Why has Xiaohongshu failed to nurture another "Perfect Diary" via its investments?

"When L'Oréal looks for innovation opportunities, it focuses on tapping unmet consumer demands and potential market space, then matches cutting-edge technologies that can meet these demands, and makes layouts at the intersection of demand and technology," said Nicolas Hieronimus, CEO of L'Oréal.

In reality, recently, Shanghai Meifang Investment Co., Ltd. under L'Oréal China has completed its investment in Shenzhen Bion Biotechnology Co., Ltd., a "potential unicorn enterprise" in Shenzhen that deeply focuses on the recombinant mussel adhesive protein track. Industrial and commercial information shows that Meifang holds 7.133109% of the shares in Bion Biotechnology, corresponding to a subscribed registered capital contribution of 136,209 yuan, which is not the total actual investment amount.

In addition to Bion Biotechnology, since the beginning of this year, L'Oréal has successively completed investments in a number of enterprises through its subsidiary Meifang, as well as multiple industrial funds it has funded to establish such as Cathay Beauty Future and Tuhui Beauty Pilot: full-cycle scalp care solution provider Keshilifu, AI embodied physical therapy robot enterprise Deyi Medical, regenerative medical aesthetic material enterprise Moyang Biotechnology, functional base makeup brand Diluowei, and hydrogen molecule anti-aging new material technology innovation platform Qilin Zhengwei. Among them, in the same month that Cathay Beauty Future invested in Diluowei, Diluowei immediately ranked TOP1 in the beauty makeup category on Douyin.

In sharp contrast to L'Oréal's continuous expansion of its beauty business territory in China, Xiaohongshu, which has more than 400 million monthly active users and serves as the core position for beauty content creation and sharing, made its last investment in the beauty track in July 2024, a strategic investment in AMIRO, and has been in a nearly silent period of investment in the past two years.

Why has Xiaohongshu stopped making investments in the beauty sector? Has investment in the beauty industry entered the era of industrial capital?

01

Making Frequent Moves to Look for More "Perfect Diary" Targets

Why was Perfect Diary, founded in 2016, able to list on the US stock market by ringing the bell in November 2020?

Xiaohongshu is undoubtedly the hero that promoted Perfect Diary's listing. Different from the mode of "offline distribution + traditional social media advertising" adopted by beauty brands at that time, the rise of Perfect Diary lies in seizing the traffic dividend brought by the rise of social media, so much so that it spent a lot of space in its prospectus introducing the advantages of full-scale product promotion by KOLs, KOCs and ordinary users.

On the Xiaohongshu platform, Perfect Diary spared no effort to create and share content to increase brand awareness and reach more consumers. Statistics from 36Kr Future Consumption show that as of August 2020, there were more than 290,000 content notes about Perfect Diary on Xiaohongshu. In comparison, there were only 30,000 notes for Carslan and Mary Dalgar. The prospectus of Perfect Diary shows that as of September 30, 2020, Perfect Diary had cooperated with nearly 15,000 KOLs, more than 800 of whom had millions of fans.

How to avoid content homogenization in massive content notes? How to reach users from different circles? How to build the structure of a single piece of content to maximize exposure? How to select suitable influencers for Perfect Diary from a large number of creators? The Xiaohongshu team would provide corresponding support to the Perfect Diary team on these issues.

The successful listing of Perfect Diary not only made the market see the content marketing value of Xiaohongshu at that time, but also made the market see the transaction path of "Xiaohongshu content creation → Tmall conversion". This value even gave birth to the ultimate method of maximizing Xiaohongshu's content marketing traffic represented by the "Zhengzhou Gang": disassembling product keywords for SEO optimization + a large number of matrix accounts + batch content generation.

The community and commercial value that Perfect Diary brought to Xiaohongshu made Xiaohongshu try to find more "Perfect Diary" targets through investment. In 2021, Xiaohongshu successively deployed new domestic color contact brand MOODY, comprehensive e-commerce service provider Shanghai Beiji, and art packaging brand Duanmu Liangjin through strategic investment; in 2022, Xiaohongshu participated in the follow-up investment of Deyi in the Pre-A round.

Why did Xiaohongshu frequently increase its layout in the beauty sector?

The reason was that the capital market was staging a carnival of new consumption at that time. According to incomplete statistics from IT Juzi, from January to December 2021, a total of 826 financing transactions (excluding IPOs and private placements) took place in China's new consumption industry, with the total disclosed financing amount reaching 831 billion yuan.

Under the hot financing market, capital was scrambling for projects, and even the target enterprises chose investment institutions in reverse. Wang Sheng, consumption partner of Innoangel Fund, said that a certain consumer brand even required investors to write a short essay when raising financing, and only after finishing it could they have the opportunity to talk with the founder. Under this carnival, the market even summed up the formula for the rise of new consumption: new brand + 3000 Zhihu notes + 500 Xiaohongshu notes + hit orders brought by internet celebrities' live streaming sales.

However, under the carnival, Xiaohongshu had its own ideas when selecting beauty targets. On the one hand, the target projects not only need to conform to the platform's tone, but also need to have both differentiation and aesthetic value. Wang Daoping, partner of China Growth Capital, once proposed that "purity" is a universal consumption theme in the beauty industry, and the base makeup track has the foundation to incubate long-term big single products and establish a stable pure consumer mind. The strategic investment team of Xiaohongshu judged that Deyi has in-depth user insights into the new consumer groups born after 1995 and 2000, and has the ability to continuously output differentiated brand value and consumption experience to young customer groups.

On the other hand, Xiaohongshu mostly enters the market in the form of strategic investment and participating in early round financing, does not set holding requirements for the target enterprises, leaving enterprises with higher operational autonomy. Taking Chengdu Dawei Technology Development Co., Ltd., the main body of Deyi, as an example, Tianyancha shows that Xiaohongshu holds only 2.9703% of the shares, while the founder Zhou Hui holds 53.5917% and has control of the enterprise.

This path choice lies in the fact that Xiaohongshu pays more attention to whether the invested target enterprises can bring ecological synergy value to the platform. With the help of user feedback accumulated by the invested brands, it can reversely verify the effectiveness of the platform's advertising products and community content operation rules.

Facts have proved that this path of Xiaohongshu received positive feedback at that time. A large number of brands settled in Xiaohongshu to carry out content marketing, continuously releasing the commercialization potential of the platform, driving the steady growth of the advertising business, and laying a foundation for Xiaohongshu's subsequent profitability. According to a report by the Financial Times, Xiaohongshu achieved profitability in 2023, after which its revenue and profits grew rapidly, most of which came from advertising.

02

From Chasing "Perfect Diary" to Shifting to AI

From 2023 to 2024, Xiaohongshu's investment in the beauty sector gradually cooled down. It participated in the B+ round of investment in the luxury e-commerce platform SENSER in 2023, and made a strategic investment in AMIRO in July 2024, maintaining a very low frequency of only one shot a year.

The direct reason why Xiaohongshu's investment in the beauty sector changed so rapidly is that new consumer brands have experienced successive thunderstorms, losses and capital shortages, and the industry has accelerated into the era of de-foaming. Among them, the share price of Perfect Diary fell from the issue price of $10.5 per share to about $2 per share in March 2022, and its market value shrank by more than 80%, which not only made the capital market return to rationality for new consumption, but also made the market realize that the growth of new beauty brands cannot only rely on content marketing, but also require solid product and supply chain capabilities.

More critically, the investment or acquisition of large beauty groups aims to supplement the shortcomings of the supply chain, form a multi-brand matrix, reuse the supply chain to expand the scale, and grasp new ingredient trends, so as to continue to expand the group's scale. Cathay Beauty Future's investment in Diluowei has made up for L'Oréal's shortcomings in the native Douyin e-commerce and affordable skin-nourishing base makeup track.

But for Xiaohongshu, this logic does not apply. Moreover, as Xiaohongshu gradually got through the commercialization of advertising, content marketing has gradually become the "standard configuration" of beauty brands, and the value of obtaining ecological synergy through invested target enterprises has gradually been weakened. According to the calculation of overseas research institution Sacra, beauty brands alone contributed about 50% of Xiaohongshu's advertising revenue in 2024.

Although advertising has attracted a large number of beauty customers, the cost is that Xiaohongshu relies too much on the advertising business. Data from GF Securities shows that advertising revenue accounted for about 80% of Xiaohongshu's total revenue in 2022, and the proportion remained at 70%-80% in 2023.

For many years, the market has repeatedly spread rumors about Xiaohongshu's IPO. If Xiaohongshu wants to go public, it naturally needs to explore more commercialization models to get rid of its dependence on a single advertising business. The reason is that in addition to the advertising diversion from ByteDance's Ocean Engine and the uncertainty of customers' annual marketing budgets, Xiaohongshu's users are mainly female groups, which has limited attractiveness to advertisers targeting male customer groups such as 3C digital products and men's clothing, which makes it questionable whether its advertising revenue can continue to grow.

So how does Xiaohongshu expand more commercialization paths?

On the one hand, it continues to focus on e-commerce. Its e-commerce has gone through different modes such as self-operated cross-border e-commerce, buyer e-commerce, and live streaming. For many years, it has frequently adjusted its organizational structure around e-commerce. Especially since 2022, it has maintained a rhythm of adjustment once a year, aiming to open the closed loop of "content creation → transaction" within the platform, and no longer make wedding clothes for other e-commerce traffic platforms. Under this layout, Xiaohongshu has also produced super head live streaming influencers such as Dong Jie and Zhang Xiaohui.

On the other hand, Xiaohongshu's investment focus has gradually shifted to AI. In March 2024, Xiaohongshu completed a $1 billion Series A investment in Moonshot AI, with the amount far exceeding the scale of previous beauty-related target investments.

According to information from multiple media, at the end of 2024, Dai Lidan, partner of Capital Today, joined Xiaohongshu as Chief Strategy Officer, reporting directly to CFO Zhang Ziqi, leading the establishment of a brand new strategic investment team; at the same time, Xiaohongshu poached a large number of talents from ByteDance's venture capital team.

03

The End of Traffic Narrative, Beauty Investment Returns to Value Itself

The addition of Dai Lidan has promoted Xiaohongshu's investment in the AI sector to enter the fast lane from 2025 to 2026. Among them, Xiaohongshu has continuously increased its investment in AI portable e-paper brand Yuexingtong through angel round, Series A round and Series A++ round. On the one hand, it has increased its investment in the same target for three consecutive rounds, on the other hand, Xiaohongshu has pressed the pause button on its investment in the beauty track.

This is not an isolated case. According to the official website of IT Juzi, in the past two years, Internet platforms such as ByteDance and Kuaishou have also entered a silent period in their investment in the beauty track, and have shifted their investment focus to AI and hard technology tracks one after another.

Why are these platforms no longer keen on investing in beauty?

"The most important and primary thing is to do a good job in investment and make