is "a bit overbearing." The person recalled to Leifeng.com that Luo Min wanted to do the house installment business and decided to transfer management trainees from each department. In the afternoon of the same day, without notifying any department managers, a temporary meeting was held in the company's management trainee group to announce the establishment of the real estate installment business group. Those who wanted to participate could stay, and those who did not want to participate could return to their original departments. During the operation of this secret project, all relevant personnel were not allowed to return to their original departments or disclose information to the outside.

Another former Qudian employee also confirmed this detail to Leifeng.com. He said that this new property installment project was named "Qu Zu" at the time and was led by Liu Zhentao, the then co-founder of Qu Fenqi. However, due to various reasons, the project was stopped after only one month, and the management trainees and other employees who were temporarily transferred were returned to their original positions.

"Luo Min is guilty of original sin," an insider of Qudian told Leifeng.com. "In fact, he should be aware of it himself."

According to Leifeng.com, Qudian's debt collection is currently contracted to a third-party company, and it is not like what Luo Min said, "No collection, no repayment." The interest rate for installment payments was very high in the early stage, and although the interest rate was reduced later, it is still very stressful for students. Coupled with various violent debt collection methods - posting on Tieba, calling counselors and parents, threatening and intimidating, these external pressures are exerted on college students, which led to the previous incidents of college students jumping off buildings due to debt collection.

In the eyes of this insider, such logic is incomprehensible. "Luo Min's original intention was good, allowing consumers to consume and enjoy the product in advance, but as long as he defaulted for one day, he would face the threat of violent debt collection, and finally forced a college student to jump off a building to solve the problem. This is also a problem faced by the entire industry."

From the end of 2014 to the beginning of 2015, Qufenqi's investment was stagnant and its B round of financing was delayed. Afterwards, Zhou Yahui, chairman of Kunlun Wanwei, made many efforts to mediate and helped Luo Min to attract dozens or hundreds of investors, but there was still no improvement.

Zhou Yahui revealed in his investment notes after Qudian went public that the B round of financing was not smooth. Under the call of DST, which chose to invest in Fenqi Le, more investors chose Fenqi Le, which is today's Lexin. After the Spring Festival holiday in 2015, Luo Min was really anxious and contacted Zhou Yahui every day, saying: "Why don't we do a round of financing of 30 million US dollars first, and the valuation can be slightly lower, so that we basically don't need to raise funds again."

Of course, the B round failed afterwards, and the C round was led by Zhou Yahui. In the financing round in August 2015, Ant Financial, as the lead investor, was officially integrated into the development of Qudian.

Regarding Ant Financial's choice of Qudian and its support in terms of resources and funds, a person familiar with the matter told Leifeng.com that Qudian did not have many options at the time. At that time, Fenqi Le had already received investment from JD.com's Liu Qiangdong, so Luo Min could choose Alibaba. Ant Financial itself is a strong financial investment, which attracted many users to Qufenqi at the time and provided great financial support, including cash loans, which were Qufenqi's main source of income after it cut off its campus business.

At that time, Qufenqi cooperated with Zhaocaibao of Ant Financial to obtain funds at a lower price. The initial funding cost of 15% to 16% negotiated with P2P was gradually reduced to 11% to 12%, and then Ant directly provided 6% to 7% of funding support, which directly saved Qufenqi a lot of costs.

Why did Ant Financial choose Qufenqi? On the one hand, Alibaba no longer does the dirty work of local marketing; on the other hand, what Ant Financial and Sesame Credit lacked most at the time was college students’ consumption data, which happened to be the business that Qufenqi was doing.

The entry of Ant has brought unlimited vitality to Qufenqi and Qudian, but it is also accompanied by the business dependence that is now criticized.

Before and after Ant entered the market, Qudian's financial statements showed that its profits and performance reached a new level - from April 9, 2014 to December 31, 2014, Qudian's total revenue was 24.133 million yuan, with a net loss of 40.775 million yuan; in 2015, the annual revenue was 235 million yuan, with a net loss of 233 million yuan. In 2016, the annual revenue reached 1.443 billion yuan, with a net profit of 577 million yuan, a significant turnaround from loss to profit. In the first half of this year, Qudian's total revenue was 1.833 billion yuan, while in the same period of 2016 it was 371 million yuan. It has exceeded last year's full-year net profit of 973 million yuan.

If Luo Min had chosen to remain silent and low-key and make a fortune quietly after the successful listing, perhaps the embarrassing situation of the stock price plummeting by nearly 20% in a single day and various business loopholes being exposed would not have happened.

I will not repeat the article "Qudian Luo Min Responds to Everything" that was all over the WeChat Moments that day. In short, Luo Min expressed many jaw-dropping and even incredible opinions, such as "Now once we find out that a person is a student, we refuse to lend money", "Any overdue debt is a bad debt here, and we will not urge them to pay back our bad debts. We won't even call them. If you don't pay back the money, forget it, we will give it to you as a benefit, that's it", "Our bad debt rate is less than 0.5%, which is the lowest in the industry."

The response, which was full of loopholes, allowed the audience to sort out the many problems hidden in Qudian's prospectus.

On the one hand, the amount of financing was falsified: taking the rather difficult B round of financing as an example, Qufenqi previously announced that the amount of B round financing was between 25 million and 30 million US dollars, but a review of the prospectus showed that this was not the case.

The table "Securities Issuances by Qufenqi Inc., a Former Holding Company of Beijing Happy Time" in the "History of Securities Issuances" column on page 223 of the prospectus shows that in the B round of financing, "BRV Lotus Fund 2012, LP" (BlueRun Ventures) invested US$1 million at US$0.24 per share; "BRV Lotus Fund 2012, LP", "Cornerstone Venture Limited" (Source Code Capital) and "Golden Summit International Ltd." (a Singapore private consortium founded by Thomsa Chan, former president of Goldman Sachs Asia) invested US$500,000, US$3 million and US$1 million respectively - the actual amount of financing in this round was US$5.5 million, which was magnified 5.45 times.

In addition to the fraudulent financing in Rounds A and B, Round C is "actually non-existent."

On December 16, 2014, Qufenqi announced that it had received a large round of C financing of 100 million US dollars. On April 3, 2015, Luo Min issued an internal email saying that Qufenqi had completed another round of financing with an undisclosed amount. But in fact, according to the prospectus, the so-called C and D rounds were actually just one round of financing.

The "Securities Issuances by Qufenqi Inc." table on page 223 of the prospectus records the details of "Qufenqi" in "Series B" - "BRV Lotus Fund 2012, LP" and "BRV Aster Fund I, LP" under BlueRun Ventures each invested US$3.5 million, "Source Code QFQ Linkage LP" (Source Code Capital) invested US$20 million, and Kunlun Wanwei invested US$50 million through the "Koram Games Limited" entity, totaling US$77 million.

In addition to the issue of false financing, Qudian’s business model is also questionable.

In fact, stripping off the cloak of financial technology and big data technology, Qudian is actually engaged in the Internet subprime loan business, harvesting low-income groups whose consumption level exceeds their consumption ability. The core support of this kind of business is risk control. With its core attached to Ant Financial, how long will Qudian be able to "stand upright"?

According to the description in the prospectus, Qudian's risk control system uses technologies such as big data, artificial intelligence and deep learning, combining Sesame Credit scores and user behavior data to assess users' willingness and ability to repay, thereby performing more accurate risk pricing and reducing operating costs.

The main reason for Qudian’s low overdue rate at present is that Qudian has set a high threshold for borrowing users - loans can only be granted if the Sesame Credit score is above 600.

Correspondingly, Qudian also pointed out the risks associated with Sesame Credit in its prospectus - if it cannot access the credit analysis data related to Sesame Credit, the company's ability to assess the credit value of potential users will be seriously affected, which will reduce the quality of lending and increase the delinquency rate. In addition, in its cooperation with Sesame Credit, Qudian does not have access to certain specific analysis results, which will also damage Qudian's risk assessment capabilities.

In other words, without Ant Financial's credit assessment, Qudian would no longer have the core risk control function as an Internet finance company. How did the New York Stock Exchange agree to list the company with such an obvious loophole? An industry insider told Leifeng.com that it was very likely that a senior executive of Qudian who had operated multiple listed companies and the support of Qudian's multiple investment institutions allowed the company to evade regulation.

"The current stock situation of Qudian is due to the support of fund companies. Only when the funds withdraw, will the real Qudian appear."