Xiaohongshu, the wildly popular social media platform considered to be China’s answer to Instagram, had been riding high last year.

With a loyal following of millennial women and an audience of 200mn active users, the company gained a $20bn valuation in a fundraising round and was marching towards a blockbuster initial public offering.

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 initiated a regulatory probe into ride-hailing group Didi days after its blockbuster IPO in New York, according to multiple people with knowledge of the move.

Private market stake sales since the beginning of the year have given Xiaohongshu an implied valuation of between $10bn and $16bn, according to private equity data provider Altive. One major Xiaohongshu investor was seeking bids to sell shares at a $14bn valuation last month, according to one 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 funding has dried up and prospects for exiting investments through IPO and buyouts 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 have forced local giants like Alibaba and Tencent to shed stakes in Chinese tech companies.

That campaign has meant investors have little immediate prospect of exiting their Xiaohongshu investment through a buyout by a 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 haven’t found a good commercial model and are over-reliant on advertising revenues. This is a problem when companies are slashing 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 monetisation efforts going forward.”

Xiaohongshu was founded in 2013 by Miranda Qu and Charlwin Mao Wenchao as an online tour guide for Chinese millennials. The co-founders used to work for the media group Bertelsmann and Bain consultancy, respectively.

The platform is a treasure trove of information for young shoppers looking for product recommendations from friends and influencers and blends Instagram’s social network with Pinterest’s search engine function. More 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 in part because of the inefficient nature of private markets as well as its diversified investor base, which spans family offices backed by Chinese real estate groups, and Tencent and Alibaba.

“Some of these real estate families have liquidity needs as their core business have been affected by the macro environment and the Covid restrictions in mainland China; they are more willing to accept a deeper discount to facilitate a sale. Hence why you’re seeing such a big range in pricing,” said Chan.

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

“Everyone could feel that the company was short of money this year,” said a former employee caught up in the job cuts. “It was clear everywhere. From the lay-offs to the management cutting budgets for projects. The quality of meals in the cafeteria declined, and they stopped providing snacks and drinks.” 

Experts believe Xiaohongshu’s thriving user base will serve as the company’s enduring strength. It has a loyal band of 200mn followers, predominantly young women in affluent cities, and sells consulting services based on insights harvested from its platform to large international brands expanding its footprint in China.

Xiaohongshu does not make its financial figures public, but the Chinese research firm LeadLeo estimated that, in 2020, 80 per cent of its revenue came from adverts and 20 per cent came from ecommerce.

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

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

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

In 2014, Xiaohongshu launched an ecommerce function but has 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 commercialisation model,” said Miro Li, founder of the Hong Kong-based brand consultancy Double V. “This will be a problem in the long term.”

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