Sub Club Podcast: The Subscription App Industry Rebound — Eric Crowley, GP Bullhound

Hosts: David Barnard & Jacob Eiting
Guest: Eric Crowley (GP Bullhound)
Date: October 2, 2024

Episode Overview

In this engaging and comprehensive episode, hosts David Barnard and Jacob Eiting are joined (for a fifth time!) by Eric Crowley, tech investment banker at GP Bullhound. The conversation dives deep into the state of the consumer subscription software (CSS) industry, with a focus on the rebound in valuations and M&A activity, strategies for generating net revenue retention, navigating platform risks, alternative exit opportunities, and the application of Maslow’s hierarchy to app success. Along the way, the trio share practical metrics, hard-earned insights, and plenty of good humor, making this an essential listen for anyone in the subscription app business.

Key Takeaways & Discussion Points

1. State of the Subscription App Industry

[02:49]

• Boom and Bust Cycle: 2021 saw a huge capital influx, followed by overhiring and overheated marketing that led to hardships in 2022–2023.
• 2024 Rebound: Companies that weathered the storm are now stronger, showing better retention and profitability. “We are seeing better opportunities and better companies now than we even have in 2021… We've probably never been busier, which is obviously exciting for me, but hopefully it's exciting for the industry.” — Eric Crowley [03:35]
• Public Valuations Reflect Rebound: Companies like Duolingo have rebounded in public markets, with a broad focus shifting to financial performance and sustainability, not just growth.

2. Valuation Metrics and The Rule of 40

[05:44]

• Rule of 40: Add year-over-year growth rate (%) to EBITDA margin (%); signpost for healthy software companies, now applied to CSS.
  • “It’s a rule of thumb. It’s like walking 10,000 steps a day. If you’re not looking to exit, focus on building your business.” — Eric Crowley [09:16]
• Rule of X: A variation that overweights growth rate for even stronger correlation with valuation multiples.
• Caveats: These are just heuristics, most relevant for large, mature companies considering exit or capital raises.

3. Active M&A and Funding Environment

[10:21]

• Notable transactions mentioned: Bending Spoons buying BuddyFit, Outside buying Map My Fitness, TeamSnap acquiring Mojo.
• Example: Flow Health raised a competitive $200 million round, double their original ask, at a $1B+ valuation, led by General Atlantic.
  • Investment Thesis: Flow’s data layer & modular expansion create a wide funnel of future up-sellable features. Strong organic growth, high TAM, and deepening user relationship justify high valuations. [11:56]

4. Category Killers and Flywheels in CSS

[15:27]

• “Consumers flock to best of breed and they learn and decide what best of breed is because other consumers tell them… Word of mouth is such a dominating channel.” — Jacob Eiting [15:40]
• Verticalization, organic growth, and strong brand identity drive lasting consumer adoption (e.g., Flow, TeamSnap, Strava).

5. Net Revenue Retention (NRR) in Consumer Subscription

[16:31]

• Traditional assumption: B2B SaaS is unique in negative churn/expansion; consumers always churn out.
• New Reality for Top Apps:
  • Price increases (à la Netflix, Amazon Prime) drive cohort revenue up over time.
  • Product expansion: Premium tiers, family plans, new features (e.g., OnX adding estate planning tools, Spotify adding family options).
  • Add-ons and one-time purchases can supplement recurring revenue (e.g., Duolingo’s streak recovery, Tinder’s super likes).
• Timing: Price increases and NRR plays only work with a solid base of loyal, long-term subscribers. [20:07]
• Communication: “You have to justify it to your users. You can't sneak it in… But if they're truly your users… they're going to get it.” — Eric Crowley [21:06]

6. Platform Threats: Apple & Google Sherlocking

[24:21]

• Apple and Google both pose existential platform risks by integrating core app features at OS-level (“Sherlocking”).
• Strategic Response: “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.” — David Barnard [28:20]
• Best-of-breed apps usually survive and even benefit if they continue innovating and providing deeper, verticalized user value.

7. Regulatory Environment & DMA

[32:52]

• DMA (Digital Markets Act) in the EU targets platform control by Apple/Google, especially on payments and app review.
• Investment Implications: Difficult to “price in” regulatory changes. Everyone’s building web subscription channels as a hedge.
  • “Hard to say what else will happen in the next four years, but it’s definitely a hot topic.” — Eric Crowley [35:19]
• Apple’s Future Moves: Speculated that Apple could still compete by making in-app purchase tools more attractive or competitive.

8. Exit Opportunities Beyond IPOs

[44:50]

• Going public is rare, constrained by scale ($500M+ revenue) and challenging public market dynamics.
  • “It’s super hard to be a subscale public company that doesn’t have some level of predictability.” — Eric Crowley [40:42]
• Private Equity, Strategic Acquisitions, and CSS Aggregators: Many founders have successful exits or liquidity via these alternative routes.
• Steady Cash Cows: Many founders now simply enjoy running profitable, dividend-generating “lifestyle” businesses. “You don't need the TechCrunch article. You don't need to call me… It's a phenomenal outcome situation.” — Eric Crowley [49:08]

9. Maslow’s Hierarchy of Subscription Needs

[49:40]

• GP Bullhound adapts Maslow’s hierarchy as a framework for CSS: apps succeed when they address deeper human needs—safety, love/belonging, esteem, self-actualization.
  • “If you're building a great CSS business, tying it to passion is a great way to enhance retention and passion ties to identity.” — Eric Crowley [50:44]
• Community features, leaderboards, and continual new content can reinforce these psychological needs.
• Takeaway: Founders should place themselves on the “hierarchy” to discover both positioning and new product opportunities.

Notable Quotes & Memorable Moments

• [03:35] Eric Crowley: “We are seeing better opportunities and better companies now than we even have in 2021.”
• [09:16] Eric Crowley: “It's a rule of thumb. It's like walking 10,000 steps a day. If you're not looking to exit, focus on building your business.”
• [15:40] Jacob Eiting: “Word of mouth is such a dominating channel.”
• [21:06] Eric Crowley: “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.”
• [28:20] David Barnard: “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.”
• [40:42] Eric Crowley: “It's super hard to be a subscale public company that doesn't have some level of predictability.”
• [49:08] Eric Crowley: “You don't need the TechCrunch article. You don't need to call me, right. To sell your business for $50 million. It's a phenomenal outcome situation.”
• [50:44] Eric Crowley: “If you're building a great CSS business, tying it to passion is a great way to enhance retention and passion ties to identity.”

Timeline of Important Segments

• [02:49] — State of the industry: boom, bust, rebound
• [05:44] — Valuation metrics: Rule of 40, Rule of X
• [10:21] — Hot M&A/funding, case study: Flow Health’s $200M raise
• [15:27] — Category killers, verticalization, word of mouth
• [16:31] — Achieving NRR in consumer apps
• [20:07] — Price increases, communication, NRR maturity
• [24:21] — Platform threats, Sherlocking, how to compete
• [32:52] — Regulation, DMA, effects on web vs. app store
• [39:17] — IPO drought, alternative exits, CSS aggregators
• [44:50] — “Cash cow” outcomes, Europe vs US, founder choices
• [49:40] — Maslow’s Hierarchy of Subscription, passion and identity

Actionable Insights for App Builders

• Focus on sustainability and retention over flashy growth.
• Measure performance against appropriate metrics only at scale.
• Embrace price increases and add-ons—but with transparency and user respect.
• Continuously innovate and deepen your niche to outlast platform threats.
• Explore all exit opportunities, not just IPOs; understand the full M&A landscape.
• Connect your app to higher-order needs—unlock passion, community, and self-actualization for lasting engagement.

Resources & Further Reading

• GP Bullhound CSS Report (2024)
• Eric Crowley’s LinkedIn: LinkedIn Profile
• RevenueCat website: revenuecat.com

For more hot takes, metrics, and future trends in subscriptions, check out the full GP Bullhound report and stay tuned for upcoming episodes!