Xiaohongshu, the wildly common social media platform thought of to be China’s reply to Instagram, had been driving excessive final yr.
With a loyal following of millennial ladies and an viewers of 200mn energetic customers, the corporate gained a $20bn valuation in a fundraising spherical and was marching in the direction of a blockbuster preliminary public providing.
Then the tide turned for Chinese language web start-ups.
The Alibaba and Tencent-backed group was compelled to shelve its plans to go public within the US after Beijing initiated a regulatory probe into ride-hailing group Didi days after its blockbuster IPO in New York, in accordance with a number of individuals with information of the transfer.
Personal market stake gross sales because the starting of the yr have given Xiaohongshu an implied valuation of between $10bn and $16bn, in accordance with personal fairness knowledge supplier Altive. One main Xiaohongshu investor was in search of bids to promote shares at a $14bn valuation final month, in accordance with one individual conversant in the matter.
Xiaohongshu is a part of a world cohort of know-how teams which have confronted a brutal reassessment by buyers, as enterprise capital funding has dried up and prospects for exiting investments by IPO and buyouts have light.
The development has been exacerbated in China by the federal government’s tech crackdown, with web start-ups an oblique causality of Beijing’s anti-monopoly marketing campaign which have compelled native giants like Alibaba and Tencent to shed stakes in Chinese language tech corporations.
That marketing campaign has meant buyers have little fast prospect of exiting their Xiaohongshu funding by a buyout by a Chinese language tech conglomerate.
“Xiaohongshu can’t help its excessive valuation with out an IPO,” mentioned Li Chengdong, founding father of Dolphin, a technology-focused think-tank in Beijing. “They haven’t discovered a superb business mannequin and are over-reliant on promoting revenues. It is a downside when corporations are slashing advertising budgets,” he added.
Xiaohongshu mentioned it “presently has no IPO plans”, including: “We’re seeing wholesome progress in our consumer numbers and income, and we are going to proceed to concentrate on rising our group and strengthening our monetisation efforts going ahead.”
Xiaohongshu was based in 2013 by Miranda Qu and Charlwin Mao Wenchao as an internet tour information for Chinese language millennials. The co-founders used to work for the media group Bertelsmann and Bain consultancy, respectively.
The platform is a treasure trove of knowledge for younger buyers in search of product suggestions from pals and influencers and blends Instagram’s social community with Pinterest’s search engine perform. Extra not too long ago, customers have been utilizing the platform to get Covid-19 information updates and share ideas throughout group lockdowns.
Jake Chan, managing companion at Altive, mentioned Xiaohongshu’s extensive value vary is partly due to the inefficient nature of personal markets in addition to its diversified investor base, which spans household places of work backed by Chinese language actual property teams, and Tencent and Alibaba.
“A few of these actual property households have liquidity wants as their core enterprise have been affected by the macro setting and the Covid restrictions in mainland China; they’re extra keen to simply accept a deeper low cost to facilitate a sale. Therefore why you’re seeing such a wide range in pricing,” mentioned Chan.
As prospects for an imminent IPO light, Xiaohongshu introduced it had dismissed slightly below 10 per cent of its workforce in April, or 200 workers. Xiaohongshu mentioned the job cuts had been a part of “regular HR optimisations” and “efficiency evaluate course of”.
“Everybody might really feel that the corporate was wanting cash this yr,” mentioned a former worker caught up within the job cuts. “It was clear all over the place. From the lay-offs to the administration reducing budgets for initiatives. The standard of meals within the cafeteria declined, and so they stopped offering snacks and drinks.”
Specialists consider Xiaohongshu’s thriving consumer base will function the corporate’s enduring energy. It has a loyal band of 200mn followers, predominantly younger ladies in prosperous cities, and sells consulting companies primarily based on insights harvested from its platform to giant worldwide manufacturers increasing its footprint in China.
Xiaohongshu doesn’t make its monetary figures public, however the Chinese language analysis agency LeadLeo estimated that, in 2020, 80 per cent of its income got here from adverts and 20 per cent got here from ecommerce.
The reliance on digital promoting has left the corporate uncovered. Market analysis agency CTR Media Intelligence estimated that within the eight months to August, total promoting spending by Chinese language retailers throughout the board fell greater than 10 per cent.
In the meantime, Xiaohongshu’s success in creating the sense of an genuine group between customers who share magnificence and purchasing journeys has led to issues that introducing an excessive amount of promoting on the location would result in a consumer backlash.
“The platform attaches an excellent worth to the group,” mentioned Ma Han, an worker at a Beijing-based social media company and sportswear influencer. “Too many adverts will destroy the sense of group.”
In 2014, Xiaohongshu launched an ecommerce perform however has struggled to compete at scale in a extremely aggressive house dominated by Alibaba’s Taobao and JD.com.
“The corporate nonetheless hasn’t discovered a superb commercialisation mannequin,” mentioned Miro Li, founding father of the Hong Kong-based model consultancy Double V. “This will probably be an issue in the long run.”