Perplexity was willing to pay $400 million to be inside Snapchat. Users weren't interested.
Snap disclosed during Q1 earnings on Wednesday that its partnership with AI search startup Perplexity has "amicably ended." The deal, announced last November, would have embedded Perplexity's search engine directly into Snapchat's messaging experience. Under the terms, Perplexity was obligated to pay Snap $400 million in cash and equity over a year, buying distribution to Snap's 483 million daily active users.
It lasted less than five months. By February, Snap said the two companies had "yet to mutually agree on a path to a broader roll out," only three months into testing. A Perplexity spokesperson told Engadget that the original implementation wasn't the right fit for either company's product goals.
Snap already had a conversational AI product that people used regularly. Over half a billion Snapchatters have messaged My AI since launch, and users sent more than 950 billion chats on the platform in Q1 alone. A search engine inside a messaging app built around casual conversation never quite fit, and testing proved it.
Snap launched AI Sponsored Snaps on April 28, its own bet on making money from AI conversations. The format lets brands show up inside My AI chats when a topic is relevant, and Snap's existing Sponsored Snaps format shows click-through rates 226% higher than standard Snap ads. "Conversation is becoming the most valuable real estate in advertising," said Ajit Mohan, Snap's chief business officer.
Perplexity has gone the other way. The company walked away from advertising altogether in February, telling reporters that ads undermined users' trust. Executives said the company doesn't track monthly active users because "we're not actually on a mission to get as many users as possible." Perplexity is now chasing what it describes as a "boutique" audience of people making "GDP-moving decisions," funded by enterprise subscriptions and publisher revenue.
The split comes during a tough stretch for Snap. The company laid off about 1,000 employees in April, roughly 16% of its workforce, while targeting more than $500 million in annualized cost cuts. CEO Evan Spiegel pointed to a return to user growth and accelerating revenue on the earnings call, but losing a $400 million revenue line while also cutting headcount adds real pressure.
You can't buy product-market fit, even for $400 million. Both companies walked away from this deal and landed on strategies that actually suit them, which tells you how little they needed each other in the first place. As AI startups everywhere scramble to prove a business model, expect more expensive breakups like this one. The partnerships that survive will be the ones where users actually wanted the product, not the ones where the term sheet looked impressive.
