Remember Quora? It is a question-and-answer website that exploded in popularity in the 2010s -- thanks to its high-profile users, including Netflix CEO Reed Hastings and Steve Case, the co-founder of AOL. Quora's founders envisioned a human-powered knowledge engine, where users could type in any question and get a high-quality answer from an expert.
At first, Quora grew at an astounding rate. It was so popular that Alphabet's Google and Facebook tried to launch competing Q&A products. But as Quora's user numbers surged, the quality of content on the platform declined. Soon, superstar users like Marc Andreessen stopped being active on Quora. By 2019, Quora had devolved into a "meaningless pile of content," according to Recode.
While Quora failed to live up to its expectations, its Chinese equivalent, Zhihu (ZH 3.53%), has outgrown its U.S. counterpart. In late March, Zhihu completed its IPO and went public. It raised $523 million from its 55 million share offering and now sports a valuation of $4.9 billion. Interestingly, Zhihu also raised $250 million in a private share sale to major Chinese tech players, including Alibaba, JD.com, and Tencent. Zhihu also counts search engine Baidu and video platform Kuaishou among its shareholders.
What has drawn this all-star cast of backers to Zhihu?
Zhihu is China's Quora -- and more
In its IPO prospectus, Zhihu recounts the story of three-year-old Ashley and how she benefited from the platform.
From an early age, Ashley was captivated by beautiful pictures of sea life. Keen to fan Ashley's interest, Ida -- Ashley's mother -- started looking for a book about oceans for her daughter. One day, Ida came across this exact question on Zhihu: "What are the best books for my little one who loves ocean animals?" Ida found two books for Ashley. Soon, Ashley started drawing sea animals with crayons. She drew a portrait of a seahorse and gave it to her mother as a gift.
This sounds like a feel-good story, but it's more than that. Zhihu is home to 315 million questions and answers. Ida found that particular question not by a stroke of luck, but by a feat of software engineering. Underneath Zhihu's deceptively simple interface -- ask a question, get an answer -- is a powerful technology platform. By leveraging artificial intelligence and big data, Zhihu routes the right content to the right user while removing spam and abuse.
Beyond technology, Zhihu has to work hard to maintain a culture of trust -- something that companies like Facebook also grapple with. Zhihu must also constantly expand the variety of content on its platform while preserving the quality of the content. By doing all this, Zhihu encourages users to keep asking questions and share their knowledge freely -- widening its "collective intelligence." This, in turn, retains existing users and draws in new ones.
So far, this approach has worked well for Zhihu. 43 million content creators have contributed 315 million questions and answers to Zhihu -- making it China's biggest Q&A online community. Monthly active users (MAUs) rose 33% to 76 million in the fourth quarter of 2020.
A growing user base and strong engagement levels, in turn, are helping Zhihu monetize its platform. It opened up to online advertisers in 2016, rolled out paid content in 2018, and launched memberships in 2019. In 2020, Zhihu launched "content-commerce" solutions -- a way for brands to produce the content displayed alongside user-generated content.
According to Vogue Business, Zhihu's commercial clients include LVMH's Louis Vuitton and Estée Lauder. Zhihu has also recently expanded into e-commerce and online education services. In 2020, advertising, paid memberships, and content-commerce solutions made up 62%, 24%, and 10% of Zhihu's revenue.
What's next for Zhihu
Zhihu has been in hyper-growth mode. Revenue doubled in 2020 to 1.6 billion yuan ($207 million), and there are good reasons to expect Zhihu to keep growing at high rates.
For one, Zhihu is a very recognizable brand in China's massive online content community market, where it estimates its total addressable market is worth 276 billion yuan. By 2025, Zhihu thinks this market could be worth 1.3 trillion yuan, as the industry finds better ways to monetize these communities. Zhihu's 1.6 billion yuan in 2020 revenue is just 1% of this opportunity.
There are many ways for Zhihu to grow its business. As a start, it can grow its user base. The bigger Zhihu's user base gets, the more valuable it becomes to advertisers. Moreover, a growing user base will help Zhihu generate more revenue from paid memberships and online education -- Zhihu had 3 million paying users in 2020, up from 1 million in 2019. But that's just a fraction of Zhihu's 76 million (and growing) MAUs. Just converting more users into paying ones is an opportunity in itself.
Still, the road ahead isn't all clear. Zhihu will have to battle for eyeballs with established content players, including Weibo, Baidu, Bytedance, and Bilibili. While none of these companies are in the Q&A community business, they compete with Zhihu for user time and ad budgets. What's more, Zhihu's finances are still in the red. This will likely remain the case for years as the company invests in growing its user base and content. There's still no telling when Zhihu will become profitable -- or if it ever will be.
Why you should keep Zhihu on your watchlist
Zhihu and Quora began around the same time, driven by the same bold ideas. But unlike Quora, Zhihu has stayed relevant. According to website analytics firm Alexa.com, Zhihu is China's 34th most popular website. Quora, ranked 346th in the U.S., has slipped into obscurity by comparison.
As long as Zhihu stays true to its obsession with quality content, it will remain relevant to a global Chinese audience. And if it keeps users delighted with an ever-growing selection of content and features, Zhihu has a shot at sustaining its high growth rate.
To see if it could actually pull this off, investors should watch Zhihu closely over the next few quarters.