If there were an equivalent of cult entrepreneurship guide “Lean Startup” for Chinese internet entrepreneurs, the CliffsNotes version would look something like this:
- Step 1: Get investment
- Step 2: Get users
- Step 3: ???
- Step 4: Profit!
Trouble is, having plentiful users doesn’t always translate into a clear path to profit.
Just ask Little Red Book. Rumors abound that the “social e-commerce” platform gutted its e-commerce division’s staff by as much as half last year. Or ask Quora-like Zhihu, or travel review platform Mafengwo. Together, these three have raised more than $1.8 billion from investors, according to Crunchbase. The return on investment? A combined 220 million active monthly users, and no profits.
Each of these apps is content-driven, but without a successful, scalable monetization model. That spells trouble when trying to convert users and venture capital into profit.
Let’s start with each platform’s content and scale.
Little Red Book is a platform to share and read product reviews and lifestyle tips across a gaggle of product categories. Think a hybrid of Instagram, Pinterest, and Net-a-Porter. It cracked 85 million monthly active users in the first half of 2019, of which a high proportion are women from China’s first and second-tier cities.
Zhihu, China’s equivalent of Quora, features Q&A that ranges from the asinine to the profound. Third party sources estimate the app has 35 million monthly active users, reading and adding to the site’s 28 million questions and 130 million answers.
Mafengwo is a travel experience sharing platform, focused on long-form content. The company claims over 100 monthly million users, but it has previously been embroiled in scandals for funny business with its numbers. I’d take that monthly active user figure with some skepticism.
Castles without moats
The trouble with freely available written content is, it doesn’t lend itself to making platforms meaningful returns. For individuals, it might be a way to make a living. But for large businesses, platforms, or portals, freely available written content is typically a loss-leader that aggregates demand and drives sales across other areas of the business.
Consider Meituan’s review platform, Dianping. This Yelp equivalent is the Meituan ecosystem’s most frequently-used function, but generates chump change compared to Meituan’s food delivery and travel units.
For content platforms that aren’t part of the Alibaba, Tencent, Bytedance, or Meituan universes, the trick is building compelling products or services that can cross-subsidize the cost of building and nurturing a large-scale content platform. This is where Little Red Book, Zhihu, and Mafengwo have struggled.
Little Red Book has had a crack at almost everything to make bank. It’s gone into cross-border e-commerce, physical stores, influencer monetization, and in-platform advertising. None of these appear to have gone according to plan.
More alarmingly, monetization efforts through overt in-platform advertising may be driving away users. According to analysis of Quest Mobile data (Chinese), Little Red Book’s monthly active users have declined from 98 to 72 million between August and October 2019. That’s a stinging setback, and the company will need to show meaningful improvement before they can confidently go to investors again.
Zhihu has been down a number of monetization paths in its eight-year history, with similarly displeasing results. It has tried monetizing experts, adding paid content featurettes, and incorporating Q&A livestreams. However, this multi-pronged effort wasn’t enough to stop Zhihu letting go of around 20% of its workforce (Chinese) in late 2018.
The stakes are now even higher. In August 2019, Zhihu raised a $434 million Series F. That’s the largest fundraise in China’s online content and entertainment segment for the past two years, and takes the company’s valuation ($3.5 billion) beyond Quora ($2 billion) and Reddit ($3 billion). All three cornucopias of information are valuation-rich, but none have turned a profit.
Mafengwo’s monetization should have been relatively straightforward: connect passionate travelers who read the platform’s reviews with relevant travel packages and take a cut of the proceeds. This would require pinching share from Trip (formerly Ctrip), which made $549 million from package sales and commission in 2018. And it hasn’t happened: the company recently announced plans to lay off 40% of its staff. Sources inform me that, without a fresh capital injection, things look bleak.
Content + scale still not enough
The internet’s widespread adoption gave rise to a particularly awful cliché: “Content is King.” This cliché has inspired a number of companies that aggregate content, of which a fair chunk have received generous investment. In investing in content-based companies like Little Red Book, Zhihu and Mafengwo, investors like Tencent (which has bet the trifecta) make some justifiable assumptions:
- High-quality written content attracts audiences
- High-quality written content across multiple themes or categories gives access to multiple high-value audience segments
But also some iffy ones:
- Advertisers will pay to access these audience segments
- Content platforms can provide advertising solutions which are attractive enough to advertisers to redirect spend from news websites and social media
- Audiences won’t leave as the platform attracts more advertisers and incorporates more advertising formats
You’ve probably spotted that why the third, fourth and fifth assumptions represent some very big “ifs.” Zhihu, Reddit, and Quora—each independent of the digital advertising magnets that are the digital giants—have found out how difficult it is to nab advertising spend.
If I’m honest, I don’t think very much of these companies’ ability to build sustainable businesses and their future prospects as independent entities. However, I commend Little Red Book, Zhihu, and Mafengwo for exploring non-advertising revenue streams. They have recognized the limits of advertising revenue and have been nimble enough to try different commercialization models. Facing uncertain futures and a poor monetization track record, they’ll need to continue iterating while being paragons of frugality.
Eventually, however, we may have to accept that China’s written content platforms need deep-pocketed patrons—whether investors or integration with one of China’s internet giants—to eke out a continued existence.
The latest funding round of each company suggests where things might go: Alibaba’s sizing up Little Red Book as a content extension for Taobao, Kuaishou and Baidu are looking to wrestle over Zhihu’s question-based foothold in search, and Tencent is adding to its small tourism portfolio.
User retention and inroads into commercialization will decide each company’s fate.