As the vicious battle between Alibaba and Tencent intensifies in China, most of the country’s technology startups are inevitably spilt into two camps as the two internet giants become active investors in the private equity and venture capital markets.
But there is always an exception.
Xiaohongshu, a Shanghai-based social media platform which targets young female users, is one of the few startups able to attract investments from both Alibaba and Tencent. Alibaba led the firm’s $300 million series D funding in June last year, two years after Tencent led an earlier funding round of $100 million in 2016.
With over 200 million daily active users, Xiaohongshu allows users to discover luxury products from overseas, share shopping tips and fashion ideas. It has been able to gain traction thanks to its in-depth content about cosmetic and fashion brands, and is now used widely by marketers and celebrities to promote their products.
Xiaohongshu, which literally means Little Red Book in English, is in the process of raising $1 billion Series E funding to reach a post-money valuation of $8 billion. This is more than double the $3 billion valuation it achieved in June last year, according to sources familiar with the company.
It might be a tough task for the high-flying startup to achieve its target, though. As China’s private equity market cools rapidly and liquidity dries up, Xiaohongshu has also encountered operational challenges as it tries to finalise the best way to monetise its business.
The six-year-old startup started as a community platform for users to share shopping tips but has since expanded into an e-commerce site for overseas fashion products.
Xiaohongshu’s unique combination of being a social media/content provider and an online shopping platform was perhaps part of the reason that attracted Alibaba and Tencent.
For Alibaba, Xiaohongshu’s massive content base is a good addition to its business portfolio as a rival of Tencent’s Wechat, the country’s largest social media and mobile app.
Meanwhile, Tencent supports Xiaohongshu as an e-commerce business in order to compete with Alibaba’s dominant online marketplace, Taobao. This follows Tencent’s strategy of supporting Alibaba’s rivals such as e-commerce sites like JD.com and Pinduoduo.
CHALLENGES
The dual-track strategy was successful in the beginning but it has run into problems as the company has grown.
In particular, Xiaohongshu’s user base has grown exponentially but the number of partnerships with suppliers is not catching up as quickly. As a result, while many of its users still see the platform as a source for product reviews, they are increasingly purchasing from other e-commerce sites.
The dual-track strategy also means that the company is putting comparatively fewer resources into e-commerce than other online shopping platforms.
The consequences are clear for Xiaohongshu. There have been complaints about weak after-sale services. The firm was recently embroiled in a series of counterfeit product scandals, which could be partly attributed to its failure to verify the identity of its suppliers and their products.
At the same time, its social media and content business increasingly competes with popular social entertainment apps such as Douyin and Kuaishou. Marketers are turning to those apps because they are able to reach a broader audience.
Despite all these challenges, Xiaohongshu remains one of the most valuable startups in China, characterised as it is by a massive user base and extremely high user engagement.
But until it comes up with the right way to operate in China’s highly competitive social media and online shopping industries, it may struggle to monetise the business and find long-term success.
