Xiaozhu.com, China's rapidly growing rival to Airbnb, has raised $300 million in Series F funding, led by Jack Ma-backed Yunfeng Capital and Advantech Capital.
Most of Xiaozhu's existing investors have joined this new round of financing, including Joy Capital, Morningside Ventures, and Capital Today. The home rental company has even landed GIC as an investor; the Singaporean state-backed fund is a frequent investor in many of Jack Ma's companies, from Alibaba to its affiliate firms.
Viewed as the unicorn of the home rental market in China, Xiaozhu’s valuation has grown rapidly and already exceeds $1 billion after its fifth round of financing. It currently has more than 500,000 homes listed on its platform in 650 cities across the world. Proceeds from this round of financing will be used to develop home rental services and to improve its user verification system.
Financing for Xiaozhu has been smooth, ever since it was founded in 2012. It got its first Series A investment of several million dollars from Morningside Ventures in December of that year, which then maintained its investment in subsequent rounds. Xiaozhu attracted $15 million Series B investment in 2014, more than $60 million Series C investment in 2015, and $65 million Series D funding in 2016.
Financial heavy-hitters signed up last year. Yunfeng Capital led the $120 million Series E investment in December last year, also joined by Joy Capital, Morningside Ventures, and Capital Today. But more importantly, Jack Ma provided a bridge between Xiaozhu and Alibaba’s 552 million annual active users in China. Xiaozhu announced in April this year that it will offer post-pay services with Fliggy, Alibaba’s travel brand - a synergistic move for both companies.
A traditional hotel brand would normally take more than a decade to provide 300,000 rooms. Xiaozhu has easily surpassed that. After only six years it boasts 1 million rooms in 500,000 homes, Li Na, partner of Yunfeng Capital told FinanceAsia. Such growth was unimaginable in the past.
With its steady and rapid expansion, Xiaozhu has maintained investor trust since day one. Morningside Ventures, as its first investor, has invested in all six financing rounds and still reckons that there will be an opportunity to raise the stakes. “This is a slow business and the process is like a marathon,” Yu Cheng, partner at Morningside, told FinanceAsia by telephone. “We have faith in Xiaozhu as it has an efficient team and is walking on the right path.” Cheng said that fundraising for Xiaozhu remains at an early stage and that more capital may still be needed thanks to the huge number of travelers to China and the growth of online booking. Compound value is what he sees in this company, and the reason for investment in the first place.
This round of fundraising completed just as the real estate market in China has hit a trough. According to data from Bloomberg, The Hang Seng Mainland Properties Index has fallen to its lowest level since August 2017. All this despite the strong push from the Chinese government on the home rental market since 2016. “De-stocking” is the word that has been used by China for the past two years. What the online home rental platform has done is to fit in with the needs of the government, while generating revenue to make those vacant houses useful.
There is always competition in the market. For Xiaozhu, rivals include Airbnb, the US-based online hospitality service that entered the Chinese market in 2015, and Tujia, another Chinese home rental platform founded in 2011. Analyst Zhang Zhen from Chinese internet research firm Sootoo told FinanceAsia that the $300 million investment has brought vitality into the market. It is highly possible that Tujia and Airbnb will increase their fundraising efforts, but it might not be as big as this one, he added. Competition will continue as long as no single platform has an absolute advantage. Yunfeng Capital's Li said that local companies have an advantage in the Chinese market as they understand their local home providers. She has faith that Xiaozhu will remain the leader of the Chinese online hospitality platforms and that its business will expand.
Will competition between Chinese home rental platforms turn into a war of capital, as providers burn money to attract customers? After all, Xiaozhu and Tujia have both just completed rounds of financing. Investors and analysts say no. The competition is not for funds, instead technology and service are key to win the battle for the billion dollar home rental market in China.