Why Perplexity is Already a Unicorn
The search market is about to become the answer market
Perplexity announced $74 million of new funding in January and a $520 million valuation. The Wall Street Journal reported last week that the company is on the cusp of a new funding round that will double its value to over $1 billion.
Perplexity is growing fast. The company recently surpassed $10 million in annual revenue, a person familiar with the matter said. Visits to its mobile and desktop app grew 8.6% in February to around 50 million users, according to preliminary estimates from the data service Similarweb.
The Numbers
Appfigures data show the company has 2.2 million downloads on iOS devices and 1.6 million for Android. The data also show that Perplexity has had a notable increase in mobile downloads recently, particularly after the Wall Street Journal article. United States users account for about one-third of iOS downloads, while Google Play downloads are led by India at 36%, Indonesia at 12%, and the United States at 8%. Perplexity has nearly a million mobile users overall in India and over 700,00 in the U.S.
Of course, these figures are dwarfed by OpenAI’s ChatGPT, which has about 140 million downloads across iOS and Android. Perplexity reflects less than 3% of ChatGPT’s downloads. However, it has nearly nine times as many downloads as Google’s Gemini advanced. Perplexity is an answer engine positioned as an alternative to Google. This is what investors are looking at in terms of value.
The $10 million in annual revenue reflects only about 40,000 subscribers to the company’s $20 per month service. Perplexity also offers API access to its service, but that is unlikely to account for a significant portion of company revenue today. Assuming 40,000 subscribers, Perplexity is converting only about 0.1% of users to its paid service. That is the big near-term opportunity.
A 2023 study by Lenny Rachitsky and Kyle Poyar found that only about one-fifth of freemium applications convert less than 2.5% of users. If Perplexity can achieve just a 0.8% conversion rate, it would be a $100 million revenue business. The longer-term opportunity is obviously to steal a share from Google in the broader search market, where Microsoft says a 1% share is worth $2 billion annually.
SK Telecom and Changing User Behavior
In addition, Perplexity just announced that the Perplexity Pro paid service will be available to 32.5 million SK Telecom users. This is a critical expansion for the company, which had fewer than ten thousand mobile downloads in South Korea before this announcement. Importantly, the new agreement will introduce users to Perplexity’s most advanced service.
Consumer habits may be Google’s biggest advantage today. The company’s name is a verb synonymous with “search,” and it reinforces Google’s 90% search market share.
When trying to create an opening in a market with such concentrated dominance by a single vendor, you must create a wedge that shifts behavior. This can only come from providing a superior product, but that is often insufficient to overcome perceived switching costs by users. SK Telecom is offering convenience by providing Perplexity and promoting its trial. After a year of use, you can imagine that many users will find they like Perplexity and may become paid users. Nearly every question asked of Perplexity is a loss for Google.
The Opportunity
Microsoft was not able to make significant inroads in Google’s search market share after it launched Bing Chat (now known as Copilot), a similar service to Perplexity. So, it might be hard to imagine a startup succeeding against the tech giants. However, as I outlined in a video demo last year, it is an exceptional product. Why should we search through 10 blue links for information that may answer our question when we can just get an answer in a couple of seconds? The experience is so superior to traditional search that Google and everyone else will be forced to match it.
However, Google has a problem. Generative AI-powered search is far more expensive to operate than traditional search, and it changes the advertising model that Google has perfected. As Spotify taught everyone in music streaming, subscriptions are more profitable than the ad model if you can get the user utility function right. Perplexity is testing that theory now, and Google is looking to follow it with Gemini Advanced.
Perplexity is getting a massive valuation bump after three months because it is showing signs of approaching “escape velocity” in adoption in an enormous market. It can quickly justify the new valuation if it simply executes higher conversion rates to paid subscriptions. Perplexity investors have a much bigger prize in their sites if they can become a significant player in the search market.
