The State of Consumer SaaS

This episode of Venture Desktop is a deep dive on the Consumer Subscription business model — or Consumer SaaS. It is an area I’ve been interested in for quite some time but I believe it is under-discussed…consider this my attempt to change that!

A few ideas and highlights from the episode:

  • How the market has evolved over the last decade and where company creation opportunities are going forward
  • Why “divine discontent” from consumers is helping accelerate the Consumer SaaS business model
  • The evolution of the capital stack and the future of M&A and PE including the opportunities at hand for Match, Spotify, and for someone to create the “Vista Equity of Consumer SaaS”

As always, I want to make sure you can check out Venture Desktop however is most convenient — you can find the Venture Desktop “video annotation” on YouTube, listen to the podcast on your app of preference, or read the fully accompanying article below. All of the links discussed in the episode can be found at the bottom of this post.



The State of Consumer SaaS

Thanks to global distribution platforms, converging consumer tastes, increasingly efficient go to market models, and emerging technologies breaking down many of the geographic barriers to reaching customers and building passionate communities, Consumer SaaS businesses are being launched and scaled around the globe in nearly every consumer vertical imaginable.

You can get a great sense for how wide ranging the impact of Consumer SaaS companies has become through this graphic which comes from a great report — the best I have seen — about the Consumer SaaS market by the investment bank GP Bullhound.

But even with this explosion, the Consumer SaaS market remains in its early days. Look at a chart of publicly traded consumer internet companies — like this one from Blossom Street Capital — and you’ll find that subscription companies and their combined impact on the public markets is quite small compared to businesses built on advertising (Facebook), commerce (Amazon), or with a marketplace transaction model (Uber).

You could interpret this as something bound to be structurally persistent or take it to mean that there is a lot of growth runway left for companies with this business model. I favor the latter point of view for a couple reasons.

First, some of the most beloved companies on that list are Consumer SaaS businesses — Netflix, Spotify, Peloton…and if you remember the framework from investor Gavin Baker that we talked about in Episode 1 of Venture Desktop it is that long term growth tends to follow early passionate engagement.

The second factor that advantages consumer subscription businesses broadly is their direct relationship and alignment with their customers. Dave Bujnowski of Baillie Gifford wrote an amazing white paper earlier this year called “The Case for Growth” that, among other things describes a shift we are undergoing as an economy from supply driven innovation —moving from tolerant consumers that take whatever companies dole out to them to an innovation curve that slopes up faster thanks to a positive feedback loop between supplier innovation and hyper-personalized demand…what Jeff Bezos has called Divine Discontent.

Divine Discontent

And while the consumer subscription model is not the only business model that can take advantage of this transformation, Consumer SaaS businesses can go to market quickly without having to solve for things like chicken and egg problems (although there are some very interesting Consumer SaaS-enabled marketplaces being built that may become the topic of a future episode). They also have a direct payment connection with consumers which accelerates the feedback loop mentioned before.

And, again per GP Bullhound, these factors are contributing to a growth trajectory that could see the average US consumer spending upwards of $100/year on digital subscription services by 2022 (up from around $10/year today).

And this gets us to the next step in understanding the Consumer SaaS landscape…how will we actually build and finance companies to fill that significant gap between consumer subscription spend today and projected spend down the road?

One thing I love noting about companies in this space — that most people miss when they see headlines about 40% of venture capital dollars being funneled to Facebook and Google ad spend — is how many companies there out there operating under the radar with very little capital raised, small teams, yet very real revenue.

Within health and fitness, one of the top categories for Consumer SaaS, two of top 5 grossing apps (as of late December 2019) applied this “Pegasus” strategy…skipping over the traditional venture track until they hit escape velocity or could raise growth capital on their own terms. This tweet from investor Dave Ambrose sums up what we’ve seen over the past couple of years well.

There is Sweat from Kayla Itsinis which, as of 2018 was doing about $80m in annual revenue with no outside capital. And there is Calm, which has now raised over $100m at a valuation greater than $1b from a top tier set of investors including Lightspeed Venture Partners…but which started off raising a modest amount of capital, got to profitability, and got aggressive with outside capital once it controlled its own destiny.

Of course, these growth paths are probably not likely ones for most companies and concerns about things like 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.

But 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 mass market and reaching a wider swath of consumers or by driving a larger share of wallet from their core userbase. In the first episode of Venture Desktop, I used to example of Spotify and their unique business model leverage to show why even at their massive scale there is a ton of growth left.

As the market and business model continue trending towards maturity and broader understanding, 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

Namely, we’ll start to see more targeted and sophisticated Private Equity and M&A plays emerge to support and extract value from companies reaching a certain scale.

The Evolving Consumer SaaS Capital Stack

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 or M&A models 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 2 below) while its decentralization has given individual brands like Tinder (image 3) 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 or listened to earlier episodes of Venture Desktop, 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 might be called 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 I think we will see both at scale, independent consumer subscription companies go after this model as well as private equity firms who should start flocking in once the market becomes more predictable and tractable.

Vertical Agnostic Operational Excellence — The Thoma Bravo / 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.


Show Links

Rereadables

Relistenables

Retweetables

The Rise of Creator Led Media Companies


Welcome back to Venture Desktop, my weekly audio(ish) project focused on exploring a key thread that I am picking up on the ground as I think about, invest in, and work with companies that are building the future of work, wellness, media, cities, and industry.

Venture Desktop is not long form, but it is a deep dive focused on highlighting, annotating, and more thoroughly understanding the trends, companies, and people shaping the rapidly changing world that we live in.

This week, I talk about Creator Led Media Companies, a topic that I’ve been fascinated with for a while and where I’ve had the chance to partner with some exciting companies taking different approaches to the market through my work at TechNexus.

In addition to the Youtube video above, you can head here to listen to the episode via your podcast app of preference (and subscribe 😉). I’ve also included all of the links I go through in the episode below.

Enjoy and please reach out with any feedback or ideas, I’d love to hear from you!


Retweetables / Relistenables / Rereadables


The Rise of Creator Led Media Companies

Venture Desktop Episode Transcript

This week, we are looking at a topic that, honestly, I’m obsessed with, and that I think is quite foundational to how we should think about economic growth and progress as we look to the future. And that is the rise of Creator Led Media Companies — which, to give a definition is a business (large or small), that is is first and foremost built around the creative skillset of an individual or a small team.

Podcasting…you have Pushking Industries centered around Malcolm Gladwell or…more traditional looking media business like The Ringer which is centered around the personality of Bill Simmons, or even a company like Glossier, which many people would think of as a product companybut was started by Emily Weiss as a side project beauty and grooming blog before expanding into the billion dollar plus business that it is today.

And this movement at a base level and to a large degree, has been enabled by what you might call Creative Compounding or Knowledge Compounding — that is, the idea that as we continue to decrease the cost of producing and transmitting digital knowledge we start this virtuous cycle of creation leading to consumption leading to creation where feats and accomplishments that may have seemed impossible or at the very least were hidden from view for a large segment of the population come to light.

Another way you might think about his idea is society increasing the surface area for the Bannister Effect to occur…the Bannister Effect, if you’re not familiar, is based around the story of Roger Bannister, the first runner to run a sub-4 minute mile. After he broke that mark, the holy grail of running that had no one had been able to crack it opened up the floodgates. Just 46 days Bannister’s feat, another runner broke through the mark…and then, just a year later, three runners broke the four-minute barrier in a single race.

We have been innundated over recent years with the downsides of the transition we are in from information scarcity to information abundance…mostly around the negative impact of social media. This idea of Creative Compounding is the polar opposite of that.

And there are a few examples of this that I love talking about. The first comes from the world of rock climbing….and there is an incredible piece from economist John Cochrane from earlier this year about this where he talks about “Free Solo”, the movie about Alex Honnold’s free solo climb of El Capitan, which had never been done before and which Cochrane considers a conquest of technology…not technology in the sense of better equipment, but the technology of communication. First, the technology of print and media and now, the technology of the internet. Each new idea in rock climbing become accessible quickly all over the world which accelerates communal knowledge and accomplishment.

There is also basketball, youth and high school basketball in particular where the current crop of players has been called the Youtube Generation since so many of the skills and mannerisms they’ve picked up have been influenced significantly by access to videos of NBA players plying their craft.

The company that has fascinated me for quite some time and has been at the forefront of understanding this has been Overtime. 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.

Dan Porter, the company’s founder and CEO described why the model has worked so well for the company in this Recode interview.

The company has created this firehose of creative compounding where, now, every dunk you see on the Overtime feed from some 16 year old somewhere in America would have won the NBA dunk content 20 years ago.

So now pulling back from sports, how do we start applying this concept at a practical level to drive growth and where are the company creation and investment opportunities in this space.

To start, it is important to focus on how we can increase “Creative Density” and there is an interesting analogy here to density within cities that is worth looking at. David Perell, discussed this in a great recent interview with Samo Burja.

Until recently the bottleneck to truly unlocking creative compounding has been the lack of full stack professional infrastructure available to support creator led media companies — ranging from the legal and financial to proper creation and distribution tools. Balaji Srinivasan recently called this the Adobe Creative Suite for Influencers.

And the lack of this has either pushed people back inside the four walls of a company, capping both their creative flexibility and upside, or forced them to try to build their businesses on top of platforms more focused on seeing value accrue to the platform than on offering tools to help creators capture value from their own network and the attention they are earning every day.

In both cases, creators were forced into economic structures that handicapped their ability to do their best work and deliver the most value to the people who care about what they have to say, show, and write. Which slows down that compounding knowledge flywheel that we have discussed.

This is changing rapidly across categories.

To get a sense for some of the different areas this is changing, I highly recommend checking out Li Jin’s post on The Passion Economy, where she provides some great examples across markets — everything from podcasting, to writing, to education. It has sort of become the cannonical post in this category.

And I’d add other categories in here as well…jumping over to a post I wrote a few months ago, we also see big opportunity here in areas like music and fitness and wellness…categories that may have been looked at as trivial from a digital tooling perspective a few years ago but which are absolutely exploding.

To tie a bow on this…there remains a huge opportunity for companies to start by building a differentiated toolset for a specific group of creators before leveling up to provide a more aligned network through which creators can gain targeted distribution and develop real, lasting relationships with their followers.

In a twist on the popular phrase, creators are now seeking out the tools that help them build their own networks and the impact of this transformation remains in its early days.


Now jumping to a quick hit section at the end here that we call Rereadables, Retweetables, Relistenables.

We’re inundated with new content…new blog posts, trending tweets, and podcasts at the top of our feed. But these things often have a self life that is shorter than it should be. So here, we jump back in time — a few news cycles or a few years — to pull out some gems you may have misses.

Rereadables

Two re-readables this week — one from Mercedes Bent at Lightspeed Venture Partners and one from Jomayra Herrera of Cowboy VC — who both wrote about the future of work…how they frame the market, what they are seeing on the ground working with companies, and probably most importantly, how they hope to see work evolve to meet changing demands of the workforce.

In both cases, the essays do a great job of putting some of the themes we discussed about the creator economy into a broader work market context.

Relistenables

My podcast rec. today is one of my favorite podcast episodes of the last few years…it features Recode’s Kara Swisher interviewing Emily Weiss, founder and CEO of Glossier, which is one of the most successful creator led companies of this generation and which I referenced earlier. Emily started Into the Gloss, a blog about women’s beauty and grooming as a side passion project while holding down a full time job at Vogue…and in the 9 or so years since has led the company to a valuation well north of $1b with one of the most passionate global customer bases of any brand on the market.

Retweetables

Every week or so, I see a new Twitter question from an investor or someone invovled in the technology market asking about the podcasting ecosystem — an ecosystem which has become quite central to the creator led media revolution. And in every case, I think the best place for them to start is this Twitter thread from investor Dave Ambrose. I receommend you start here as well. So we’ll fire up a quick retweet for Dave here.

That is it for today, thank you so much for joining me on Venture Desktop and look forward to doing this again. If you want to stay up to date, come find me on Twitter @brettbivens or head to venturedesktop.substack.com to subscribe to the newsletter and get all of the links that I go through during the show in your inbox.

Thanks again and talk to you soon!

Spotify, Audio, and Business Model Leverage

Venture Desktop — Episode 1

Hey! 👋

Welcome to Venture Desktop, a new weekly audio(ish) thing I am trying out where I look back at all the stuff I worked on over the last week and try to pull out some learnings from what I am picking on the ground as I think about, invest in, and work with companies that are building the future of work, wellness, media, cities, and industry.

It is not long form, but it is a deep dive and if you are interested in or work in the areas mentioned above, I think you will find it valuable. Below the video, you can find all of the links I went through in the recording.

This week, I dive deep on Spotify, the exploding audio market, and a concept called Business Model Leverage. 

Enjoy!

Spotify, the audio market, and business model leverage

Deep Cuts

  1. Retweetables — Semil on Followability
  2. Rereadables — Bill Gurley on the 10x Revenue Club
  3. Relistenables — A16Z, A Podcast About Podcasting