Xiaohongshu shed up to half of its implied value in the private market

Xiaohongshu, a hugely popular social media platform considered China’s answer to Instagram, has been on the rise for the past year.

With faithful following of Millennials women and an audience of 200m active users, the company won a valuation of $20bn in the fundraising round and is marching towards a blockbuster initial public offering.

Then install it for Chinese internet start-up.

The Alibaba and Tencent-backed group were forced to abandon plans to go public in the US after Beijing initiated a regulatory probe into ride-hailing group Didi days after its blockbuster IPO in New York, according to several people with knowledge of the move.

Private market share sales since the start of the year have given Xiaohongshu an implied valuation of between $10bn and $16bn, according to private equity data provider Altive. A major investor Xiaohongshu was seeking an offer to sell shares at a valuation of $14bn last month, according to a person familiar with the matter.

Xiaohongshu is part of a global cohort of technology groups that have faced a brutal reassessment by investors, as venture capital costs have dried up and prospects for exiting investments through IPO and buyouts have withered.

This trend has been exacerbated in China by the government’s crackdown on technology, with internet startups an indirect causality of Beijing’s anti-monopoly campaign that has forced local giants such as Alibaba and Tencent to divest Chinese tech companies.

The campaign means investors have little prospect of an immediate exit from their Xiaohongshu investment through a buyout by the Chinese tech conglomerate.

“Xiaohongshu cannot support its high valuation without an IPO,” said Li Chengdong, founder of Dolphin, a technology-focused think-tank in Beijing. “They have not found a good commercial model and rely more on advertising revenue. This is a problem when companies reduce their marketing budgets,” he added.

Xiaohongshu stated that “currently we have no IPO plans”, adding: “We see healthy growth in the number of users and our revenue, and we will continue to focus on developing 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 travel guide for Chinese millennials. The co-founders worked for Bertelsmann media group and Bain consultancy, respectively.

The platform is a treasure trove of information for young shoppers looking for product recommendations from friends and influencers and combines Instagram’s social network with Pinterest’s search engine functionality. Recently, users have been using the platform to get Covid-19 news updates 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 the private market as well as its diversified investor base, which includes family offices backed by Chinese real estate groups, and Tencent and Alibaba.

“Some of these housing families have liquidity needs because their core business has been affected by the macro environment and the Covid restrictions in mainland China; they are more willing to accept deeper discounts to facilitate a sale. That’s why you see a large price range,” said Chan.

As prospects for an imminent IPO faded, Xiaohongshu announced that it had laid off just under 10 percent of its workforce in April, or 200 employees. Xiaohongshu said the job cuts were part of “normal HR optimization” and “performance review process”.

“Everyone can feel that the company lacks money this year,” said a former employee caught up in job cuts. “It’s clear everywhere. From layoffs to management cutting budgets for projects. The quality of the food in the canteen is declining, and they stopped serving snacks and drinks.”

Experts believe that Xiaohongshu’s advanced user base will be the company’s lasting power. It has a loyal band of 200 million followers, mainly young women in affluent cities, and sells consulting services based on the insights harvested from its platform to large international brands expanding their footprint in China.

Xiaohongshu does not make its financial figures public, but Chinese research firm LeadLeo estimates that, by 2020, 80 percent of its revenue will come from advertising and 20 percent from e-commerce.

The reliance on digital advertising has left the company exposed. Market research firm CTR Media Intelligence estimates that in the eight months to August, overall advertising spending by Chinese retailers across the board fell by more than 10 percent.

Meanwhile, Xiaohongshu’s success in creating a sense of authentic community between users who share beauty and shopping trips has caused concern that introducing too much advertising on the site will lead to user backlash.

“The platform attaches great value to the community,” said Ma Han, an employee at a Beijing-based social media agency and sportswear influencer. “Too much advertising will destroy the sense of community.”

In 2014, Xiaohongshu launched an e-commerce function but has struggled to compete at scale in a competitive space dominated by Alibaba’s Taobao and JD.com.

“The company still hasn’t found a good commercialization model,” said Miro Li, founder of Hong Kong-based brand consultant Double V. “This will be a problem in the long term.”

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