China's answer to Quora has some hard questions to answer. Ten years into the business, Zhihu, the country's largest online Q&A forum, is seeking a $6.4 billion valuation in New York, raising over $800 million through an initial public offering plus private placements to strategic investors.
The company narrowed losses and doubled revenue last year thanks to an aggressive membership push. But its business model makes the price look expensive.
Victor Zhou and Li Shenshen started Zhihu, meaning "do you know" in classical Chinese, in 2011, providing curated industry insight and life hacks from top Chinese minds. Its ad-free space originally attracted influential contributors like former Google China President Kai-Fu Lee and Xiaomi founder Lei Jun.
After luring big backers including Tencent and Baidu, Zhihu tried to monetise by embracing advertising. It also ventured into online education, live-streaming video and e-commerce. In 2020 it doubled sales from a year earlier and halved a net loss to 518 million yuan ($80 million). Subscription payments nearly quadrupled, while advertisement income, its bread and butter, jumped 46%. Even so, at the top of its target price range of $11.50 per share, the money-losing company is pricing itself at 31 times 2020 sales, higher than comparable listed companies like Bilibili, which trades at 21 times, and microblog site Weibo, at seven.
Generating the growth necessary to justify such a price seems a stretch. Zhihu has struggled to scale up, and some users have begun to complain that content quality is deteriorating. Spending on content and operations tripled in 2020. Even after last year's jump, it has only 76 million monthly active users. Rivals have started poaching popular contributors.
In general the online Q&A model is losing lustre. ByteDance, owner of the TikTok video app, shut down its Quora-like offering. Quora itself announced layoffs last January.
Shifting from text to video is one potential solution. ByteDance rival Kuaishou owns a stake in Zhihu, and could help. But it won't be easy. Bilibili is already hosting financial and knowledge-sharing video bloggers. Investors will want more answers than questions.