China's Zhihu completes $522m IPO, endures volatile debut
Chinese question-and-answer platform Zhihu endured a difficult New York Stock Exchange debut, closing at a 10.5% discount to its IPO price on a day when US-listed Chinese stocks fluctuated wildly.
The company – which counts Alibaba Group, Tencent Holdings, and JD.com among its backers – raised $522.5 million through its offering, having sold 55 million American Depository Shares (ADS) at $9.50 apiece. This was the bottom end of the indicative range. The stock opened at $8.05 on March 26 and fell as low as $6.81 before recovering to end the day at $8.50. This gave Zhihu a market capitalization of $4.75 billion.
Zhihu is unusual in that it enjoys a broad range of strategic support within China. Baidu and Kuaishoul, a short video platform that listed in Hong Kong earlier this year, led the company’s Series F round in 2019, committing $434 million at a valuation of $3.5 billion. Tencent led a $55 million Series C in 2015 and then re-upped in the next three rounds.
Alibaba and JD are more recent arrivals. Zhihu completed a $250 million placement alongside its IPO, with Alibaba and JD each contributing $100 million, according to a filing. Tencent put in $30 million, while the remaining $20 million came from Lilith Games, a Chinese online gaming business.
Zhihu was founded in 2010, shortly after its US counterpart Quora, with which it shares several features such as online voting, user-generated topics, and options to follow certain topics or users. The company attracts a wide array of content creators, from individuals giving firsthand accounts of their unique experiences to tutors providing exam preparation tips to hobbyists sharing expertise.
As of December 2020, Zhihu had 43.1 million cumulative content creators, who had contributed 315.3 million questions and answers. Average monthly active users (MAUs) stood at 75.7 million in the fourth quarter of 2020, up 33% year-on-year. Zhihu claims to be China’s largest Q&A-inspired online community and one of its top five comprehensive online content communities.
The company achieves monetization primarily through online advertising, which was introduced in 2016 as a means of connecting brands with targeted audiences based on content consumption. Since then, it has added paid membership – as of December 2020, three million average monthly paying members received unlimited access to the content library – paid-for content, and content-based online marketing solutions.
Zhihu’s revenue reached RMB1.4 billion ($207.2 million) in 2020, up from RMB670.5 million a year earlier. Over the same period, its net loss narrowed from RMB1 billion to RMB517.6 million.
China Insights Consultancy (CIC) estimates the country’s online content industry – comprising material generated by professionals and standard users – will be worth RMB1.3 trillion in 2025, compared to RMB275.8 billion in 2019. The user base will grow from 773 million to one billion, while revenue per user rises from RMB356.70 to RMB1,292.40.
Sinovation Ventures was one of Zhihu’s earliest investors, having started with an angel round in 2011. It now owns 11.2% of the company. Qiming Venture Partners provided a $10 million Series A round later the same year and SAIF Partners took the lead in a $22 million Series B in 2014. Qiming and SAIF hold 9.7% and 7.9%, respectively.
Tencent owns 11.1% and Capital Today China Group – leader of a $100 million Series D round in 2017 – has 5.8%. Kuaishou has 7.1%. Other investors in the company include Advantech Capital, Oceanpine Capital, and Mercer Investment, and Sunshine Life Insurance, all of which took part in a Series E round of $270 million in 2018.
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