Why they invested: Perplexity

Welcome to the second edition of our “Why they invested” series. In each post, we deconstruct investing decisions in one of today’s fastest-growing startups. In our first post, we covered Zip.

Today, we’re diving into Perplexity.

It’s hard to have a conversation about AI without Perplexity coming up. The attention it gets is warranted. Since publicly launching their conversational answer engine, Ask, a year ago, Perplexity has served over half a billion queries to their 10 million monthly active users. They’re on a mission to “serve the entire planet’s unbounded curiosity.”

In this piece you’ll hear directly from investors on why they invested in Perplexity. As with all Signature Block posts, we mostly get out of the way, stepping in to tie the conversation together.

Here’s a snapshot of Perplexity:

• Founded: 2022
• Tagline: A conversational answer engine
• Capital raised: ~$102M
• Founders: Aravind Srinivas, Andy Konwinski, Denis Yarats, Johnny Ho
• Traction: ~10M monthly active users (as of Jan 2024)
• Investors: New Enterprise Associates, Bessemer Venture Partners, Kindred Ventures, IVP, Factorial Funds, Databricks, Elad Gil, Nat Friedman, Nvidia, Jeff Bezos (Bezos Expeditions Fund), Tobi Lutke, Guillermo Rauch, Naval Ravikant, Balaji Srinivasan and Austen Allred

If you only have a few minutes, here’s the TL;DR on why investors invested in Perplexity:

• Investors were drawn to the team’s skill, imagination, and ambition to radically improve search. The Perplexity founding team combines experience from AI research organizations like DeepMind, Google, and OpenAI; consumer companies like Quora; and enterprise companies like Databricks.Cack from IVP spoke about the team’s ability to parallel process “a grand, long-term vision while shipping product relentlessly.”
• Investors were drawn to the team’s speed of execution. Ann from NEA noted that the team developed a new user experience in less than three months—a feat unmatched by search competitors for years.
• Timing was right with a tipping point in consumer pain. Multiple investors cited the growing challenges encountered by users with conventional search engines, including misleading answers and excessive ad clutter, as a factor that makes timing right for Perplexity. Sol from Factorial Funds noted that Google is facing an innovator's dilemma.
• Disruptive user experience and explosive traction. Perplexity is an answer engine. It provides direct answers to users' questions in real time, an alternative to traditional search engines like Google, which return a list of links. Critically, all answers are sourced and footnoted, allowing the user to verify the factualness of the content.
• The opportunity to create a new “answer engine” category. Ann from NEA noted that tech challengers emerge at the intersection of technology shifts, consumer behavior changes, and business model disruption, all of which Perplexity is at the center of. Investors were drawn to the company’s "disruptive potential" to fundamentally transform our interaction with the web.

Shoutout to Ann Bordetsky (NEA), Cack Wilhelm (IVP), and Sol Bier (Factorial Funds) for contributing to this post.

The team’s skill, imagination, and ambition to radically improve search

Several investors highlighted the Perplexity teams, led by Aravind Srinivas, blend of skill, imagination and ambition, as a primary reason they invested. The company founding team's pedigree cuts across AI research organizations like DeepMind, Google, and OpenAI, consumer companies like Quora, and enterprise companies like Databricks.

“The founding team includes CEO Aravind Srinivas, a former PhD at Berkeley who has contributed to groundbreaking AI research [2] at Deepmind, Google, and OpenAI; CTO Denis Yarats, a former PhD at NYU, Meta AI staff research scientist and head of Quora's Ranking & ML team; Chief Strategy Officer Johnny Ho, previously at Quora and Tower Research Capital, and the former World #1 IOI 2012 and World #3 ACM-ICPC (olympiad and collegiate computer science competitions); and President Andy Konwinski, co-founder of Databricks, who brings extensive expertise scaling one of the world’s fastest-growing decacorns.”

— NEA, Our Investment in Perplexity AI: Answer Engines and the End of Traditional Search

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“I was a bit skeptical before I met Aravind, given how many companies had tried to disrupt Google and failed. However, when we met Aravind in early 2023, and were blown away by his focus and understanding of incentives in the search space. Aravind had a clear vision, that most of Google’s search queries were lower-value navigational and local search. The whitespace was deep Q&A search, where users were looking for answers versus spending time parsing through many links to answer one or more questions. From there, the product could expand to local search and beyond.

Finally, we did some technical DD on the pplx-api and were impressed by the low latency and high accuracy. For all these reasons, a strong technical team with a clear vision, a leading product in the space, incredible product velocity and iteration, and an obsessive focus on customer experience, we decided to invest.”
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— Sol Bier (Factorial Funds)

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“We led the Series A in Perplexity because we saw the disruptive potential of LLMs to fundamentally improve how we interact with the open web and a visionary team with the skill and imagination to radically improve search.”

— Ann Bordetsky (NEA)

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“The team possesses the unique ability to uphold a grand, long-term vision while relentlessly shipping product, requirements to tackle a problem as important and fundamental as search.”

— Cack Wilhelm (IVP), Perplexity raises Series B Funding Round

Speed of execution

The AI market rewards fast-doers. A recurring theme in why investors invested was the team’s execution speed. Ann from NEA highlighted that in three months, the Perplexity team made strides that other search competitors haven't achieved in years. IVP’s memo highlighted the staggering number of features the team shipped within 48 hours of release.

“From ten blue links to succinct answer engine, the Perplexity team had achieved in less than 3 months what other privacy-centric search competitors hadn't been able to do in years – deliver a magical new user experience.”

— Ann Bordetsky (NEA)

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“As we mentioned above, we highly value the speed with which they ship product. In the last three months [note: circa October 2023], with a team of 30 people, Perplexity has added features like file uploads, collections, and image search; rebuilt the UI for the mobile app and web; launched a default search Chrome plug-in; made each new OSS model available within 48 hours of release without any early access; and released an API service for inference on OSS models.”

— Cack Wilhelm (IVP)

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 “In addition to their backgrounds, the team has demonstrated one of the fastest shipping velocities we have seen, bringing serious competition to companies with multiple orders of magnitude more employees in a matter of months.”

— NEA, Our Investment in Perplexity AI: Answer Engines and the End of Traditional Search

Tipping point in consumer pain

Several investors spoke about the stagnation of search technology and increasing difficulties users face with traditional search engines, such as misleading results and ad clutter. Perplexity's approach combines the efficiency of LLMs with the reliability of traditional search pipelines, delivering a UX that prioritizes accuracy, transparency, and efficiency in information retrieval, to deliver a radically more trustworthy experience.

“Google, on the other hand, was stuck with an innovator's dilemma. Switching to an AI search experience was a lower-margin business that would forgo valuable ad-screen real estate. Also, both our team and Perplexity believe Google’s incredible page rank and sorting algorithm was slowly being gamed by SEO.”

— Sol Bier (Factorial Funds)

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“Approximately 50% of consumers report that they sometimes feel misled by search results, many complain about ads, and a quarter report they often end up somewhere unexpected that does not provide what they were looking for[1].”

— NEA, Our Investment in Perplexity AI: Answer Engines and the End of Traditional Search

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“We have all grown accustomed to inputting a query (into Google) and getting back links to navigate the web. With the advent of LLMs, Perplexity can now, cost-effectively, provide cohesive, thoughtful answers instead of just links, resulting in people getting the answer vs. a path to finding the answer.”

— Cack Wilhelm (IVP)

Disruptive user experience and explosive traction

Perplexity’s user experience is truly disruptive. Perplexity is an alternative to traditional search engines like Google, allowing users to directly pose questions and receive answers backed up by a set of sources (vs a list of relevant links). It combines traditional search pipelines with large language models like GPT-4 to deliver useful, accurate, and referenceable answers.

Aravind is outspoken about Perplexity’s commitment to building a better search experience, “And so we committed ourselves to the harder mission of making it a successful consumer product”, guided by their compass of, “factfulness and accuracy is what we care about.”

“We think now is an exciting time for consumer AI products. Unlike enterprise AI, many of these consumer products are net new experiences. We also think the product feedback cycle is faster for consumer companies given how new this paradigm is.”

— Sol Bier (Factorial Funds)

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“The team's commitment to building a trustworthy, referenceable and 10x better answer engine, along with the fanatical early user love for the product, made us incredibly excited to partner with Perplexity in disrupting traditional search.”  

— Ann Bordetsky (NEA)

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”The product's popularity is driven not only by its technical merits but also by an intuitive UI, enabling users to explore threads of knowledge, dive into related topics, provide input and corrections, and share link their unique threads with anyone.”

— NEA, Our Investment in Perplexity AI: Answer Engines and the End of Traditional Search

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"They have created a delightful user experience for the curious. Whether it's better because it's accurate, because you can dig into readily sourced links to confirm, or because it's a clean UI, we don't really know right now, but we know that it's working."

— Cack Wilhelm (IVP)

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“Perplexity AI's game-changing product combines traditional search pipelines with LLMs while emphasizing scientific fact and verification through a rigorous citation process that grounds every answer in referenced sources. Accuracy through transparency, context and user feedback is a core tenet of Perplexity’s knowledge engine.”

— NEA, Our Investment in Perplexity AI: Answer Engines and the End of Traditional Search

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“The company has seen strong momentum in its web product offerings, consistently growing about 100% month-over-month with 10M monthly visits and 2M unique visitors in February alone.”

— NEA, Our Investment in Perplexity AI: Answer Engines and the End of Traditional Search

Opportunity to create a new “answer engine” category

From their FAQs, “Perplexity’s mission is to make searching for information online feel like you have a knowledgeable assistant guiding you.” They’re setting out to build an entirely new category of product, an answer engine, to execute on “serving the entire planet’s unbounded curiosity.”

“We see a new category being defined, something beyond just a Google replacement.”

— Sol Bier (Factorial Funds)

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“Tech challengers emerge at the intersection of technology shifts, consumer behavior change and business model disruption. Perplexity is uniquely situated to capitalize on today's perfect storm: the ever-accelerating race of LLMs and AI infrastructure, consumer interest in AI-powered applications and agents, and the opportunity to create entirely new categories of product. Just as Uber and Meta emerged in the mobile wave, we think Perplexity can create an entirely new category of AI-native knowledge engine.”
— Ann Bordetsky (NEA)

Let us know which company you’d like us to cover in the next one. Links to our Twitter below.

Until next time,
Ryan and Vedika from Weekend Fund