Funding Options for Subscription Apps

Pros and cons of various funding options, as well as investor expectations

February 22, 2023

While venture capital can be a good option for many subscription apps, it isn’t the only funding option β€” and might not be the best fit for your long-term goals. We’ve assembled a panel of experts to talk about the different types of funding available to subscription apps. Nico, Eric, Tyler, and David chat about the pros and cons of various funding options, as well as what expectations investors have.

Topics we cover:

  • Venture capital for subscription apps
  • Private equity, venture debt, and other funding options
  • The Calm Company Fund β€œShared Earnings” model
  • What metrics do investors care about?
  • Understanding (and pitching) your TAM
  • What expectations do investors have?
  • How to prepare for your next round of funding
  • Transcript

    Hello, everyone, and welcome to our little chat today about funding subscription apps one or two. You know, while people are kind of streaming in, wanted to introduce myself and revenue Kat real quick. So I’m David Bernard developer advocate at revenue Kat but in the app space, literally since the very beginning had an app on the App Store in August of 28, and I’ve been doing it ever since. And revenue, as most of you all probably know, a subscription app platform. So we provide everything from Native SDK is to make it easier to interact inside your app with place for building apps, for billing and then also our server side infrastructure to pass data to integrations like phrase and branch and amplitude and get that real time subscription status across all your data stack. I also have a great dashboard and plenty of other tools and our mission of revenue is to help you as app developers make more money. So we’ve got a lot of cool things in the works on that front. A couple other notes in addition to these officers chats. I also do a club podcast. So if you check that out, it’s health club. And we also run a private community. So one of my colleagues will drop the waitlist in the chat. So it’s totally private so we can be a little more open, not indexed by Google. So people, you know, share stats and talk benchmarks and talk about building successful subscription businesses. Another bit of housekeeping. This entire presentation will be recorded. So if you have to drop off or you want to share it with a colleague, you’ll be emailed. After we wrap with the full recording and then what to expect today. So I’m going to hand it off to the guest panelists who each talk for 5 to 10 minutes about their perspective on funding subscription apps. And then I’m going to ask some questions. Both this and the podcasts are really fun for me because I get to ask really smart people the questions I want to ask them. So I’m going to selfishly start by asking them a few questions myself, but then we will open it up to a listener Q&A. They’re down at the bottom. You should see a little button that says questions. So when you have a question, you can drop it in there. If we answer the question, by the time we get to the Q&A, feel free to delete it. If you see a really interesting question, go ahead and upload it. I’m going to probably take the top three or four questions depending on how much time we have at the end. So as a host, I’m not very good at being in the chat. There are some revenue cap folks in the chat, but I like to really focus on the guest, so leave your actual specific questions in the Questions tab and we’ll get to them. So as you read in the landing page, we’re going to be talking about funding subscription apps. And I’m really excited to have such a variety of perspectives on this. And that was kind of the point of today, is that there really are a lot of opportunities out there to find your subscription app that look a lot different than you may think. And so I wanted to kick things off with Nico Witten born. He is the founder of adjacent and has been investing in subscription apps since very early. He was at 0.9 before adjacent and didn’t early investment in and has really been at this consumer subscription app game longer than almost anybody. So Nico was I don’t want to hand it off to you and talk about the more traditional venture capital model and how that fits for subscription apps. All right. Thank you very much, David, and Thanks for having me. Happy to talk about this and also very keen on hearing more about the other prospectus after. I think it would be a good discussion. So Jason is an early stage venture capital fund. And I give my perspective on this space specifically. There’s also different stages that we can talk about later. And when it comes to venture funds, whether it’s growth investors, private equity investors, and maybe we’ll touch upon that later if those questions are people interested. But I’ll start from my perspective. And I think the background it is helpful to understand is that venture investors typically are looking for really big outcomes in the cases that work out well. Right and so what that really means for an early stage portfolio, typically there’s maybe one or two out of 20 to 30, sometimes 40 companies in a portfolio that end up being such big outliers that they’re returning the early stage fund multiple times over. And what that. Means is that the mindset that an investor at the early stage has when backing a company is that there’s a high risk that it doesn’t work out. But also a small risk that it becomes a very significant company in the course of 10 years or so, maybe longer. It’s a very long time horizon, at least from the stage that I’m sitting at. And so it is important, I think, to understand when you start your company, you know, when companies are being spun specifically in the space to have a sense for whether there is potential to actually reach that type of scale, which is not true for all types of mobile companies and not true for all kinds of consumer subscription companies. Also, not true for all types of SaaS companies, by the way, are e-commerce companies. And it’s just a very small percentage of companies that can go all the way. However, one of the things that I think are unique here, and we’ll touch upon some of the alternative funding rights as well, of course, but one of the things that are unique and that attracted me to mobile subscription companies are that the cost of starting a business is pretty low compared to most other verticals that you’re looking at. Right? so you and even me as an investor, I have backed teams of own before where someone just started a company by themselves and proved out that there is a market, that the product actually has a lot of users and also is, you know, delivering the metrics and the growth that somebody would expect for seeing the potential of it going to a scale that could provide better returns. And that is something that is very atypical for, let’s say, software as a service, which is a vertical that I also invest in and that I had had invested in before I started before starting a Jason. And typically the investment in product and the sales motion itself is so much more complex that it is very hard to do that with a team of one, two, three, four, five people, which is not true for mobile. And so I think what it does is it really similar to what a Shopify maybe would do for a solo entrepreneur with physical products? I think what the App Store enables is for solo entrepreneurs that are mobile developers to come out and create a product and then push it into the market and make revenue very quickly with a tool like revenue guidance or by hiring something together themselves. I think that’s something that really brought innovation to a much quicker pace, however, also filled the market with a lot of applications and products and ideas that probably are going to be, you know, a good lifestyle business, but not necessarily a good venture scale business. And so one of the things that I always try to tease out when I have those conversations, one for myself or two also to align myself with the founders of those companies is what’s really your drive, right? What is your what is your ambition level? What is your I think, you know, expectation for where this could go. And it’s OK. Sometimes you don’t know all of this from the beginning. But I think there’s a certain level of almost sacrifice and willingness to go through the pain and take it to a level of scale in terms of people, in terms of revenue. And in terms of outcome. At the end of the day, that is very self-selecting for a certain type of entrepreneur and group that need funding to reach that level. If that is not the case, if people are down to, you know, create this, see what it is, if it’s a side project, if it’s maybe the full, focused project, but it’s more for sale, your lifestyle and, you know, obviously growing it as much as possible, but not necessarily wanting to take it to a level where it could be a generational company. I think in that case, oftentimes as better funding alternatives out there and starting with, you know, Angels and some of the other things that we’re coming at. And even for me, I will say that there is companies that I’m working with even today where after a year or two or so, you maybe, you know, start becoming interesting to some of the strategic players in the space, to some potential acquirers that are reaching out. And even then, you know, like I think it’s always good to check in and before you do another round of financing, which could be, let’s say I usually invest at the seed stage after me, there’s usually a serious investor that comes with their own criteria of what makes a good investment for them, right? So every time you take money from a dc, the bar kind of goes up in terms of what the new investor expects you to achieve for them to be the successful outcome. And so, you know, I try to not be too pushy in that regard, even when I’m already invested. Of course, I need some of the companies that actually go the whole way to make my fund work. But at the same time, I think there are cases where I wouldn’t want to push a founder into a path that we have learned in the last couple of years is maybe not the right one for them, maybe not the best fit, and maybe it’s not the best outcome for everybody. And so I think having those conversations early on and also with the early investors along the journey I think is very important to making sure that there is the right expectation with the right alignment. And there’s nothing, you know, bad or I don’t know that there’s nothing really wrong with trying to shoot for something else, but it’s a lifestyle business, but it’s a smaller exit or better. It’s I mean, also keeping the optionality and not knowing for a while. I think if someone falls into one of those camps, it makes much more sense to not take a lot of funding to not, you know, seek out venture capital funding necessarily to keep all options open. I think that is usually my recommendation in sometimes in the case that’s already work with the founders. But oftentimes before we actually have a funding discussion and I think in Mobile. This is more significant in adequately is just maybe saying it a little differently. I think the percentage of companies that are funded in Mobile subscription, a smaller percentage of them should be funded by venture capital than a lot of other verticals nexus, marketplace, e-commerce and so on. Just because there’s so many different levels of outcomes and a large percentage, I think we’ll find it harder to get to those. Gael through that scale and those numbers that actually would make a later stage venture capitalist at least happy with an outcome and be the right alignment. So maybe I’ll, I’ll stop here for a second, but David let me know if I should go a little bit. Sure no, that’s great. Yeah, no. And I’ll have some questions to follow up on, but we’ll go ahead and pass it off to Tyler from here. So Tyler runs the company fund, which used to be called earnest capital. I was talking to him before we went live. I actually submitted it to earnest back in the day and got to know or well, I don’t know if I got it. I didn’t get it, didn’t hear back. It was very early in the fund. And I think he got Tyler got inundated. Best thing to happen to me, though, because that’s how I ended up in revenue cap. But I’m a little biased. I really appreciate what Tyler’s been doing and just kind of the opportunity of fine. But I’ll let you tell him. I’ll let Tyler tell you what the model is and why. It can be very interesting because as Nico was saying, you know, there are opportunities that are venture scale in the app store, but there’s just so many opportunities that aren’t venture scale that maybe a little funding does actually still help. So I think Tyler’s model is really interesting in that regard. So Tyler, I’ll let you take it away and tell us about the company fund. Cool Yeah. Thanks, David. Yeah so I run the company fund. You know, the way I like to describe it is from a founders perspective, working with us is going to share a lot of things in common with working with a venture capital fund. So, you know, we write a check at a fairly early stage, up to about 500k. We’re then kind of long term partners with founder for the rest of their journey. We provide a ton of resources. We don’t sit on boards, but we are generally confidantes of the founders and we have a community of about 200 mentors that help our portfolio founders succeed. So in a lot of respects, you get a lot of similar kind of experience to working with many VC funds. That said, we are not a venture capital fund, and the main difference is that we operate on a very different thesis. It’s a bit of almost the inverse or the other end of the spectrum that Nico laid out in traditional VCs in terms of really focusing on, you know, these, these very, very huge outcomes and being willing to take on quite a lot of risk to get those. We do the calm approach, which is, you know, we are basically looking for opportunities where we can invest at the early stage and then the company may not need to raise any more capital ever again. They may become profitable. They are generally making taking that dial of how much risk versus how much growth do you want and turning it back a little bit. So not taking quite so much risk in order to hit growth targets, being a little more conservative around hiring, cash flow, all that kind of stuff and generally optimizing for the chance of success versus the magnitude of success. So we want as many of the companies in our portfolio to succeed and basically whatever definition of success. The founder has, right. So that can be so we try to structure our deals to where, hey, if you are a solo founder, we invest a little bit of capital. And then you get an offer to sell the company for $10 million bucks, like we’re all high fiving. Because you didn’t raise too much money. You didn’t bring on too much team. You know, like everybody is actually happy with that outcome. That’s what we’re kind of optimizing for. And then up from there. Right not only those kinds of outcomes, but, you know, there are larger outcomes that can happen. But that’s our basic thesis is trying it back those companies. We created a financing product basically to align ourselves with these kinds of trajectories. It’s called the shared earnings agreement, and there’s some complexity to it, which is all detailed on our website. But the gist of it is that where there’s a profit share component, so we’re investing in companies where we might be the only check they ever get. They might never raise another round and they might become steady state, very profitable and share that revenue. Cat has a bunch of folks they can highlight that are really small teams of people earning like seven figures each a year and they just cut dividends to themselves. We don’t want to be sitting there with a convertible note saying like, hey, you know, we don’t want this. This is bad for us. We’re not getting any of this. So we create a short earnings agreement where we get a small percentage of the profits. And there’s an incentive for the founders to make those payments, because they’re also sort of repurchasing their equity back as they make those payments. So so that’s the gist of it. There’s a lot of details there in terms of where we like to invest, we basically invest post revenue. So we don’t do any pre-revenue idea, stage pre-seed, all that sort of stuff is kind of out of scope for us. But pretty much once your product has some revenue and as like a month over month track record of generating revenue, you’re, you’re in our wheelhouse. So maybe as little as like $1,000 a month in revenue is something that we’ll take a look at up to about a million in a year in annual recurring revenue would be the full spectrum of where we would invest, although we’re more focused on the earlier stage end of that spectrum. But we have invested in like we invested of 1 Second Everyday day, which is a pretty popular mobile app with a subscription service, and they were much further along. But still really fit our thesis. And then one last point is that I want to kind of position where we are in the landscape because we get often lumped as this general listicle of like VC alternatives, most of which are not very similar to us. So we are much more like a long term equity partner than some of the revenue based financing products that you might have seen out there stripe, capital, cab chase, pipe, etc., et cetera. There’s a long list of things that are basically debt products, more or less. You know, they give you some capital, you repay them every single month out of your revenue, and then eventually you’re done right over whatever that payback period is. And then you kind of high 5 and see you later. We do not do that. We are profit based and we are long term partners for founders. So we’re much closer to this sort of equity end of the spectrum than is similar to Angels and VCs and that whole chunk of people who are taking the bet on the whole trajectory of the company versus trying to give you some cash and get that cash back as quick as possible. A good mental model that I use for folks is about which one of those to use is. I say like, do you have a money machine? Right? do you have something in your business where you can put a dollar in and get more than $1 back out on a really short time period? If so, you should be looking at these kind of debt revenue based products. They’re fantastic for we pump money into ads, we get customers and we rinse and repeat. If you’re looking for something that’s going to change the trajectory of your company, you want to hire a team of engineers that you can afford right now that’s going to unlock a new market for you. You want to go full time on the business When you currently can’t because it doesn’t support. You can’t quit your job. You know, those kinds of things that are not a money machine. It’s like we’re going to change the slope of this business from this to this. That’s where we’re a good fit. Yeah that’s great. Thanks, Tyler. And next up is Eric Crowley, partner at GP bill Howard, investment banking firm. And Eric and I’ve been chatting a ton since I joined revenue cat. And the cool thing about Eric and in his purview on subscription apps is that kind of in-between where Tyler and Nicole sit on the kind of outcomes spectrum, there’s really a whole lot of opportunity. Tyler kind of alluded to some of them already. Nicole alluded to some of them. It’s like there’s just really is just this really broad spectrum of opportunity and Eric kind of deals in all of them, including venture capital. But I wanted him to come and kind of back clean up and kind of hit on all the high points of, you know, not only were Tyler and Nicole have said, but also just that kind of wide swatch in between. So, Eric, take it away, everybody. As David said, Eric, I sit here in San Francisco. Great to meet everybody. Just real quick on people around where I’m a merchant bank headquartered in London. We have 11 offices around the globe. We focus on two things. One is advisory work, which is about 75% of my time. We help companies kind of graduate to the next level. And so that means helping them sell some chunk of their equity to private equity, to a strategic sometimes raise venture capital and then occasionally do the venture debt thing, which we’ll talk about in a second. But we’re also investors. We’re big believer in the CSR consumer subscription software ecosystem. And so we’ve invested in companies like fish brain brucia, which is a hardware enabled business as well as like Discord and patron, which are a lot of some of the bigger ones. But yeah, so real quick, I started focusing on consumer subscription software in 2018. We helped lead the sale of all trails, which is a hiking season business, help sell them to Spectrum Equity. And so that was a fantastic outcome. And where we typically get involved is the founder or the owner, something like that. They’re thinking about exiting, right? And so some of the options that we would sit down and talk to them about is, hey, what are your goals? What are your objectives? Do you want to retire? Are you staying on board? Right continuing to work with this company. And so we kind of walk through a couple of different things, which is what David alluded to, which is, you know, what are some of these other, let’s call it, bigger check opportunities? And so the way we think about it is if you’re looking to sell a chunk of your equity. Right, which is very different from what Tyler’s doing, and it’s been a little slower than what Nico’s doing. But we’re thinking about selling, you know, 60, 70, 80% of your business. So really think about selling control. There’s a couple of options we have walk founders through. So one, which is people have heard a lot about but sometimes don’t really understand is private equity. And so a private equity is effectively a company that has been formed to buy other companies. And then they raise money from limited partners or sometimes founders, sometimes themselves, and then they buy equity in the business. And so generally that is to take control of that business in a positive way in our world to help them grow. And so that’s one option. Another one is venture capital, which is what Nico is doing. And there’s a whole stage of venture capital now, used to be companies are by 5% of the business, very similar to what Jason does. And now there’s venture capital by 40, 50% And these are companies like summit and there’s companies like quad partners. And so they will, you know, spectrum equity, for example, insight into buy 30, 40% of a business. So allow a founder to take some chips off the table but so in control and really kind of parties and benefit from the upside and then other options will help founders think through is like some of the options that Tyler talked about some of these what we’d call it venture debt or revenue based financing options. And so these are options for what’s going to allow you to either fund growth, maybe take money off the table. And so they come in a variety of shapes and forms. Generally, these options that debt options, right. They require cash flow, right? So that’s profits. That’s some level of scale that the Lenders, which are typically a lot more risk averse candidate can look at and say, hey, I’m very confident if I give you $2 million, you’ll give me you’ll give me two million or $2.5 million back in two years. And so that’s just something we help farmers think through. And so those are companies like Bravo. Like I like, like Tyler mentioned, upper 90 tap chase or a couple other good examples of companies that do that. And so one thing to think about what we do is we sit down and help you evaluate all the options, but really talk about what your goals are. And so that’s an important thing that all people think through their cash money. OK well, there’s a lot of things that come with money. Right so do you want a partner? Right so maybe those private equity, do you want someone to sit on your board, maybe get someone like Nico. Right and venture capital? Or do you just want money and you want to give someone back money in a little bit? That’s that’s kind of like the venture debt challenge. So having to kind of answer questions on that and basically help people establish a framework for deciding what they want. And so that’s what we do with any client engagement, right? As you sit down and truly understand, like, what do you want, what are your goals, what are your objectives? And then you can start. Moving through those different options. So, Yeah. David, back to you. Awesome Thanks. So, yeah, I had a few questions I wanted to ask and a few more that came up as y’all were talking. I wanted to kick things off and kind of a little round Robin. And I think, you know, on the top of a lot of people’s minds right now is the public markets and all the scary stories of deals not going through and venture tightening up and valuations drifting lower. So I wanted to just kind of I’ll put it at each of you as we get through. But, you know, in the last six months, in your view of things, you know, how have things changed and what different expectations should founders have? So I’ll kick it off with Nico. What what different expectations should the founders have today versus, you know, six months ago or a year ago? And kind of how is the market shifting in your kind of seed stage venture capital? Yeah, well, I think we can all expect that everything is going to zero. No, no, I’m kidding. I’m being dramatic. I think what has changed is that some of the pacing and the crazy valuations and rounds that we’ve seen in the last two years specifically probably you could argue even before that have slowed down, somewhat driven by some of the dips in the public markets, higher interest rate inflation, and the expectation that this is not the end of it. And so I do believe that the bar will get higher, at least when it comes to financings from venture capitalists. That being said, there’s been a lot of money raised in the last couple of years from these investors and usually also the biggest funds those venture capitalists had raised in the history of their existence. And so there’s a lot of money still ready to go. I think it’s just become clear that the valuation levels that we were seeing at the later stage, specifically in the last two years, were not sustainable or are no longer sustainable given where public multiples are now. And so I think that most venture capitalists have slowed down their pacing to try to understand what that means for them and to just also extent, their own runway and the money that they can invest. And I think that will just lead to a higher bar for follow on financings and probably somewhat lower valuations because in you know, at the end of the day, all venture capitalists have also some kind of incentive to wait and see and have things go a little bit shift a little bit more towards them in terms of the power and I guess the weighting of of, of the relationships, whereas the last two years we’ve probably seen very strong entrepreneurial markets and a lot of competition for the best deals. And I think that’s cooling down a little bit. Does that mean that this will change for ever? Of course not. That’s always cycles and it’s also one of the cycles. I’m going through. I started to venture 12 years ago, but since then, things have been pretty good. So I’m also excited to learn and see what does it mean? I think what it makes us, or at least from my position, what’s important to me is that I try to make the companies that I work with understand that we are trying to be sustainable businesses as well. And this is maybe somewhat controversial actually for venture capitalists to say, actually, I was at a conference recently where a very good investor said that they would never invest in the cash flow positive business, which I don’t subscribe to that or at least I’ve seen many businesses, including call them actually when we invested. But I was at inside that was already cash flow positive and still had a significant upside and 10x or more since then. I think that it’s just always reasonable and good to think about how dependent you are on external sources of funding. And in times like these, it’s probably good for especially mobile founders to think about how can we take advantage of this very cash efficient business model that we have and make us extend the runway that we have, or maybe scale down some of the spending to make sure that we have enough to actually get us through some of the bumpy roads. And so I typically try to recommend making sure that we can extend the runway as much as possible. There’s also some cash flow positive companies in the portfolio that I think should not increase spending as much as maybe planned. But at the end of the day, especially at the seed stage, I think the funding will continue. I think the seed said that actually the safe states that is impacted the least because the delta in valuations is typically released even though we’ve also seen some. Perverted stuff going on there in the last couple of years. I do believe things will keep on going on. I think there’s just the expectation that you can raise a new round every six to nine months when things are going well. Those are no longer true, and it’s probably good to be reasonable about cash flow and costs and not being too aggressive in times like this. By the way, I just want to 1 because I brought up column and I think it’s actually interesting to also say this. I think the Jason portfolio because it has a lot of investments in Mobile subscription companies is in some ways more robust than other portfolios because of this very cash efficient business model where when we invested in the reason we saw them pull off this annual subscription business model. So well, whereas, you know, the pioneers like Netflix and Spotify and so on had all had monthly pricing. And content and actually ended up going for annual pricing, charging that upfront, one of the reasons they did that and innervated in this. And it ended up working very well and I would argue is the gold standard now for most consumer subscription companies is because they actually couldn’t raise more money. They had raised maybe $2 or $3 million in angel seed money, including some syndicates and a lot of people. But we’re not able to raise venture capital for that business. So they had to really lean in on this cash efficient model of let’s be very few people make a lot of revenue and charge upfront so that we can reinvest that into growth because they had high ambitions. And so by the time we met them, they had gone to significant levels of revenue, cash flow positive, but a few million in funding. And that was one of the reasons I got so interested in this business model, because I saw that if you find the right opportunity, you actually can get very far with very little funding. And in times like these where the markets are a little shaky, where following financing is not so readily available, I think it’s actually to the advantage of most subscription founders that they can dial it up and down very quickly and have some of these tricks up with the seeds of when do they monetize and how do they package their pricing if it is a product that people are willing to pay for? And so I actually I think we’re in a good position. I think specifically, you know, the people that are paying attention here, I think are usually in positions where they can dial it up and down much more than people in other verticals. And that sometimes is a bit of a downside because it probably also informs the upside in some cases. But I think right now this could be an advantage because you can still keep the company alive with a pretty good, pretty good revenue stream, even with relatively moderate costs, with a relatively moderate cost base. Yeah and then to follow up on that, you kind of already touched on it. But you know, as I said, investor, that has also helped companies raise their and B and you’ve participated in some of those. What are those metrics that you think a founder should be focused on? I mean, in some ways, you kind of alluded to that the less you need the money, the more attractive you are to fund, which is the opposite. But, you know, if a company, you know, has been planning a series A and, you know, now the markets are looking tougher, like what are the things they should be doing right now to be ready for that series A to be ready for that series B to get that next infusion of cash in this kind of a market. What should they be focusing on? Any specific metrics? Yeah, I would say the first one is unit economics, just to an end, probably to that should both be named at the same time. But I would say on the one hand, I think definitely unit economics. I think the time where you could overspend on acquisition and hope to monetize it later on are kind of gone and probably never should have been that way. But I believe that having a good grasp on your Keck and understanding what the lifetime value is on the other side of the equation is really, you know, table stakes for even going into conversations with investors because it’ll give you information about how profitable is your business model at scale, right. And so I think going into acquisition and making sure that the first like assuming your annual subscription product, I would say that should never be losing money on the first purchase. So like just making sure that you’re already profitable I would say. And with the first annual subscription is for me I think a very good kind of, you know, simple way to think about profitability. But of course, overall, the unit economics would be much better when you think of a longer term horizon. So retention and the paid annual renewals and how much they flatten out and how many people actually stick around and use the product for years and not just months or weeks. That I think is an underlying fundamental driver. Of how significant the business can become and to just also touch upon this, because especially when you take on venture money, I think it becomes more important. It’s just what’s the opportunity at the end of the day? Right and so that is usually informed by how deep is the market. And sometimes that can be misleading, right? Because in the case of conferences, people, one didn’t think that meditation would be mainstream, but it did become. But also, there were so many alternatives that were indirect, but also, you know, similar in terms of what they delivered. But actually not as comfortable and not as readily adaptable as what con was able to deliver to the consumer. And so I think that the death of the market is as the second big important point. And I would also put in there. And this is one of the reasons why I called the founder jasons, because I actually like to look at markets that are relatively Mason today but could become mainstream in the future because those are the markets where you don’t have 1,000 different apps in the App Store already that are trying to go after the same customer because you want to go into that direction. It is going to be very difficult to really differentiate with products and even more difficult to differentiate with acquisition, right? Because at the end of the day, most companies, especially on mobile, are still using the same channels. And sometimes there’s a bit of a variation of which one works for which company. But it’s always harder no matter how well you how good you are at execution of building a product, to go against 50 other competitors and to be the first that is being picked up with a wave that is just, you know, growing. And so that positioning for me is a really important part of how I think about opportunities and why sometimes my investments look kind of strange or weird to people until hopefully they don’t sometimes look weird the whole time, but that’s part of it. And so I think thinking about that, like what? What does the market look like? On the one hand, how deep is it? And you know, what does the competitive threat look like or the landscape there? And then on the kind of macro sorry, the micro level, what do the unit economics look like? Do we do efficient acquisition and do we keep customers long enough to actually drive lifetime value that make this a good business in the long run? Yeah so, Tyler, same question to you. You know, given current market conditions, how are you thinking about investments? It does seem like kind of your investment thesis makes you probably the least impacted by broader market conditions. I am curious to maybe put a twist on this. You know, as we are potentially poised to enter a recession, you know, consumer spending may start to drop. How are you thinking about investments and more specifically, profitability going into this, these uncertain times? Sure Yeah. So you’re right that the the, you know, valuation dynamics going on right now, primarily in public stocks and the venture market have not really affected us that much. We’ve been pretty upfront from day one that we were not going to be offering the kind of like top of market valuations write about in TechCrunch and why can we get away with that? You know, because why wouldn’t people take the higher valuation is because we’re focused on opportunities that are really just not a fit for traditional VCS, right? It’s just very clear from the get go that this is a market that you can build a great business in, but you can’t build a billion or $10 billion business. So it’s kind of apples to oranges to comparison. So we’ve been investing at pretty reasonable valuations, which is fair for everybody because the founders are not going to raise that much capital, so they’re not going to end up that dilute it. Right so it’s not a huge deal. Yeah, so the falling valuations and all that is, is kind of I mean, we’re watching it, but it’s not really affecting our day to day. I think where it is affecting is, you know, I’m a huge fan of the venture capital model when done well and when applied to the correct situations. And one of the things that I had to watch for the last kind of two years ish with somewhat painfully was a number of businesses and founders come into our sort of radar that were a really clear fit for what we’re trying to do. You know, they were going after a niche. They didn’t have any competitors. They could build this little micro monopoly there and it would be awesome. And we were like, great, we’re so stoked. And then some person who was, in my opinion, doing very badly would come in and say, now we want to give you $5 million at a $25 million valuation, right? Like, well, I don’t know what to tell you. Like, there’s a real risk that you raise that money. You staff up to 30 people and you just can’t grow revenue fast enough to make that all make sense, because it’s just not that there’s not enough depth to the market to support all that capital. But what can you do? Right I mean, they’re a giant pile of money being offered to them at a crazy valuation. You know, we would see that not over and over again, but enough times that it was very annoying. And, you know, I some of those companies have already shut down and I am very fearful for those companies in that position right now. They’re going to have to make some real aggressive changes. So we are definitely seeing less of that. Right, a little more of a retrenchment to let’s do the things that we’re all actually good at, not, Oh my god, we have so much money. Where do we even put it? Let’s just put it everywhere. Right so that, I think will be healthy for founders in the long term for folks to stay in their lanes a little bit. That sense. What was the last twist the u.s.? Oh, about Yeah. Like potential recession and stuff like that. Yeah Yeah. I mean I think know, I mean, customer revenue is the most reliable way to support your business, right? You know, venture markets in all kinds of funding markets can be fickle. They can react really quickly to changes in the underlying dynamics. And you’re just on much firmer footing if you are basically I already sort of break even or you’re on a clear, straightforward trajectory to get there well before your existing cash runs out. Right and so I think, you know, companies that are in that position are going to be able to stay really long term focused. They’re going to be able to make more strategic decisions versus trying to do whatever they can to kind of raise their next round. So yeah, I mean, I think companies that are going to really thrive in this environment where maybe previously, you know, access to capital was a little bit more of a weapon that might give you a competitive advantage. I think you’re going to really have to build a big business are good business to thrive in the coming market. Yeah Yeah. And Eric, same question to you. So how are the public markets effecting a private equity buyouts, transactions? Yeah, a lot to talk about there, I’m sure. Yeah I mean, we get that question probably asked just about once an hour over the last month here. It’s been a little hectic too to raise, I think about it a public markets are a signal of confidence in the future. And so what it is, is like most of our clients are not going public. I’m assuming most of the people on this call are not thinking about going public any time soon. So the valuations of public markets are purely an indication of confidence of what people are excited for, for the future. So when we talk to our clients, obviously, you know, multiples are operates easier to justify a higher multiple for a business. But in reality, great businesses get great prices. That’s that’s how the world works. The way we think about it is there’s a bell curve of outcomes for any business. 5′ people. 10 bidders. Strategic public companies, private equity. Looking at a company unattended. Right the price is never the same all the time. People look at the same company and say, 50 million, 75 million, 100 million. It’s a bell curve of outcomes. And when public markets unfortunately go a little crazy, what happens is people get a little more conservative and there’s a bell curve of outcomes. It just shifts left, right. And so the overall number of bids will probably come down a little bit. But the goal of my job when I talk to my clients, right, is to get that bit on the far edge of the bell curve, right, the top right bid. And so it’s going to influence things. It’ll get crazy. People have wide ranges of valuations right now, but the internet day, great businesses get great prices. And so it’s just kind of keep your head down, focus on not worry less about current valuation unless you’re trying to sell in the next six months because things will change. All right. One more quick question. Let’s see if we can do like a 90 second answer each year. And it is going to be hard. But I want to get this one more thing in before we jump to the listener Q&A. So so Eric, you recently brought up actually in the sub club community. The concept of service obtainable market as opposed to total addressable market. And I had never heard that term before, and I was really fascinated by your answer. So I’d love for you to just give us a quick overview of what that means. And then I’d love to kick it to Tyler and Nico just to give a quick their own color on how you think about the opportunity. I mean, you know, too many founders, you know, list their TAM in a way that just doesn’t make any sense. So Yeah. Tell me about service attainable market. Yeah so it’s a little bit of a business school concept, but but it actually applies in real life and people just don’t think about it correctly. So the one thing on the AM from some club, everyone has a tam, right? And let’s just use a fitness app as an example. Right so everyone in the world need to do some level of exercise. So hypothetically, your TAM could be every single person on the planet. All right, well, then you got to keep going. You had to drill down between service obtainable market and service addressable market. So if you go service addressable market, which is the next level down, right, maybe everyone on the planet with a smartphone and the ability to pay $10 a month. Right so now that’s your addressable market is actually who can you truly reach? And then you go to Service obtainable market, which is a much narrower subset. And so what I encourage people to do is think through, OK, you know, everyone with a smartphone on the planet who can pay $10 a month is now potentially a customer, but who can ultimately actually reach. Right who would really do this? Who would pay for this? And that takes into account a whole host of names outside of just purely large, large numbers. How much can you spend? How big can your company actually get? What are your competitors doing right? If you said, hey, I’m going to go do meditation, you absolutely have to take into account that someone else could use another service within that service addressable market or that TAM. And so it ultimately comes down to it puts a much finer point on TAM. And I think it truly allows people to have a better idea of what you can deliver as a business. And it’s really important as you think about like, what is our outcome going to be, right? If you’re going to go make a fitness app, you guys are once it’s a billion people, this is $1,000,000,000 business where you really have to kind of go through and think about who else is playing in that cool. What can I truly actually attain? And as far as a, as a target market from a customer base, Yeah. Hopefully an answer to correctly. David from my website. Yeah no, that was great. Tyler, anything to add on TAM and service obtainable market? I would say we think about it very similarly to what Eric just laid out. So now we really do not care about the most egregiously optimistic version of, of TAM that folks will sometimes put in their pitch deck and we think much more about. I actually don’t know if I’ve been regularly using that term, but I will now. But basically just, you know, average revenue per customer. How many of those customers exist realistically in the market now? And you know, what market share do you think you could theoretically capture, which is mostly a function of just how competitive is the market? Right so, you know, well, we’ll dial that up if they are in this crazy niche, industrial niche that no one’s ever heard of and they’ve got no competitors and likely won’t ever we can say, OK, well, probably you can capture a big chunk of that market. So we give you more kind of credit for that. But yeah, that’s basically how we think about it and how I would encourage founders to think about it at a minimum. I mean, that’s how you should be thinking about it strategically, terms of how you’re making decisions. And also, it’s probably a good idea to pitch it that way, although there’s arguments to be made that you should pitch it with TAM and then think in terms of service addressable markets. But that’s a little bit outside of my wheelhouse. But yeah, no, I think it’s a great point. Nico so I am especially interested to hear from you. I’m sure you’ve been pitched on our fitness app. It’s $1,000,000,000,000 market, you know. What do you like to see? How do you like to see founders address total addressable market when they’re pitching you and what. Yeah any horror stories or, or good examples of founders who’ve really kind of brought that home in, in a appropriate way. That’s not so I like the notion of attainable market because I do believe that it takes into account the external factors like competition, which total addressable does not. And I think it’s even more important in Mobile subs than in other categories because it seems to be flatter. In terms of the acquisition channels and also in terms of how the user finds you through search or rankings or features. Right and so I think I generally have it’s interesting because like, but you know, or even Revolut or some of the other investments when, when people see or hear that oftentimes the ones that are interested in talking are other players in that category, whereas I want to find the ones that create that category. And so the, the difference here being I’m not like once, once this category has been established, it’s likely too late for somebody to build the venture scale business in it, or at least it’s very hard, right? And so that’s why I actually don’t think about very much. I want to understand more the shift of how behavior and certain demographics are changing to then understand if a product that somebody is developing for that segment has the potential to be, you know, pushed forward by that macro shift. And so that’s really difficult to define. That’s why I’m talking about it somewhat in an abstract way, because what it means is generally not, OK, this is the total market size, and then this is how much we can think we can get because of all these other competitors. But more. We believe that the future will be like this because of x, y and z, and that’s why we’re building this product. That will then be the go to solution for this specific pain point. And that’s more what I’m thinking about. And, and I’m very, very positive that the three other VCs would answer this very differently. But I think at the early stages, when you think about time horizon of a decade or more, it’s much more important to think about what the world will look like at that point or what is currently happening that is changing the world in such a way that it could look different in the future, and that a product that benefits from those shifts can be pushed forward. Then having a snapshot of what the world looks like today, because I do believe that the scale of the economic, the scales of economy, of being the first to create the category, maybe the first two like head space and are so significant that everybody coming after is going to split the remainder of the market because they have such a big advantage in terms of positioning, mindshare, understanding, distribution, having money to push into those channels and having optimized the funnel and, you know, integrations, partnerships, I think it’s going to be very difficult to come in later and do that. So for me, it’s usually when it’s very established automatically not very interesting. And that makes it somewhat frustrating for people when they get in touch with me sometimes because they say, yeah, but you invest it here, in here. And I say, yeah, but that’s, you know, that’s, that’s why I don’t think there’s more opportunity here to build something as that can reach that scale. Yeah, that’s such a fascinating answer. I like how you kind of twisted that on its head. Not looking at today’s total addressable market, but look at the real future growth opportunities is a great way to I mean it’s a great way to think about positioning your business. And then also, you know, for those of you in the audience who, you know, maybe don’t already have an app or are thinking about your next step, thinking in that way, I think is a great way to position yourself well for the future. So, yeah, let’s go ahead and move on to listener Q&A the top. I’m going to start with this, the top of the question. And Tyler, I think this is a good one for you. So question from Joey. I’m working on an app with three others. We’re working on it most nights outside of work. I would like to ultimately focus on it full time. What are some critical things to have before going for funding? It’s a good question. I mean, I’ll just say our perspective, which is, you know, I would recommend, you know, proving that people will pay for it. Right so fundamentally, we ask three very, very, very basic high level questions in terms of our first kind of screening, which is, you know, can this team build it? Will people pay for it and can they find a greater than 0 channels to grow it? And right. And so having at least some kind of an answer in all three of those buckets is a really big hurdle, right? So saying like, OK, you know, we don’t invest in stuff where it’s hypothetical, where they only have a basic proof of concept, right? We need to know that they can actually build what they say they’re going to build so, you know, launch a version and get it. Having real users. Will people pay for it, right? Make sure that you start to have some amount of proof of monetization because we personally don’t want to be taking a bet on. Well, a lot of people are using this for free. We haven’t bothered to try to monetize it yet. And there are investors that are fine with that. But for our point of view, we want to see some evidence that people will pay for it. And then the last piece is trying to find one source of growth that can be just, you know, native App Store. Search that. That’s fine. Referrals are great. You know, AdWords are great, word of mouth is great. Anything that is sort of reliably churning out new customers, those are the three things that I would focus on, because if you really just have nothing but blank stares on any one of these three, it’s going to be very hard for us or potentially any investors to really take it seriously and consider writing a check. So that’s kind of how I think about it. So that’s helpful. Yeah, great answer. Next one, I’m going to pass this one to Eric. Eric did already kind of answer it a little bit there in the questions, but you’re certainly very thoughtful on what kind of kpis, growth coming retention do you guys like to see? So yeah, Eric, you kind of work with folks all across the board from VC to buyouts and everything else. So what are you looking at metrics wise to kind of prove out the both the, the, you know, ability to get bought and sell the app, but also to, you know, be investable as an app. Yes I mean, every buyer looks at different things, but there’s generally common themes. And that’s what I try to answer in the chat as far as, you know, what are things that give people that all investors will want to see? And that could be people that are buying the app for your users or they’re buying the app because of the profit they think it’ll make. And that’s know, we kind of look at other financial metrics like revenue growth, gross margins, gross profit margins, and then, you know, obviously ebita, which is kind of another proxy for cash flow. LTV to kayak is a big one I focus on in S businesses. And so because that tells me a couple of different things. One, it tells me your retention and your pricing strategy. So how much are people willing to pay for your business? Right, if you’re charging $1 versus charging 100 those are two very different dollars, very different LTV cap kind of shows me two things. One is how much are you paying for customers? And the really interesting thing about cash is you can measure in a bunch different ways. So there’s one thing I look at, which is blended cap, and that includes a mix of both organic customers that come to your website or find you in the App Store and then piggyback, which is how are you actually marketing to your customers? Is that happening through ads, through Apple’s App Store ads, through Facebook, Instagram. And it’s a really important measure for how quickly that business or how efficiently that business can grow. And then sometimes on retention, it’s a little early, so it’s hard to tell like how many people will or will retain on their subscription if they do sign up. So then we look at measures of engagement, right? How often are they averaging the app or are they using it pretty frequently? Is it something they use episodically? Right so like a hiking app will be used very differently from listening to music or an entertainment and so truly understanding what is the use case of your app is important to understand engagement. So it’s a lot of us. But if it happened to answer any other questions on that topic, it’s really important. Yeah, yeah, that is super important. You know, it’s actually something we think a lot about our revenue count as well. It’s like our dashboard. Amusingly, I’m sure Neil has seen our dashboard. Many times talking to his portfolio companies and potential investments. And Eric and Tyler, you may have as well, but it’s, you know, something that we really think about a lot. It’s like, what are these key things that really matter to your business? And I think, you know, we’ve got some of them in our dashboard already, but it’s something we’re going to continue to expand on and really help our customers better understand their business through these metrics. Yeah, I wish we could take more questions, but I got 4 minutes left and a couple of the panelists have a hard out. So we’re going to go ahead and wrap it with that. And Eric Tyler, niko, Thank you all so much for joining us. Thank you, everyone, for showing up and asking your questions. But any kind of I thought you kicking us out, Melissa. Yes so Thank you, everyone. As I said, a recording of this will be emailed to you. You can share it with colleagues if you find it interesting. I’m also interested if any of you have specific topics or specific panelists that you would like to see on Futurecast office hours chats. So feel free to email me David at revenue cat to suggest topics, suggest guests and Yeah Thank you. Bye Thank you, David. Thanks, everyone. Thanks, everybody. Thanks to.

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