FUND RAISING: Alibaba’s Second-Hand Spin-Off, LeTV’s Unnamed Investor

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Bottom line: Alibaba’s spin-off of its C2C marketplace for second-hand goods could reflect a new trend for big Internet firms to separately run individual assets, while LeTV may have provided most of the money in the first funding round for its smartphone unit.

Taobao spins off Xianyu

A couple of fund-raising headlines are spotlighting emerging trends in China, including a nascent move by big companies to spin off smaller units as separately run and funded entities. That move was center stage in new reports that e-commerce juggernaut Alibaba (NYSE: BABA) is spinning off its Xianyu marketplace that specializes in sales of second-hand goods between consumers.

The second headline comes from online video high-flyer LeTV (Shenzhen: 300104), and spotlights a trend that shows rapidly cooling investor sentiment towards overheated sectors like video and smartphones. That news has LeTV declining to name any of the backers in the first funding round for its fledgling smartphone unit, hinting that no serious investors were interested in this particular opportunity that raised $530 million.

Let’s start with Alibaba, which is working desperately to clean up its Taobao C2C marketplace where rampant trade in pirated goods resulted in a high-profile dispute with China’s commerce regulator earlier this year. Now media are reporting that Taobao is planning to spin off its Xianyu site as a separately run and funded company. (English article; Chinese article)

Xianyu is quite a vibrant community for traders of second hand goods, featuring more than 50,000 communities and more than 200,000 daily transactions, according to the reports, which cite unnamed sources talking about the spin-off plan. A number of big-name venture companies including Sequoia Capital and IDG Capital are reportedly interested in investing in Xianyu, reflecting the company’s big growth potential.

It doesn’t seem like piracy would be a big issue for Xianyu, since the site is involved in second-hand goods and not new merchandise sales. Perhaps that’s partly behind the decision to spin off the unit, since investors might consider it a safer bet than Taobao due to lack of piracy concerns. Regardless of the reasons, the move looks interesting because it would mark a reversal of the much bigger trend by China’s big Internet companies to buy up other firms.

We saw something similar earlier this week, when leading online classified ad site 58.com (NYSE: WUBA) announced it would spin off its Guazi.com used car platform as a separate company. (previous post) While 2 cases don’t really constitute a trend just yet, we’ll have to see if more companies follow with similar plans. Such a trend would certainly make sense in the current environment where companies like Alibaba own a wide range of assets in many different businesses, making it hard for investors to understand and evaluate the big parent companies.

Self-Funding Smartphones?

Next there’s the LeTV news, which includes the headline figure of $530 million announced by the company’s charismatic CEO Jia Yueting in a Thanksgiving Day email to employees. (Chinese article) LeTV has been moving aggressively into smartphones this year as part of a drive to promote its core online video services, though its late arrival to that space means it will face an uphill battle to differentiate itself from its many Chinese rivals.

While the $530 million figure is certainly impressive, especially in the current environment of weakening investor sentiment, it’s also quite notable that LeTV has declined to disclose the names of any investors in this new funding round. Obviously we can’t read too much into this decision, but it does seem a bit unusual for a company like LeTV that likes to brag about this kind of thing.

That’s leading me to guess, perhaps incorrectly, that much of the funding is coming from Jia Yueting and maybe the listed LeTV itself. The company made headlines in May when it raised 7.5 billion yuan ($1.2 billion) in a private placement, and concurrently announced that Jia would sell up to 148 million of his own shares valued at $1.8 billion at that time. (previous post) Those 2 sums would be more than enough to easily cover LeTV’s new capital raising, and I wouldn’t be surprised if Jia and LeTV provided most or all of the funds due to lack of interest from most serious private investors.

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