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Eric Crowley, GP Bullhound

David Barnard
February 3, 2021
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In This Episode

Our guest today is Eric Crowley, a tech investment banker with GP Bullhound, focusing on consumer subscription software (CSS), enterprise software, and financial technology. With investments in companies ranging from Spotify to Fishbrain, and clients such as AllTrails, Partnerize, and Motif, GP Bullhound provides transaction advice and capital to many of the leaders in the consumer subscription software space. Prior to joining GP Bullhound, Eric was a senior executive at a leading education SaaS company focusing on corporate finance and strategy.

In this episode, you’ll hear about:

  • Why there’s no real cap to the subscription app market
  • Why you don’t need a ton of venture capital to build an app business
  • The 7 key metrics that make a CSS business successful

Follow Us:

David Barnard: https://twitter.com/drbarnard

Jacob Eiting: https://twitter.com/jeiting

Eric Crowley: https://twitter.com/crowxu

Here’s the Outline of Our Interview with Eric:

[1:15] Pioneers of the CSS industry; Nico Wittenborn.

[1:33] Eric’s background in consumer subscription software: The University of Chicago; Spartan School of Aeronautics; AllTrails.

[5:20] How GP Bullhound helps tech entrepreneurs.

[6:35] Eric is a venture capital “scout.”

[6:49] GP Bullhound’s investments have had more than 40% IRR; Spotify, Slack, Fishbrain.

[8:13] Have any CSS businesses gone public? Bumble; Spotify; Match Group; Netflix; Dropbox.

[8:52] Prediction: There will be 50 more publicly-traded CSS businesses in 10 years.

[9:21] It’s still early days for consumer subscription software; Salesforce; the Nascar app.

[10:31] It’s increasingly common for consumers to have multiple CSS subscriptions; FitOn, Strava.

[12:24] Why Eric isn’t worried about “subscription fatigue”; family management apps.

[15:12] Mid-market CSS businesses and venture capital; Calm; Headspace; Lightricks; Braavo.

[17:04] How app companies are hitting $50M-250M in revenue without much venture capital.

[24:48] Consumer spend is 70% of the US GDP; OnlyFans, Substack.

[25:38] Web 3.0 is subscription-only CSS services.

[29:35] The role of subscription apps during the COVID-19 pandemic; pray.com; Zwift.

[30:24] Subscriptions vs. one-time purchases in the gaming industry; World of Warcraft; Fortnite.

[31:08] Subscription tiers, price points, and price caps.

[32:30] Cost structures for CSS vs. SaaS; Calendly.

[34:32] Expanding into adjacent verticals — finding your TAM 1, TAM 2, and TAM 3; Calm; Strava.

[36:28] Fishbrain gives their users a discount at Bass Pro Shops.

[37:47] The CSS Flywheel: how to make your CSS business successful.

[45:26] Premium content and the community experience; Elevate; Zero.

[47:20] Produced content vs. user-generated content.

[49:08] The evolving investment ecosystem: what does the future of CSS look like? 

[51:26] Connect with Eric: email, LinkedIn, Twitter; GP Bullhound’s research.


“An easy bet to make is that there will be 50 more CSS publicly-traded businesses in 10 years than there are today.” - Eric

“My thesis is that if you fast-forward 5 years or even 2 years, I bet most people will be subscribing to 4 or 5 different things — through their phone only. And I bet that’ll be closer to 10 in the next 3 years.” - Eric

“The exciting thing about this space is that entrepreneurs are building better products.” - Eric

“Consumers have been conditioned, just like CTOs and businesses were, to pay for software — because it makes your life better.” - Eric

“The thing that I get excited about with CSS is that it can be done with very little capital raised.” - Eric

“I think you’re going to see people see value in these services because they streamline your life. They make things easier, either in your professional work or your personal work, and the idea of $10 a year for something is not that material.” - Eric

“Looking at all these trends — people paying for podcasts, things like OnlyFans and Substack — we’re seeing these financial gatekeepers, or barriers to the direct exchange of value between very disparate creators and consumers, coming down.” - Jacob

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Episode Transcript

Hey, you're listening to the sub club podcast, a show dedicated to the best practices for building and growing subscription app businesses. We'll share insider secrets from the top subscription apps on the app stores. Let's get into the show. Welcome to the sub club podcast. I'm your host, David Bernard.
And with me as always co-host Jacob biting. Say hello everybody. Our guest today is Eric Crawley, a tech investment banker with GE people hound, focusing on consumer subscription, software, enterprise software, and financial technology with investments in companies ranging from Spotify to fish, brain and clients such as all trails, partner, eyes and motif.
GP bull hound provides transaction advice and capital to many of the leaders in the consumer subscription software space. Prior to joining GP bull hound. Eric was a senior executive at a leading education SAS company, focusing on corporate finance and strategy. Welcome to the podcast, Eric. It's quite a bio.
Yeah. Thanks David and Jacob. Good to see you guys again. And thanks for having me on. I was a big fan of what you guys are doing to support the consumer subscription software ecosystem. Yeah, we were we were a couple, I think also like Nico people that were wandering through the woods on this brand new space until we found each other over the internet.
It's great. We're finally finally making these connections. You're absolutely right. Hey, before we dive into some of the meatier topics and we have a pretty big list of talking points to get through But we'd like to get a quick overview of kind of the path that led you to be to GP bull hound.
And then, so even more specifically what led you to focus on consumer subscription software? Yeah it's actually a pretty winding path. I don't think this is something that anyone would design on purpose, but I'm pretty happy with where I've gotten to. So I'm originally from Ohio from a small town, a little shout out from one of the first States of the union.
And ended up going to business school in Chicago at the university of Chicago, which was my entry point into finance graduated at one of the worst times of all time in 2008, which is right. Exactly how you draw a plan. And so I joined Lazard as a M and a, and then quickly a restructuring banker.
Stayed there for five years and then ultimately it became an operator, so it wants you to advise companies for a few years. You actually want to go get your hands dirty. And so I was an operator for an education company called Spartan college, which is focused on the aviation education space and then was ultimately recruited to join East park learning, which is an education SAS business.
Headquartered in Chicago and then ultimately myself and a few other colleagues moved out to San Francisco as we were working with a lot of the larger tech companies, Apple and Google to it's really good to East park software into the schools. And so education is a big passion area for myself.
And so spent two years there helping that team grow and scale. And it's a pretty phenomenal company in my personal opinion. And then ultimately was looking to come back to investment banking. Focusing on technology. And so I talked to a few firms and, GPB people hadn't really stood out to myself.
It's entrepreneur owned. They're focused exclusively on technology. So we don't have a, an industrial group or an energy group. These are, we are only tech bankers. And so we focus on the middle market, which is companies that have enterprise values of 50 million up to 250 million.
And then we'll go even all the way up to a billion as our firm continues to grow and scale. And, David, you asked the question about CSS or consumer subscription software. It's definitely not a topic. A lot of bankers think about, sitting here in San Francisco, I could take a tennis ball and throw it out my window.
And I would hit three bankers focusing on software businesses, enterprise SAS. And so I wanted to think a little differently and find something I get super excited about, passionate about.  My journey into CSS really started with the sale all trails, which is a hiking app to spectrum equity.
And so all trails is, was a small business based here in San Francisco, but its potential is just massive. Yeah. It has an Altria subscription. That's how, it's big. I know it's real. And that's exactly how you know, it's real. And so all trails was focusing on people that wanted to go explore in the outdoors and they offered a free version to a lot of people.
But what was super interesting to me and really opened my eyes was I was talking to and Ron about how they monetize that business. And instead of doing ads, which is what we all grew up with on the internet they said like we could sell an annual subscription to people in exchange for a few additional features, downloadable maps safety features, additional guidance.
And so that type of stuff really got me interested in the category. And I started writing research about it, started talking to some really smart people in this space like spectrum and summit, some of the leading investors there. And then ultimately just started creating my own research and trying to create my own knowledge base about the CSS ecosystem.
And so it's been phenomenal to watch it grow up. And I know we'll talk about that in a little bit about where the space is headed, but it's a space I'm really passionate about. I've been doing a lot of work there professionally and personally. So I'm going to have to ask us the financial simpleton than I am is like, can you give a quick differentiation for people like venture capital?
Investment banking, like where does what you do lie and like how does that compare to maybe like different types of financial stuff?
I don't know. Oh there's so many different terms we could go into. So at its core, G people hound is an advisory firm. So our job is to provide advice on mergers and acquisitions for companies that want to sell themselves or by someone else. Or they want to raise capital. So think like they want to sell 30% of their business to put some money in the bank to go out and grow or just put money in the founder's pockets.
That's a very common thing we do. What makes us a little unique first, a lot of other investment banks is we also have a separate venture capital fund. So we will actually invest our own money onto companies' balance sheets in exchange for a portion of the equity. So it's a very similar to someone traditional venture funds, like a Sequoia Andreesson hallways.
We absolutely operate that, but it's, but if you think about our business, the most of it is the advisor business. So we serve, we wear two hats. I sit in the advisory business, but I serve as a scout if you want to think about it that way, because I'm out here looking at CSS businesses all day.
So if I find something interesting. No, I quickly send it over to our venture team and say, Hey guys, you should take a look at this. It's absolutely something we should invest in. And we've made some pretty good investments. Our funds have had, North of 40% IRR, even though we fly very much under the radar and primarily invest in European investments out.
We were an early investor in Spotify, which is one of the OGs, CSS and businesses out there, early investors in Slack investors in fish brain Playtonic Bosu. So quite a few different CSS businesses. Interesting. So on the investment banking side, you don't actually have your own capital that you're maintaining.
It's more about facilitating transactions versus a traditional firm. Okay. We help strategic companies think big players like Nike or Cision that are coming in and buying businesses or will help private equity, which are businesses that have their own capital raise from outside investors.
Come in and take ownership of some of these businesses. And that's exactly with all trails. We're spectrum, which is a private equity fund came in and provided their capital, their cash out some of the initial founders, plus plus some of the early management team. Yeah, I think it's really interesting.
Just I tell you, we've talked on this podcast before with Nico and in other cases that in some ways the expected returns and model for venture differs enough for CSS businesses that I think it opened there opens up a lot of doors for some of these things that you wouldn't traditionally. I think of private equity investments, I think of different ways of liquidity that don't necessarily.
Cause have we had a CSS business go public yet? There hasn't been a real obvious one. Bumble's coming soon. Which one? Bumble, I think is, Oh, okay. I was coming. To think about thinking about the match group, right? Yes. That's the whole way you've got Spotify hosts, old school CSS business, and then go to the biggest one ever Netflix.
Yeah. There's actually quite a few. And if you don't approach your murders you can look at Dropbox. For example, most of their users are individuals or small businesses. We call them like pro-sumer category. So it's absolutely coming and there will be, it might be easy to make is there will be 50 more CSS, publicly traded businesses in 10 years than there are today.
I didn't. Yeah, I don't disagree. I guess you think of when the kind of coverage that IPO's get, it really tends towards business software. And and just doesn't get as excited, but I'm sure, this is, we're recording this on the same day, call them just announced their new monster round.
And so I assume that they're on a path towards that if that's what they want to do as well. So yeah, it'll be interesting to see, I think. One thing that you've mentioned already alluded to is that we are just in these early days and this is,  we're in like SAS when Salesforce hit a hundred million, which I w you know, forgive me.
What, when was that? What was that like 10 years ago. Years ago? Yeah. So I would absolutely agree we're earning early innings and the way I think about this. It's if you flashback 10 years in a SAS software is who would buy software that just sits on your server, you don't own it.
Why would you pay for that? Doesn't make any sense to me, right? And then you quickly see this forward-leaning CTO start to pick it up. They're advancing. It's just like your dad buying an Altria subscription. Yeah. You might be one of his very few friends that's buying. He's a huge NASCAR fan. I had to convince him last year to subscribe to the NASCAR app, which is really good.
Usually $5 a month. He's I don't pay for that crap or whatever, but I was like, no, you should really do it. It's awesome. And now he's got that. He's got all trails, right? And this is the father of a man who runs a SAS subscription service. There's a lot, there's a lot to go yet out there and like consumer adoption.
I think there are, the cool thing is if you look across age ranges, right? You'll see people might have one subscription. Maybe they have Netflix, or, if you're hearing the music, maybe you have Netflix and Spotify and then you're in a fitness. So maybe you have a fit on subscription or you're in biking.
So you have a Strava or Swift subscription. And you just started saying this out loud and you start to see more and more areas where people could be spending their money on CSS and my thesis, which is a Salesforce thesis is that if you fast forward and five years or really two years, I bet most people will be subscribing to four or five different things on their, through their phone only.
And I bet that'll be closer to 10. In the next three years. And so I think, the exciting thing about this space is that entrepreneurs are building better products. If you think about it, 1.0 is you're building for the advertiser and hoping to get a couple of consumers to come look at it.
And that was the model web 2.0 was, Hey, you did a bunch of freemium stuff, either in an app or website format. And then you hopefully try to attract people to come pay for it. But consumers have been conditioned just like CTOs were busy. This is worth paying for software because it makes your life better.
And so if you fundamentally can say that about a product what's the issue about paying $5 a month or $30 a year? It's really not that much money. If it truly makes you make your day-to-day life better, like your dad with an SRM, he's closer to the drivers. He's feels like he's part of the experience.
How was that a bad thing? And the cool thing is, so now NASCAR doesn't have to worry about advertise, but they definitely still worry about advertising, like the NASCAR app. For example, it can really focus on providing your dad the best in quality service for five bucks. It's that direct exchange, right?
That, that value delivered for cash which makes me love what we do here at revenue, which is to enable that even more. I think that when I hear  this like number of subscriptions and people just as these niches proliferate, do you ever worry about, there's always been the specter of subscription fatigue, right?
That everybody's like always saying like next year is this subscription, fatigue is coming, subscription. Fatigue is coming. I also think that there's a second potential boundary, which might be. Are there, are we going to run out of niches? Cause is there going to be like, eventually we've figured everything out?
Like how do you, I would say that you have, you continue to apply the SAS example. We definitely haven't run out of niches and growth in the SAS space. So how do you think about that in terms of some of these, like these naysayers? Yeah, it's a common question I get. And I think people are worried.
They're going to be subscribing to 20 things and not know about it and have this massive credit card bill, but. But if you look at the consumer experience, you actually, as a, without even thinking software, you actually subscribed to quite a lot. You have a phone bill, a cable bill, a mortgage. No, these are effectively subscriptions, even if we don't call them subscriptions.
And so once again, it's I revert back to you will pay for something if it provides value to your life. And if it's in the form of a subscription or one-off payment, it just changes everything. Now. You raised a good point. Like you probably don't need to subscribe to seven fitness apps.
And that's a little expensive, right? But you might subscribe to a fitness app and entertainment, maybe one or two or reading one, maybe a podcast, one. Then you have maybe a family management app or a financial app that you're subscribing to the management app. It's one of my biggest categories of any entrepreneur like life three 60 is that would be an example that's a great way to think about it.
Yeah. If you go through the ecosystem, bumble's the start of your family up and then you could quickly have, effectively like a Microsoft power BI and extremely personal CRM. But no, I think there's some huge categories.
And you asked the question about niches and the cool thing about CSS is it's different than B2B SAS, right? Niches, consumers are 7 billion globally. And, even if you just go with ones that are using cell phones, you're at 5 billion, that's pretty large number. So a very small niche of people that like to play curling in, in the North American hemisphere, is probably 10 million people. And if you get 1 million people to subscribe, that's a 10% hit rate. And if you could charge $30 million or $30 a person, that's a pretty good business. And so not all of these businesses will be massive columns, right? With 4 million paying subscribers, focusing on meditation, sleep help.
A lot of these will be niches, but there'll be phenomenal businesses that you can own and operate and scale pretty quickly. That's interesting that you're in the, in that kind of mid-market space. Because when you talk to VCs, it's all about,  you need to be a billion dollar business to take venture capital.
How do you think about those businesses? Both as an investor and as an investment banker, that the being able to scale up to that 50 to 250 million that you primarily deal with how does the fundraising look different? How does the growth trajectory look different? W  and how does that look different than the calms and the headspaces and the light tricks that are a billion dollar businesses already?
Yeah,  just like in every other investment banking industry, there's always categories of businesses. Some will be high flying, category dominant players, where they're going to try to go after the biggest part of the Tam. And that's, you can say like calm and Headspace, they're going to go be huge multi billion dollar businesses, and they already are. But there'll be a lot of other ones that are lifestyle businesses, and they're going to spit off a lot of cash and that can provide someone, a really nice living and provide investors a really good return. Not might not be, like a hundred X, like a column or something like that, but it'll still be a really nice return.
And the great thing about the ecosystem in CSS is it's constantly evolving and people that are looking for a hundred extra turns are absolutely there. There's going to be people that are going to look and be looking for, a five X return. And there'll be people that are looking forward 20 to 30 or a 20 to 30% IRR over time.
And so you're seeing a bunch of products that are starting to come out that are supporting that. So venture capital exists. There's absolutely like Bravo, for example, is doing some really cool stuff on the funding area. To support people that don't want to take the loot of equity capital, but just need some marketing dollars to try out this.
And so it's an extension of your credit card extensively. Some of these transactions that you're seeing that are hitting that 50, especially in the consumer space, or are you seeing companies that did take funding or at this point it's still seeing more bootstrapped or friends and family round angel invested like.
Yeah. What kind of funding do you see coming, getting a company to that 50 to 250 million range. Yeah. Th the great thing about CSS is it's so cashflow beneficial to the entrepreneur because effectively you're getting paid upfront to deliver a service to someone, and it's effectively zero marginal cost, to deliver one additional product to someone. And if you're delivering a good product, they'll continue to subscribe and it doesn't cost any more to get them. And so the really thing I get excited about CSS is it can be done with very limited capital raised, right? All trails had raised very limited amount of money.
I currently have a client in the job search space. That's almost entirely bootstrapped. They raise $500,000 a few years ago, and they're doing close to 15 million in revenue. And so they're three investors, right? It's two angels and kind of the CEO. And so I see these types of businesses all across the board.
And it's really exciting to me. Because it does, it allows people to buy and build at a pace they're comfortable with and they don't have to swing for the fences, which is, effectively the venture capital model. And there's actually nothing wrong with that. But since it's so scalable and, we can tie it into kind of the flywheel around CSS and how the cashflow metrics work.
But because you can scale these without a lot of external capital, it can be grown by just an individual or small group of people without the need to raise a big venture cap around. That's why I think it's been interesting to see over the last,  I've been on the side of trying to pitch one of these businesses to traditional sand Hill or at least fly on the wall for this pitches.
And they've been tough until you really have something, but I've have seen this evolution with, some more investors who are savvy. They understand that. Cause it doesn't, it actually turns the need for venture capital on its head a little bit. Because you don't need this, like a massive outlay people always ask us like Oh, what's your enterprise customer look like?
And I'm like, you'd be really surprised. It can be like all the way from blue chips, like all the way to three or four people who are pulling down a million bucks a month because they, they've cracked some acquisition strategy and scaled it. Yeah, I have to think that's being slightly.
I don't know if it's disruptive, but there at least as some kind of alpha here, if you understand this asset and like how to actually work with it. Yeah.  It's definitely an, a strategy that the entrepreneurs can make a decision on. If, especially if it's, let's say it's in the, I don't want to keep going back to meditation, but let's say it's in a biking category, right?
Strava and Swift, both just raised huge rounds because they're going toe to toe for, to be the dominant biking platform out there. And there's other players that are, they're a little bit smaller that haven't raised those big, exciting rounds, but they're really nailing a niche within biking or within outdoor activity.
That's pretty exciting. So there's definitely a lot of paths available to people. Yeah. When you're looking to the next 10 years, as you were talking about earlier where do you see the consumer spend coming from? This is something we talked about a little bit with Nico, but if consumer subscriptions, you showed in a presentation, some numbers that it's estimated to be 150 billion by 2022.
And then, over the next 10 years, I imagine you're forecasting, much larger growth with subscription fatigue, and all these things in the mix. Where do you see consumers pulling that spending from, to then start spending on software, even if they value it, like they it's got to come from the budget somewhere.
Where do you see that coming from? The great thing about these businesses is that it's not a big chunk of your budget. If you think about a Strada subscription, right? It's just a little over $30 a year. That's a movie night, right? That's not a big chunk of change out. And if you're passionate about biking, there's a good chance.
You've bought a $1,500 road bike. So we're not talking about a massive individual spend. It's the accumulation of thousands and millions of consumers that are really pulling that money forward. And if you wanted to take it out of a bucket just assume that everyone's only got a hundred dollars to spend a month.
I see some of it coming out of entertainment. A lot of, it's effectively, you're using a service, if it's improving your productivity at work, maybe you're spending less money on, you take one less cab ride, and you effectively can get a subscription to Speechify.
So there's a lot of ways this money could come out and really streamline your life and kind of cut spending from other categories. But I don't think it is, I don't think it's a major incremental spend. Yeah, that makes a lot of sense. And as you as you see the growth and I don't, we talked before about offline about trying to get some numbers on this and I'll, I don't know that anybody's published good numbers on.
Where we're at currently with consumer subscription span by individual people on average, and then where we're headed. But but I would guess that, now we're in the low kind of two digits a year or a month. And then for it to grow 10 X, it's not that every single person on earth is going to be spending a thousand dollars a year on consumer subscription software.
Because as you were saying that the total addressable market, the total number of people who have mobile devices now and can spend is so huge. That the, for it to grow tremendously, doesn't involve individuals individually spending a ton of money. So maybe  guess I spoke to most of that, but what are your thoughts on  where we're at generally and where we're headed with that spend?
Yeah, I, once again, I think we're very early. You absolutely. If you call your close friends and networks, if you're involved in tech and, working on with tech companies, there's a good chance. You're probably already cracking a hundred dollars a year in spend was going to say a thousand or a hundred a month thousand a year.
Doesn't seem, especially for These are, six, six figure making like city dwelling tech people. It doesn't surprise me, that's a median, right? Maybe I don't think it seems that unreasonable, at least in the next decade. Exactly. And especially if let's say you go over to, we're talking Western world here.
If you think about some of the Asian economies, they paid for podcasts, right? Advertising, they skipped most of the advertising internet 1.0 over there. And people are paying one, two, three bucks for podcasts where they're agreeing to subscribe to stuff. And you can see that quickly scaling.
And so think about like only fans, right? It's a business that's starting to get a lot of attention, but should have been getting attention a long time ago. They have hundreds of thousands of consumers that are subscribing to that content. And so you're seeing the same thing happen with Netflix and Spotify.
And  as people, continue to grow up, you'll probably subscribe to a dating app, right? Tinder is a free app, but it made $1.2 billion in revenue. That something doesn't sync up there, right? It's if I'm not subscribing to it, then who is. And so I think you're going to see people see value in these services because they streamline your life.
They make things easier either in your professional work or your personal work. And the idea of 10 bucks a year for something is not that material. So that's where I get so excited about this category, because if you look at consumer spending 70% of the, a U S GDP, it's a big amount of money that could come towards the sector, even if just a small half a percentage of that slides off and comes into software.
Looking at all of these trends that people paying for podcasts, things like only fans, things like sub stack. Yeah. Is that you have all of these we're seeing this, I'm sure that somebody, some other fancy thought leader has written something about this on medium already, but you're just seeing these the app store being like the opposite of this, but some of these like financial gatekeepers or like some of these barriers to direct exchange of value between very disparate creators and consumers coming down.
You're seeing that EBC with Patrion. You see what? Yeah. All of these systems. I almost wonder if it's that web 3.0, do we have a name for 3.0, is that what we're I'm not an investor, so I don't have these thought technologies totally sorted out. That's exactly how I think about it. If I was categorizing this one, 1.0, advertising supported free web 2.0 is, you know how you can get it free or you get a premium, but you're seeing some of the top name companies and the guys who are big brands, established followings are saying like, Hey, we can't make money on advertising, nor do we want to anymore.
We're going to go subscription only, right? Wall street, journal subscription, only New York times subscription only. And they're, they got beat up on ads and they just decided like this isn't a business model. We could work more, but. Our information, our services is actually extremely valuable.
So consumers marginal propensity to pay. Now, once again, Jacob, to your point, you're talking about people that are probably have a decent income already, but they want this information, so they're willing to pay for it. And so that, that will percolate through other services. That people want access to something and they want something in particular and they want it semi customized, right?
Like I can set up filters and services. And the great thing about CSS businesses is they're very interactive. It's not a one way portal where I'm just kicking something out to someone they interact and they have to deal with it. If they get like a Strava, for example, every time I put my information into Strava, it gets better.
For me, it's more valuable. Yeah. More valuable. And so I, that's why I get super excited about this category. If you think about, I know you guys had like fitness AI on. A few weeks ago, think about when you could have your Apple watch and your AirPods sync to that, and you could tell them exactly what weight you're picking up and putting down.
And it automatically tracks that in, in the service, that's absolutely something that people would pay for it. Get rid of all the notebooks. It would get rid of you, you needed to take notes. And you're starting to see even more more businesses coming out that are using sensors that integrate directly into the CSS applications.
And so they're going to get better and more valuable. That's what made that's what made Dropbox sticky. And what made them be able to build a huge consumer is because the product gains value over time. I think that's one thing when I talk to folks setting up, just starting to think about monetization I'm always like try to find out, try to figure out features.
Cause there's the classic, Oh, I'm going to charge money for my calculator. So for my calculator, I'm like, that's, you'll make it a little bit more than you would on a consumable or a non-customer a one-time purchase, but it's not gonna really be different. You have to have something that a user can form a long lasting relationship with.
They can invest in. And then ideally you're running ahead of them too. Like you're out there. You're building the next features. You're anticipating their needs. So by Bringing this audience together. It's so well paralyzes with some of these other audience services, right? All the fans are patriotic or whatever.
You're bringing this like group of people together around something you're offering a service to them. And then, you're investing it's, it really is so much more even then I think. The B2B SAS is so much more community oriented. And originally to see more of like when I was working on elevate, we never really unlocked any of the community aspect of these things we have here as building revenue cap.
We have, that's been interesting as like a parallel in a B2B context. I think it was Eric. We had a call a few months ago. We riffed on the idea of religions.  There's obviously a lot of examples of religious related apps and  Bibles and Korans that you can subscribe to and things like this.
But I actually think, you look at calm and even zero and fasting and stuff like this, it's there's a fine gray line between these things becoming religions. And this is going to be like weird and offensive or something probably. But I actually do think that there will be some category of CSS, going back to the, are we going to run out of niches? No. Cause I think like Scientology is a bad example, but you'll have the benevolent version of Scientology come up as a consumer subscription as an app. Like an app is a, especially in the COVID world, like an app is a good vehicle for these kinds of like community building things.
Anyway, that's my like crazy SAS man, CSS man rant. But if you think about it the Vatican's working with pre.com. Because they need it. They need a way to reach their followers. And unfortunately with COVID like churches tough, but engaging with people digitally is a great way to continue to build that community.
And I think especially within some niches within CSS community is really what it's all about. Like looking Swift, the biking app, right? You're doing that because you want to race your buddy and like maybe you live in Austin and your buddy lives in New York and that's just not possible, but. The $30 subscription.
I think it's 15 bucks a month just with, you're raising him every two weeks. That's an awesome experience. You're not getting anywhere else. It's interesting to reflect on it against I was paying subscriptions for things like world of Warcraft, like these these non-mobile contexts, but I ha you haven't seen it.
It's adapted in a different way. In mobile gaming, he went there heart, gaming has gone to subscription really quickly because they realized like spending a ton of money for these massive titles is really hard to do, but you have a subscription or some people are doing these in game payments and you can get substantially more revenue because the margin propensity of the value you can deliver your consumer goes up first, pay 29 99, you get the game and you walk out of it.
Fortnight's doing way better that in the back with their high percents versus like your standard triple a title, you got to CSS, right? Where the subscriptions just aren't all the same. There's, there's some that offer there's a pro, then there's a premium and there's a platinum and there's ways to effectively have positive net revenue with these subscriptions.
Just like you do an enterprise SAS. Yeah, we've David and I've talked about this a few times is one of the challenges is I think with you mentioned it too, is like the price points. There's not that big a range and price points for these things, like low end. Whatever, $30 a year, high end, like a couple hundred, a hundred dollars bucks a year, but it doesn't range all that much.
And yeah. And it's capped in most cases. You have all your paying users going to make this much. Maybe there's a little bit of tiering in there versus like even Tinder. I don't know what the split is, but a lot of their revenue probably I assume, comes from, they have like consumable purchases as well.
And their app that  they've done intelligently. They've done okay, we're going to get the steady with the consumer, the subscriptions, but then we're also going to put up these like scalable spending models to try and capture these like big spenders. But I think that's just a constraint we need to work in.
It's a constraint of these biz that I think is good because it's actually, I think a, I think uncapped spending has  externalities that aren't really captured by the people that push those things. So I think it's probably a good restraint, but then it also I, and this goes back into the sort of an asset class, or like how we think about these businesses, because it does change your timelines.
It changes your like how you think about growing the business. It also changes a lot of your cost structures around things like commute or things around support,  you're dealing with an ACV in the tens of dollars, as opposed to a SAS company that's in the thousands.
So it really does change just like also changes is like the tooling you need, which is a revenue cap.com. Yeah. Yeah. I was gonna say you're exactly right. While their revenue looks similar, the cool thing about CSS is usually the cost structure is wildly different from SAS, because most of it's self-serve.
So you're doing, you're spending, decent more on marketing because you're trying to resource consumers where they need to be reached but some of the best CSS businesses build their own funnels. They're using organic traffic to come in and referrals like Calendly is Calendly.
The calendaring tool was one of my favorites because they get marketing every time. One of their consumers used to just, it just pounds, my head it's my inbox, five times a day. I think that's what you're seeing. Some of these best guys do, and they don't need customer support. It's, self-serve, it's an FAQ page within the app or the on the website, however, they need it.
So your margins and your cash flows on these businesses can actually be substantially higher, even at earlier stages than some of your best SAS businesses they don't need to burn for years and years. And you don't typically see these hundred million dollar losses like you do doing a lot of the SAS businesses.
I, I think one of my attractions too, is just the dynamism in the industry. Just like how many. Like the births and deaths of some of these businesses can be pretty fast. But that's good. It's that's how we find. Niches that need served is by, developers having access to capital, in these little sips is all you need, right?
It's to get something off the ground and to test it, which I don't know. I think it's a big advantage over, over other verticals. You can iterate so much faster. And you can really just focus on your core customer and then, see what catches it's I've talked to a couple people that kind of think of your Tam one 10, two, 10, three.
Your Tam, one's super small. You're solving the near pain point for them, but then you should be quickly thinking about what's, look at like calm, they focus on meditation, but they quickly went to Tam two, which is people that have trouble sleeping. And then you can quickly find this happening and, Strava was biking now they're running and now they're horseback riding.
And so you could quickly go from Tampa tan to Tam as you think about it and how these businesses scale and what their core offering really can provide. And that's interesting because I'm at that stage as a somebody building. And this is, I think what maybe differentiates, we were talking about these different, like the columns and the Strava is going for the moon versus these, lifestyle businesses or businesses with like different growth trajectories.
I think that might be the core difference is if you are really in love with a specific vertical and a specific Tam, and that's what your passion is. That might put some sort of cap or some sort of adjusted curve on how fast your business will grow. Versus folks like calm or Strava that are, yeah, they're mastering these like separate sort of adjacent verticals.
And then it's actually because the business becomes much more about building the machine. That attacks different verticals. And so that's, if anybody's listening to this, that's trying to decide what camp they're in. That might be a good guiding principle. Are you just super passionate about this problem you're solving then maybe that's a bit more of the path you should take and maybe don't go out and raise that giant venture round right away.
Versus if you're fascinated by this. This idea of building a machine that attacks different verticals and learning about the space and consumers and how to listen to users and do product then maybe like it opens up some of these like bigger opportunities. There's other ways to think about that too.
If you're super passionate about one niche, right? You want to stick with your firsthand fishing or fish brain, which all those hands up as the GPP portfolio company, they've they, instead of expanding to hunting, what they've done is they've just gone deep on fishing. So they've launched like a marketplace.
So now you can buy the goods and services you want to use to be excited about your passion through fish brain. In addition to learning about the best foster, which just outside of the subscription world altogether, right at that stage, you're doing you're just doing, they leverage your subscription to help provide additional services to your members.
So you get a discount from bass pro shops, for being a fish brain member. So like you could start to see this spiral pretty quickly. And that's that net net revenue retention, where you can go deeper and deeper into the niche where you can increase that revenue through those kinds of exhilarated services.
Yeah. There you go. Yeah, you can uncap that ACV cap that I was alluding to before is exactly right. A fish brain is such a fascinating when they're actually a revenue cat customer as well. But, and I've used them as an example, a lot talking about this. My favorite they're my favorite have you heard of this giant company?
Probably not but speaking of building the machine in one of your recent presentations, you were talking about the CSS flywheel. So we'll put a link to it in the show notes, but why don't you just step us through. You're thinking and the, on this flywheel of the, like how to build these really great businesses and those key things to be thinking about as you build it.
Yeah. And then one just massive asterix I'll start off with is, I'm writing about this from 30,000 feet. I would love to hear, I love to hear from people that are on the ground, building these and let them tell me what I got wrong. Yeah. He's a year ahead of what I think is going on. When I talked to him, when I talked to the people on the front lines, I'm like, you're doing what is amazing?
No,  that's the cool spot, but yeah. So to David's question on the flywheel. What I'm trying to do is educate both investors and, just the common, common entrepreneur that's thinking about starting a business in space about. How do you make these businesses work and which is translated into how do you make these businesses valuable?
Cause we're all everyone's students, starting as an entrepreneur is trying to find something that works for them and just makes a successful business. And so the North star in CSS is recurring revenue, right? So you want to develop a product that is so valuable to someone they are willing to pay you.
Not once. But twice, three times, four times, five times. And so then you have to think about what is going to be valuable to someone over time, not just at the point where they need it today. It's when they're going to need it. Maybe it's not tomorrow, but it might be next month or, when they go on a hunt with Onyx it's next fall.
So how do you convince them that our recurring subscription is the right tool here? So the first thing I started out I think about is your content,  what are you delivering to them? Is it a service? Is it information? If you look at movie, which is a really interesting Netflix competitor, they're doing prestige films, right?
So they are doing something that you're not going to get somewhere else and you're getting that first subscription. So that's something that not a lot of the people have. If you think about. Like all trails it's detailed hiking information that has reviews and photos. And you're not going to get that on Google.
And so that's premium content. That's encouraging you to come to them and it has to be delivered in a really easy to understand consumer interface. The UX UI has to be really good. And then what I get really excited about some proprietary data. So if you're, as we mentioned, like the best CSS apps are two way streets.
Or you're putting data into that app. And an exchange is putting back a better service for you or better information for you. So it's customizing your view and your view is different than David's view. And Jacob, when he opens up his app is going to get different information. And a lot of these guys are just starting to scratch the surface here, but it's getting really exciting.
I think it's more and more web wearables come in your pods, different sensors it's becomes a much more valuable service. And then the one thing, when you think about growth then is you use your acquisition. What investors are really focusing on right now is are you paying for users through Facebook and Google which can spike and have prices go way up, like during an election, your average cost to acquire a customer on Facebook was a much more expensive in October, November than it was March and April.
So that's a big thing people are focusing on. So if you think about scalable businesses that don't require venture capital, finding organic channel to acquire customers is extremely important. So are you getting referrals or people kind of sharing. You know the business with other use when they use it like a Calendly or a Strava.
And then one of the key things that people are trying to figure out is modernization and pricing strategy. And I talk about this in the report, but it's effectively, where's your paywall. People are using either web 2.0, which is a freemium model. And then they try to convince you to convert for additional features or they're saying our products so good.
You pay us today. And so I think understanding your monetization, understanding what the propensity to pay is extremely important. Is nine 99, the right price, or is 1999, the right price. And those are, if you pick one versus the other, you potentially double your revenue without losing any conversions.
And so people are really playing around with this to define what's the right location of your paywall. What's the right amount of stuff to give away for free or incentivize people to start engaging with your service, start putting information into the service. And then when you try to charge them, and that's an extremely important conversation, I cannot overemphasize that enough.
So understanding. You know where your competitors are pricing at or where, alternative good would be priced at is extremely important as an anchor point for people to think about. And then the last two points is, are you going for an issues or base initially, or are you really chasing a large Tam and that's really important to investors.
But once again I wouldn't let this be your main focus. I would be focusing on some of the other ones first. To deliver the best product for your niche, because your niche is probably huge. If you think it's maybe, if you say world of Warcraft, we know that's millions of users, and there's,  there's a ton of people that are in a hunting and people don't really think about that here on the West coast. But if you go to Ohio and Michigan, there's a lot of people that are very passionate about that. And so while it may seem niche to me in sitting in San Francisco, I know that most of my friends are big hunters back in Ohio.
So it's actually much bigger than I think. And then also you think about your competition, right? Would you rather be competing in the fitness space, which is a huge Tam, but it's going to have hundreds of competitors, new guys coming in every day, lots of Metro capital sitting there. And then the final piece is your return or retention, which is, that's what all these other components are all driving towards is convincing someone to pay you a second time.
And that's that's the second biggest thing after use acquisition that investors are focused on is, are people leaving our service because they're not getting enough value from it. Or are they leaving it because they're not engaged with it. They're not using it enough. What's the drivers of that retention.
And so if everything else in your premium content, your proprietary data, the pricing is fair. You should be able to keep a lot of those users around it. And the great thing is in STSS evolves with Apple pay and Google pay PayPal. Like people don't just turn off because of bad credit cards anymore. It's a solved feature through the Apple store is that if they change their credit card through Apple pay, it's another simple measure for you to be able to charge them on a very fair basis with a heads up that they're going to get charged for something.
But if you're delivering quality content and a valuable service, Your turn rates will go way lower. So happy to dive into any of those David, but it's a pretty important mindset to think about. Yeah. When I was when I was creating the notes for this, I didn't even think this, but as you talk through it, I wish we could spend 30 minutes and do a whole podcast on each of those segments.
Like I kept wanting to interrupt you and stopping myself. There's just so much to unpack there, but I think you and what I appreciated about your presentation and we'll link to this in the show notes. Is it, that's a really good, like high level summary of what people in this space should be thinking about.
And so like we could deep dive on each of those individually and we could spend, we really could spend an hour on each of those. Talking about user acquisition and thinking about so many people are building around Facebook, being the acquisition strategy. Guess what? In 2021, that's going to change big time with Apple, essentially deprecating the idea of, and so it's there's so much to discuss in each of those little segments that, and I loved what you said about that one specifically about.
Like trying to find, even if you are spending on Facebook and other stuff, finding other ways to diversify your attention and finding organic channels to, to compliment and to amplify the money you are spending on ads anyway. So I could I, yeah we can deep dive on all of those. I will hold on.
I will deep dive on one thing, which I think the, I think we met, we touched on this a tie tied some things from earlier conversation, but. This whole idea of like premium content, I think is something that a lot of devs miss out on there's this data, the intake is important, but this is like content I'm noticing more and more with the most successful examples.
And I was going to add another example of content being community as a form of content. But this is something I think when we were working on elevate way back in the day that we we were already a content company because we were in education, but we didn't really realize that is that a product that we are building?
This is a content product until we were already in it yeah, we need to be producing something. And I think zero is a really great example of a company that's thought about that content first. Like they've got. They brought in an external expert to help them generate content. They've made that a big part of the experience for two reasons.
One it's brand building, it drives these organic channels because that content is shareable. But then also it sets up this expectation that you're getting into this more than just something to track your fast or something to track your biking or whatever. You're getting into this like whole community.
No, this whole ecosystem of content. And then, yeah, that, that feeds back into, we were talking about churn and driving churn down and I think we're still early and in this whole thing that, I wonder if we're so concerned about churn now, because we don't know what, like a five-year turn horizon looks like and how these for, I think the best apps, I think column's probably seeing it now, which is why they're able to go out there and really raise, like I've had my call subscription for a very long time.
And I've never going to turn it off probably. And I wonder if that's going to also start to dominate as far as like  these things that you know, I, as far as just reflecting on how early we are in this the story you hit on a really cool spot. When you go into content, right?
Do you have to develop the content or are your users going to create the content for you? So one of the big benefits of all trails is that every time I go hiking, I'm creating content for all trails for free. And so that, so it's different than Netflix where Netflix has to go and pay stuff.
Everything right. There's interactive and Netflix is shocking actually. When you think about it, maybe that would be a, that would cause a revolt. If like I went into, there were comments on my movie suddenly in Netflix, I think they've, I think they AB tested that a little bit where you could see what your friends are watching and stuff like that.
I don't think it went well, I think said everyone to know that you're watching some different stuff or something that's maybe not. What's your public persona would be, would admit, this is one of the things I saw people light up Quimby about though as well, was that they, it was all very like broadcast.
Like they didn't hit, they had content nailed. They had a lot of content, but they didn't have any of these like sort of other expectations that you would, you would have for this. These, I think mobile is too is just different from I would feel very intruded upon having a social experience, hit me on my TV, but for some reason it's more normalized on a mobile device.
That's absolutely right.  Your bread can consume social networks on your phone. That's very normal these days, but if somebody Facebook me on my TV, I'm not cool with that. That's different too, wrap things up, but I did want to ask about the and you actually made a Mo a note on this, about the involvement evolving investment ecosystem.
And just that as you were talking about kind of web 1.0, had its kind of. The start of that tech and software investment. And then what 0.2 0.0, saw a phase shift and then with SAS and everything we've seen that change dramatically. What do you see happening in the investment space and where do you see this going evidence?
It's back to the Salesforce analogy, right? Were very few investors were investing in B2B SAS, because that's just, that just wasn't a thing at the initial. No one understood it. No one thought it would be adopted that much. And we're a year or two past that stage here in the CSS space.
Some of the really smart investors. And I think venture investors like true ventures or Lightspeed that were there pretty early are putting money early into CSS businesses. And you're starting to see the next wave, like a spectrum or a summit or the Sherman group coming in. And they're making the growth equity investments that I think about, which are, and we're not going to buy your company, but we're going to give you a 20, 30 million, 40 million go out and really grow this thing.
And then the cool thing about the space is you're starting to see some of the big investors come in and provide that next level of exit opportunities for both the entrepreneur and those earlier investors like Blackstone buying Bumble, that's a big CSS business where your best customers churn.
If you're successful, those customers leave dating, which a lot of people don't think about, but it's gonna be fascinating. The S one. And then you're seeing you starting to see like KKR bonded as Swift, right? That's a bike gaming company, right? They don't have any physical goods whatsoever. It's pure consumer subscription software.
So you're seeing the big guys come in and put a billion dollar valuations on some of these. And then as we talked about at the beginning, public markets are going to be pretty receptive to these. I think some of the best ones are going to come out and show these phenomenal cashflow characteristics their ability to grow with hardly any spend, mash group's stock has soared.
Peloton. I think we're all very familiar with what they've been able to accomplish with both a hardware and a consumer subscription software business model so that the path is laid here. So public investors are clamoring for these and I think we'll see a lot more over the next couple of years.
So a lot of people are looking into it. Yeah. That's really interesting. To go ahead and wrap up working people find you online and anything else you want to mention before we wrap up? Sure. Yeah.  I'm pretty available. I always like to chat with entrepreneurs or investors, this is an area I'm super passionate about.
You can find me at T people have emails, Eric dot crowley@gepeoplehound.com and all our research, by the way, including what David's talking about is on our website. I'm on Twitter at  pretty responsive there. And then, you can always go to LinkedIn, which is another example of a consumer subscription software business with LinkedIn premium, not to plug the category, but it definitely exists.
Yeah. So I encourage people to reach out, actually love it. As you can tell, geek out about this stuff and it's something I'm really passionate about. So happy to have a 30 minute conversation with pretty much anybody. I'll back that up and say, the first time I encountered you was through this like PDF, I found that was the first like fancy investment banker thesis thing I ever saw and consumer subscriptions.
That was my first encounter. Then I was lucky enough to get to work with you on your second iteration or the most recent iteration of it. So yeah, I, I have to say, I have to recommend it. It will have a link in the show notes as a medium blog that, that tears apart your terrace on your most recent one.
But I definitely think it's worth going through cause there's really good data in there that you've put together. Yeah. We'll link to all that in the show notes. And it's interesting. We were talking about this early, that earlier that we're like, we're still so early in the space. I remember in April, I think Eric, you reached out to me and then I was telling Jacob, I was like, Hey, you should really talk to this guy, Eric.
He did that subscription thing and it's going to do another one. And it's like there, there aren't these like big established. Known players in the space that have these like a, I think of Mary Meeker's report. It's yeah, like there's going to be that of the generic. Yeah.
We're going to need more slides now I'll get to work. All right. Hey, this was super great. I really appreciate you. Yeah. Thanks Eric. Thanks for your time. Absolutely guys, big fans. Talk to everyone soon. Sure. You never miss an episode. Subscribe to the show in your favorite podcast player.
Thanks so much for listening until next time.