Posted on June 08, 2021
Since the Xiaohongshu IPO has been rumored forever, I’d love to hear opinions from the group on the company, for once, before the prospectus drops. It’s a company that has a lot of traffic and buzz, but seems to really struggle to find a monetization model.
The Tech Buzz China episode on the company was back in 2018, titled “powering ecommerce with content.” Back then, if you’ll remember, it was referred to as “Instagram and Pinterest sprinkled with a dose of Taobao.” But now, it seems to want to embrace livestreaming ecommerce (after it tried short video and stories formats beginning in 2019, to middling success). The business model is a 2-5% platform take rate, which is in line with other platforms like Kuaishou.
Founded in 2013, it is one of the few companies (like fellow Gen Z darling Bilibili), to have received investment from both Tencent and Alibaba.
I’ll list out some simple pros vs cons and look forward to your comments:
Edit: I realized I forgot to include the rumored financials for Xiaohongshu:
2020 rumored revenue (in Chinese): $600-800mm USD of advertising about 80% of total, ecommerce GMV of ~$1Bn, with revenues representing about 15-20% of total (so, quick math, abt $100-200mm). Rumored valuation of $10Bn. Kind of a big range here, but all very plausible numbers …
Pros:
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Good user growth. MAU is supposedly 138mm in Feb. 2021, +72% from a year earlier, or 80mm. But … it’s starting from a much smaller base.
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Expansion into different verticals, not just clothing and cosmetics that it’s mostly known for. Since April 2020, deep integration with travel websites have made it an enticing vertical. Other growth areas include education, sports, consumer electronics, photography and food. The growth rates given by the company in these verticals range between 200-1000%, which just proves that diversification is very recent.
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It is right now where the brands launch and new brand formation / investment is one of those Big Trends in China right now & for the next few years I’d imagine. Should be enough of a wave to ride to a good IPO? But only if they can capture the upside …
Cons:
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Mainly … where’s the business model? If as we note above, the core logic of new brands is that they 种草 zhongcao AKA cultivate fans on Xiaohongshu, then launch on Tmall and promote on Douyin, and if such new (digitally native) brands are accounting for such a large proportion of investment and return in China, then why is Xiaohongshu’s cut of the success so small compared to the other platforms, (as far as we know anyway)? I’d guess that is because at least in part because all the advertising dollars need to go on Tmall, where the actual transaction occurs … 😜
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Per LatePost, the company did not fulfill its GMV targets for either 2018 or 2019. Its original thesis of community-powered (traditional) ecommerce is largely acknowledged to have failed (the executive in charge of it has left, and it’s been revamped to be heavily livestreaming). 80% of its revenues are estimated to be from advertising.
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Why did it go into livestreaming ecommerce so late? Yes, it was pulled from appstores in Summer 2019 (making for a tense time when we visited them in October that year for the investor trip!) and that’s the excuse given for the slow execution, but … it’s just sooo late. Unlikely it can make much of a dent now with all the whitespace filled in. This really does seem like a management problem …
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It’s still small / niche. Let’s compare it to $BILI. Xiaohongshu DAU in Q1 2020 was 30mm (vs ~50mm for Bilibili at around the same time). Bilibili MAU has reached 223mm in Q1 2021, +30% from a year earlier. So, Xiaohongshu is growing faster, but it’s only about 60% of BILI MAU. It does have a higher DAU / MAU ratio though.
