Xiaohongshu sheds up to half its implied value in private markets

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

With the support of millennial women and an active audience of 200 million, the company achieved a $20bn valuation in total revenue and is on track for a blockbuster initial public offering.

Then the tide turned for Chinese Internet startups.

Members of Alibaba and Tencent were forced to back off their plans to go public in the US after Beijing launched a legal investigation into ride-hailing group Didi just days after its IPO was blocked in New York. according to many wise people.

The private equity market since the start of the year has given Xiaohongshu an implied valuation of between $10bn and $16bn, according to private equity data provider Altive. A large investor in Xiaohongshu is looking to sell shares at a price of $14bn last month, according to a person familiar with the matter.

Xiaohongshu is part of a group of global technology groups that have faced brutal scrutiny from investors, as venture capital funding has dried up and the prospect of exiting and investing through IPOs and buyouts has ended.

This trend is exacerbated in China by the government’s crackdown on technology, and the Internet’s launch is an indirect result of Beijing’s anti-terrorist campaign that has led to state giants such as Alibaba and Tencent taking down Chinese technology companies.

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The announcement has meant that investors have little prospect of exiting their investment in Xiaohongshu by buying the Chinese technology company.

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

Xiaohongshu said that he “currently has no IPO plans,” adding: “We are seeing good progress in our number of employees and revenue, and we will continue to focus on developing our community and making Our fundraising efforts are ongoing.”

Xiaohongshu was founded in 2013 by Miranda Qu and Charlwin Mao Wenchao as an online travel guide for Chinese millennials. The partners work for the Bertelsmann advertising group and the Bain consultancy, respectively.

The platform is a great source of information for young shoppers looking for product recommendations from friends and influencers combining the social network Instagram and the search service Pinterest. Recently, users have been using the platform to get Covid-19 news updates and share advice during the country’s lockdown.

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Jake Chan, director of operations at Altive, said Xiaohongshu’s high valuation is partly due to the poor nature of the private market and the diverse investor environment, which includes family-owned companies. supported by China’s shopping group, along with Tencent and Alibaba.

“Some of these families have financial needs because the housing environment and the Covid restrictions in China have affected their core business; they are willing to accept deep discounts to facilitate sales. Therefore, you see high prices like that,” Chan said.

As the prospect of an imminent IPO diminishes, 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 monitoring” and “service analysis process”.

“Anyone can imagine that the company is bankrupt this year,” said one former employee involved in the job cuts. “It’s clear everywhere. From termination to budget management for projects. The quality of food in the cafeteria has deteriorated, they have stopped serving food and drinks.”

Experts believe that the key to the success of Xiaohongshu will be the company’s sustainable strength. It has a loyal following of 200mn, mostly young women in affluent cities, and sells consulting services based on the insights generated on its platform to national brands. the world is expanding its footprint in China.

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Xiaohongshu does not make its revenue figures public, but Chinese research firm LeadLeo estimated that, in 2020, 80 percent of its revenue will come from advertising and 20 percent from ecommerce.

Relying on digital media has left the industry exposed. Market research firm CTR Media Intelligence estimated that in the eight months to August, total advertising spending by Chinese marketers across the board fell by more than 10 percent.

Meanwhile, Xiaohongshu’s success in creating a sense of community among users who share beauty and shopping trips has led to concerns that the introduction of large-scale advertising on the site will lead to a backlash. job.

“The platform puts a lot of value on the community,” said Ma Han, an employee at a social media company based in Beijing and a sportswear influencer. “Too much publicity will destroy the public opinion.”

In 2014, Xiaohongshu launched an ecommerce business but struggled to compete in the highly competitive market dominated by Alibaba’s Taobao and JD.com.

“The company has not seen a good business model,” said Miro Li, founder of Hong Kong consulting firm Double V, “This will be a problem in the long run.”

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