During the early days of Zhihu, China’s version of Quora, the company attracted a spate of internet industry executives curious to learn about its inner workings. Wang Xing, the outspoken founder of Chinese food delivery giant Meituan Dianping, is one of them.
Wang, one of the earliest users of the Question & Answer (Q&A) platform, chanced upon a folder containing the business cards of Zhou Yuan, Zhihu’s founder and CEO. Perplexed by Zhou wearing a different hat on each card, he asked Zhou for an explanation.
Giving a signature sheepish smile, Zhou admitted that he used the cards to meet different clients, as the company lacked sufficient staff at the moment. “This won’t do,” Wang said in surprise. “You should recruit all the suitable people you need to fill these positions.”
Since then, Zhihu has grown into China’s top Q&A platform, attracting over 85 million monthly active users (MAUs) in the first quarter of 2021. But allies close to Zhou say the episode remains a significant source of embarrassment for him. The strengths and weaknesses it reveals about Zhou and the internet company he founded are now increasingly scrutinized as investors consider whether the firm has reached the limits of its expansion.
For Zhou, the stakes are higher. He will have to prove that he is the right man to continue leading the enterprise.
A reclusive founder
Zhou is no stranger to tough questions. He’s been asking them as a journalist at local tech magazine IT Manager World (IT Jingli Shijie) in his early career.
A former colleague from Zhou’s journalist days, who now is a partner at Yunfeng Capital, remembers him as an affable, plain-dressing reporter with a burning passion for starting his own business from scratch. Zhou was often seen twirling a pen repeatedly while deep in conversations with others, with an enigmatic expression on his face. “He was an honest person whom you could befriend and showed a strong willingness to engage in self-critique,” said Li.
Zhou would bring these traits to Zhihu, which he founded in 2010, along with co-founder Li Shenshen. In an interview in 2010, Li highlighted the same traits that had attracted him into the partnership—Zhou’s kindness, an unwavering motivation to succeed that helped rally the colleagues around him, and a stubborn streak tempered by a self-critical attitude.
Zhou soon applied a lesson from an earlier big data startup he started in 2008 that failed to gain traction. He has confessed to being deeply introverted in the past, choosing to avoid big business networking events and head home instead. But at Zhihu, he courted other entrepreneurs to visit his office for lunch, to consult them on a range of prickly business questions. It was this approach that eventually brought Wang into his office.
Despite being an invitation-only service between 2010 and 2012, Zhihu quickly grew in popularity among a small circle of elite users and grabbed the attention of China’s growing internet community. Additions to the platform, including the popular science blog Songshuhui, cemented its reputation as a youth-friendly source of informational content.
But as a self-styled cerebral entrepreneur, Zhou and his firm were less accustomed to the cutthroat competition typical of the Chinese tech world.
A rude awakening came in 2017, with the launch of a direct competitor Wukong Q&A (Wukong Wenda), the brainchild of ByteDance’s Zhang Yiming, and a spin-off from his company’s popular news aggregator app Toutiao.
Friends close to Zhou say that he was enraged when Wukong poached several high-profile influencers from his platform. “Zhang Yiming does not play by the rules,” he said. But Zhou was advised that there was little he could do to stop legit competition from fellow competitors.
Competition has become a greater threat in recent years, driven by the rise of paid subscription models.
The emergence of a slew of other subscription-based Q&A services could convince some of Zhihu’s most influential contributors to jump ship under monetary incentives, subsequently taking away a chunk of their followers with them.
The Iget (Dedao) app launched in 2015 by Chinese media personality Luo Zhenyu is one of these challengers that added pressure on Zhihu, with its range of online learning courses covering a variety of topics ranging from the arts to science and technical skills.
Zhihu suffered a further blow when Songshuhui left the platform to launch its own Q&A subscription. Despite early overtures to Songshuhui founder Ji Xiaohua (popularly known by his web name of Ji Shisan) in regular meetups fueled by alcohol, Zhou failed to convince Ji to stay, and relations between the two have since turned sour.
Despite being adverse to conflict, Zhou has quickly moved his company on a defensive footing.
“I am not an egocentric CEO that forces others to do what I say,” he told local media Daybreak in an interview in 2017. “During meetings, everyone will often voice valid criticism and feedback and are unafraid of pointing out that my views are problematic.”
Zhou sided with business necessity rather than his instincts when corporate accounts were introduced to Zhihu in 2015 and when the site began to introduce paid e-courses to fend off competition in 2016.
Some in management, particularly Zhou, worried that such a move would have too much influence on business interests and overly monetize the platform. But for a firm that wants to grow, it was a source of revenue too big to turn down.
The numbers have validated Zhou’s choice. Paid advertising and promotional content made up over 70% of the RMB1.4 billion (USD 207.2 million) Zhihu earned in 2020, far outstripping other revenue streams like paid membership. Despite early successes in its offensive against Zhihu, Wukong Q&A has floundered and shut down in February this year.
But Zhou has hesitated to cross other red lines. A Tencent product manager had approached him when Zhihu was getting off the ground with a new business proposal: Launching a new Q&A service that allows users to ask questions and get instantaneous replies.
It was a bold initiative that would have allowed Zhihu to mount a serious challenge to traditional search engine services. But it was quickly rebuffed by Zhou. “I believe that a genuine Q&A service creates high-quality content for its users, rather than just focusing on getting (instantaneous) content,” he replied.
The tension between having to create profitability while retaining the authenticity of its community is the core challenge for Zhihu, said Gan Jianping, an investor in Zhihu. “Zhihu has a sizeable number of users, but it is difficult to attract more paid users without transforming the social atmosphere of the site,” she said.
The company remains in the red, although it has reduced losses by more than half compared to 2019. It made a net loss of RMB 518 million last year.
The investor that made Zhihu
To understand why investors have stuck with a loss-making firm, it is illustrative to look at the first round of angel funding for Zhihu in 2010.
In August that year, Zhou received an early morning call from Zhang Liang, a then investment associate at local VC Innovation Works. Zhang told Zhou that his colleague Huang Jixin, another associate at Innovation Works, had arranged a meetup with a potential investor for Zhihu.
The meetup happened at 9:00 p.m. that day in a bustling mall in Beijing’s central business district. Twenty minutes into the chat, Zhou secured RMB 1.5 million (USD 234,237) from investor Shao Zhong, a media tycoon and the founder of China’s Modern Media Group who has been described by some as China’s equivalent of Rupert Murdoch.
Shao, who provided the critical financial and talent openings Zhihu needed to get off the ground, once called his decision to invest in Zhihu the wisest decision he has made since founding his media empire in 1993.
After receiving Zhihu’s first investment, Zhang and Huang quit their VC jobs to join Zhou as the co-founders of the Q&A platform.
Along with Li, they started working on the site’s source code and branding at an office in Beijing’s bustling Sanlitun commercial district the day after. The office came rent-free, courtesy of their investor.
Zhang has adopted a hands-on approach, giving his input on issues ranging from product design to personnel. It was him who first came up with Zhihu’s iconic name after a brainstorming session that churned out over 100 possibilities, which ultimately proved inconclusive. In a moment of inspiration, Zhang put a twist on an aphorism from The Analects written by the Chinese philosopher Confucius which described one’s attitude to learning. Zhihu (“want to know” in Chinese) was born.
This backing has been essential even as other investors doubted the site’s future prospects. When an investor got in touch with Zhou, indicating interest, he was asked how many new users Zhihu expected to attract in a year. Zhou’s estimate of 20,000 prompted the investor to quickly hang up.
“I really wanted to tell him that (high) web traffic and the scale of our operations are not the goals of Zhihu,” said Zhou. Huang was an early believer in this vision. He pushed for marketing of the site’s high-profile contributors, ranging from the likes of Tencent CEO and founder Pony Ma to famed angel investor Xu Xiaoping, as gurus who could provide authoritative answers to a knowledge-hungry userbase.
The sterling reputation of Zhihu and its celebrity user base have allowed it to punch above its weight in attracting investment. It raised nearly USD 1 billion in seven rounds of equity financing prior to an initial public offering on the New York Stock Exchange in March that raised a further USD 737 million. It counts among its backers the likes of Alibaba, JD.com, and Tencent, and even potential rivals like Kuaishou.
But friends and those who have worked with Zhou say that these successes have only piled pressure on him to resolve the conundrum of having to commercialize and keep investors happy while maintaining the site’s spirit that attracted them in the first place.
Zhihu suffered a blow with the departure of its co-founder Li in March to seek new ventures. Its stock price is hovering near its IPO price of USD 9.50 after falling from a high of USD 11 in April.
But Zhou is determined to retain control of his company’s future, reflecting an attitude first shown in the early days of Zhihu when a prospective buyer approached Zhang with an acquisition offer. Zhou quickly called Zhang after hearing the news. “We started Zhihu to achieve results. If we sell it away halfway, we will earn money but lose our chance to fulfill our vision forever,” Zhou said. “Why are you thinking of selling the firm?”
In doing so, Zhou has rejected the prevailing trend of consolidation in the tech industry. Sogou, China’s third-largest search engine firm, was on the verge of being acquired by Tencent in a USD 3.5 billion deal, likely spelling the end of its founder and CEO, Wang Xiaochuan’s 16-year reign in the company.
In his tenth year at Zhihu’s helm, Zhou can point to strong results as proof that his firm is on the right track. Average MAUs have grown by 38% year-on-year, according to the firm’s latest earnings results, while total revenue has jumped by over 154% in the same period to USD 73 million, beating analysts’ estimates.
Despite rising losses from increased marketing spending, Zhou insists that its burgeoning user base validates the “content-centric growth strategy and monetization approach” that he has adopted for Zhihu.
He knows that market loyalties are fleeting. As he once remarked: “What makes the world go round are not new problems, but rather the value and validity (of new solutions).” Whether Zhou has the right solutions for charting Zhihu’s future remains to be seen.
The original article was written by Di Wenting for Xinmang Daybreak, a segment published by 36Kr, KrASIA’s parent company.