Xiaohongshu, the hugely popular social media platform billed as China’s answer to Instagram, has had a boom over the past year.
With a loyal following of millennial women and an audience of 200 million active users, the company achieved a $20 billion valuation in a fundraising round and marched toward a blockbuster IPO.
Then the tide turned for Chinese internet start-ups.
The Alibaba- and Tencent-backed group was forced to shelve its plans to go public in the US after Beijing launched a regulatory probe into ride-sharing group Didi days after its blockbuster IPO in New York, according to several people supported by knew the step.
Sales of private markets holdings since the beginning of the year have given Xiaohongshu an implied valuation of between $10 billion and $16 billion, according to private equity data provider Altive. According to a person familiar with the matter, a major Xiaohongshu investor was seeking bids to sell shares worth $14 billion last month.
Xiaohongshu is among a global cohort of tech companies that have faced a brutal reappraisal from investors as venture capital funding has dried up and prospects for exiting investments through IPOs and acquisitions have diminished.
The trend has been exacerbated in China by government crackdowns on tech, with internet startups an indirect causation of Beijing’s anti-monopoly campaign that has forced local giants like Alibaba and Tencent to divest stakes in Chinese tech companies.
This campaign has left investors with little immediate prospect of ending their investment in Xiaohongshu through a takeover by a Chinese tech giant.
“Xiaohongshu cannot prop up its lofty valuation without an IPO,” said Li Chengdong, founder of Dolphin, a tech-focused think tank in Beijing. “They haven’t found a good commercial model and are too dependent on advertising revenue. This is a problem when companies cut marketing budgets,” he added.
Xiaohongshu said it had “no IPO plans at this time,” adding, “We are seeing healthy growth in our user base and revenue, and we will remain focused on growing our community and strengthening our monetization efforts going forward.”
Xiaohongshu was founded in 2013 by Miranda Qu and Charlwin Mao Wenchao as an online travel guide for Chinese millennials. The co-founders used to work for the media group Bertelsmann and Bain Consulting.
A treasure trove of information for young shoppers looking for product recommendations from friends and influencers, the platform combines Instagram’s social network with Pinterest’s search engine capability. More recently, users are using the platform to get updates on Covid-19 and share tips during the community lockdown.
Jake Chan, managing partner at Altive, said Xiaohongshu’s wide price range is partly due to the inefficiency of private markets, as well as its diversified investor base, which includes family offices backed by Chinese real estate giants, as well as Tencent and Alibaba.
“Some of these property families have liquidity needs as their core businesses have been impacted by the macro environment and Covid restrictions in mainland China; They are more willing to accept a higher discount to facilitate a sale. That’s why you see such a wide price range,” Chan said.
As prospects of an impending IPO faded, Xiaohongshu announced that it had laid off nearly 10 percent of its workforce, or 200 employees, in April. Xiaohongshu said the job cuts are part of “normal staff optimization” and the “performance appraisal process.”
“Everyone could sense that the company ran out of money this year,” said a former employee caught up in the downsizing. “It was clear everywhere. From the layoffs to management cutting budgets on projects. The quality of the meals in the cafeteria deteriorated and snacks and drinks were no longer offered.”
Experts believe that Xiaohongshu’s growing user base will be the company’s enduring strength. It has a loyal group of 200 million followers, mostly young women in affluent cities, and sells consulting services based on the insights gained from its platform to major international brands that are expanding its presence in China.
Xiaohongshu doesn’t release its financial figures, but Chinese research firm LeadLeo estimates that by 2020, 80 percent of its revenue will come from ads and 20 percent from e-commerce.
Dependence on digital advertising has left the company vulnerable. Market research firm CTR Media Intelligence estimated that total advertising spend by Chinese retailers fell more than 10 percent in the eight months to August.
Meanwhile, Xiaohongshu’s success in creating the sense of authentic community among users sharing beauty and shopping tours has prompted concerns that introducing too much advertising on the site would lead to user backlash.
“The platform places great value on the community,” said Ma Han, a staffer at a Beijing-based social media agency and sportswear influencer. “Too much advertising destroys the sense of community.”
In 2014, Xiaohongshu launched an e-commerce function, but has struggled to compete at scale in a highly competitive space dominated by Alibaba’s Taobao and JD.com.
“The company hasn’t found a good commercialization model yet,” says Miro Li, founder of Hong Kong-based brand consultancy Double V. “That’s going to be a problem in the long run.”