Xiaohongshu, the wildly popular social media platform seen as China’s answer to Instagram, hit a fever pitch last year.
With a loyal following of millennial women and a following of 200 million active users, the company earned a $20 billion valuation in a fundraising round and was heading for a successful initial public offering.
Then the tide turned for Chinese internet start-ups.
The Alibaba- and Tencent-backed group was forced to suspend plans to go public in the United States after Beijing launched a regulatory probe into ride-hailing group Didi days after its IPO in New York, according to multiple people at the aware of this decision.
Private market equity sales year-to-date have given Xiaohongshu an implied valuation of between $10 billion and $16 billion, according to private equity data provider Altive. A major Xiaohongshu investor was seeking offers to sell shares at a valuation of $14 billion last month, according to a person familiar with the matter.
Xiaohongshu is among a global cohort of tech groups that have faced a sharp revaluation by investors as venture capital funding has dried up and prospects for exiting investments through IPOs stock market and redemptions have faded.
The trend has been exacerbated in China by the government’s tech crackdown, with internet start-ups an indirect causality of Beijing’s anti-monopoly campaign that has forced local giants like Alibaba and Tencent to lose stakes in Chinese tech companies .
This campaign has meant investors have little immediate chance of exiting their investment in Xiaohongshu through a takeover by a Chinese tech conglomerate.
“Xiaohongshu cannot sustain its high valuation without an IPO,” said Li Chengdong, founder of Dolphin, a technology-focused think tank in Beijing. “They haven’t found a good business model and are too dependent on ad revenue. This is a problem when companies reduce their marketing budgets,” he added.
Xiaohongshu said it “currently has no IPO plans,” adding, “We are seeing healthy growth in our user numbers and revenue, and we will continue to focus on growing our community and strengthening our monetization efforts in the future.”
Xiaohongshu was founded in 2013 by Miranda Qu and Charlwin Mao Wenchao as an online tourist guide for Chinese millennials. The co-founders worked for media group Bertelsmann and consultancy Bain respectively.
The platform is a wealth of information for young shoppers looking for product recommendations from friends and influencers and combines the social network of Instagram with the search engine function of Pinterest. More recently, users have used the platform to get updates on Covid-19 and share tips during community lockdowns.
Jake Chan, managing partner at Altive, said Xiaohongshu’s wide price range is partly due to the inefficient nature of private markets as well as its diverse investor base, which includes family offices backed by real estate groups. Chinese, as well as Tencent and Alibaba.
“Some of these property families have cash needs as their core business has 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 price range,” Chan said.
As prospects for an imminent IPO faded, Xiaohongshu said it laid off just under 10% of its workforce in April, or 200 employees. Xiaohongshu said the job cuts were part of “normal HR optimizations” and the “performance review process”.
“Everyone could feel the company was running out of money this year,” said a former employee caught up in the layoffs. “It was clear everywhere. From layoffs to management budget cuts for projects. The quality of meals in the cafeteria has gone down and they have stopped providing snacks and drinks. »
Experts believe that Xiaohongshu’s thriving user base will be the company’s enduring strength. It has a loyal group of 200 million followers, mostly young women from wealthy cities, and sells consulting services based on insights collected on its platform to major international brands that are expanding its footprint in China.
Xiaohongshu does not make its financial figures public, but Chinese research firm LeadLeo estimated that in 2020, 80% of its revenue came from advertising and 20% from e-commerce.
Addiction to digital advertising has left the business exposed. Market research firm CTR Media Intelligence estimated that in the eight months to August, overall ad spending by Chinese retailers across all areas fell by more than 10%.
Meanwhile, Xiaohongshu’s success in creating a sense of authentic community among users who share beauty and shopping journeys has raised concerns that introducing too much advertising to the site will lead to a backlash from users. users.
“The platform values the community very much,” said Ma Han, an employee of a Beijing-based social media agency and sportswear influencer. “Too many ads will destroy the sense of community.”
In 2014, Xiaohongshu launched an e-commerce feature, but struggled to compete at scale in a highly competitive space dominated by Alibaba’s Taobao and JD.com.
“The company still hasn’t found a good go-to-market model,” said Miro Li, founder of Hong Kong-based brand consultancy Double V. “It will be a long-term problem.”
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