The Consumer Subscription Roll-Up Opportunity

Led by companies like Netflix and Spotify and accelerated by shifting consumer preference, the Consumer Subscription Software (Consumer SaaS) market is in the midst of an exciting period of growth that, per GP Bullhound, could see the average US consumer spending upwards of $100/year on digital subscription services by 2022 (up from around $10/year today).

With global distribution platforms, converging consumer tastes, more efficient business models, and emerging technologies breaking down many of the geographic barriers to building passionate communities, Consumer SaaS companies are being built and scaled around the globe in nearly every consumer vertical imaginable. Again, from GP Bullhound:

Consumer Subscription Private Equity

Many companies in the segment have leveraged these factors to make serious progress without an over-reliance on external capital while those looking to use investment to fuel growth have found a very willing market. Within our portfolio, we’ve seen both capital strategies work well.

And while concerns about consumer retention and long term sustainability persist thanks, in part, to the same potential for shifting consumer needs that opened up the market in the first place, it is clear that a large number of new brands based around the Consumer SaaS model have real potential to become long term “franchises” that finally make the leap from single product companies to businesses offering a broader range of services and experiences to customers — either by going wide and reaching a wider swath of consumers or by driving a larger share of wallet from their core userbase.

As the market and business model continue trending towards maturity, it is inevitable we will see the capital stack mature alongside it — moving beyond large VC rounds focused on winning early market opportunities to systematic strategies where alpha is driven by operational excellence and global scale.

Private Equity for Consumer Subscription

In a previous post, I wrote about the opportunity for a firm to roll-up the At-Home Fitness market using L Catterton’s activity in the space as a guide. What is worth pulling out of that post to set a baseline is what, beyond simply more mature market dynamics, creates a roll-up opportunity in the first place.

The strategy tends to work well when the group of companies being brought together are similar enough that they can benefit from shared, scaled out fixed “infrastructure” across core business functions but are different enough (end customer demographics, positioning/brand, geography, etc.) that they don’t encroach too aggressively on one another.

Quickly, I’ll touch on three examples where different buyout models that could be employed effectively in the Consumer SaaS market and how we might think about when and where we’ll see those strategies executed.

Multi-Brand Vertical Platform — Match

While I’ve noted throughout that the Consumer SaaS market — and the private equity opportunity related to it — is in its infancy, that’s not entirely true. One company (Match Group in Dating) has been early to the opportunity in building a wholly owned portfolio of Consumer SaaS companies.

Match — who owns Tinder, Hinge, and OkCupid among many others — has spent the last 20 years building up a set of brands that cater to virtually every dating desire. The depth of expertise and data Match has developed via this strategy has enabled it to understand better than anyone else what features and experiences users across the portfolio are seeking (image 1 below) while its decentralization has given individual brands like Tinder (image 2) the ability to respond with agility and innovative ideas to meet their specific set of consumers where they are.

Where else might this strategy work? My guess is that it will first be employed in the fitness space. We’ve already seen precedent in the brick and mortar boutique world with firms like Xponential Fitness expanding category by category. L Catterton’s aforementioned play in the equipment market is another indicator that this may be the next domino to fall.

Hub and Spoke — Spotify

If you follow me on Twitter, you’ve seen a lot from me recently about Spotify and the opportunity they have to expand beyond music to subscription offerings that more broadly address the “Spoken Word” market. By nature of owning a platform with significant consumer demand and laddering from music to their now large play in podcasts, Spotify is upstream (data-wise) of a lot of different Consumer Subscription expansion opportunities that it can capture via M&A and new internally developed products.

This is what I call the “Hub and Spoke” model — leverage a core subscription userbase and then upsell additional offerings to gain a larger share of wallet from your core customers. Until recently, this option seemed out of reach for most Consumer SaaS companies struggling to simply generate enough demand to support a single product at scale. This is changing.

And while Spotify is, of course, not a private equity player, the opportunity for a similar model exists in other categories (religion is one that sticks out to me, but there are others).

Vertical Agnostic Operational Excellence — The ThomaBravo / Vista of Consumer SaaS

This final model is one that, to my knowledge, has not yet been deployed in the Consumer SaaS space but thanks to more experienced operators, better long term data and benchmarks, and a more mature corporate M&A market, the pure-play Consumer SaaS Buyout firm — built on operational excellence playbooks, top-tier talent networks, and a long term commitment to the business model in the mold of ThomaBravo or Vista Equity seems on the horizon.

Building out this model to start would not take a massive capital investment as the firm going after the opportunity would likely not be vying to compete to buy billion dollar companies like Calm or Blinkist. Instead, the strategy would be best focused on vertical opportunities in companies that are either:

  1. Largely founder owned via capital efficient growth (i.e. staying off the VC treadmill) where the initial product is reaching its natural growth limit and a buyout can provide founder liquidity and allow for a capital and management injection more focused on leveraging a strong brand to expand to new categories / geographies that couldn’t have been reached via organic growth.
  2. Companies overly reliant on VC funding to date without clear paths to large growth rounds or $1b+ outcomes but where a more rigid operational approach could yield a more sustainable business that — within a 3-5 year period — can be turned into an attractive asset for a corporate buyer.

While we may be a couple years out from this strategy being employed at an kind of real scale — as the market remains so nascent that most categories are still very much up in the air and long term category structures are far from being in place — it is something I will be watching closely.

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Creative Compounding

As USV’s Albert Wenger tweeted heading into 2019, there is a lot of pessimism in our public discourse with much of the ire directly or indirectly pointed at technology as both a concept and as an industry.

While there is undoubtedly strong justification for concern and – in many cases – outrage, I am fortunate as an early stage investor to have the opportunity to meet daily with founders tackling high impact problems whose default worldview edges strongly to the side of optimism. This has given me a glance at many things happening in the world of technology that are worth being excited about.

One thing that has me extremely optimistic is the continued level of creative compounding in “offline activities” that has been and will continue to be enabled by the internet — and specifically by some of the social platforms that have been (rightfully) on the receiving end of so much ire.

Another term for this might be the “Digital Bannister Effect”:

My favorite example of this as a sports fan and someone who grew up as an athlete in a world where the internet was just starting to impact how we trained, played, and shared is what I see daily on the Overtime Twitter and Instagram feeds.

For the uninitiated, Overtime is essentially a mobile sports content network focused on high school and college athletes — many of whom already have hundreds of thousands of followers and are smarter than ever about how they build their own brands. Young, digitally native fans flock to the platform to become “early adopters” of these athletes…many of whom have next to zero chance of actually making it to the NBA or even starring at the Division I level.

What is most striking to me about Overtime is how it has become an engine of creativity for young athletes looking to make a name for themselves. The tweet below sums it up.

To bring it back to Wenger — who wrote the highly recommended World After Capital — many things that used to be scarce have now become abundant. In the case of Overtime, young athletes 25 years ago had very limited access to the exploits of top NBA and college players, let alone their peers. They’d be able to watch ESPN to catch a few highlights but the long tail of truly interesting stuff happening in small college and high school gyms across the country was totally under the surface.

Now, players can derive essentially unlimited inspiration for dunks, passes, and celebrations by spending 5 minutes on Instagram. The internet has unlocked the ability to access all of that long tail content, making our attention the scarce resource.

Effectively curating that firehose of information to help users spend their attention in positive ways has become an almost unsolvable challenge for many of the broad-based networks on the internet. As a result, we are starting to see the pendulum swing towards networks of niches and tastemaker-driven communities where masterful curation is a core part of the experience.

Overtime is one of these tastemaker-driven communities that has figured out how to build passion among its base and kickstart a segment of “creators” whose output compounds in quality over time thanks to continued feedback and competition from one another and from the millions of consumers their incredible feats of athleticism reach every day and it is one (of many!) things that has me excited about what technology is enabling us to accomplish.

Podcast discovery isn’t a company, maybe “narrative discovery” should be.

Like Hunter Walk — and millions of other people — I love podcasts…and have for the last decade or so. I even hosted a few episodes of my own podcast back in the 2010/11 time frame.

Also like Hunter, I believe that podcast discovery is pretty broken for both people new to the medium and power users like me. Discovery within podcasts I’ve subscribed to is even an issue for me at this point as many now have a back catalog of nearly a decade.

As an example, I spent my ride to the airport this morning looking through old episodes of the Entrepreneurial Thought Leader Series from Stanford to download for my flight. Although I’ve listened to a number of these episodes over the years, I’ve never gone back through to the beginning to fully catch up on what I missed, nor should I have to.

A halfway decent discovery engine would know that since I subscribe to the ETL series, follow @Ev on Twitter, and have a professional interest in the business of podcasting (via social engagement, email subscriptions, etc.) I would be interested in hearing Ev Williams get interviewed about Odeo in 2005 (!) when podcasting was in its “pre-Geocities” phase.

Instead, I had to scroll back through hundreds of past episodes to find the interview, which I highly recommend.

Podcasts aren’t alone in this. Creative forms of content discovery are in short supply across the web. So while “podcast discovery isn’t a company”, I’ve often wondered if narrative discovery could or should be.

Here’s what I mean.

Today, most of what we consume about a historical period or event is wrapped together in relatively precise formats and generally consumed via a single type of media — think a Michael Lewis book or Dan Carlin’s Hardcore History (to bring it back to podcasts).

And while some larger events have seemingly been analyzed from every angle (financial crises, wars, political campaigns), there remain thousands of alternative storylines within each of those sweeping periods that are under-documented. Sometimes it is due to lack of broad based commercial viability of a story, other times it is a matter of “winners writing history”, and in many cases (especially as we go further back in time) there no longer exists enough information to fully document and convey the happenings within one of these micro-narratives.

That has changed with events unfolding during the internet era, as the amount of long tail of content — blog posts, audio recordings, videos, newspaper articles, social posts, etc. — has truly exploded and the “definitive” account of something can be more personalized than ever.

What I’ve wondered is if there a market for a service that combines web-scale content collection and indexing with human curation to build out personalized event, period, or even concept focused narratives that exist on the spectrum somewhere in between the well polished book or documentary on one side and a random set of Google and Wikipedia searches on the other and are delivered in a multimedia format.

My trip back through the archives of the ETL podcast series prompted a few storylines about the technology industry that I’d love to receive a loosely structured digital dossier — full of videos, interviews, blog posts, and audio recordings — about. A few examples are the history of payments on the Internet, Silicon Valley during the financial crisis, the rise of the Chinese internet in the aughts, and the clean-tech bubble.

There are also themes related to sports, music, health, and travel where I’m not necessarily looking for a singular definitive account, but instead just want to be pointed in the right direction on my “random walk” so I can start connecting my own dots.

As you may be able to tell, I don’t have a fully developed point of view about how this would be productized, what curation would look like, how it would be personalized, or even if there is a viable business model in it.

But given the amount of high quality “dark matter” sitting quietly and under appreciated in blog, podcast, and video archives around the web, it seems like it could be the type of “shadow market” capable of supporting a successful company in the hands of the right team.