Xiaohongshu Gains $17 Billion Valuation Amidst Major Investments

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Xiaohongshu, China’s fastest-growing social media platform, has secured backing from venture capital firm DST Global, marking a significant move by foreign investors into a tech sector largely avoided since a stringent Beijing crackdown. The photo and video-sharing platform, immensely popular with young women in urban areas, organized sales of existing shares to current and new investors in recent weeks, leading to a company valuation of $17 billion, as reported by individuals familiar with the situation.

DST, established by Moscow-born Israeli tech entrepreneur Yuri Milner and a former investor in Facebook, participated in the investment round alongside Hong Kong-based HongShan, formerly known as Sequoia China, which increased its existing stake. Chinese private equity firms Hillhouse Investment, Boyu Capital, and Citic Capital also contributed to the influx of capital. Although the exact size of DST’s investment remains undisclosed, the collaboration signals robust confidence in Xiaohongshu’s potential.

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Xiaohongshu, DST, HongShan, and Citic refrained from commenting on the development, while Hillhouse and Boyu did not respond to inquiries.

This surge of confidence follows a landmark year for Xiaohongshu, also supported by VC firm GSR Ventures and Singaporean state-backed investor Temasek, as it turned profitable in 2023. The platform reported a net profit of $500 million last year, stemming from revenues of $3.7 billion—a stark contrast to the $200 million loss on $2 billion in revenue it experienced in 2022, as previously covered by the Financial Times.

Interestingly, Xiaohongshu boasts backing from both Chinese internet giants Tencent and Alibaba. Start-ups usually have to align with one or the other for investment, but Xiaohongshu’s support from both entities decreases the likelihood of it becoming an acquisition target for either, thanks to their veto power over potential sales to competitors, according to knowledgeable sources.

Investors are wagering that Xiaohongshu is among the limited cadre of Chinese tech unicorns set for an impressive initial public offering (IPO) following substantial growth. The platform achieved 312 million monthly active users in 2023, a 20% increase from the previous year, making it the fastest-growing large social media platform in China last year, based on Financial Times calculations.

At the apex of Chinese internet start-up valuations in 2021, Xiaohongshu was valued at $20 billion in a fundraising round that included Temasek. This valuation dipped to $14 billion by the end of last year, through transactions where Beijing-based VC Gaorong Capital and HongShan purchased stakes from China-based Genesis Capital and Granite Asia, formerly known as GGV, respectively.

Genesis Capital, Gaorong Capital, and Granite Asia did not respond to requests for comment.

“Xiaohongshu reached a $20 billion valuation during the peak of VC tech investment. Unlike many other start-ups forced into successive down rounds or closure, it is growing into its valuation,” stated a Shanghai-based venture capitalist.

The confidence in Xiaohongshu is further buoyed by its strong financial performance and renewed optimism that Beijing might once again favor overseas listings for large tech companies. It has been three years since the ill-fated New York IPO of ride-hailing giant DiDi, which eventually delisted amidst a wider crackdown by Beijing on the nation’s tech behemoths.

However, one investor warned that Xiaohongshu’s extensive consumer data might complicate any future plans to launch an IPO abroad, given Beijing’s stringent regulations on cross-border data sharing.

Xiaohongshu serves as a key resource for international Chinese travelers seeking dining and shopping recommendations. The company has been enhancing its overseas business development team to explore markets popular with Chinese tourists and to attract more advertisers to its platform, according to an informed source.

The platform has also become vital for retailers aiming to expand their audience, and it has reportedly offered to promote artificial intelligence start-ups in exchange for equity, as previously reported by the Financial Times.