← Sub Club by RevenueCat
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- [00:01]
A
Welcome to the Sub Club Podcast, a show dedicated to the best practices for building and growing app businesses. We sit down with the entrepreneurs, investors and builders behind the most successful apps in the world to learn from their successes and failures. Sub Club is brought to you by RevenueCat. Thousands of the world's best apps trust RevenueCat to power in app purchases, manage customers, and grow revenue across iOS and Android and the web. You can learn more@revenuecat.com let's get into the show. Hello, I'm your host, David Barnard, and with me today, revenuecat CEO Jacob Eiding. Our guest today is Eric Crowley, a tech investment banker with GP Bullhound, where he provides transaction advice and capital to top companies in the consumer subscription software space. On the podcast, we talk with Eric about the rebound of consumer subscription valuations and investor interest, how to generate net revenue retention in consumer and why you should pinpoint where your app sits on Maslow's hierarchy of needs. Hey, Eric, thanks so much for joining us on the podcast today.
- [01:15]
B
Thanks, guys. Always great to be here. Really appreciate you having me back.
- [01:18]
A
Fifth time on the podcast. You're our most seasoned guest.
- [01:23]
B
It is quite an honor. This is probably one of the things I look forward to every year to do.
- [01:28]
C
Is this why you do the report now? You're like, if I don't do the report, I'm not going to get on Sub Club and that would just ruin my year.
- [01:34]
B
You guys are so popular these days. I have to keep my game up in order to get on docket.
- [01:39]
C
Got to keep up.
- [01:40]
A
And Jacob, nice to be talking to you today as well.
- [01:43]
C
I'm here, I'm good. I'm under prepared, which is great because like, Eric is over prepared, so. But it's good. I'm always excited to. I don't know, we live, we live the macro at revenuecat, right? Like dealing with customers every day. But like, it's nice to get a chance to zoom out and look at the industry a little bit more broadly and make sure it's still here and still growing.
- [02:06]
A
So, yeah, and that's actually exactly where I wanted to start, is that we produce the State of Subscription Apps report every year now. Done the second, already planning the third for 2025. This is your fifth or fourth CSS report and I feel like your report in the fall is always this nice kind of state of the industry. You take a much broader look at the industry than we do in our report, and so it's kind of a nice balance. And, you know, reading through a draft of your report week I found a lot of really interesting stuff that I, you know, hadn't been thinking as deeply about. But I did want to kick it off, just kind of talking, what is the state of the subscription app industry? How are things going from your point of view on financing and M and A and all those kind of things?
- [02:50]
B
Yeah. So, well, thanks for having us, guys. I think, you know, for people that haven't seen our report before, we. We're an investment bank and venture capital fund. So we come at. The CSS industry is kind of like from a transactional industry. We're not builders like a lot of your listeners are, but we are, you know, advisors or investors into businesses in the consumer subscription, or as we call it, CSS industry. So our report kind of comes at it from that angle, which is, you know, how do you make. How do you invest or buy or sell companies in this space? I mean, you guys know this from seeing the data at a micro level.
- [03:20]
D
Right.
- [03:20]
B
The industry went through a huge boom in 2021. Tons of capital came flying in, which meant tons of capital got spent on marketing and growth and new ideas. And then some of that capital got put to waste, Unfortunately. So, like, 22, 23 was a rough year for a lot of these companies. Like, they overhired their marketing, returns went down. They weren't able to scale nearly as fast as they were hoping. And so you saw a lot of pain kind of happen in 22 and 23 with some companies buying a business a lot, scaling down, switching models, pivoting the B2B E commerce versus subscription. But what I can tell you now in 2024 is things have probably never been better. A lot of companies took their medicine. A lot of really great founders and builders kept their head down, and they kept doing exactly what their mission was, which is serving their customers. And we are seeing better opportunities and better companies now than we even have in 2021. So companies are growing quickly. They're growing profitably. They have retention rates that are just fantastic. And so, you know, from a. As a M and A advisor, right. We generally see. What we see are companies coming to market. When they're. When they're ready to do something, they'll give us a call. And so we've got this window, you know, usually six to nine months before a transaction happens with, hey, we know what great businesses are coming to market. So it's. We've probably never been busier, which is obviously exciting for me, but hopefully it's exciting for the industry. Over the next six to 12 months.
- [04:41]
A
As you share in the report. That's not only the case in these private conversations that you're having with apps looking to sell or raise or whatever, but we see that in the public valuations as well. Like Duolingo is trading, I think at an all time, well, not an all time revenue multiple high compared to the 2021 bubble, but it's certainly rebounded quite a bit since the drop.
- [05:03]
B
Yeah, I think you see that across the board, with some exceptions.
- [05:06]
D
Right.
- [05:06]
B
There are some businesses that had huge Covid booms, like some of the dating services that just weren't able to keep that level of growth up. They've said, hey, we probably overhied, overspent, we're focusing on profitability, which means, you know, their growth slowed and their revenue multiples come down. But they're still fantastic businesses trading at good revenue multiples and great EBITDA multiples. So I think that's, you're just seeing that shift. But that's also happening across B2B software is happening across technology where, you know, if you're not one of the magnificent seven, you are evaluated on your financial performance. And so revenue growth and EBITDA margins are becoming like how the market evaluates CSS business just as they evaluate B2B SaaS businesses.
- [05:44]
D
Yeah.
- [05:44]
A
In your report you mentioned this idea of exceeding the rule of 40. I didn't quite grok what you meant by that in the report.
- [05:50]
C
I would love to finally learn the Rule 40 because I've pretended to know it on occasion, but it's bantered around.
- [05:56]
B
A ton in the investment universe and it's almost starting to be debunked. But for listeners that haven't spent time on this, and hopefully they have it, they're building code rule of 40 investment term. So you take your year over year growth rate, let's just say your year over year growth rate is 30%. And then if you have an EBITDA margin or cash flow margin of 10%, so you're the dollars of your cash flow you have divided by your revenue.
- [06:19]
D
Right.
- [06:20]
B
That's. And you add those two together, you take 30% plus 10%. That's 40 at least 40.
- [06:25]
D
Right.
- [06:26]
C
The higher the better.
- [06:27]
D
Yeah.
- [06:27]
B
The goal is higher.
- [06:28]
D
Right.
- [06:29]
B
And you can grow 60% and lose 10% on EBITDA margin. So you got rule of 50. That still means you're doing well. And so in the public markets, I think there's a slide in the report for people to see. There's a really high correlation on what multiple you trade on a revenue Multiple with what your rule of 40 score is. And that's been really intriguing. But there's even another data point that'll be in the report, which is the rule of X, which effectively, so once you guys understand Rule 40, which we just did a quick intro on, now there's a rule X, which effectively there's a higher correlation with companies that are growing faster. So if you take the math and say instead of just doing one revenue growth rate plus the EBITDA margin, now if you do the revenue growth rate times 2 and add it to the EBITDA margin, so you're kind of overweighting, you're overweighting the revenue growth rate. That's actually even a higher correlation correlates to about 60, 70% of the stock price versus, you know, the other one was the rule of 40 is closer, about 56.
- [07:22]
C
And so basically that's just a, you know, a heuristic. Is that something you guys came up with?
- [07:26]
B
We definitely didn't come up with it. That's, I think one of the investment funds, Bessemer, I think started, or Bessemer did Rule of X, which is pretty cool.
- [07:32]
C
Just like they're just coming up with like a better model to match like trading values with like growth rate and profitability.
- [07:39]
B
It's just rules of thumb.
- [07:41]
C
Yeah, because the thing is 40, somebody just said like at some point 40 is good, above that is good and below that is bad. Well, first of all, it's mathematically heinous to add your growth rate to your EBITDA margin. They are both percentages, but they are apples and oranges. Right. Like, it's a weird thing, but it does happen to kind of give you some information and like with the number 40 at least, and maybe if I say this wrong, Eric, correct me, but essentially, like, if you're growing more than 40% a year, it's okay. If you're not profitable because you're growing 40% a year, that's fine. Like you can burn some amount, you know, for every point you're over 40% growth rate. If you're losing that percent on your margins, cash flow margins, that's okay. But if you're below that, if you're sub 40, probably you should be cash flowing or at least like, you know, be profitable. But again, that 40 number was some number some investment person put on the board at some point. But it's notionally correct and interesting.
- [08:34]
A
But it's also telling. If you're, if you're growing at 60 and losing 40, then you're not hitting the rule of 42. So it's like you can't also just be lighting cash on fire like it was 2020 for revenue.
- [08:47]
C
Cat. Like, we've gone above and below for different reasons. Like, we've had years where our growth rate is really high, but our burn was really high, and we actually were below the line. And then we've had years where our growth rate stayed high, but we actually got a little more fit fiscally. Still losing money, but like, in a more responsible way.
- [09:03]
B
I don't know.
- [09:03]
C
This is, this is a thing that probably doesn't concern. Concern any SaaS company under 5 or 10 million in revenue. I don't think you should be looking at this, but when you're at the growth and scale stages, it. It can be a helpful, like, way to look.
- [09:17]
B
It's a rule of thumb. It's like walking 10,000 steps a day. Yeah. I mean, if you're not looking to exit, focus on building your business. Right. Build the right thing for your customers.
- [09:25]
D
The.
- [09:25]
B
These heuristics, these rule of thumbs, like, they work themselves out and then to this point. Right. Like it's a data point in a moment of time.
- [09:31]
D
Right.
- [09:32]
B
A company's not a data point. It's. It's a linear progression. Step one, step two, step three, step four. So there may be years where like, yeah, I'm going to spend a crapload of money because there's this huge opportunity. Yeah.
- [09:41]
C
And often that's when you need to. Right. Like if the top of that number, your growth rate starts to flag, you might need to burn a lot more money to like, change the product or like figure out a new growth thing.
- [09:50]
B
Nothing written cement. It's just investors, like simple analogies to help them narrow down investment opportunities and this is one they use.
- [09:56]
D
So.
- [09:56]
B
Yeah. So we report on.
- [09:57]
A
Yeah. Super handy for folks in the audience. So I, I think we'll probably have folks doing tens of million dollars a year listening to this podcast, thinking about when the right exit opportunity is and what kind of multiples. So, yeah, a great rule to, to kind of optimize toward if you are looking for some kind of exit or funding or otherwise in the short term.
- [10:18]
D
Yeah.
- [10:18]
B
You should at least know what your metric is. That's the best way to think about it.
- [10:21]
A
Seems like M and A has also been hot this year. A lot of CSS businesses on the move.
- [10:28]
B
Yeah, it's been, it's been good. I mean, I think it's still early days. There's a lot more coming. I think we've Been working on a few, you know, there's a bunch of other ones like the 7 max just bought buddy Fit in Italy, which is fitness.
- [10:39]
D
Right.
- [10:39]
B
If you think about like fitness apps, still doing deals, that's pretty exciting. You know, Outside just bought Map My Fitness, which is from Under Armour, which is a cool deal. I was actually a founder buying back his own company. You know, there's, there's seen a bunch of other cool stuff that's happening and I think we expect a lot more to come. So like Bending Spoons has been busy. Francisco Partners bar the weather company, which is pretty cool. We helped Team Snap buy Mojo, you know, that business in the youth sports space, which is, we're really excited about that. And then, you know, there's been some financings that have been really exciting. We were fortunate enough to work with Flow Health. You guys know the female health business, they're just an absolute phenomenal business. We helped them raise a really nice round from Gen Atlantic. So it's been really exciting.
- [11:20]
A
I know you can't go super deep on Flow, but I did want to go a little deeper. And you talk about it some in the, in the report, but what is the investment thesis? I mean, you know, what was announced publicly is that, you know, they raised 200 million at an over $1 billion valuation. And then in the report you even share that they went out looking for 100 million and ended up in a very competitive situation where they raised it to 200. So what you can share publicly. I'd love to hear a little more color on, on how that happened and what the investment thesis was behind such a high valuation and then the competition to get in on it.
- [11:56]
B
Yeah, so. So Flow's been around for a long time. Founded by Dimitri, you know, years and years ago. And I've known him for, you know, since 2019, since I started in the industry. So Flow is a female health focused business. It has a freemium model. So I think we've disclosed this, but there's, you know, north of 60, 60 million MAUs and then, you know, a fraction of that are actually paid subscribers. And so FLO does a great job of providing females and now their partners with information around reproductive cycles, menstrual health. And now they're moving into perimenopause and menopause, which is just really, really exciting. And so the thing about this space, and you'll talk about this when we get to consumers, like other consumer subscription areas, it's super crowded, there's tons of. You can use aura. You could use Apple Health and those are big names, right, that everyone knows. And then there's tons of other female health focused or period tracking apps. What we really like about Flow is that they will work with females early on when they're kind of like this is the very beginning of their health journey. 15, 16, 17. And they'll provide a free product and they kind of create this data layer between when they're 18 all the way until when they're 35, 40, 50, moving into perimenopause. And then what you do is you can provide free services to that individual as much as they need. And then when they do need to move into a paid program, right, there's modules effectively that you can subscribe to. You get all the services of Flow Premium, but you can only maybe only use one or two or maybe use all of them. But the cool thing is they're just there when you need them. And so then what I think the thesis from, from GA was is you can just continue to stitch and add new offerings to the Flow off to the flow data layer and then that just increases the surface area for where they're, you know, 60 million MAUs will find a reason to subscribe. And even if you capture 1 to 3% of those with each new module, that's hundreds of millions in revenue. And so we were really excited about it. I think the thesis was born out. A lot of investors saw that potential. You know, we do think this is probably a public company at some point. We're really excited about that and it's just going to be another great CSS business that's in the public market. So yeah, happy to answer any questions, but obviously have to keep most of confidential.
- [13:59]
C
Yeah, I mean I'll do some analysis. 60 million, there's a lot of people, there's billions of potential users on the planet. So that's a very good thesis. And then I think we've seen this play out multiple times that like data generates retention, right? Or like the more somebody invests in an app and the more time like horizontally it has with you, like the higher your retention is going to be. And that's something I always. It's not a debate we have so much anymore, but I used to get a lot of people asking me like, oh, should I make this a subscription app? And like how do I like structure an app that's like worth adding a subscription to? And I think I always counseled and I still believe this that like something that gets better over time will have naturally will one it'll justify A subscription, because it's something people use for years and years, but then also like the value goes up, it compounds, you know, over time. And so, yeah, I think this is a very natural, large human need, large tam. You know, it's a competitive space. So it's interesting that there's. There would be one to emerge. I mean, that does seem to be kind of how markets develop over time is like once somebody has kind of figured out the optimal combination of current available technologies, there will be like a small oligopoly. So that doesn't surprise me. But yeah, it's interesting to think, like, there's probably other categories that haven't developed as much as flow. And I think it still speaks to the maturation. 60 million, that's like nobody, you know what I mean? I don't know what the total number of customers because there's some slices that from 8 billion people down. But like, but like, obviously we've barely began.
- [15:28]
B
Yeah, you're. You're on the concept that we call category killers, Jacob, and we talked about it a little bit in the last report where in consumer, right. Consumers flock to best of breed and they learn and decide what best of breed is because other consumers tell them.
- [15:40]
C
Is word of mouth is such a dominating channel.
- [15:44]
D
Right.
- [15:44]
B
And so, you know, flow is really special. I think Demetri's talked about this where they get over 50% of their users are organic.
- [15:50]
D
Right.
- [15:50]
B
They've got great App store rankings. Right. People, you know, moms now are telling their daughters, friends, girls in school tell each other about it.
- [15:56]
D
Right.
- [15:57]
B
So it's really a powerful flywheel. And so we kind of saw this in youth sports, like where we saw, you know, we think there'll be two, maybe three winners in U Sports. We think TeamSnap's one of those. We have a couple predictions around financial services, AI news. Big one in family health or family management. We call it the chief household officer. We think there's going to be a unicorn there too. And I think that's what our CSS practice is oriented around, which is helping find those unicorns early on, helping them get to like the next level and then hopefully seeing them go public. But we think there's a lot more to come. So we think flow is a perfect example of what will be a lot of future public companies.
- [16:31]
A
Things you mentioned in there about flow and then also have a whole slide in the report about is finding ways to generate net revenue retention in consumer subscription. And those two acronyms don't usually go together. CSS and NRR at least positive nrr. Yeah, exactly.
- [16:49]
C
Nets can be positive or negative.
- [16:50]
D
So.
- [16:51]
A
But yeah, I'd love for you to walk us through your thinking. And you kind of already talked a little bit about it with flow and expanding the product. But what are some of the other ways that consumer subscription businesses can start thinking about NRR being a possibility instead of just always being a kind of net negative with all the churn going on?
- [17:12]
D
Yeah.
- [17:12]
B
So the biggest. So when we started the CSS practice, the biggest thing we had to overcome was people were like, well, this isn't B2B SaaS. The big thing that people love about B2B SaaS is once you land a customer, hypothetically, you could sell them more seats over time.
- [17:26]
D
Right.
- [17:27]
B
So that, you know, you start with 10 seats, then you go to 20 seats, then you go to 30 seats. So like, you know, sales source sells a customer.
- [17:33]
D
Right.
- [17:33]
B
They can gradually grow with that customer. And that's really exciting. Right, because the cost of landing them takes one time and then you add more revenue and it becomes an extremely profitable business model. The issue people think they see with consumer is that you sell the consumer once and then that price is capped.
- [17:48]
D
Right.
- [17:48]
B
You sell them for 29.99, for example, for a year. That's all the money you'll make from that individual best case. And then there's such high churn that you never get this positive net revenue retention. And you know, the answer is that's not true. It's not always not common. But in the best of breed CSS businesses, the way to think about this is every consumer subscription business has churn, and most of them are high churn. The question is, when does that churn stabilize? Like, when do you find what we call within our in our GPP CSS report, like the locals versus the tourists. So to use an example, if you start with 100 users and you turn 50 in your first year on annual subscriptions, you're down to 50 users. Then the second year you keep 45 of those 50, right? So now you're at 40%. But then the third year you keep 43, and then the fourth year you keep 42. So now all of a sudden that parabola has just flatlined. And so like, effectively your dollar revenue retention is equal. But then here's where the NRR can start to play in is CSS businesses have figured out you can do price increases. So we have this on our report, which we kind of graph Amazon's prime subscription, Netflix's costs, and Hulu's costs, because Those are all mostly public and they go up every two years. And so all of a sudden now you're seeing pricing expansion which is David, you kind of ask how do you get nrr? So now if you have a flat cohort number of users you're just adding price increases, right?
- [19:05]
C
Which can overcome double digit compounded inflation, will help drive the market to being accepting of it doesn't allow you to.
- [19:12]
B
Get away with that, that's for sure. But then you see other ways to monetize, right, Like Spotify go they launched family plans so they now they acquired the mom and then the mom brought in and out for the dad and the family. So now there's a family plan. So you just got, you had user expansion with that same one customer. You can upsell new features right Like Quicken Onx. They've Onx launched like global maps, right versus just your state maps. You can upgrade to a higher tier. Quicken's adding like estate planning tools really cool. So if you already are on their financial management software now you could do wills and trusts and have like a locker to store like important documents. That's an easy upgrade for users. And so we're seeing some really cool ways that custom that CSS businesses are generating net revenue retention. But it does require you to really dig deep in the data and understand you know, how do these businesses work, how do what do consumers value? And then once again back back to the point, how do you bring more value to that same subscription which may justify a price increase or just keep them subscribing like both of those things could be useful.
- [20:08]
C
It's really not a lever worth pulling until you've in css until you've compounded a handful of years and like you've got, you've got a base of, of sturdy long term subscribers that you can win risk to churn them a little bit but then also just to have a body of like long termers that you can actually either offer something to or even a price increase. I don't think the price increase thing is. Yeah I think Netflix and Disney did a good job of paving the expectation for that from a consumer perspective simultaneously with price increases and pretty much everything everywhere. I used to be very against this because like I thought, I don't know, I just thought it was like I'm not worth doing, not worth the negative press which again I think for most scaling early stage it's not but when you're late stage when you've got like a very mature subscriber base and you're starting, you know that 40 doesn't add up itself. You know what I mean? You gotta like, you gotta find each point. Like I think there's, I think there's a case to be made that it's, it's, it's an okay thing to do.
- [21:06]
B
You have to justify it to your users, right? You can't sneak it in. You send an email, you say, hey guys, we're going from 29.99 to 35.99 and here's why. Here's all the benefits you're getting for that extra six bucks. Once again, like if, if they're truly your users, right? If they're truly people that have been subscribing for two to three years and they're like, yeah, I use this product every month or I use it once a year for my big camping trip or hey, I log into this every day.
- [21:27]
C
They're not churning, just send them a link to the inflation report for less.
- [21:32]
B
You can ab test this stuff like a lot of companies. A B test, right? They try a little bit, see what the retention is. But generally like what I found with most of my clients is that if you're a best of breed and you're producing a good quality service, people are going to get it.
- [21:44]
C
Yeah, you have margin, you have uncaptured margin basically, right. Like that's what you're leaving on the table. It's not just trying to get a fair price. And I don't know, I think there's some argument that you can have like an asymmetric power there. Like if you've like captured people's data and like, you know, I don't know, I think it's, there's some, there's some amount of balance you want to do there. But you know, I don't know, ideally we're finding the, the optimums of pricing.
- [22:08]
B
Yeah, but value capture thing, I don't ever buy into that because there's just a lot of options for consumers. So like if you offend someone, right? If you personally offend them with however you message it, or like, hey, you can't turn because I've got your information, they'll be a little pissed, right? And so like you're creating this, this desire to get back at you. All right, so like you don't want that, you just want like, hey guys, we're doing the best for you, but this is what's best for us. So let's just meet in the middle. And I think consumers are totally fine with that.
- [22:37]
C
I Think founders typically depending on how close you are to the product, it's probably once, probably once you're Talking about Rule 40, this is no longer a concern. But when it's like an auteur person who remembers not charging anything for their product, it can be very, very uncomfortable because some somebody will be pissed and like you just have to be okay with that.
- [22:55]
B
For sure it's gonna happen.
- [22:56]
C
If you aren't okay with one person being pissed, you probably shouldn't have started a company or built an app because like it's just comes to the territory.
- [23:02]
A
A little bit we haven't talked about yet. I don't think you explicitly mentioned in the report but a lot of CSS businesses are also cracking the code on one time purchases as well of like add ons. Duolingo being a great example of that. I don't think in their numbers they're showing because they do still have pretty high turns. I don't think they're anywhere close to NRR positive yet but they're driving that direction with the like buying the. I forget what all the little things are like, you know, streak recovery and things like that. It's definitely something apps can and should be exploring for sure.
- [23:38]
B
I mean tender's been doing this for years, right? You could buy baskets of super likes, right. They're not a subscription but it enhances your ability to use the product.
- [23:45]
D
Right.
- [23:45]
B
I think we're going to see more and more of that with css especially as you can do more and more targeted customization around offers around the products you're actually selling. With some of these AI tools, you could do one off maps, you could do specific layers. I think you see this in a lot of the prosumer tools, right? If you want to create your own personal template or email template or something like that, that's a one time purchase. So there's a lot of cool stuff coming and I think it's just going to get more interesting. So I think David, to your point, stick to the subscription. That's where the vast amount of money is. But if there is something you could offer your users without taking your eye off the ball on the subscription, I think it's something to think through.
- [24:21]
A
We've kind of been talking mostly about the upside, but there also are a lot of threats in the industry, one of which directly applies to flow. And I'm actually going to have the or we're going to have the founder Dmitri on the podcast soon and so I've actually already spoken to him. So a little preview of that episode. But he had some interesting thoughts around when Apple Health came into their space. You know, they introduced period tracking as a default part of the OS. AllTrails is facing that with iOS18 adding hiking maps right into the built in map. So how do you think about the threat of platform owners expanding into these product spaces?
- [25:03]
B
Most of these services rely on Apple and Google for some, some level of either customer acquisition, some features. Right. Using the hardware that Apple and Google, I'm kind of focusing on those two. But you could expand this to aura, you could expand it to whoop are generating, right. And so you're at risk there. And I think, you know, Atlas just kind of focus on Apple, right? Because they generally get most of the slings and arrows tossed at them. Is there a really valuable participant in this ecosystem? You can't knock that. But I think they're starting to get a little pressure because they charge pretty high fees, right? The 30% fee. And then they also they have a history of this term Sherlocking, which is coming from a historical thing they've done with another app called Watson where they'll kind of copy features that are highly used in some of their main apps and kind of just continue to build the Apple service ecosystem. And so I mean you guys probably see this from their public reports like their hardware sales are slowing, their services sales are growing like wildfire. And so a lot of stuff they're offering for free, like maps, they'll put the all trail or the hiking maps into the map services. That's just to get more people to use maps, right? Because they can start to sell more and more ads off that. The adding more data into health that helps them sell watches. That's a value add service for them. If you're a founder and you're building, I think one of the people always talk about is Apple Demo day is startup death day.
- [26:17]
D
Right?
- [26:17]
B
You just never know when Apple releases something if that is perfectly designed to what you were trying to solve for. And so yeah, it's a competitive threat. There's no denying it. There's no paper over it. But the silver lining is like Apple is a big juggernaut. They bring a lot of people awareness to the category, right? So the certain thing they add to it, people now become aware of that feature. They'll look for best of breeding. So if you're a top 20% app, this could be a benefit for you, right? But you have to constantly keep innovating. You can't just build an app like, you know, to use alltrails as an example, they can't just stop doing stuff and say well we're good, right? They always have to be 10x better than whatever Apple's offering is, right? More photos, more reviews. Now they're doing social features, right? Apple doesn't do any of that. You know what happens is I think you know, you've got to use Flow and Alltrails as an example. Like Apple may clip off a couple percentage of their free users but what they don't do is they don't take the people that would pay for all trails and Flow. Those people do not just stay on Apple.
- [27:14]
D
Right.
- [27:14]
B
They're trying to look for a premium experience. So they will go premium. But if you're use the negative side, right? If you're an app that hasn't innovated, you're kind of just a me too app sitting at, you know, the bottom of the ranks, the rankings in the app stores. That's hard. It's a hard spot to be and so investors are pretty smart about that. So you have to be really knowledgeable and ability to overcome like that challenge question which is going to come up.
- [27:36]
A
I like the way you frame it in the report too that there's broad and shallow which is what the platforms do. It's like they like when they introduce period tracking in Apple watch, they had to do it for the masses. It's broad and shallow. It's not a super deep feature. And then Flow is the exact opposite and then the way you frame it in the report is verticalized and deep where they have so many other features and layered upon. Like to your point earlier, it's like the things that people are going to pay for in Flow are the things Apple is just never going to add to this mass market app. So the best defense against Sherlocking is building a real moat with that depth and verticalized product offering instead of doing that kind of me too thing that puts you at huge risk.
- [28:21]
C
Has there ever been any other app besides Watson that was Sherlocked actually Sherlocked, right? Yeah, yeah. I feel like it's something everybody talks about all the time but it like never actually had like who Was it recently? 1Password. Because they Apple like upgraded all their password stuff and Everybody's like whoa, 1Password's over. And I'm like, like we use 1Password business syncing all of that stuff cross platform. No, never in a million years. Like they're gonna, you know. Well one I think probably people are over tuned to the Apple ecosystem talkers, you know, who think like oh I'll Just do everything through Apple. I don't know, I just don't think there's been actually that many cases or.
- [29:01]
A
Nothing meaningful to kind of to Eric's point, it's like the me toos. Yeah, sure, maybe they got dropped off, but like nothing we care about.
- [29:08]
C
I think maybe I would think twice if there was a great like OS level solution already. I might think twice about starting something new in there. But if you're already in that space and I guess, yeah, if you're not like just nascent like very beginning, if your product has any sort of differentiation whatsoever, like Apple and Google or whoever, they're building it because there's something there, like they would not care unless it was substantial. And so I'm a believer in most of the time it's, it's kind of a boon or at least neutral. The exception of maybe a few cases.
- [29:37]
B
But if you're best to breed. So think about it like from a note taking standpoint, right, Notion's probably going to survive. Any AI tools that Apple integrates into Notes, right, They'll probably survive. There's a bunch of other note taking apps that may have a really rough time capturing customers. So notion probably fine.
- [29:54]
D
Right.
- [29:54]
B
And I don't know Notion, you know, I have no inside information. But if you're someone else and they're an AI and Apple all of a sudden integrates like some bunch of other tools or kind of starts to look a little more like Google Docs within their Notes platform, that could be a tough spot to be. I'm using some of the transcription services in Apple's voicemail. Pretty good, right? So if you're using something a separate product could be a problem. You can't stop growing in the space just because Apple exists. It's like what people used to do in social networks. Like oh my God, Google's doing something. Facebook's a dead.
- [30:20]
C
Well, no, David, I'm trying to think, are there any. Are there? I'm trying to. I can't think of one tool that I've like switched to the OS level on.
- [30:28]
A
You know, the Notes is a good example though because as Apple added more and more to Notes, this was probably five years ago I stopped using a third party Notes app.
- [30:37]
C
It's true. Yeah, because you used to not have Sync. Like their sync is really good now and like it's a great app.
- [30:42]
A
Yeah, it's really is a fantastic app. But it's not like I never used Evernote I was using actually perfectly validates. Eric's point is like I was using kind of a more bare bones me too third party Notes app that didn't even have like super sophisticated syncing, wasn't super feature rich. And so moving to Apple's Notes just made a ton of sense as they've added all these features. But I wasn't an Evernote kind of power user.
- [31:09]
C
Yeah, the AI side though too. It's like the system level Notes app will now habituate users to some of those features and then Apple's not going to update them but once a year if that. Right. And so now everybody else is building AI integrated, has like a warm up app that everybody uses. Then you're in class and you see somebody next to you using something crazier and you're like oh you don't use whatever. And then it's like well I'm going to switch to that. Right. So this stuff's so dynamic and so like hard to fully characterize like consumer behavior that I think it's overblown.
- [31:39]
A
So now that's a fantastic point. Like Apple is unlikely to integrate AI features into the Notes app at the level that would kind of be meaningful for me. But now that you bring that up, I would actually. I mean I have so many notes now going back five or six years since I like started using it more in depth that like hard to find.
- [31:59]
C
It'd be hard to switch, right?
- [32:01]
A
No, no, no, but I'm saying it's like more incentive to switch. With AI companies really get aggressive with better tooling and finding and rag search and all that kind of stuff.
- [32:10]
B
Yeah, because with the aip, we didn't put this in the report, but if you think about it, they're going to need access to data.
- [32:17]
D
Right.
- [32:17]
B
And so they will want specific requests like access to your contacts, access to your calendar tools. Apple is going to be a little protective on that. But which one are the consumers going to trust to unleash an AI engine on their own personal information? So I think there's, there's a double edged sword there too. Like I think the founders and the builders don't know integrate AI tools so much faster than Apple. Just Factored like probably 3x2, three years ahead of Apple. But if you want to trust someone with your data source, like your course data, like contacts or calendar, Apple might have a slight advantage there. So you really have to connect with this premium offering or get that consumer buy in which is like, hey, what are my friends using? Do they love it?
- [32:51]
D
Cool.
- [32:51]
B
And I'll use that app.
- [32:53]
A
I don't want to go super Deep because it's just been talked about a ton. But because it is being talked about a ton, I'd love to just kind of get the read of the room on like the DMA and all the regulatory kind of overhang we have.
- [33:07]
C
It's over. Terry resigned. It's going away. Right. I thought he just, when he left, it's over. No, that's not how Europe works.
- [33:15]
A
Okay, but how is that like being priced into acquisitions? How is it being priced into investments? How is the investment community thinking about regulation both positively and negatively?
- [33:27]
B
Yeah, I mean, so on the DMA side and focusing on Europe, for people that don't know what that is, the Digital Markets Act. So it's a legislation instituted by the eu and I think what it's designed to do is kind of loosen the grip that some of the large platforms, specifically like Apple, Google have on independent developers. And there's a couple areas. Right. They kind of restrict payments for one, which everyone's very focused on, but they also restrict a lot of other stuff like how you do marketing, discounts, offerings, stuff like that, customization, App review. App review, Yeah, I just had a.
- [33:59]
A
Couple of run ins with App Review.
- [34:00]
C
In my side project, App David suddenly pro dma.
- [34:07]
B
He's like, I've never been more patent of French, French legislation than now, so. But I think like this is something like the EU generally has been on the forefront of privacy. What they do generally sometimes occasionally filters over here to the US but it's pretty hot topic right now. It's really hard to price. So everyone's kind of saying like, can I just assume Apple's 30% goes to 15 and the company gets 15% more profitable? No, can't. Can I tell you for sure? Every one of my clients is looking at some sort of a web subscription offering for sure.
- [34:35]
D
Right.
- [34:35]
B
And those are getting better and better. I think revenuecats work on some stuff. There's a bunch of other names that are, that are thinking about how do we offer a web subscription tool that provides the same features that the App Store does, which is user management, taxes, payment, making sure that like you're collecting taxes appropriately in every jurisdiction with all but at a 5, 7% commission rate versus 30%. And I think there's going to be some big changes once those products scale and they get really, really good, which the App store's had a 10 year lead on doing something like that. I think consumers are going to be comfortable to take a 10, 20% discount and sign in through the web real quick and then come back to an app. I think we're going to get trained on that, just like we got trained on how we do subscriptions. Hard to say what else will happen in the next four years, but it's definitely a hot topic.
- [35:20]
C
Yeah, I mean, there's, there's been a lot of energy around the, like, web funnel capture and there's been some new tech that's. People are building tools for this, but none of that's, like, driven by the dma. Like, a lot of that was allowed before. I will be interested to see if any of these stores reach any sort of, like, escape velocity. I just think the size of the market is too restrictive for it to reach any sort of meaningful scale national, internationally. And honestly, this is like, we're recording this the week after Thierry Breton, I think it's his name, who is the head of dma, resigned or was asked to resign, which I do think, I do think Mark's kind of potential. I mean, who knows? I don't know what the internal politics of the commission are, but I think, like, Mark's potentially a sea change. I don't know if that means the DMA will change or at least, like, maybe enforcement will not become a thing anymore, but he was pretty actively harassing Apple last year on specific details. Like, you can imagine a version or the DMA is out, Apple shipped their version and then the EC just shut up and that was it. But, like, we've gone through the last year where it's been tick and tack and back and forth in a big uncertain mess. Even if it just goes to back to, like, okay, the status quo, I think that's good for. I mean, maybe it's not the outcome everybody wanted, but I think that's good for the industry in terms of, like, maybe we've got some stability. But, yeah, I'm just, I'm just hopeful maybe it'll be a little less exciting in the next year. Would be a dream for me.
- [36:40]
B
People like predictability and stability.
- [36:42]
C
It's true. I mean, it's, it's, it's cliche potentially, but, like, hey, like, I, you know, and if we want to build anything with these platforms or these changes or this openings, if we need stability and we need, like, time to, like, be like, okay, how do we actually integrate this stuff? But yeah, I go back to your prediction that just there will be more people driving to the web. I just think that's generally going to be true. I think experiences that will still stay an app. I'm still, like, a big believer that the user Experience delta between what can be provided in a web browser and what I think there was a. There was a decade there where we thought the web browser would get developed enough that it was going to overTake. But the two biggest makers of web browsers are Apple and Google, so they have a big incentive to make sure the browser never gets too good. Right. So I don't think we're going to.
- [37:26]
B
See that anytime soon.
- [37:27]
A
This trend though is also kind of on Apple. Right. And so there is tools in their tool shed to reverse that trend a bit. Like there are ways that they can more strongly incentivize in app purchase. And to your point earlier, Eric, the tools for doing these things aren't fully mature. Like Stripe just bought Lemon squeezy. I saw a job posting for a manager of merchant of record. So it's like Stripe looks like they're building a Stripe branded merchant of record similar to what Paddle does. But it's like they're just now doing that. And so like there's not. And then even Stripe today doesn't support all the countries and all the payment methods and all the things that the App Store does. And so there's potential here for Apple to innovate. And that's what you want in good regulation and good policy is to force somebody like Apple to be more competitive versus just collecting the 30% and resting on their laurels. So I'm kind of curious to see what happens the next couple of years if they kind of fight back a little.
- [38:31]
C
None of this was DMA triggered though. Paddle and like all this stuff was happening already and Apple may or may not react and actually that was what caused it.
- [38:39]
D
Right.
- [38:40]
C
But I'm sure somebody will be like, well then there was the DMA and then Apple got better and it's like, well, no, I think they were going to do that anyway. But okay, yeah, good point.
- [38:48]
A
But yeah, it's still going to be interesting to see what, what happens and I'm especially curious to see what Apple does to kind of shift that because there's definitely a trend toward it. Like Eric was saying, like there's a trend toward people trying to capture more and more on the web to avoid that 30. So surely Apple has seen that and is trying to figure out what to do and then surely Google as the other half of the oligopoly will either follow suit or have their own innovative approach to trying to win some of that back.
- [39:17]
C
In the report you talk a little bit about IPOs and how CSS relationship to IPOs. I think we're at a really interesting time right now in the public markets, or lack thereof, I think. Was There been like four IPOs this year? I'm sure there's been more, but four that are like on my right, it's been extreme. Probably one of the most intense droughts in public, and that's in the B2B side. Even so when you look at consumer, I assume it's been actually worse. So I'm curious, like, you know, on the less, it seems like more deals that are less than going public, more like private equity acquisitions and stuff like this. But how do you see the, I guess the IPO market broadly and then how it applies to this segment?
- [39:54]
B
Yeah, I mean, I think you're dead on, Jacob. Like IPOs are down big from 2021 for sure. 2022. I don't think we're even at 2018, 2019 levels. So I think there's a lot of investors hungry for cash, but there's a lot of private deals happening. Like Stripe's a perfect example. You mentioned them earlier. They've done tons of secondary deals.
- [40:12]
D
Right.
- [40:12]
B
So instead of going public, they're like, cool, we'll just collect a check and be able to pay out some of our investors.
- [40:16]
D
Yeah.
- [40:17]
C
And the only loser is retail.
- [40:18]
D
Right?
- [40:18]
B
Yeah. So like they just go public later.
- [40:20]
D
Right.
- [40:21]
B
Like, so that's, that's the risk, like.
- [40:22]
C
Just to put like a quantifier on it. There are billions of re.
- [40:26]
D
Right.
- [40:26]
C
Like they're at an insane scale.
- [40:28]
B
And like there's a lot of consumer businesses that went public like an all birds, you know, that went public during kind of back the timeframe they want public wishpacks. It's super hard to be a subscale public company that doesn't have some level of predictability.
- [40:42]
D
Right.
- [40:43]
B
Even Bumble, which is a household name, right. That's got billions of revenue, their stock's gotten pounded.
- [40:48]
D
Right.
- [40:48]
B
Duolingo's done really well. So it's definitely a have and have nots.
- [40:51]
C
Do you think there's a world where somebody replicates Duolingo success in the public markets on consumer side?
- [40:57]
B
I think I might have worked with one recently.
- [40:59]
D
Yeah.
- [40:59]
B
Okay. So I definitely do. I think there's great success businesses that are starting to scale. You know, if you start to get to 4 or 500 million in revenue and you're predictable, like public markets like that.
- [41:10]
D
Right.
- [41:10]
B
They can see that path where hey, you're going public at 500 million and now you're closer to 7 on a way to 750 and profitable on your own destiny. People buy that.
- [41:18]
C
It's easy numbers to say, but when. When you talk about, like, just like to get to that scale is such an ins journey. And like this numbers, like, how many subscription apps at least, like, purely. If you just look at, like, just iOS apps, there's maybe 15. Like, even in that realm, I think.
- [41:36]
B
There'S some pretty good ones out there. I mean, you can kind of start going, like down the line.
- [41:41]
D
Right.
- [41:41]
B
There's people. Everyone knows Strava, Right. A couple hundred million, you've got discord.
- [41:45]
D
Right.
- [41:46]
B
All of a sudden, that's a pretty big one.
- [41:48]
D
Right.
- [41:48]
B
Or a kind of a hardware manufacturer with a subscription offering where they're probably someone that could go public and kind of compete with a Garmin, with the health and wellness. There's a play there. I think there's more than you think. There's a lot of information I have that I probably can't chat through. There's great companies out there that are at serious scale that just don't want to go public yet.
- [42:07]
C
Is the constraint on the companies not wanting to do it because of the blood in the streets, it's gnarly out there, or is it more on the buy side? There's just public market investors aren't really interested in.
- [42:18]
B
It's a little bit of both.
- [42:19]
D
Right.
- [42:19]
B
Like, if you're a founder and you're like, man, I'm still trying to. I'm growing, I'm growing. I've got a lot of things going on. I'm focusing on product. Do you want to go deal with the public markets and do quarterly projections?
- [42:28]
C
No. Oh, you weren't asking me.
- [42:31]
B
Maybe something you'll get out.
- [42:33]
C
Not that I'm at the scale. Not that anybody think. But you got to, you know, but so then.
- [42:37]
B
Then you look at the public markets guys, right? And a lot of those guys have taken a bloodbath. Yeah.
- [42:41]
C
I don't know if I've ever met a founder whose public market stock is higher than their IPO price. That just might be a unique time in my life.
- [42:50]
B
There's a lot out there. There's a lot out there.
- [42:52]
C
Presumably when IPO in like 2002 or something.
- [42:55]
B
I'm guessing if you IPO'd in 21, good chance you're underwater.
- [42:59]
A
Well, hey, as we record this, the Fed just dropped 50 basis points, so money's free again, right?
- [43:05]
C
Yeah. Great, great. I should IPO'd yesterday. Damn it.
- [43:10]
B
There's secondary available, right? Like the, you know, deal frequency get done and we've done. There's a lot of secondaries. So like there's money out there swapping around that are not in the public markets that are very happy to do secondary deals. And so if that exists, guys, that kind of solves the problem, relieves the pressure from the, from your employees, your investors, and then it also still gets money into your company. Like that's an easy answer, right? So like, why go public until you really need that network?
- [43:33]
C
I just really want to deny private market investors their fees, Eric. That's really what my. Just 2 and 20, I can't, I can't suffer it. E trade's a lot more efficient, but that's totally.
- [43:44]
B
2 and 20 is a hefty chunk. I'm not gonna, not gonna deny that.
- [43:48]
C
Yeah, well, it's an interesting time. We'll see. It's gonna be one of two. Like one, we're just in like a pretty heavy market depression on companies going public in it or turn to a healthier, like, more accessible final destination for companies. But I do worry about like the broader macroeconomic impacts of the fact that only high net worth individuals and you know, the folks that manage their money are the ones who are able to invest in like, small cap companies because that's where the most growth is. Right? Which I think will have like, negative implications for, you know, wealth inequality and things like this. I mean, maybe it's not substantial, but I think it is a loss. I think the world we had in, in some of the 2010s and you know, going back to even like the 2000s where, you know, going public was just a thing you did once you had some amount of scale and some modicum of predictability, it's gone. But I think too, though, probably as you were saying, it's a very rare situation to even find yourself considering that I think a lot more founders, if coming to an exit is something that you're interested in, I think there's much easier paths than aiming to public with much less work, frankly.
- [44:51]
A
Well, and that's what you covered in the report. I mean, there's a whole slide on other good outcomes for CSS businesses, and I did want to actually talk through some of those. So other than striving for ipo, what are some of the outcomes you're seeing your clients look toward as great outcomes for their businesses?
- [45:08]
B
I think We've covered why IPOs are positive negatives. But I mean, the cool thing about CSS is there's a lot of people that want to own great CSS businesses. And so you know, we sold a business called Nutracheck to a content company called Immediate Media. And so they were able to effectively say, hey, we want, we have an ad driven model with tons of Maus people looking at our content. We need a subscription offering for that. And so that was a home run deal. So it was a subscription business selling to a content business. And you put those two together and that just solves a lot of cat questions. Private equity, actively looking at the space. So they're actively looking at great businesses that are cash flowing just like they would a car wash business. They like growth businesses that have nice predictable revenue streams. CSS is literally the definition of that. And then there's founder owned businesses. We're seeing lots of people just be like, hey, I'm good to go. And they'll sit there and they'll collect their dividend and it's a phenomenal outcome for them. And that is not a bad thing. And then one area we're really excited about is these CSS aggregators. We kind of talked about this a while back, but there's a ton. There's like 5 million businesses in the App Store that are generating money, right? That's a lot of companies and most are small. You know, there's a very few that are, to Jacob's point are like north of 500 million in revenue. That's really rare. But there are a bunch that are doing 5, 10, 15 million in revenue profitably, I bet a lot of revenue cat customers. And so what we start to see are these CSS aggregators and there's a bunch, we'll name a bunch in our report. I won't do it here. That are buying these companies up for multiples of ebitda. They're giving founders liquidity, they're taking over the app. Sometimes they bring the team, sometimes they don't. It kind of depends on the, on the buyer. And these are great sources of liquidity for founders. And so we're seeing these guys really scale, they're railing raising institutional capital. And like we're kind of sitting there like the Berkshire halfway. The App Store is. They're going through, they're buying these things on their valued fairly, but they're not getting revenue multiples. Right? These guys buy off EBITDA multiples. So if you're generating EBITDA and you're saying, hey, I'm just done, I want to go off and do something else, I think I can get 20, 30 million in my pocket or I can go raise a VC round and then I have to sell for 100 million. That's a pretty good option as a founder to think about. And so we're seeing that happen quite a bit right now. It's like betting spoons, for example, bought Evernote, really good example. Then what we transfer as well. There's. And there's a bunch of these coming in Europe specifically and then a few here in the US Is there a.
- [47:23]
C
Theory the case, like why they're more common in Europe than here? It might just be that bending spoons is in Europe.
- [47:28]
B
That could be part of it is.
- [47:30]
C
Definitely in Europe and they're the ones doing the most of it. It seems like they're great.
- [47:33]
B
Yeah, they're really smart operators. But I think there's a couple of things. One, there's a little more affordable technical talent over in Europe. If you're not going to bring a team. Right. Someone's running the business for you, right? Yeah.
- [47:43]
C
So just like high profit margin businesses, like two businesses with equal every everything else equal is going to have a higher margin in a lower cost of living place.
- [47:52]
D
Yeah. Right.
- [47:52]
B
If you can still capture. Do the marketing. Right. Correctly, still capture U.S. consumers. So I think we've seen stuff like that really scale. But also some of the talent over there is just phenomenal and they really understand marketing. They know the best of breed practices. Right. They're implementing AI left and right. And so they've been able to scale businesses that like some names that we haven't heard of here in the TechCrunch world, if you will, that are used by hundreds of millions of people around the globe. They just don't happen to sit in Silicon Valley or Austin, so they don't get the press, but they're big businesses.
- [48:21]
C
I think it's also worth pointing out that like exits are only needed if you need an exit. Like I think it's good if you do want an exit. And then you need to know these things and you should plan accordingly. And I think there are some choices you can make strategically as a business owner to like plan for that and to give yourself optionality. But I also say like, if you don't see yourself needing a lot of liquidity in the short term and like you're in it for the long haul, then go back to the original algorithm. Eric was saying, just focus on your business, keep your head down. And because the market's going to look completely like if you're not going to sell for 10 years or 15 years or 20 years, the market's going to be completely in a different shape and A lot of this advice might be moot. The only thing that will probably stand the test of time is good businesses that build good products that do it efficiently. Right, like that. That will always be true.
- [49:09]
B
Yeah. And that's. That was the last one we just said, keep a cash cow. Like, I know lots of founders in San Francisco, around the globe that have, like, a nice business kicking out 3,4 million of EBITDA to them. They take some nice dividends and they're happy. Like, you know, it's a great life. Like, so you don't need the TechCrunch article. You don't need to call me, right. To sell your business for $50 million. I'm a phenomenal outcome situation. So I think that's becoming more and more common to people. And then, like, we give that advice all the time, like, hey, like, we don't think this is going to sell for 50 million. So sit there, hold on it. Like, buy a nice second house, Live a good life.
- [49:41]
D
All right.
- [49:41]
A
The last thing I did want to talk as we wrap up is you have this slide called Maslow's Hierarchy of Subscription. And I thought this was a fun place, kind of an optimistic place to kind of end the episode here. What do you mean by that? And then where do you see the opportunities?
- [49:57]
B
So I think a lot of people are familiar with Maslow's hierarchy of niche needs. And this is a, you know, a psychology term effectively, where it just kind of describes, like, how do consumers focus their life and their goals, how they orient their lives? And it's so starting from the bottom up. And I, you know, there's no illustration here, but you kind of focus on food, water, shelter first, right. The basics is to stay alive. Then you go safety, right. Are you kind of happy, Healthy.
- [50:19]
D
Right.
- [50:19]
B
Is your family happy and healthy? But then it starts to get a little more esoteric, a little more like personal self fulfillment. You've got love and belonging. Like, do you have someone you're, you're a partner. Are you part of a community that you really feel part of? Then you have esteem. Like, do you feel really good about who you are?
- [50:34]
D
Right.
- [50:35]
B
Like, you personally, are you happy with your health, your looks, your fitness? And then you have self actualization, which is, I want to be better than I am today, so I'm doing something to improve myself.
- [50:44]
D
Right.
- [50:44]
B
And so we talked about this last year that, that if you're building a great CSS business, tying it to passion is a great way to enhance retention and passion ties to identity.
- [50:57]
D
Right.
- [50:57]
B
So if you think about this. If I say, yeah, I'm a Strava user, well, what do you think? What are this? What does that person think? Well, they're probably an athlete. They probably care about fitness, right? So it's an identity. If you're a surfline user, you're a surfer, right? That's just who you are. You know, it's who you identify as. If you use Team Snap, you're probably a passionate coach of youth sports. Maybe your kid, son, daughter, plays soccer somewhere and you're like, that's who I am. I liked it. I like to use Team Snap. If you're Onyx, you're a hunter, right? That's just who you are. You're an outdoorsman, you're rough, you're rugged. Like, that's just who you are. And so we've, we kind of took the pyramid and we laid out different CSS businesses that are building for those different needs. And the way we'd encourage founders to think about that is, is which, and this is a little esoteric, but it's like, which need are you targeting?
- [51:39]
D
Right.
- [51:39]
B
If you're going to do love and belonging, well, man, you should have a community function built into your app. Absolutely right. If you're doing esteem, some sort of leaderboard is a great way for people to feel esteem by knowing where they are on that leaderboard. Self actualization, you need to constantly putting new content in so people can get better and better whatever they're trying to do. Like, you know, if it's a yoga app.
- [51:58]
D
Right.
- [51:58]
B
Or mental health.
- [51:59]
D
Right.
- [51:59]
B
There needs to be new content so they get better and better at the yoga practice. So yeah, we think there's a lot to think through here. It's a new concept for us, a new framework we're trying out. But we always like to just think about not just stocks and graphs, like looking backwards, we want to look forwards.
- [52:13]
D
Right.
- [52:13]
B
And seeing like how do you think about building a new company or re aiming an existing company to. Towards where a market is or going to be.
- [52:20]
A
Yeah, the graph is really fun too. So we'll, we'll provide a link to the full report in the show notes. So if, if you haven't already downloaded the report and weren't following along, you should definitely go check out this one graph in particular. I mean, there's so much great content, so they should definitely download it either way. But I love the way you, you kind of sketch those out. And like at the very top, you know, with the self actualization are things like reflectly, like an AI Powered journal and audible, you know, listening to audiobooks and learning and calm, you know, working on your, your mental space. Yeah, it's a fantastic chart and a great exercise for folks to kind of plot themselves on that chart. And if you don't find a spot to plot yourself on that chart, look, look for the opening in the chart where you should be aiming to fit on that chart. So I thought it was really good. Another note that you put in there that I just hadn't thought of. And, and I feel like every report there's like one or two lines that just kind of blow my mind. And you said in there, consumer spend accounts for 70% of the US GDP and of course a lot of that's going to mortgage and car payments, like the base needs of food, transportation, housing, those kind of things. But when you think about, and as we talked about last report, there's just a lot of money being spent on a lot of different areas. You know, Onyx, which you just mentioned, you know, people are spending tens of thousands of dollars a year as a hunter. These passions, these self actualization, the love and belonging, the community, there's a lot of money going toward these. And consumer subscription businesses building great products have an opportunity to enter those markets and capture so much more of that spend than is currently captured in the existing products. And that excites me about kind of where we're headed as an industry.
- [54:05]
B
Yeah, I think a lot of value that used to be analog is being captured digitally or those analog or physical services are now being provided with digital subscriptions attached to them. And so we think that's a really exciting trend for us. Right. You're seeing this at healthcare for sure. You're starting to see it, you know, like the Amazon buying one medical, right. That's a medical subscription that now has a software tool driven drive, hopefully going to benefit healthcare in the US which is a heck of a challenge. But so these things that previously were offline, you know, health and safety, for example, is a good one, right? Like 360 citizen. These are safety needs, right. That you won't normally think about being software subscriptions that people, people said like man, there's a gap there in the market. I'm going to build something so I know where my kids are. I think we talk about like screen time, right? That's kind of a safety issue, right? Like who are your kid, who are your kids interacting with online? Like that's, those products are being built and they're good, right. And so I think there's just more and More of the world as it goes digital, we'll just need new solutions within that pyramid of needs. So you know, we think it's a, it's a pretty wide opening area and.
- [55:04]
A
Finding places of value along this chart as well. There's a company called Bright Canary that I actually subscribe to and it's one of those things like you just wouldn't think this even necessarily could exist. But I pay whatever it is, six, eight, ten bucks a month and don't even think about it because what it does is it actually tracks my kids YouTube watching and then flags any concerning content. And so you know, as a parent I'm super concerned about what my kids are exposed to online. So like to that screen time point like as a parent paying eight bucks a month to get a summary of what my kids are watching on YouTube is like no brainer. No brainer. And so there's so many opportunities like that to like find things that people value and then build products around it and something like Bright Canary, they're pretty unique in the market and like that couldn't have existed a few years ago and now it's like a whole new segment that they can go after of safety for kids online.
- [56:00]
B
Yeah, we're seeing, I mean there's some, I mean stuff like bird watching, there's bird nest that have AI cameras enabled. They'll tell you exactly what showed up so you can learn like which bird. But it's a great business man, great product.
- [56:10]
C
My mom, I got my mom one this year, Shout Out. It's also an adjacent company but there's.
- [56:14]
B
Another business I love called Tractive that's in the dog collar space. Dog collar, the most non technological thing ever. But now they've added GPS and you're like well that's cool. I live in a city, right? Dwayne does my dog, I don't need to know where my dog is. It lives in my apartment. It's you know, a tiny little puppy. But now they've added leaderboard functions right. So you can see how much your pug walk first ever the pugs. And do you want to be, want to be the parent that doesn't walk their dog?
- [56:37]
D
Right.
- [56:37]
B
So all of a sudden now you're starting to add more features in which once again all designed to keep your dog healthy and safe. But like they've added features that encourage you to go do that. And that was something that probably doesn't need to exist three or four years ago.
- [56:48]
A
It's freaking awesome. I actually bought a FI collar friend of the podcast Gerald Stone is I think VP of product. They were now fantastic product. And then talking earlier about NRR and market expansion. I just got an ad in fi. They're rolling out a pet supplement. Like add this to your pet's dog food to keep them healthy, make their coat shinier and everything like that. Super compelling offer once you've got the attention with the value prop of the GPS enabled collar which is super fun too. Like seeing how many steps a dog has taken, seeing where they land on the leaderboard. Like our whole family is like super into it already and they have like massive market expansion opportunity into the pet market where we're spending, you know, $200 a month on our dang dog.
- [57:36]
B
David. It's not. You're not spending $200 a month on your and your dang dog. You're spending dollar on a family member.
- [57:41]
A
True. Yes, of course.
- [57:43]
C
Yeah. But that it's probably your cheapest family member. If we want to start breaking out family members by line items. David, it's probably one of your cheaper.
- [57:50]
A
It is by far the cheapest family member and I, and I love him to death. He's so sweet. But when I see the bills come in and I'm a bit of a typewriter.
- [57:57]
C
They used to not cost that much. They used to not cost that much. Lifestyle a creep, you know, for sure.
- [58:03]
A
But anyways, that was a great place to end. I think there's, you know, as saturated as the market feels like, there's just so much opportunity still. Opportunity for existing businesses to grow and find new layers of product market fit, opportunities to expand their nrr, opportunities to grow into other markets. Like there's so much opportunity still in this space and even opportunity for brand new businesses started in 2024 to become those IPO candidates in a few years. So really, really fun place to be playing in and really fun place to be working in and really fun to talk to you about all of this today.
- [58:37]
B
We love what we do every day. We get to meet these awesome businesses. So yeah, thanks for having me again, guys. It's always a pleasure. Thanks.
- [58:43]
A
Yeah. Awesome. So we're going to link to your LinkedIn and the report and the GP Bullhound website. Anything else you want to share as we're wrapping up?
- [58:50]
B
No, like the best thing, we love to talk, like just reach out. Like I'll be at the Revenue CAT conference in San Francisco on the 26th, so if you're there, say hi but also just reach out, email me Eric dot crowley@gpbullhan.com. even if you're not looking to sell, like, that's okay. We don't need to talk to you for that. We host CSS CEO dinners. We love just getting operators together to sit and talk and like, like, decide where the opportunities are, where we should build.
- [59:13]
C
So you all need to help Eric Steel Flow is what he's trying to say, because, like, these pipelines don't build themselves, baby.
- [59:20]
B
We're doing pretty well. I think we're pretty happy with the reputation we have. And we get a lot of. A lot of great companies that love to talk.
- [59:27]
C
I joke a little, but, like, I think it's. You might not ever engage with anybody for a transaction. It's helpful to know people who can pin. See where you're at if you're ever thinking about maybe doing it someday. And then if you do ever want to work through a transaction with somebody, it's helped to have known them for more than, like, the life of the transaction.
- [59:45]
B
So, no, we'll turn down people all the time if they just kind of call us out of the blue. We'd like to know you for two or three years. Like, know what your goals are, what your objectives, like, where the weaknesses are, where the strengths. Like, spend time getting to know any advisor regarding, like, lawyer, accountant, like, so they actually can truly help you. Like, don't just call them up and say, like, hey, you want to do something? Like, this is an important moment for your company. Like, take the time.
- [60:07]
A
All right, well, so much fun chatting, Eric, and we'll see you in San Francisco next week and see you on the podcast again next year for the 2025 report number six.
- [60:16]
C
Seven. Something like that.
- [60:18]
B
I'd be honored to be considered.
- [60:22]
A
Thanks so much for listening. If you have a minute, please leave a review in your favorite podcast player. You can also stop by chat.subclub.com to join our private.