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Author | Zheng Haoyuan Liu Tiantian | Intern

Editor-in-Chief | Chen Junhong

Recently,Little Red BookSpread againIPOnews.

According to foreign media reports, its E+ round of financing was valued at $17 billion, a $3 billion decrease from the $20 billion valuation in 2021. In early July this year, Xiaohongshu was reported to have laid off nearly 30% of its employees. A former insider revealed that "Xiaohongshu's overall stability is indeed very low. There are not many employees in the commercialization department who have been working for more than two years. The average length of service in the company is only half a year, and there are about 6,000 employees with a length of service of more than one year."

From the performance point of view, although Xiaohongshu turned losses into profits for the first time in 2023, its proud DAU (daily active users) has hit a bottleneck. Public data shows that at the beginning of 2023, Xiaohongshu set a goal of reaching 140 million daily active users by the end of 2023 after its daily active users exceeded 100 million, but by the end of the year, its annual DAU only increased to 106 million. During the same period, Xiaohongshu's MAU (monthly active users) has reached 312 million, a year-on-year increase of 20%, making it the fastest growing social media platform in China, but compared with Kuaishou and Douyin, which have annual revenues of tens of billions of yuan, Xiaohongshu, which has only achieved 20 billion yuan in revenue, is still stuck on the road to monetization.

Last year, Xiaohongshu closed its two self-operated platforms, “Welfare Club” and “Little Oasis”.E-commerceCurrently, its e-commerce revenue only accounts for 15%-20% of its total revenue, while advertising revenue has remained at around 80% for many years. This has also caused Xiaohongshu to vacillate between content and e-commerce, lacking strategic stability.

IPO road is dim

According to the Financial Times, Xiaohongshu recently received investment from venture capital firm DST Global, with Sequoia China, Hillhouse Capital, Boyu Capital and CITIC Capital also participating. The market valuation reached US$17 billion, which was lower than the US$20 billion valuation in 2021, but slightly higher than the US$14 billion valuation at the end of 2023. Industry insiders said that Xiaohongshu was not short of money, but an early investor had an exit demand and new investors were willing to join, which facilitated the transaction.

It is worth mentioning that a considerable number of invested companies have withdrawn from Xiaohongshu Technology's overseas investments in recent years, and some even withdrew within less than a year after investment. Tianyancha shows that Xiaohongshu Technology has historically invested in 8 companies, most of which were established in 2019-2020. Xiaohongshu entered in 2018-2021, but gradually withdrew in 2022 and 2023. Some market analysts believe that the delay in IPO may have caused its investment enthusiasm to fade.

Regarding the question of whether Xiaohongshu can go public, an industry insider told NetEase Finance that "IPO is a must during the Internet boom, but this round of listing period has ended. Since the Internet has no physical business and no physical assets, it will lose points with the China Securities Regulatory Commission. On the other hand, companies go public to raise funds, but Xiaohongshu has not yet made clear its development strategy. Where to use the money raised and how to explain it to the China Securities Regulatory Commission are both problems."

It also pointed out that Internet companies listed on the US stock market all have their own real things. For example, Pinduoduo's mall system has a large number of Party A and Party B users.JD.comPreviously, Alibaba has brought home appliances to the countryside, physical JD Express stores, and offline stores such as JD Mall, and has connected products to the national medical insurance system. In comparison, Xiaohongshu does not have anything substantial enough. If its profits mainly rely on traffic, whether it can control its stock price is a problem. In addition, many previous negative issues have not yet been completely resolved, which will affect its IPO.

In early July this year, Xiaohongshu was exposed to massive layoffs, and was once caught in doubts about the stability of its personnel. According to reports, the hardest hit areas of Xiaohongshu's layoffs this time are the community department and e-commerce products. There are reports that at least 10 R6 and above employees of its commercialization team will leave in 2023. A former insider revealed that Xiaohongshu's overall stability is indeed very low. There are not many employees in the commercialization department who have been in the company for more than two years. The company's overall average length of service is only half a year, and there are about 6,000 employees with a length of service of more than one year. According to media reports, Xiaohongshu currently has about 10,000 employees (including interns). If this is roughly estimated, the proportion of employees with a length of service of more than one year is about 60%.

Previously, Xiaohongshu was publicly exposed to three large-scale layoffs, mainly targeting fresh graduates and employees on probation. The most recent large-scale layoff occurred in April 2022, with an elimination rate of about 10%. If the previous rounds were aimed at reducing costs and increasing efficiency, then this round of layoffs may be related to its commercial performance during the 618 period not meeting expectations.

In addition to the layoff controversy, Xiaohongshu has also repeatedly been caught in public opinion storms due to illegal information. In May this year, Xiaohongshu was exposed to have "illegal adoption" content. Later, during the period when the platform was dealing with illegal information, it was exposed that there was information suspected of illegal trafficking of child photos. In recent years, Xiaohongshu has also been caught up in public opinion storms including pornography, inflating reading volume, and illegal transactions.

In the above-mentioned public opinion storm, the issue of Xiaohongshu involving pornography was repeatedly mentioned by the media. In July 2019, Xiaohongshu was required to rectify its pornography-related issues and was put back on the shelves 77 days later.

In November, netizens exposed that the Xiaohongshu APP pushed large-scale nude photos and videos of beautiful women to users, and the content was explicit and suggestive. In addition, many bloggers who posted such content would leave contact information on other platforms such as WeChat, QQ or Weibo on their Xiaohongshu accounts. In response to this matter, Xiaohongshu said that it had handed over this information to relevant departments for further investigation. In September 2021, Xiaohongshu was exposed again by CCTV, reporting that many videos that obviously leaked the physical privacy of minors were pushed. On August 30, 2023, a self-media article entitled "Xiaohongshu's "All-inclusive Travel Hitchhiking Fees" is pornographic" was exposed, causing an uproar on social media. The article stated that the travel hitchhiking notes on Xiaohongshu, under the banner of looking for hitchhikers, actually involved sexual transactions. Subsequently, Xiaohongshu said that it would conduct a full-scale review, and once it was found that there was illegal content, it would seriously deal with the violating users in accordance with the law.

E-commerce business continues to encounter obstacles

In 2013, the mobile Internet was in its development stage. Meituan had just started its food delivery business. Kuaishou was living in a small house in Beijing's Tiantongyuan, trying to transform from an application tool to a short video. Kuaidi Taxi officially "expeditioned north" to compete directly with Didi. At the end of the same year, Xiaohongshu, a shopping guide platform for overseas shopping, was born.

2014 is known as the first year of cross-border e-commerce. The government proposed the goal of "buying from the world and selling to the world" for cross-border e-commerce. Xiaohongshu built its own e-commerce business to do closed-loop e-commerce and launched a cross-border e-commerce "welfare club". In 2015, Xiaohongshu upgraded its push system, generated user portraits based on user content, and recommended content based on user tags. Discussions on other life topics besides shopping began to appear in the community, which meant that Xiaohongshu began to transform from a simple tool to a community platform. At that time, Xiaohongshu had acquired more than 20 warehouses in Baorui District, and established an e-commerce customer service team of more than 300 people in Wuhan, building a full chain including procurement, warehousing, logistics, and customer service. Its business model can be summarized as using big data analysis to understand user preferences, "planting grass" for users through the editing of high-quality content, achieving precise reach through information flow, search and other channels, and finally converting it into a transaction in the e-commerce sector. After the user completes the purchase, the "pulling of grass" is completed.

As the grass-seeking business continued to grow, some brands began to seek cooperation with bloggers in Xiaohongshu. The founder Mao Wenchao thought of Instagram, which also broke the circle with its picture and text community. The latter promoted the explosive growth of the community by inviting a large number of celebrities and celebrities from all walks of life to join. In just two years, it was acquired by the founder of Facebook.ZuckerbergIt was acquired for $1 billion and now has 1 billion global users. Xiaohongshu also replicated this growth strategy, first inviting Hu Ge to be the brand spokesperson, and then launching two popular variety shows for young people, Idol Producer and Produce 101, gradually introducing a large number of stars. In 2017, the number of Xiaohongshu users exceeded 10 million.

It is worth noting that in 2016, cross-border e-commerce competition has become increasingly fierce.TaobaoGlobal Shopping, JD Global Shopping,TmallInternational has captured 50% of the cross-border market. Among the rising stars of independent cross-border e-commerce, Xiaohongshu has surpassedYang PierIt has become second only to NetEase Kaola.

Its co-founder Qu Fang once said, "Xiaohongshu is not an e-commerce company, but an amusement park. People come to this amusement park to browse and play, and if they see something they want to buy, they can buy it, that's all."

Just as Xiaohongshu defined itself as an "amusement park", the major giants have begun to share the "fat meat" of e-commerce. At the end of 2017, Taobao anchor Li Jiaqi joined Douyin and gained more than 10 million followers in two months; in 2018, Douyin officially launched the shopping cart function, and in the same year ByteDance also launched the e-commerce APP "Zhi Dian" that focuses on the sinking market; Kuaishou platform added the "Kuaishou Store" function, and through cooperation with Taobao and Youzan, it guides users to shop on third-party platforms.

In addition to emerging platforms constantly entering the e-commerce market, traditional e-commerce is also transforming. In 2017, JD Logistics was established, pushing JD's e-commerce business to a new level. Taobao also fully upgraded its content, traffic, and gameplay this year, ushering in the spring of live streaming sales, and a group of traffic anchors headed by Li Jiaqi were born. Later, celebrities such as Li Xiang, Wang Zulan, and Liu Genghong also joined Taobao's live streaming sales plan.

On the other hand, although Xiaohongshu launched a cross-border e-commerce "welfare club" in the second year of its establishment, it failed to allocate more funds and resources to improve the back-end fulfillment capabilities of traditional e-commerce, such as supply chain, payment, and logistics, which resulted in its failure to complete the construction of the e-commerce ecosystem. It was not until 2018 that Xiaohongshu's commercialization department was officially established, mainly responsible for its advertising and content monetization business. Since then, advertising business has accounted for half of Xiaohongshu's revenue. However, due to the lack of e-commerce operations, insufficient supply chain and talent, and the price turmoil of third-party merchants, Xiaohongshu failed to achieve its e-commerce GMV revenue target in 2018-2019, and its cross-border e-commerce business did not find a breakthrough.

During the 2020 epidemic, the number of camping notes on Xiaohongshu increased by 3 times, and youth trend culture such as urban sports and frisbee social networking began to explode. Following the rise of the trend, Xiaohongshu launched its own e-commerce business "Little Oasis", focusing on four major categories: camping, urban sports, cycling and skateboarding. However, due to the relatively narrow audience of these vertical niche tracks and the fact that most users have fixed preferences and purchasing channels, Taobao has occupied the minds of consumers, JD has logistics advantages, and Pinduoduo has cost-effective advantages, Xiaohongshu has become a wedding dress for other platforms.

In the end, the business of "Little Oasis" failed due to poor sales one year after its launch. At the same time, in order to focus on domestic e-commerce business, "Welfare Club" also announced its closure after 9 years of operation. Data shows that in 2021, the GMV (total transaction volume) of Douyin live e-commerce exceeded 800 billion yuan, Taobao exceeded 500 billion yuan; the GMV of Kuaishou's e-commerce business was 680 billion yuan, while the GMV of Xiaohongshu was less than 10 billion yuan.

"Planting grass" can't turn into cash

Mao Wenchao once said, "How far an Internet community can go and how much value it has are most closely related to two things: one is the seed users, which determine the genes at the beginning of the community, and the other is the core gameplay, which determines how the community will grow in the future."

Obviously, Xiaohongshu has never found the key to its core gameplay. Since its establishment, it has been jumping back and forth between "community" and "e-commerce", and the closed-loop business model of the content ecosystem has not been established.

Xiaohongshu has been exploring the monetization of the community's "grass planting" capabilities. In 2017, as the cross-border e-commerce industry declined overall, Xiaohongshu began to transform, focusing on building Xiaohongshu into a life sharing community platform. By deeply binding with new domestic cosmetics such as Perfect Diary, it further consolidated the user volume of the vertical beauty track. Perfect Diary's sales exceeded 200,000 on the first day of its launch on Xiaohongshu, and its sales were close to 50 million the following year. However, behind the brand's seemingly impressive sales are huge operating costs. From operational launch to later maintenance, it requires a high investment of manpower and funds. In this way, Xiaohongshu's advertising operations are more like traditional advertising companies rather than algorithm-driven Internet companies.

In 2018, Xiaohongshu established a commercialization department and began to develop splash screen ads, commercial ads and other businesses. In 2019, it incorporated third-party merchants into the content community and cooperated with WeChat to extend its social e-commerce business through mini-programs. In 2020, it introduced Taobao external links to achieve interoperability with Youzan platform. However, this move caused an embarrassing situation in which users planted grass in the community but placed orders on other platforms. Therefore, Xiaohongshu completely banned the Taobao external link function the following year and launched the "account and store integration" strategy to provide brands with a private domain e-commerce environment.

In 2022, Xiaohongshu merged the community department and the e-commerce department, and added three second-level departments, namely the merchant department, transaction product department, and service department; in March 2023, the live broadcast business was promoted to an independent department; in August of the same year, Xiaohongshu integrated the e-commerce business and the live broadcast business, and established the first-level transaction department, which is parallel to the community department and the business department, ushering in the "buyer era". However, the commercial conversion value of "buyer live broadcast" is far less than the mainstream "store live broadcast" in the market.

From a strategic perspective, when major platforms have launched "10 billion subsidies" and included price cuts in their platform strategies, Xiaohongshu has repeatedly emphasized that low prices are not the core value of its e-commerce. When Douyin and Kuaishou define themselves as interest-based e-commerce and trust-based e-commerce, and use hawking live broadcasts to encourage consumers to place orders, Xiaohongshu is committed to a slow-paced style of bringing goods. Its anchors tend to share exquisite life concepts and consumer awareness during live broadcasts, emphasizing the tone of the live broadcast room, in order to cultivate user consumption habits and gradually build up the transaction volume of high-priced products.

This move has made traditional leading e-commerce companies in the price war jealous, and they have followed suit. Taobao launched the "Shopping" section, JD.com added the "Shopping" entrance, and Pinduoduo launched "Pin Xiaoquan" in an attempt to create its own content seeding section. In addition, major content giants have also rushed to join the game. Douyin has launched a picture and text experience section and an independent Croissants APP, and WeChat has created a small green book, but many imitators have not achieved significant results. While many platforms were scratching their heads and imitating, Xiaohongshu got a share of the "quiet" 618 e-commerce war in 2023, breaking the previous sales record with a single GMV of 50 million.

As Xiaohongshu struggled to strike a balance between its community and e-commerce businesses, problems with its content regulation began to emerge. In 2021, a notice from the Ministry of Industry and Information Technology titled "Looking Back on Issues Such as APPs Requesting Permissions Beyond the Scope and Excessively Collecting User Personal Information" attracted everyone's attention. Among the 38 APPs disclosed that had violated regulations, Xiaohongshu was one of them. In recent years, Xiaohongshu has been repeatedly exposed to scandals such as false propaganda, buying and selling accounts, spending money on rankings, and excessive promotion. Many netizens complained that "Xiaohongshu has long since changed, flooded with a large number of filters and advertising information."

In this regard, Zhu Wei, director of the Communication Law Center of China University of Political Science and Law, said, "The healthy development of social e-commerce in the future cannot rely solely on Internet celebrities and traffic. Promotion that only cares about planting grass and ignores the consequences is a short-sighted way to quench thirst, which may drag down both the platform and the brand." In order to avoid the content of the notes from exploding again, Xiaohongshu has spent a high cost to set up an independent review team to maintain the community ecology.

It is understood that Xiaohongshu has completed 7 rounds of financing in the 11 years since its establishment. In 2021, the first year of economic recovery, Xiaohongshu won US$500 million in financing when everyone was not optimistic about the economy.TemasekTencent led the investment, and old shareholders such as Alibaba and Tiantu Investment followed suit. The post-investment valuation is as high as US$20 billion. So far, its cumulative fundraising amount has reached US$900 million.

At present, Xiaohongshu has not yet fully opened its live broadcast business, and the entrance to live broadcast e-commerce is relatively hidden. An industry insider pointed out to NetEase Finance that community platforms have more complicated thinking on commercialization than other platforms, and their development pace is entangled and restrained. It has been slow to cultivate users' consumption habits on the platform. Xiaohongshu has been deeply labeled as a "grass-planting platform", which has led to the phenomenon that users are willing to spend money, bloggers can also make money, but the platform does not make money.

The above-mentioned person said that the biggest problem of Xiaohongshu is that it has not done "mall integration" and the overall business thinking is not clear. Douyin has done better in this regard. It has an independent mall with a clear entrance and has divided its main body and e-commerce into two businesses, while Xiaohongshu has combined them into one. If it is engaged in commodity consumption e-commerce, it will face two big mountains, Taobao and Pinduoduo. Community e-commerce is a suitable path for Xiaohongshu. It will concentrate the currently independent and scattered UP hosts into its own mall for unified management and replace the signing fee with traffic support. It can invest in personalized e-commerce, make personalized products such as wearable armor, find its own vertical category and continue to develop, and then expand to a larger world. The market has demand, and it also needs refined demand.