How Perplexity AI got to +$1B valuation with $20M ARR under Google's Monopoly

How to find Product Market Fit in a monopolistic market

Hey everybody welcome back to the Product Market Fit Newsletter 🚀

My name is Guillermo Flor and I write this weekly newsletter to help founders, growth professionals and product people to grow & fund their companies.

This week we are going to talk about how Perplexity AI:

1. Was founded 🏗️

2. Raised Capital 💸

3. Grew 📈

4. What went wrong & founders insights (premium) 💥

But, before getting into it, As usual, some good beats🔥 Enjoy it!

Communication board

• I’m opening up 2 hours of free weekly consulting for startups fundraising or going to market. Find a slot here. (Soon to release Podcast)

• Inbound website is live! If you know any company that might be interested, an intro would be great!!

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How Perplexity AI got to +$1B valuation with $20M ARR under Google's Monopoly

Perplexity AI is revolutionizing the search engine market by creating a new category within it, moving from traditional lists of links to direct, conversational answers.

Founded in 2022, this AI-powered search engine has seen meteoric growth, now valued between $2.5 and $3 billion. Their mission? To transition the world from links to answers and build the ultimate knowledge app.

Perplexity AI Pitch Deck

1. The Founding Team

Perplexity has world class team with 4 founders that have extense experience both in AI and entrepreneurship 👇

• Aravind Srinivas (Co-founder & CEO): A former research intern at OpenAI, DeepMind, and Google, Aravind brings a wealth of AI expertise. He was also a research scientist at OpenAI and has invested in several AI startups. LinkedIn

• Andy Konwinski (Co-founder & President): Before Perplexity, Andy co-founded Databricks, a data analytics company now valued at over $28 billion. LinkedIn

• Denis Yarats (Co-founder & CTO): A PhD student in AI at NYU and former AI Research Scientist at Facebook, Denis's experience spans both academic and practical AI applications. LinkedIn

• Johnny Ho (Co-founder & Chief Strategy Officer): Previously a quantitative trader at Tower Research and an engineer at Quora, Johnny has a strong background in both finance and engineering. LinkedIn

2. The Product

Perplexity AI addresses the limitations of traditional search engines by offering a platform that provides direct, conversational answers to user queries. Their AI-powered search engine facilitates complex research and analysis, going beyond simple navigational and informational queries.

Perplexity AI Pitch Deck

Perplexity AI Pitch Deck

Practical Insights:

• Identify Market Gaps: Perplexity AI spotted the need for direct, conversational answers in search, unlike the traditional list of links.

• Leverage AI Capabilities: Utilize advancements in AI to enhance product offerings, making them more user-friendly and efficient.

• Focus on User Experience: Perplexity’s emphasis on accurate, referenced answers ensures a superior user experience.

3. Business Model

Perplexity operates on a freemium model, offering both a free tier and a paid subscription:

• The free tier allows users to ask a limited number of questions per month and access a subset of Perplexity's AI models.

• The paid subscription, Perplexity Pro, costs $20 per month and provides unlimited queries, access to Perplexity's full suite of language models, and premium features like file uploads for analysis and summarization.

Perplexity AI Pitch Deck

4. The Market

Perplexity AI capitalizes on the rapid advancements in large language models, which have increased user expectations for direct, conversational answers from search engines. Their timing and innovative approach have positioned them well in a market traditionally dominated by Google.

Tailwinds and Competition

With the fast-paced developments in AI, especially in natural language processing, users are increasingly expecting more from search engines. Perplexity AI has leveraged this shift, finding product-market fit by providing accurate and referenced conversational answers. Unlike traditional search engines that provide lists of links, Perplexity's approach resonates with users looking for immediate and precise information.

5. The Growth

Since its inception, Perplexity AI has experienced explosive growth:

• 2 million monthly active users in the first four months

• 500k+ searches in the last month, marking a 1036% increase YoY

• 75 million queries in the US in early 2024, compared to the same number for the entire previous year

• $20 million in annual recurring revenue (ARR) as of April 2024, up from $7 million ARR at the end of 2023

Marketing

Perplexity AI got attention of entrepreneurs with large followings like Jack Dorsey and that made it go viral and get early traction.

Distribution Strategies

Perplexity AI has strategically formed partnerships with major companies to expand its user base:

• Telecom Partnerships: Collaborations with SoftBank and Deutsche Telekom have expanded their reach to over 335 million potential users worldwide.

• Enterprise Offerings: Their shift towards enterprise solutions like Enterprise Pro and partnerships with companies like Zoom, HP, and Databricks have opened new revenue streams and expanded their market opportunity.

6. The Funding